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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-26004
DIVERSIFIED FUTURES TRUST I
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(Exact name of registrant as specified in its charter)
Delaware 13-3780260
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One New York Plaza, 13th Floor, New York, New York 10292
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 778-7866
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Limited Interests
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(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 CK 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 [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Amended and Restated Declaration of Trust and Trust Agreement of the
Registrant dated as of August 25, 1994, included as part of the Registration
Statement on Form S-1 (File No. 33-81534) filed with the Securities and Exchange
Commission on September 13, 1994, pursuant to Rule 424(b) of the Securities Act
of 1933, is incorporated by reference into Part IV of this Annual Report on Form
10-K
Registrant's Annual Report to Interest holders for the year ended December
31, 1998 is incorporated by reference into Parts II and IV of this Annual Report
on Form 10-K
Index to exhibits can be found on pages 10 and 11.
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DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
TABLE OF CONTENTS
<TABLE>
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PART I PAGE
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Item 1 Business......................................................................... 3
Item 2 Properties....................................................................... 3
Item 3 Legal Proceedings................................................................ 3
Item 4 Submission of Matters to a Vote of Interest Holders.............................. 4
PART II
Item 5 Market for the Registrant's Interests and Related Interest Holder Matters........ 4
Item 6 Selected Financial Data.......................................................... 4
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 4
Item 7A Quantitative and Qualitative Disclosures About Market Risk....................... 4
Item 8 Financial Statements and Supplementary Data...................................... 8
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 8
PART III
Item 10 Directors and Executive Officers of the Registrant............................... 8
Item 11 Executive Compensation........................................................... 9
Item 12 Security Ownership of Certain Beneficial Owners and Management................... 9
Item 13 Certain Relationships and Related Transactions................................... 9
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 10
Financial Statements and Financial Statement Schedules........................... 10
Exhibits......................................................................... 10
Reports on Form 8-K.............................................................. 11
SIGNATURES.................................................................................. 12
</TABLE>
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PART I
Item 1. Business
General
Diversified Futures Trust I (the 'Registrant'), a Delaware Business Trust,
was organized under the Delaware Business Trust Act on May 18, 1994 and will
terminate on December 31, 2014 unless terminated sooner under the provisions of
the Amended and Restated Declaration of Trust and Trust Agreement (the 'Trust
Agreement'). The Registrant's trustee is Wilmington Trust Company. The
Registrant was formed to engage in the speculative trading of commodity futures
and forward contracts. On January 5, 1995, the Registrant completed its initial
offering and raised $25,262,800 from the sale of 249,628 limited interests
('Limited Interests') and 3,000 general interests ('General Interests')
(collectively, the 'Interests') and commenced operations. The Registrant's
fiscal year for book and tax purposes ends on December 31.
The Registrant was permitted to sell a maximum of $50,000,000 of Limited
Interests, plus $50,000,000 of additional Limited Interests when Prudential
Securities Incorporated ('PSI') and Prudential Securities Futures Management
Inc. (the 'Managing Owner') exercised the over-subscription option granted to
them by the Trust Agreement. Following the close of the initial offering period,
additional Interests were offered and sold monthly at their month-end net asset
value ('NAV') per Interest during a continuous offering period ('Continuous
Offering Period') which expired on August 31, 1996. Additional contributions
raised during the Continuous Offering Period resulted in additional proceeds to
the Registrant of $41,129,100 from the sale of 299,640 Limited Interests and
1,628 General Interests.
All trading decisions for the Registrant are made by John W. Henry & Company,
Inc. (the 'Trading Manager'), an independent commodity trading manager which
manages the Registrant's assets pursuant to four trading programs developed by
the Trading Manager. The Managing Owner retains the authority to override
trading instructions that violate the Registrant's trading policies.
The Registrant is engaged solely in the business of commodity futures and
forward trading; therefore, presentation of industry segment information is not
applicable.
Managing Owner
The Managing Owner of the Registrant is a wholly owned subsidiary of PSI, the
Registrant's commodity broker and principal underwriter and selling agent of its
Interests. PSI is a wholly owned subsidiary of Prudential Securities Group Inc.
The Managing Owner is required to maintain at least a 1% interest in the
Registrant as long as it is acting as the Registrant's managing owner.
Competition
The Managing Owner and its affiliates have formed, and may continue to form,
various entities to engage in the speculative trading of futures and forward
contracts which have certain of the same investment policies as the Registrant.
The Registrant is a closed-end Trust which does not currently, and does not
intend in the future to, solicit the sale of additional Interests. As such, the
Registrant does not compete with other entities to attract new participants.
However, to the extent that the Trading Manager recommends similar or identical
trades to the Registrant and other accounts which it manages, the Registrant may
compete with those accounts for the execution of the same or similar trades.
Employees
The Registrant has no employees. Management and administrative services for
the Registrant are performed by the Managing Owner and its affiliates pursuant
to the Trust Agreement as further discussed in Notes A, C and D to the
Registrant's annual report to limited partners for the year ended December 31,
1998 ('Registrant's 1998 Annual Report') which is filed as an exhibit hereto.
Item 2. Properties
The Registrant does not own or lease any property.
Item 3. Legal Proceedings
There are no material legal proceedings pending by or against the Registrant
or the Managing Owner.
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Item 4. Submission of Matters to a Vote of Interest Holders
None
PART II
Item 5. Market for the Registrant's Interests and Related Interest Holder
Matters
Information with respect to the offering of Interests is incorporated by
reference to Note A to the Registrant's 1998 Annual Report, which is filed as an
exhibit hereto.
A significant secondary market for the Interests has not developed, and it is
not expected that one will develop in the future. There are also certain
restrictions set forth in the Trust Agreement limiting the ability of an
Interest holder to transfer Interests. However, Interests may be redeemed as of
the last business day of any full calendar quarter at the then current NAV per
Interest. Consequently, holders of Interests may not be able to liquidate their
investments in the event of an emergency or for any other reason.
There are no material restrictions upon the Registrant's present or future
ability to make distributions in accordance with the provisions of the Trust
Agreement. No distributions have been made since inception and no distributions
are anticipated in the future.
As of March 4, 1999, there were 2,306 holders of record owning 293,357.624
Interests which include 2,934 General Interests.
Item 6. Selected Financial Data
The following table presents selected financial data of the Registrant. This
data should be read in conjunction with the financial statements of the
Registrant and the notes thereto on pages 2 through 9 of the Registrant's 1998
Annual Report which is filed as an exhibit hereto.
<TABLE>
<CAPTION>
Period from
January 5, 1995
(commencement of
Year Ended December 31, operations) to
--------------------------------------- December 31,
1998 1997 1996 1995
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Total revenues (including interest) $ 9,529,178 $13,955,119 $24,485,692 $ 19,003,618
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Net income $ 2,340,736 $ 5,527,892 $15,110,020 $ 12,430,489
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Net income per weighted average Interest $ 7.09 $ 14.43 $ 36.56 $ 40.56
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Total assets $61,687,320 $70,024,756 $81,040,831 $ 49,519,507
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Net asset value per Interest $ 200.91 $ 191.70 $ 176.16 $ 142.65
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This information is incorporated by reference to pages 10 through 12 of the
Registrant's 1998 Annual Report which is filed as an exhibit hereto.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
Past Results Not Necessarily Indicative of Future Performance
The Registrant is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and
substantially all of the Registrant'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 Registrant's main line of business.
Market movements result in frequent changes in the fair market value of the
Registrant's open positions and, consequently, in its earnings and cash flow.
The Registrant'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
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value of financial instruments and contracts, the diversification effects among
the Registrant's open positions and the liquidity of the markets in which it
trades.
The Registrant 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 futures market scenario will affect performance, and
the Registrant's past performance is not necessarily indicative of its future
results.
Value at risk is a measure of the maximum amount which the Registrant could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Registrant's speculative trading and the recurrence in the
markets traded by the Registrant of market movements far exceeding expectations
could result in actual trading or non-trading losses far beyond the indicated
Value at Risk or the Registrant'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
Registrant's losses in any market sector will be limited to Value at Risk or by
the Registrant's attempts to manage its market risk.
Standard of Materiality
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 Registrant's
market sensitive instruments.
Quantifying The Registrant's Trading Value at Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Registrant'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).
The Registrant's risk exposure in the various market sectors traded by the
Trading Manager is quantified below in terms of Value at Risk. Due to the
Registrant's mark-to-market accounting, any loss in the fair value of the
Registrant's open positions is directly reflected in the Registrant's earnings
(realized or unrealized) and cash flow (at least in the case of exchange-traded
contracts in which profits and losses on open positions are settled daily
through variation margin).
Exchange maintenance margin requirements have been used by the Registrant as
the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange-traded
(almost exclusively currencies in the case of the Registrant), 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 Registrant'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 aggregated to determine each trading category's aggregate Value at
Risk. The diversification effects resulting from the fact that the Registrant's
positions are rarely, if ever, 100% positively correlated have not been
reflected.
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The Registrant's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with the
Registrant's open positions by market sector at December 31, 1998. All open
position trading risk exposures of the Registrant have been included in
calculating the figures set forth below. At December 31, 1998, the Registrant's
total capitalization was approximately $58.9 million.
<TABLE>
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Value at % of Total
Market Sector Risk Capitalization
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Interest Rates $3,844,921 6.53%
Currencies 1,261,024 2.14
Commodities 974,096 1.65
Stock indices 389,788 .66
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Total $6,469,829 10.98%
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Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Registrant is
typically many times the applicable maintenance margin requirement (maintenance
margin requirements generally range between approximately 1% and 10% of the face
value), as well as, many times the total capitalization of the Registrant. The
magnitude of the Registrant'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, although unusual, but historically
recurring from time to time, could cause the Registrant to incur severe losses
over a short period of time. The foregoing Value at Risk table, as well as the
past performance of the Registrant, give no indication of this 'risk of ruin.'
Non-Trading Risk
The Registrant 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.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Registrant's market risk
exposures--except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Registrant manages its primary market
risk exposures--constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Registrant's primary market risk exposures as well as
the strategies used and to be used by the Managing Owner and the Trading
Managers for managing such exposures are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual results of the
Registrant'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 risk management
strategies of the Registrant. There can be no assurance that the Registrant'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 Registrant.
The primary trading risk exposures of the Registrant at December 31, 1998, by
market sector, were:
Interest Rates. Interest rate risk is the principal market exposure of the
Registrant. Interest rate movements directly affect the price of sovereign bond
positions held by the Registrant and indirectly affect the value of its stock
index and currency positions. Interest rate movements in one country, as well
as, relative interest rate movements between countries may materially impact the
Registrant's profitability. The Registrant's primary interest rate exposure is
to interest rate fluctuations in the U.S. and other G-7 countries. To a lesser
extent, the Registrant also takes positions in the government debt of smaller
nations--e.g., Australia. The Managing Owner anticipates that G-7 interest rates
will remain the primary market exposure of the Registrant in the foreseeable
future. The changes in interest rates which have the most effect on the
Registrant are changes in long-term, as opposed to short-term, rates. Most of
the speculative positions held by the
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Registrant are in medium- to long-term instruments. Consequently, even a
material change in short-term rates would have little effect on the Registrant
were the medium- to long-term rates to remain steady.
Currencies. The Registrant's currency exposure is due 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 Registrant's major exposure has typically
resulted from positions in the local currencies of G-7 countries. These include
outright, as well as, cross-rate positions--i.e., positions between two
currencies other than the U.S. dollar. The Managing Owner does not anticipate
that the risk profile of the Registrant's currency sector will change
significantly in the future, although it is difficult at this point to predict
the effect of the introduction of the Euro on the Trading Manager's currency
trading strategies. 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 Registrant in
expressing Value at Risk in a functional currency other than U.S. dollars.
Commodities. The Registrant's primary commodities exposure lies in the energy
market and results from gas and oil price movements, often resulting from
political developments in the Middle East. The Registrant's major energy
exposure has typically resulted from positions in light crude, crude oil, and
natural gas. Additional exposure is supplied by open positions in precious
metals, particularly gold and silver. In the agricultural sector, the
Registrant's market risk exposure is primarily due to price movements resulting
from severe or unexpected weather conditions. The Trading Manager trades in
various agricultural commodities including, but not limited to, coffee, sugar,
wheat, and corn.
Stock Indices. The Registrant's primary equity exposure is due to equity
price risk in the Nikkei Dow (Japan), FTSE 100 (Britain) and Australian All
Ordinaries Index. The stock index futures traded by the Registrant are by law
limited to futures on broadly based indices.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Managing Owner and the Trading Manager, severally,
attempt to manage the risk of the Registrant's open positions is essentially the
same in all market categories traded.
The Trading Manager attempts to minimize market risk exposure by applying its
own risk management trading policies which include the diversification of
trading assets into various market sectors. Additionally, the Trading Manager
has an oversight committee broadly responsible for evaluating and overseeing the
Trading Manager's trading policies. The oversight committee meets periodically
to discuss and analyze issues such as liquidity, position size, capacity,
performance cycles, and new product and market strategies.
The Managing Owner attempts to minimize market risk exposure by requiring the
Trading Manager to abide by various trading limitations and policies. The
Managing Owner monitors compliance with these trading limitations and policies
which include, but are not limited to, limiting the amount of margin or premium
required for any one commodity or all commodities combined and generally
limiting transactions to contracts which are traded in sufficient volume to
permit the taking and liquidating of positions. The Managing Owner may impose
restrictions (through modifications of such trading limitations and policies)
upon the trading activities of the Trading Manager as it, in good faith, deems
to be in the best interests of the Registrant. Additionally, the Managing Owner
may terminate the Trading Manager if the net asset value of the Registrant
declines by 33 1/3% during any year or since the commencement of trading
activities. Furthermore, the Trust Agreement provides that the Registrant will
liquidate its positions, and eventually dissolve, if the Registrant experiences
a decline in the net asset value of 50% in any year or since the commencement of
trading activities. In each case, the decline in the net asset value is after
giving effect for distributions, contributions and redemptions.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
At December 31, 1998, the Registrant's primary exposure to non-trading market
risk resulted from foreign currency balances held in Canadian dollars. As
discussed above, these balances, as well as any risk they represent, are
immaterial.
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Item 8. Financial Statements and Supplementary Data
The financial statements are incorporated by reference to pages 2 through 9
of the Registrant's 1998 Annual Report which is filed as an exhibit hereto.
Supplementary data specified by Item 302 of Regulation S-K (selected
quarterly financial data) is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
There are no directors or executive officers of the Registrant. The
Registrant is managed by the Managing Owner.
The Managing Owner's directors and executive officers and any person holding
more than ten percent of the Registrant's Interests ('Ten Percent Owners') are
required to report their initial ownership of such Interests and any subsequent
changes in that ownership to the Securities and Exchange Commission on Forms 3,
4 or 5. Such executive officers, directors and Ten Percent Owners are required
by Securities and Exchange Commission regulations to furnish the Registrant with
copies of all Forms 3, 4 or 5 they file. All of these filing requirements were
satisfied on a timely basis (other than Tamara B. Wright who did not file Form 3
in a timely manner upon becoming a Director but subsequently filed and is now
current in all filings). In making these disclosures, the Registrant has relied
solely on written representations of the Managing Owner's directors and
executive officers and Ten Percent Owners or copies of the reports that they
have filed with the Securities and Exchange Commission during and with respect
to its most recent fiscal year.
The directors and executive officers of Prudential Securities Futures
Management Inc. and their positions with respect to the Registrant are as
follows:
Name Position
Eleanor L. Thomas First Vice President
Barbara J. Brooks Chief Financial Officer
Steven Carlino Vice President, Chief Accounting Officer and
Treasurer
A. Laurence Norton, Jr. Director
Guy S. Scarpaci Director
Tamara B. Wright Senior Vice President and Director
ELEANOR L. THOMAS, age 44, has been a Vice President of Prudential Securities
Futures Management Inc. and Seaport Futures Management, Inc. since April 1993
and a First Vice President since October 1998. She is primarily responsible for
origination, asset allocation, and due diligence for the managed futures group
within PSI. She is also a First Vice President of PSI. Prior to joining PSI in
March 1993, she was with MC Baldwin Financial Company from June 1990 through
February 1993 and Arthur Andersen & Co. from 1986 through May 1990. Ms. Thomas
is a certified public accountant.
BARBARA J. BROOKS, age 50, is the Chief Financial Officer of Prudential
Securities Futures Management Inc. She is a Senior Vice President of PSI. She is
also the Chief Financial Officer of Seaport Futures Management, Inc. and serves
in various capacities for other affiliated companies. She has held several
positions within PSI since April 1983. Ms. Brooks is a certified public
accountant.
STEVEN CARLINO, age 35, is a Vice President and Treasurer of Prudential
Securities Futures Management Inc. He is a First Vice President of PSI. He is
also a Vice President and Treasurer of Seaport Futures Management, Inc. and
serves in various capacities for other affiliated companies. Prior to joining
PSI in October 1992, he was with Ernst & Young for six years. Mr. Carlino is a
certified public accountant.
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A. LAURENCE NORTON, JR., age 60, is a Director of Prudential Securities
Futures Management Inc. He is an Executive Vice President of PSI and, since
March 1994, has been the head of the International and Futures Divisions of PSI.
He is also a Director of Seaport Futures Management, Inc. From October 1991 to
March 1994, he held the position of Executive Director of Retail Development and
Retail Strategies at PSI. Prior to joining PSI in 1991, Mr. Norton was a Senior
Vice President and Branch Manager of Shearson Lehman Brothers.
GUY S. SCARPACI, age 52, is a Director of Prudential Securities Futures
Management Inc. He is a First Vice President of the Futures Division of PSI. He
is also a Director of Seaport Futures Management, Inc. Mr. Scarpaci has been
employed by PSI in positions of increasing responsibility since August 1974.
TAMARA B. WRIGHT, age 40, is a Senior Vice President and Director of
Prudential Securities Futures Management Inc. She is a Senior Vice President and
Chief Administrative Officer for the International and Futures Divisions of PSI.
She is also a Senior Vice President and Director of Seaport Futures Management,
Inc. and serves in various capacities for other affiliated companies. Prior to
joining PSI in July 1988, she was a manager with Price Waterhouse.
During the fourth quarter of 1998, Steven Carlino replaced Barbara J. Brooks
as Treasurer of Prudential Securities Futures Management Inc. and Seaport
Futures Management, Inc. Additionally, during December 1998, Tamara B. Wright
was elected as a Senior Vice President and Director of Prudential Securities
Futures Management Inc. and Seaport Futures Management, Inc. On March 26, 1999,
Thomas M. Lane, Jr. resigned as President and Director of Prudential Securities
Futures Management Inc. and Seaport Futures Management, Inc.
There are no family relationships among any of the foregoing directors or
executive officers. All of the foregoing directors and/or executive officers
have indefinite terms.
Item 11. Executive Compensation
The Registrant does not pay or accrue any fees, salaries or any other form of
compensation to directors and officers of the Managing Owner for their services.
Certain directors and officers of the Managing Owner receive compensation from
affiliates of the Managing Owner, not from the Registrant, for services
performed for various affiliated entities, which may include services performed
for the Registrant; however, the Managing Owner believes that any compensation
attributable to services performed for the Registrant is immaterial. (See also
Item 13, Certain Relationships and Related Transactions, for information
regarding compensation to the Managing Owner.)
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 4, 1999, no director or executive officer of the Managing Owner
owns directly or beneficially any interest in the voting securities of the
Managing Owner.
As of March 4, 1999, no director or executive officer of the Managing Owner
owns directly or beneficially any of the Interests issued by the Registrant.
As of March 4, 1999, no owners of Limited Interests beneficially own more
than five percent (5%) of the Limited Interests issued by the Registrant.
Item 13. Certain Relationships and Related Transactions
The Registrant has and will continue to have certain relationships with the
Managing Owner and its affiliates. However, there have been no direct financial
transactions between the Registrant and the directors or officers of the
Managing Owner.
Reference is made to Notes A, C and D to the financial statements in the
Registrant's 1998 Annual Report which is filed as an exhibit hereto, which
identify the related parties and discuss the services provided by these parties
and the amounts paid or payable for their services.
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PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements and Report of Independent Accountants--incorporated
by reference to the Registrant's 1998 Annual Report which is filed as an
exhibit hereto
Report of Independent Accountants 2
Financial Statements:
Statements of Financial Condition--December 31, 1998 and 1997 3
Statements of Operations--Three years ended December 31, 1998 4
Statements of Changes in Trust Capital--Three years ended December 31,
1998 4
Notes to Financial Statements 5
2. Financial Statement Schedules
All schedules have been omitted because they are not applicable or the
required information is included in the financial statements or notes
thereto.
3. Exhibits
Description:
3.1 Amended and Restated Declaration of Trust and Trust Agreement of the
and Registrant dated as of August 25, 1994, (incorporated by reference to
4.1 Exhibits 3.1 and 4.1 of Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1994)
4.2 Subscription Agreement (incorporated by reference to Exhibit C to the
Registrant's Registration Statement on Form S-1, File No. 33-81534, dated
as of September 13, 1994)
4.3 Request for Redemption (incorporated by reference to Exhibit D to the
Registrant's Registration Statement on Form S-1, File No. 33-81534, dated
as of September 13, 1994)
10.1 Escrow Agreement, dated as of September 13, 1994, among the Registrant,
Prudential Securities Futures Management Inc., Prudential Securities
Incorporated and The Bank of New York (incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994)
10.2 Brokerage Agreement, dated as of January 4, 1995, between the Registrant
and Prudential Securities Incorporated (incorporated by reference to
Exhibit 10.2 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994)
10.3 Advisory Agreement, dated as of September 13, 1994, among the Registrant,
Prudential Securities Futures Management Inc., and John W. Henry & Co.,
Inc. (incorporated by reference to Exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1994)
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C>
10.4 Representation Agreement Concerning the Registration Statement and the
Prospectus, dated as of September 13, 1994, among the Registrant,
Prudential Securities Futures Management Inc., Prudential Securities
Incorporated, Wilmington Trust Company and John W. Henry & Co., Inc.
(incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1994)
10.5 Net Worth Agreement, dated as of September 13, 1994, between Prudential
Securities Futures Management Inc. and Prudential Securities Incorporated
(incorporated by reference to Exhibit 10.5 of the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1994)
10.6 Secured Demand Note, dated as of January 4, 1995, between Prudential
Securities Group Inc. and Prudential Securities Futures Management Inc.
(incorporated by reference to Exhibit 10.6 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994)
10.7 Secured Demand Note Collateral Agreement, dated as of January 4, 1995,
between Prudential Securities Futures Management Inc. and Prudential
Securities Group Inc. (incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994)
10.8 Form of Foreign Currency Addendum to Brokerage Agreement between the
Registrant and Prudential Securities Incorporated (incorporated by
reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1996)
13.1 Registrant's 1998 Annual Report (with the exception of the information
and data incorporated by reference in Items 5, 7 and 8 of this Annual
Report on Form 10-K, no other information or data appearing in the
Registrant's 1998 Annual Report is to be deemed filed as part of this
report) (filed herewith)
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
</TABLE>
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Diversified Futures Trust I
By: Prudential Securities Futures Management Inc.
A Delaware corporation, Managing Owner
By: /s/ Steven Carlino Date: March 31, 1999
----------------------------------------
Steven Carlino
Vice President, Chief Accounting Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities (with respect to the Managing Owner) and on the
dates indicated.
By: Prudential Securities Futures Management Inc.
A Delaware corporation, Managing Owner
By: /s/ Eleanor L. Thomas Date: March 31, 1999
-----------------------------------------
Eleanor L. Thomas
First Vice President
By: /s/ Barbara J. Brooks Date: March 31, 1999
-----------------------------------------
Barbara J. Brooks
Chief Financial Officer
By: /s/ Steven Carlino Date: March 31, 1999
-----------------------------------------
Steven Carlino
Vice President and Treasurer
By: Date:
-----------------------------------------
A. Laurence Norton, Jr.
Director
By: /s/ Guy S. Scarpaci Date: March 31, 1999
-----------------------------------------
Guy S. Scarpaci
Director
By: /s/ Tamara B. Wright Date: March 31, 1999
-----------------------------------------
Tamara B. Wright
Senior Vice President and Director
12
<PAGE>
1998
- --------------------------------------------------------------------------------
Diversified Futures Trust I Annual
Report
<PAGE>
LETTER TO LIMITED OWNERS FOR
DIVERSIFIED FUTURES TRUST I
1
<PAGE>
PricewaterhouseCoopers (LOGO)
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Telephone (212) 596 8000
Facsimile (212) 596 8910
Report of Independent Accountants
January 26, 1999
To the Managing Owner and
Limited Owners of
Diversified Futures Trust I
In our opinion, the accompanying statements of financial condition and the
related statements of operations and changes in trust capital present fairly, in
all material respects, the financial position of Diversified Futures Trust I at
December 31, 1998 and 1997, and the results of its operations for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the managing owner; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 managing owner,
and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
2
<PAGE>
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash $55,481,234 $ 65,565,864
Net unrealized gain on open commodity positions 6,197,212 4,447,026
------------- -------------
Net equity 61,678,446 70,012,890
Other receivable 8,874 11,866
------------- -------------
Total assets $61,687,320 $ 70,024,756
------------- -------------
------------- -------------
LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 2,543,697 $ 1,973,508
Management fee payable 205,624 233,415
Incentive fee payable -- 305,704
------------- -------------
Total liabilities 2,749,321 2,512,627
------------- -------------
Commitments
Trust capital
Limited interests (290,423.624 and 348,652.217 interests
outstanding) 58,348,534 66,836,959
General interests (2,934 and 3,522 interests outstanding) 589,465 675,170
------------- -------------
Total trust capital 58,937,999 67,512,129
------------- -------------
Total liabilities and trust capital $61,687,320 $ 70,024,756
------------- -------------
------------- -------------
Net asset value per limited and general interests $ 200.91 $ 191.70
------------- -------------
------------- -------------
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
REVENUES
Net realized gain on commodity transactions $4,475,810 $ 7,279,598 $22,881,256
Change in net unrealized gain on open commodity
positions 1,750,186 2,933,683 (1,477,961)
Interest income 3,303,182 3,741,838 3,082,397
---------- ----------- -----------
9,529,178 13,955,119 24,485,692
---------- ----------- -----------
EXPENSES
Commissions 4,666,065 5,289,700 4,747,920
Management fees 2,424,509 2,761,108 2,529,237
Incentive fees 97,868 376,419 2,098,515
---------- ----------- -----------
7,188,442 8,427,227 9,375,672
---------- ----------- -----------
Net income $2,340,736 $ 5,527,892 $15,110,020
---------- ----------- -----------
---------- ----------- -----------
ALLOCATION OF NET INCOME
Limited interests $2,317,331 $ 5,472,611 $14,958,815
---------- ----------- -----------
---------- ----------- -----------
General interests $ 23,405 $ 55,281 $ 151,205
---------- ----------- -----------
---------- ----------- -----------
NET INCOME PER WEIGHTED AVERAGE LIMITED AND GENERAL
INTEREST
Net income per weighted average limited and general
interest $ 7.09 $ 14.43 $ 36.56
---------- ----------- -----------
---------- ----------- -----------
Weighted average number of limited and general
interests outstanding 330,196 383,058 413,244
---------- ----------- -----------
---------- ----------- -----------
- --------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CHANGES IN TRUST CAPITAL
<TABLE>
<CAPTION>
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Trust capital--December 31, 1995 327,345.725 $46,119,407 $576,089 $46,695,496
Contributions 164,986.430 23,425,200 83,500 23,508,700
Net income -- 14,958,815 151,205 15,110,020
Redemptions (86,488.452) (13,726,923) (95,780 ) (13,822,703)
----------- ----------- --------- -----------
Trust capital--December 31, 1996 405,843.703 70,776,499 715,014 71,491,513
Net income -- 5,472,611 55,281 5,527,892
Redemptions (53,669.486) (9,412,151) (95,125 ) (9,507,276)
----------- ----------- --------- -----------
Trust capital--December 31, 1997 352,174.217 66,836,959 675,170 67,512,129
Net income -- 2,317,331 23,405 2,340,736
Redemptions (58,816.593) (10,805,756) (109,110 ) (10,914,866)
----------- ----------- --------- -----------
Trust capital--December 31, 1998 293,357.624 $58,348,534 $589,465 $58,937,999
----------- ----------- --------- -----------
----------- ----------- --------- -----------
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
NOTES TO FINANCIAL STATEMENTS
A. General
Diversified Futures Trust I (the 'Trust') was organized under the Delaware
Business Trust Act on May 18, 1994 and will continue until December 31, 2014
unless terminated sooner under the provisions of the Amended and Restated
Declaration of Trust and Trust Agreement (the 'Trust Agreement'). On January 5,
1995, the Trust completed its initial offering having raised $25,262,800 from
the sale of 249,628 limited interests ('Limited Interests') and 3,000 general
interests ('General Interests') (collectively, the 'Interests') and commenced
operations. The Trust was formed to engage in the speculative trading of
commodity futures and forward contracts. The Trust's trustee is Wilmington Trust
Company. The managing owner of the Trust is Prudential Securities Futures
Management Inc. (the 'Managing Owner'), a wholly owned subsidiary of Prudential
Securities Incorporated ('PSI'), which, in turn, is a wholly owned subsidiary of
Prudential Securities Group Inc. ('PSGI'). PSI was the principal underwriter of
the Interests and is the commodity broker of the Trust. The Managing Owner is
required to maintain at least a 1% interest in the Trust so long as it is acting
as the Managing Owner.
The Trust was permitted to sell a maximum of $50,000,000 of Limited
Interests, plus $50,000,000 of additional Limited Interests when PSI and the
Managing Owner exercised the over-subscription option granted to them by the
Trust Agreement. Following the close of the initial offering period, additional
Interests were offered and sold monthly at their month-end net asset value
('NAV') per Interest during a continuous offering period which expired on August
31, 1996. Additional contributions raised during the continuous offering period
resulted in additional proceeds to the Trust of $41,129,100 from the sale of
299,640 Limited Interests and 1,628 General Interests.
All trading decisions are made for the Trust by John W. Henry & Company, Inc.
(the 'Trading Manager'), an independent commodity trading manager. The Trading
Manager trades the Trust's assets pursuant to four of its trading programs: the
Financial and Metals Portfolio; the Global Financial Portfolio; the Original
Investment Program; and the G-7 Currency Portfolio. The Managing Owner retains
the authority to override trading instructions that violate the Trust's trading
policies.
B. Summary of Significant Accounting Principles
Basis of accounting
The books and records of the Trust are maintained on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Commodity futures and forward transactions are reflected in the accompanying
statements of financial condition on trade date. The difference between the
original contract amount and market value is reflected as net unrealized gain or
loss. The market value of each contract is based upon the closing quotation on
the exchange, clearing firm or bank on, or through, which the contract is
traded.
The weighted average number of limited and general interests outstanding was
computed for purposes of disclosing net income per weighted average limited and
general interest. The weighted average limited and general interests are equal
to the number of Interests outstanding at year end, adjusted proportionately for
Interests subscribed and redeemed based on their respective time outstanding
during such year.
The Trust has elected not to provide a Statement of Cash Flows as permitted
by Statement of Financial Accounting Standards No. 102, 'Statement of Cash
Flows--Exemption of Certain Enterprises and Classification of Cash Flows from
Certain Securities Acquired for Resale.'
Income taxes
The Trust is treated as a partnership for Federal income tax purposes. As
such, the Trust is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual Interest holders. The Trust may be subject to other
state and local taxes in jurisdictions in which it operates.
5
<PAGE>
Profit and loss allocation, subscriptions, distributions and redemptions
Net realized profits or losses for tax purposes are allocated first to
Interest holders who redeem Interests to the extent the amounts received on
redemption are greater than or are less than the amounts paid for the redeemed
Interests by the Interest holders. Net realized profits or losses remaining
after these allocations are allocated to each Interest holder in proportion to
such Interest holder's capital account at month-end. Net income or loss for
financial reporting purposes is allocated monthly to all Interest holders on a
pro rata basis based on each Interest holder's number of Interests outstanding
during the month.
Distributions (other than redemptions of Interests) are made at the sole
discretion of the Managing Owner on a pro rata basis in accordance with the
respective capital accounts of the Interest holders. No distributions have been
made since inception.
Additional Interests were offered monthly at their month-end NAV per Interest
until the continuous offering period expired on August 31, 1996 as further
discussed in Note A.
The Trust Agreement provides that an Interest holder may redeem its Interests
as of the last business day of any full calendar quarter at the then current NAV
per Interest.
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ('SFAS 133'),
which the Trust is required to adopt effective January 1, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires that an entity recognize all derivatives as
assets or liabilities measured at fair value. The Trust does not believe the
effect of adoption will be material.
C. Fees
Organizational and general and administrative costs
PSI or its affiliates paid the costs of organizing the Trust and offering its
Interests and pay the routine operational, administrative, legal and auditing
expenses.
Management and incentive fees
The Trust pays the Trading Manager a monthly management fee equal to 1/3 of
1% (a 4% annual rate) of the Trust's NAV as of the end of each month.
In addition, the Trust pays the Trading Manager a quarterly incentive fee
equal to 15% of the New High Net Trading Profits (as defined in the Advisory
Agreement among the Trust, the Managing Owner and the Trading Manager).
Commissions
The Managing Owner, on behalf of the Trust, entered into an agreement with
PSI as commodity broker whereby the Trust pays a fixed monthly fee for brokerage
services rendered. The monthly fee equals .64583 of 1% (7.75% per annum) of the
Trust's NAV as of the first day of each month. From this fee, PSI pays all of
the Trust's execution (including floor brokerage expenses and NFA, clearing and
exchange fees) and account maintenance costs.
D. Related Parties
The Managing Owner and its affiliates perform services for the Trust which
include, but are not limited to: brokerage services, accounting and financial
management, registrar, transfer and assignment functions, investor
communications, printing and other administrative services. Except for costs
related to brokerage services, PSI or its affiliates pay the costs of these
services in addition to costs of organizing the Trust and offering its Interests
as well as the routine operational, administrative, legal and auditing fees.
The costs charged to the Trust for brokerage services for the years ended
December 31, 1998, 1997 and 1996 were $4,666,065, $5,289,700 and $4,747,920,
respectively.
The Trust's assets are maintained either in trading or cash accounts with
PSI, the Trust's commodity broker, or for margin purposes, with the various
exchanges on which the Trust is permitted to trade. PSI credits the Trust
monthly with 100% of the interest it earns on the net assets in these accounts.
6
<PAGE>
The Trust, acting through its Trading Manager, executes over-the-counter,
spot, forward and/or option foreign exchange transactions with PSI. PSI then
engages in back-to-back trading with an affiliate, Prudential-Bache Global
Markets, Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions.
PBGM keeps its prices on foreign currency competitive with other interbank
currency trading desks. All over-the-counter currency transactions are conducted
between PSI and the Trust pursuant to a line of credit. PSI may require that
collateral be posted against the marked-to-market position of the Trust.
As of December 31, 1998, a non-U.S. affiliate of the Managing Owner owns
2,463.953 Limited Interests of the Trust.
E. Income Taxes
There have been no differences between the tax basis and book basis of
Interest holders' capital since inception of the Trust.
F. Credit and Market Risk
Since the Trust's business is to trade futures and forward (including foreign
exchange transactions) contracts, its capital is at risk due to changes in the
value of these contracts (market risk) or the inability of counterparties to
perform under the terms of the contracts (credit risk).
Futures and forward contracts involve varying degrees of off-balance sheet
risk; and changes in the level or volatility of interest rates, foreign currency
exchange rates or the market values of the contracts (or commodities underlying
the contracts) frequently result in changes in the Trust's unrealized gain
(loss) on open commodity positions reflected in the statements of financial
condition. The Trust's exposure to market risk is influenced by a number of
factors including the relationships among the contracts held by the Trust as
well as the liquidity of the markets in which the contracts are traded.
Futures contracts are traded on organized exchanges and are thus
distinguished from forward contracts which are entered into privately by the
parties. The credit risks associated with futures contracts are typically
perceived to be less than those associated with forward contracts, because
exchanges typically provide clearinghouse arrangements in which the collective
credit (subject to certain limitations) of the members of the exchanges is
pledged to support the financial integrity of the exchange. On the other hand,
the Trust must rely solely on the credit of its broker (PSI) with respect to
forward transactions. The Trust presents unrealized gains and losses on open
forward positions as a net amount in the statements of financial condition
because it has a master netting agreement with PSI.
The Managing Owner attempts to minimize both credit and market risks by
requiring the Trust's Trading Manager to abide by various trading limitations
and policies. The Managing Owner monitors compliance with these trading
limitations and policies which include, but are not limited to, executing and
clearing all trades with creditworthy counterparties (currently, PSI is the sole
counterparty or broker); limiting the amount of margin or premium required for
any one commodity or all commodities combined; and generally limiting
transactions to contracts which are traded in sufficient volume to permit the
taking and liquidating of positions. The Managing Owner may impose additional
restrictions (through modifications of such trading limitations and policies)
upon the trading activities of the Trading Manager as it, in good faith, deems
to be in the best interests of the Trust.
PSI, when acting as the Trust's futures commission merchant in accepting
orders for the purchase or sale of domestic futures contracts, is required by
Commodity Futures Trading Commission ('CFTC') regulations to separately account
for and segregate as belonging to the Trust all assets of the Trust relating to
domestic futures trading and is not to commingle such assets with other assets
of PSI. At December 31, 1998, such segregated assets totalled $47,295,189. Part
30.7 of the CFTC regulations also requires PSI to secure assets of the Trust
related to foreign futures trading which totalled $14,585,018 at December 31,
1998. There are no segregation requirements for assets related to forward
trading.
As of December 31, 1998, the Trust's open futures and forward contracts
mature within one year.
7
<PAGE>
At December 31, 1998 and 1997, gross contract amounts of open futures and
forward contracts are:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Financial Futures Contracts:
Commitments to purchase $241,713,301 $323,162,224
Commitments to sell 450,175,973 164,238,663
Currency Futures Contracts:
Commitments to purchase 29,926,525 --
Commitments to sell 22,716,988 --
Other Futures Contracts:
Commitments to purchase 2,666,083 9,518,584
Commitments to sell 15,300,056 32,427,955
Currency Forward Contracts:
Commitments to purchase 464,787 19,553,488
Commitments to sell 7,297,275 80,175,259
</TABLE>
The gross contract amounts represent the Trust's potential involvement in a
particular class of financial instrument (if it were to take or make delivery on
an underlying futures or forward contract). The gross contract amounts
significantly exceed the future cash requirements as the Trust intends to close
out open positions prior to settlement and thus is generally subject only to the
risk of loss arising from the change in the value of the contracts. As such, the
Trust considers the 'fair value' of its futures and forward contracts to be the
net unrealized gain or loss on the contracts. Thus, the amount at risk
associated with counterparty nonperformance of all contracts is the net
unrealized gain included in the statements of financial condition. The market
risk associated with the Trust's commitments to purchase commodities is limited
to the gross contract amounts involved, while the market risk associated with
its commitments to sell is unlimited since the Trust's potential involvement is
to make delivery of an underlying commodity at the contract price; therefore, it
must repurchase the contract at prevailing market prices.
At December 31, 1998 and 1997, the fair value of open futures and forward
contracts was:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
Assets Liabilities Assets Liabilities
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 59,531 $ 607,294 $ 436,575 $ --
Currencies 969,688 187,500 -- --
Other 589,283 134,120 2,522,268 137,955
Foreign exchanges
Financial 5,991,154 385,014 1,204,856 371,572
Other 114,259 11,014 72,375 3,475
Forward Contracts:
Currencies 5,365 207,126 1,538,801 814,847
----------------- ----------------- ----------------- -----------------
$ 7,729,280 $ 1,532,068 $ 5,774,875 $ 1,327,849
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
</TABLE>
8
<PAGE>
The following table presents the average fair value of futures and forward
contracts during the years ended December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C> <C>
Assets Liabilities Assets Liabilities
----------------- ----------------- ----------------- -----------------
Futures Contracts:
Domestic exchanges
Financial $ 744,665 $ 152,149 $ 559,707 $ 63,625
Currencies 74,591 21,197 -- --
Other 832,436 231,205 1,147,030 275,922
Foreign exchanges
Financial 2,557,314 319,871 1,917,123 296,742
Other 74,156 26,229 23,147 14,578
Forward Contracts:
Currencies 1,813,641 1,709,484 2,112,523 1,336,640
----------------- ----------------- ----------------- -----------------
$ 6,096,803 $ 2,460,135 $ 5,759,530 $ 1,987,507
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
</TABLE>
The following table presents the trading revenues from futures and forward
contracts during the years ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 748,929 $ 1,108,889 $ 746,240
Currencies 435,938 -- --
Other (2,713,903) (1,144,183) 4,352,894
Foreign exchanges
Financial 9,093,501 5,491,781 7,931,309
Other 405,655 (297,738) (7,312)
Forward Contracts:
Currencies (1,744,124) 5,054,532 8,380,164
----------- ----------- -----------
$ 6,225,996 $10,213,281 $21,403,295
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
9
<PAGE>
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Trust commenced operations on January 5, 1995 with gross proceeds of
$25,262,800 allocated to commodities trading. The Trust continued to offer
Interests on a monthly basis until the continuous offering period ended on
August 31, 1996, resulting in additional gross proceeds to the Trust of
$41,129,100.
At December 31, 1998, 100% of the Trust's net assets were allocated to
commodities trading. A significant portion of the net assets was held in cash
which is used as margin for the Trust's trading in commodities. Inasmuch as the
sole business of the Trust is to trade in commodities, the Trust continues to
own such liquid assets to be used as margin. PSI credits the Trust monthly with
100% of the interest it earns on the net assets in these accounts.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in certain commodity futures contract
prices during a single day by regulations referred to as 'daily limits.' During
a single day, no trades may be executed at prices beyond the daily limit. Once
the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Trust from promptly liquidating its commodity
futures positions.
Since the Trust's business is to trade futures and forward contracts, its
capital is at risk due to changes in the value of these contracts (market risk)
or the inability of counterparties to perform under the terms of the contracts
(credit risk). The Trust's exposure to market risk is influenced by a number of
factors including the volatility of interest rates and foreign currency exchange
rates, the liquidity of the markets in which the contracts are traded and the
relationship among the contracts held. The inherent uncertainty of the Trust's
speculative trading as well as the development of drastic market occurrences
could result in monthly losses considerably beyond the Trust's experience to
date and could ultimately lead to a loss of all or substantially all of
investor's capital. The Managing Owner attempts to minimize these risks by
requiring the Trust's Trading Manager to abide by various trading limitations
and policies. See Note F to the financial statements for a further discussion on
the credit and market risks associated with the Trust's futures and forward
contracts.
Redemptions of Limited Interests for the years ended December 31, 1998, 1997
and 1996 were $10,805,756, $9,412,151 and $13,726,923, respectively. Redemptions
of General Interests for the years ended December 31, 1998, 1997 and 1996 were
$109,110, $95,125 and $95,780, respectively. Redemptions of Limited and General
Interests from the commencement of operations, January 5, 1995, to December 31,
1998 totalled $42,563,023 and $300,015, respectively. Future redemptions will
impact the amount of funds available for investment in commodity contracts in
subsequent periods.
The Trust does not have, nor does it expect to have, any capital assets.
Results of Operations
The net asset value per Interest as of December 31, 1998 was $200.91, an
increase of 4.80% from the December 31, 1997 net asset value per Interest of
$191.70, which was an increase of 8.82% from the December 31, 1996 net asset
value per Interest of $176.16. The MAR (Managed Account Reports) Fund/Pool
Index, which tracked the performance of 281 and 315 futures funds in 1998 and
1997, returned 6.57% and 9.34%, respectively. Past performance is not
necessarily indicative of future results.
The Trust's positive performance in 1998 resulted from gains in the
financial, energy, grain and meat sectors. Losses were incurred in the metal,
index, currency, and soft sectors.
The Trust profited significantly from financial sector positions. Trades in
Japanese government bonds ('JGB') profited as the result of economic and
political events in the Far East. JGB prices reached record
10
<PAGE>
<PAGE>
highs in response to mid-year reports that the Japanese economy had ceased to
stabilize. Other profitable positions included 10-year U.S. Treasury, German,
and short-term British bonds.
Energy sector positions also achieved gains for the Trust. Positions in most
energy markets, including light crude and crude oil, were profitable as prices
continued to reflect ample inventories worldwide.
The metal sector positions in gold, silver, and copper incurred the largest
losses for the Trust. Silver positions lost value as declining warehouse
inventories caused prices to rise. In the index sector, volatile global stock
markets--affecting positions in the Nikkei Dow (Japan), and SFE index
(Australia)--fueled losses for the Trust.
Additionally, short coffee positions in the soft sector detracted from the
Trust's performance as a result of storm damage in Central America.
Interest income is earned on the net assets held at PSI and, therefore,
varies monthly according to interest rates, trading performance, and
redemptions. Interest income decreased approximately $439,000 for the year ended
December 31, 1998 compared to 1997. This decrease was primarily due to lower net
assets as a result of redemptions and weak trading performance during the first
six months of 1998. Interest income increased approximately $659,000 for the
year ended December 31, 1997 compared to 1996, due to higher average net assets
in 1997 versus 1996. During 1996, net assets continuously increased as a result
of additional contributions through August as well as strong trading performance
beginning in September. In 1997, net assets remained relatively stable as a
result of strong trading performance, particularly during the second half of
1997, offset by redemptions.
Commissions are calculated on the Trust's net asset value at the beginning of
each month and, therefore, vary according to trading performance and
redemptions. Commissions decreased approximately $624,000 for the year ended
December 31, 1998 compared to 1997. This decrease was primarily due to lower
monthly net asset values as a result of redemptions and weak trading performance
during the first six months of 1998. Commissions increased approximately
$542,000 for the year ended December 31, 1997 compared to 1996. This increase
was due to higher net assets in 1997 versus 1996 as described in the interest
income discussion above.
All trading decisions for the Trust are made by John W. Henry & Company, Inc.
(the 'Trading Manager'). Management fees are calculated on the Trust's net asset
value at the end of each month and, therefore, are affected by trading
performance and redemptions. Management fees decreased approximately $337,000
for the year ended December 31, 1998 versus 1997, but increased approximately
$232,000 for the year ended December 31, 1997 versus 1996 for the same reasons
commissions fluctuated as discussed above.
Incentive fees are based on the New High Net Trading Profits generated by the
Trading Manager, as defined in the Advisory Agreement among the Trust, the
Managing Owner and the Trading Manager. Trading performance resulted in
incentive fees of approximately $98,000, $376,000 and $2,099,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ('SFAS 133'),
which the Trust is required to adopt effective January 1, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires that an entity recognize all derivatives as
assets or liabilities measured at fair value. The Trust does not believe the
effect of adoption will be material.
Year 2000 Risk
Investment funds, like financial and business organizations and individuals
around the world, depend on the smooth functioning of computer systems. The year
2000, however, holds the potential for a significant disruption in the operation
of these systems. Many computer systems in use today cannot distinguish the year
2000 from the year 1900 because of the way in which dates are encoded. This is
commonly known as the 'Year 2000 Problem.' The Trust could be adversely affected
if computer systems used by it or any third party with whom it has a material
relationship do not properly perform date comparisons and calculations
concerning dates on or after January 1, 2000, which in turn could have a
negative impact on the handling or determination of trades and prices and the
services provided to the Trust.
11
<PAGE>
The Trust has engaged third parties to perform primarily all of the services
it needs. Accordingly, the Trust's Year 2000 Problems, if any, are not its own
but those that center on the ability of the Managing Owner, Prudential
Securities Incorporated, its Trading Manager and any other third party with whom
the Trust has a material relationship (individually, a 'Service Provider,' and
collectively, the 'Service Providers') to address and correct problems that may
cause their systems not to function as intended as a result of the Year 2000
Problem.
The Trust has received assurances from its Managing Owner and Prudential
Securities Incorporated that they anticipate being able to continue their
operations without any material adverse impact from the Year 2000 Problem.
Although other Service Providers, such as the Trust's Trading Manager, have not
made similar representations to the Trust, the Trust has no reason to believe
that these Service Providers will not take steps necessary to avoid any material
adverse impact on the Trust, though there can be no assurance that this will be
the case. The costs or consequences of incomplete or untimely resolution of the
Year 2000 Problem by the Service Providers, or by governments, exchanges,
clearinghouses, regulators, banks and other third parties, are unknown to the
Trust at this time, but could have a material adverse impact on the operations
of the Trust. The Managing Owner will promptly notify the Trust's limited owners
in the event it determines that the Year 2000 Problem will have a material
adverse impact on the Trust's operations.
The Trust has considered various alternatives as a contingency plan. If the
Year 2000 Problems are systemic, for example, the federal government, the
banking system, exchanges or utilities are affected materially, there may no
adequate contingency plan for the Trust to follow other than to suspend
operations. If the Year 2000 Problems are related to one or more of the other
Service Providers selected by the Trust, the Trust believes that each such
Service Provider is prepared to address any Year 2000 Problems which arise that
could have a material adverse impact on the Trust's operations.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Trust from inception through December 31, 1998.
12
<PAGE>
- --------------------------------------------------------------------------------
I hereby affirm that, to the best of my knowledge and belief, the
information contained herein relating to Diversified Futures Trust I is accurate
and complete.
PRUDENTIAL SECURITIES
FUTURES MANAGEMENT INC.
(Managing Owner)
By: Barbara J. Brooks
Chief Financial Officer
- --------------------------------------------------------------------------------
13
<PAGE>
OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 1998 was $112.
The Trust's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited owners without charge upon written
request to:
Diversified Futures Trust I
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
14
<PAGE>
Peck Slip Station BULK RATE
P.O. Box 2016 U.S. POSTAGE
New York, NY 10272 PAID
Automatic Mail
DFT1/17152
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial
information extracted from the financial
statements for Diversified Futures
Trust I and is qualified in its entirety
by reference to such financial statements
</LEGEND>
<RESTATED>
<CIK> 0000926805
<NAME> Diversified Futures Trust I
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-Mos
<CASH> 55,481,234
<SECURITIES> 6,197,212
<RECEIVABLES> 8,874
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 61,687,320
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,687,320
<CURRENT-LIABILITIES> 2,749,321
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58,937,999
<TOTAL-LIABILITY-AND-EQUITY> 61,687,320
<SALES> 0
<TOTAL-REVENUES> 9,529,178
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,188,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,340,736
<EPS-PRIMARY> 7.09
<EPS-DILUTED> 0
</TABLE>
