<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 1999
/ / 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: 0-17592
PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3464456
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check CK 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 __
<PAGE>
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash $ 3,901,054 $ 3,671,967
U.S. Treasury bills, at amortized cost 12,599,463 12,676,437
Net unrealized gain on open commodity positions 510,290 1,700,674
------------- ------------
Total assets $17,010,807 $18,049,078
------------- ------------
------------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable $ 753,077 $ 276,765
Management fees payable 56,551 59,976
Accrued expenses 45,624 56,613
------------- ------------
Total liabilities 855,252 393,354
------------- ------------
Commitments
Partners' capital
Limited partners (36,869 and 38,588 units outstanding) 15,993,746 17,479,065
General partner (373 and 390 units outstanding) 161,809 176,659
------------- ------------
Total partners' capital 16,155,555 17,655,724
------------- ------------
Total liabilities and partners' capital $17,010,807 $18,049,078
------------- ------------
------------- ------------
Net asset value per limited and general partnership unit ('Units') $ 433.80 $ 452.97
------------- ------------
------------- ------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
2
<PAGE>
PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1999 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
REVENUES
Net realized gain on commodity transactions $ 835,471 $ 110,672
Change in net unrealized gain on open commodity positions (1,190,384) (923,178)
Interest from U.S Treasury bills 143,225 182,048
----------- -----------
(211,688) (630,458)
----------- -----------
EXPENSES
Commissions 345,352 428,989
Management fees 170,772 187,067
General and administrative 19,280 19,216
----------- -----------
535,404 635,272
----------- -----------
Net loss $ (747,092) $(1,265,730)
----------- -----------
----------- -----------
ALLOCATION OF NET LOSS
Limited partners $ (739,617) $(1,253,065)
----------- -----------
----------- -----------
General partner $ (7,475) $ (12,665)
----------- -----------
----------- -----------
NET LOSS PER WEIGHTED AVERAGE
LIMITED AND GENERAL PARTNERSHIP UNIT
Net loss per weighted average
limited and general partnership unit $ (19.17) $ (28.78)
----------- -----------
----------- -----------
Weighted average number of
limited and general partnership units outstanding 38,978 43,974
----------- -----------
----------- -----------
- ---------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
<TABLE>
<CAPTION>
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1998 38,978 $17,479,065 $176,659 $17,655,724
Net loss -- (739,617) (7,475) (747,092)
Redemptions (1,736) (745,702) (7,375) (753,077)
------ ----------- -------- -----------
Partners' capital--March 31, 1999 37,242 $15,993,746 $161,809 $16,155,555
------ ----------- -------- -----------
------ ----------- -------- -----------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of Prudential-Bache Diversified Futures Fund L.P. (the 'Partnership')
as of March 31, 1999 and the results of its operations for the three months
ended March 31, 1999 and 1998. However, the operating results for the interim
periods may not be indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1998.
B. Related Parties
Seaport Futures Management, Inc. (the 'General Partner') and its affiliates
perform services for the Partnership 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. A portion of the general and administrative expenses of the
Partnership for the three months ended March 31, 1999 and 1998 was borne by
Prudential Securities Incorporated ('PSI') and its affiliates.
Costs and expenses charged to the Partnership for these services for the
three months ended March 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
- --------------------------------------------------------------
Commissions $345,352 $428,989
General and administrative 1,107 3,281
-------- --------
$346,459 $432,270
-------- --------
-------- --------
</TABLE>
Expenses payable to the General Partner and its affiliates (which are
included in accrued expenses) as of March 31, 1999 and December 31, 1998 were
$6,807 and $6,853, respectively.
The Partnership's assets are maintained either in trading or cash accounts
with PSI, the Partnership's commodity broker and an affiliate of the General
Partner, or for margin purposes, with the various exchanges on which the
Partnership is permitted to trade.
The Partnership, 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 Partnership pursuant to a line
of credit. PSI may require that collateral be posted against the
marked-to-market position of the Partnership.
C. Credit and Market Risk
Since the Partnership's business is to trade futures, forward and options
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, forward and options 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 Partnership's
unrealized gain
4
<PAGE>
(loss) on open commodity positions reflected in the statements of financial
condition. The Partnership's exposure to market risk is influenced by a number
of factors including the relationships among the contracts held by the
Partnership as well as the liquidity of the markets in which the contracts are
traded.
Futures and options 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 and options 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 Partnership must rely solely on the credit of its broker (PSI)
with respect to forward transactions. The Partnership 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 General Partner attempts to minimize both credit and market risks by
requiring the Partnership's trading manager to abide by various trading
limitations and policies. The General Partner 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 General Partner 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 Partnership.
PSI, when acting as the Partnership's futures commission merchant in
accepting orders for the purchase or sale of domestic futures and options
contracts, is required by Commodity Futures Trading Commission ('CFTC')
regulations to separately account for and segregate as belonging to the
Partnership all assets of the Partnership relating to domestic futures and
options trading and is not to commingle such assets with other assets of PSI. At
March 31, 1999, such segregated assets totalled $12,073,441. Part 30.7 of the
CFTC regulations also requires PSI to secure assets of the Partnership related
to foreign futures and options trading which totalled $4,820,776 at March 31,
1999. There are no segregation requirements for assets related to forward
trading.
As of March 31, 1999, all open futures and forward contracts mature within
one year.
At March 31, 1999 and December 31, 1998, gross contract amounts of open
futures and forward contracts are:
<TABLE>
<CAPTION>
1999 1998
-------------- -----------------
<S> <C> <C>
Futures Currency Contracts:
Commitments to purchase $ 2,366,078 $ 10,565,568
Commitments to sell 22,382,100 4,949,313
Forward Currency Contracts:
Commitments to sell 6,329,936 4,219,516
Financial Futures Contracts:
Commitments to purchase 40,162,076 78,684,333
Commitments to sell 138,614,151 146,222,704
Other Futures Contracts:
Commitments to purchase 1,775,756 696,677
Commitments to sell 6,652,581 3,973,905
</TABLE>
The gross contract amounts represent the Partnership'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 Partnership
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 Partnership 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 Partnership's commitments to
5
<PAGE>
purchase commodities is limited to the gross contract amounts involved, while
the market risk associated with its commitments to sell is unlimited since the
Partnership'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 March 31, 1999 and December 31, 1998, the fair values of open futures and
forward contracts were:
<TABLE>
<CAPTION>
1999 1998
------------------------ --------------------------
Assets Liabilities Assets Liabilities
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $159,331 $ 15,881 $ 76,613 $ 186,825
Currencies 210,760 114,675 313,683 34,663
Other 155,725 39,082 118,553 37,369
Foreign exchanges
Financial 194,506 175,460 1,616,559 110,998
Other 19,967 1,491 17,057 2,810
Forward Contracts:
Currencies 116,590 -- -- 69,126
-------- ----------- ---------- -----------
$856,879 $ 346,589 $2,142,465 $ 441,791
-------- ----------- ---------- -----------
-------- ----------- ---------- -----------
</TABLE>
The following table presents the average fair value of futures and forward
contracts during the three months ended March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 130,860 $ 72,270 $ 186,677 $ 22,141
Currencies 293,752 61,663 154,927 20,624
Other 109,568 40,660 397,333 49,369
Foreign exchanges
Financial 936,282 126,407 453,896 109,352
Other 15,549 2,843 8,639 3,357
Forward Contracts:
Currencies 110,351 21,410 195,651 345,737
---------- ----------- ---------- -----------
$1,596,362 $ 325,253 $1,397,123 $ 550,580
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
6
<PAGE>
The following table presents trading revenues from futures and forward
contracts during the three months ended March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 438,165 $ (36,079)
Currencies (38,103) 59,003
Other (182,211) (496,386)
Foreign exchanges
Financial (1,102,468) (89,529)
Other 32,233 27,617
Forward Contracts:
Currencies 497,471 (277,132)
----------- ---------
$ (354,913) $(812,506)
----------- ---------
----------- ---------
</TABLE>
7
<PAGE>
PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
(a limited partnership)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on October 19, 1988 with gross proceeds
of $30,107,800. After accounting for organizational and offering costs, the
Partnership's net proceeds were $29,387,470.
At March 31, 1999, 100% of the Partnership's net asset value was allocated to
commodities trading. A significant portion of the net asset value was held in
U.S. Treasury bills (which represented approximately 75% of the net asset value
prior to redemptions payable) and cash, which are used as margin for the
Partnership's trading in commodities. Inasmuch as the sole business of the
Partnership is to trade in commodities, the Partnership continues to own such
liquid assets to be used as margin.
The percentage that U.S. Treasury bills bears to the net assets varies each
day, and from month to month, as the market values of commodity interests
change. The balance of the net assets is held in cash. All interest earned on
the Partnership's interest-bearing funds is paid to the Partnership.
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 Partnership from promptly liquidating its commodity
futures positions.
Since the Partnership's business is to trade futures, forward and options
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 Partnership'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 relationships among the contracts held. The
inherent uncertainty of the Partnership's speculative trading as well as the
development of drastic market occurrences could result in monthly losses
considerably beyond the Partnership's experience to date and could ultimately
lead to a loss of all or substantially all of investors' capital. The General
Partner attempts to minimize these risks by requiring the Partnership's trading
manager to abide by various trading limitations and policies. See Note C to the
financial statements for a further discussion on the credit and market risks
associated with the Partnership's futures, forward and options contracts.
Redemptions recorded for the three months ended March 31, 1999 were $745,702
for the limited partners and $7,375 for the General Partner, and from
commencement of operations (October 19, 1988) through March 31, 1999 totalled
$44,296,839 and $1,052,338, respectively. Future redemptions will impact the
amount of funds available for investment in commodity contracts in subsequent
periods.
The Partnership does not have, nor does it expect to have, any capital
assets.
Results of Operations
The net asset value per Unit as of March 31, 1999 was $433.80, a decrease of
4.23% from the December 31, 1998 net asset value per Unit of $452.97.
First quarter trading resulted in net losses. The Partnership incurred losses
in the financial, metal, soft and grain sectors. Profits were recorded in the
currency, energy and index sectors.
The Partnership experienced losses in the financial sector due to positions
in the Euro 10 year bond, Japanese government bond and LIFFE three month
interest rate, which reacted to volatility in the interest rate markets
throughout the first quarter. The metal sector rallied during the first half of
the quarter until events in Kosovo led to NATO military attacks on Yugoslavia
resulting in losses for the Partnership. Grain
8
<PAGE>
sector positions in soybeans incurred losses for the Partnership due to weak
Asian demand and large global soybean surpluses.
During the quarter, the U.S. dollar continued its surge, supported by strong
economic statistics and fueled by interest rate differentials. Additionally, the
Brazil-International Monetary Fund agreement released some pressure off the U.S.
dollar as some level of confidence seemed to be restored in Latin America. As a
result, the U.S. dollar posted significant gains against the Euro, which
contributed to Partnership profits. Positions in the energy sector experienced
gains during the quarter. Energy markets continued to set new highs, propelled
by OPEC's announcement to make substantial cuts in crude oil exports.
Interest income is earned on the Partnership's investment in U.S. Treasury
bills and varies monthly according to interest rates, trading performance and
redemptions. Interest income from U.S. Treasury bills for the three months ended
March 31, 1999 decreased by approximately $39,000 as compared to 1998. The
decline in interest income was the result of lower interest rates in 1999 as
well as fewer funds being invested in U.S. Treasury bills due to redemptions.
Commissions paid to PSI are calculated on the Partnership's net asset value
on the first day of each month and, therefore, vary monthly according to trading
performance and redemptions. Accordingly, they must be compared to the
fluctuations in the monthly net asset values. Commissions decreased by
approximately $84,000 for the three months ended March 31, 1999 as compared to
the corresponding period in 1998 principally due to the effect of 1998
redemptions on the monthly net asset values as well as a reduction in the annual
commission rate from 9% to 8% of the monthly net asset values which took effect
August 1, 1998.
All trading decisions for the Partnership are made by John W. Henry &
Company, Inc. Management fees are calculated on the Partnership's net asset
value as of the end of each month and, therefore, are affected by trading
performance and redemptions. Management fees decreased by approximately $16,000
for the three months ended March 31, 1999 as compared to the corresponding
period in 1998 principally due to the effect of 1998 redemptions on the monthly
net asset values.
Incentive fees are based on the New High Net Trading Profits generated by the
trading manager, as defined in the Advisory Agreement among the Partnership, the
General Partner and the trading manager. No incentive fees were earned during
the three months ended March 31, 1999 and 1998.
General and administrative expenses include audit, tax and legal fees as well
as printing and postage costs. General and administrative expenses for the three
months ended March 31, 1999 was comparable to the corresponding period in 1998.
Year 2000 Risk
A discussion of Year 2000 risk and its effect on the operations of the
Partnership is included in the Partnership's annual report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--There are no material legal proceedings pending by or
against the Registrant or the General Partner.
Item 2. Changes in Securities--None
Item 3. Defaults Upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders--None
Item 5. Other Information--Effective April 1999 Eleanor L. Thomas and Joseph A.
Filicetti have been elected by the Board of Directors of the General
Partner as directors. In addition, Ms. Thomas has also been elected by
the Board of Directors as President of the General Partner replacing
Thomas M. Lane. Ms. Thomas joined PSI in February 1993 and is primarily
responsible for origination, asset allocation, and due diligence for
Managed Futures. Mr. Filicetti was elected by the Board of Directors of
the General Partner as Executive Vice President. Mr. Filicetti joined
PSI in September 1998 and is the Director of Sales and Marketing for
Managed Futures.
Item 6. (a) Exhibits
4.1 Agreement of Limited Partnership of the Registrant, dated as of
May 25, 1988 as amended and restated as of July 12, 1988
(incorporated by reference to Exhibit 3.1 and 4.1 of
Registrant's Annual Report on Form 10-K for the period ended
December 31, 1988)
4.2 Subscription Agreement (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on
Form S-1, File No. 33-22100)
4.3 Request for Redemption (incorporated by reference to
Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, File No. 33-22100)
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--None
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
PRUDENTIAL-BACHE DIVERSIFIED FUTURES FUND L.P.
By: Seaport Futures Management, Inc.
A Delaware corporation, General Partner
By: /s/ Steven Carlino Date: May 14, 1999
----------------------------------------
Steven Carlino
Vice President and Treasurer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information
extracted from the financial statements for
Prudential-Bache Diversified Futures Fund L.P.
and is qualified in its entirety by reference
to such financial statements
</LEGEND>
<RESTATED>
<CIK> 0000833225
<NAME> Prudential-Bache Diversified Futures Fund L.P.
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Mar-31-1999
<PERIOD-TYPE> 3-MOS
<CASH> 3,901,054
<SECURITIES> 13,109,753
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,010,807
<CURRENT-LIABILITIES> 855,252
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,155,555
<TOTAL-LIABILITY-AND-EQUITY> 17,010,807
<SALES> 0
<TOTAL-REVENUES> (211,688)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 535,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (747,092)
<EPS-PRIMARY> (19.17)
<EPS-DILUTED> 0
</TABLE>
