FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1997
Commission File Number 33-75056
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
New York 13-3729162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statement of Financial Condition at
September 30, 1997 and December 31,
1996. 3
Statement of Income and Expenses and
Partners' Capital for the three and
nine months ended September 30, 1997
and 1996. 4
Notes to Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 - 10
PART II - Other Information 11
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ------------
(Unaudited)
ASSETS:
<S> <C> <C>
Equity in commodity futures trading account:
Cash and cash equivalents $145,091,046 $170,574,018
Net unrealized appreciation on open futures contracts 7,597,750 6,887,203
Commodity options owned, at market
value (cost $12,450 and $607,539, in
1997 and 1996, respectively) 6,895 442,696
------------ ------------
152,695,691 177,903,917
Interest receivable 479,837 558,298
------------ ------------
$153,175,528 $178,462,215
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 692,437 $ 831,169
Management fees 342,113 412,599
Other 79,995 108,043
Incentive fees 61,031 3,476,717
Redemptions payable 2,475,665 2,005,213
Commodity options written, at market value
(premiums received $83,070 in 1996) -- 41,213
------------ ------------
3,651,241 6,874,954
------------ ------------
Partners' Capital
General Partner, 2,048.9308 Unit
equivalents outstanding in 1997 and 1996 2,504,633 2,561,901
Limited Partners, 120,270.7434 and
135,181.6379 Units of Limited Partnership
Interest outstanding in 1997 and 1996,
respectively 147,019,654 169,025,360
------------ ------------
149,524,287 171,587,261
------------ ------------
$153,175,528 $178,462,215
============ ============
</TABLE>
See Notes to Financial Statements
3
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SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTHS THREE-MONTHS NINE-MONTHS NINE-MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity futures:
Realized gains (losses) on closed positions $ 1,272,924 $ (1,262,655) $ 2,753,659 $ 8,914,707
Change in unrealized gains /losses on open positions 2,840,871 7,325,730 827,978 (3,767,035)
------------- ------------- ------------- -------------
4,113,795 6,063,075 3,581,637 5,147,672
Less, brokerage commissions and clearing
fees ($83,076, $94,466, $246,584 and $314,109,
respectively) (2,451,605) (2,477,914) (7,581,705) (8,052,478)
------------- ------------- ------------- -------------
Net realized and unrealized gains (losses) 1,662,190 3,585,161 (4,000,068) (2,904,806)
Interest income 1,579,945 1,554,404 4,898,034 5,018,184
------------- ------------- ------------- -------------
3,242,135 5,139,565 897,966 2,113,378
------------- ------------- ------------- -------------
Expenses:
Management fees 1,100,450 1,086,149 3,411,173 3,462,193
Other expense 15,220 64,439 111,358 219,411
Incentive fees 61,032 -- 808,726 446,772
------------- ------------- ------------- -------------
1,176,702 1,150,588 4,331,257 4,128,376
------------- ------------- ------------- -------------
Net income (loss) 2,065,433 3,988,977 (3,433,291) (2,014,998)
Additions 42,621 -- 295,260 2,035,483
Redemptions (9,643,369) (13,060,839) (18,924,943) (38,442,579)
------------- ------------- ------------- -------------
Net decrease in Partners' capital (7,535,315) (9,071,862) (22,062,974) (38,422,094)
Partners' capital, beginning of period 157,059,602 164,840,196 171,587,261 194,190,428
------------- ------------- ------------- -------------
Partners' capital, end of period $ 149,524,287 $ 155,768,334 $ 149,524,287 $ 155,768,334
============= ============= ============= =============
Net Asset Value per Unit
(122,319.6742 and 143,145.4075 Units outstanding
at September 30, 1997 and 1996, respectively) $ 1,222.41 $ 1,088.18 $ 1,222.41 $ 1,088.18
============= ============= ============= =============
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 15.37 $ 28.57 $ (27.95) $ (3.48)
============= ============= ============= =============
</TABLE>
4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. General:
Smith Barney Diversified Futures Fund L.P. (the "Partnership") is a
limited partnership organized under the laws of the State of New York, on August
13, 1993 to engage in the speculative trading of a diversified portfolio of
commodity interests including futures contracts, options and forward contracts.
The commodity interests that are traded by the Partnership are volatile and
involve a high degree of market risk. The Partnership commenced trading
operations on January 12, 1994.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. Smith Barney Inc. ("SB"), an affiliate of
the General Partner, acts as commodity broker for the Partnership. All trading
decisions are made for the Partnership by Campbell & Company, Inc., John W.
Henry & Company, Inc., Chesapeake Capital Corporation, Abraham Trading Company,
Rabar Market Research, Inc., AIS Futures Management, Inc. and Telesis Management
Inc. (collectively, the "Advisors"). Telesis Management Inc. was added as an
advisor to the Partnership effective August 1, 1997.
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Partnership's financial
condition at September 30, 1997 and the results of its operations for the three
and nine months ended September 30, 1997 and 1996. These financial statements
present the results of interim periods and do not include all disclosures
normally provided in annual financial statements. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes included in the Partnership's annual report on Form 10-K filed with
Securities and Exchange Commission for the year ended December 31, 1996.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
5
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
NOTES TO FINANCIAL STATEMENTS
(continued)
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three and nine months ended
September 30, 1997 and 1996, were as follows:
NINE-MONTHS ENDED THREE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
Net realized and unrealized
gains (losses) $12.20 $25.91 $(32.50) $(8.94)
Interest income 12.37 10.25 37.09 30.50
Expenses (9.20) (7.59) (32.54) (25.04)
-------- -------- -------- --------
Increase (decrease) for
period 15.37 28.57 (27.95) (3.48)
Net Asset Value per Unit,
beginning of period 1,207.04 1,059.61 1,250.36 1,091.66
-------- -------- -------- --------
Net Asset Value per Unit,
end of period $1,222.41 $1,088.18 $1,222.41 $1,088.18
======== ======== ======== ========
3. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
The Customer Agreement between the Partnership and SB gives the
Partnership the legal right to net unrealized gains and losses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The fair value of these commodity interests, including options
thereon, at September 30, 1997 was $7,604,645 and the average fair value during
the nine months then ended, based on monthly calculation, was $10,136,135.
4. Financial Instrument Risk:
The Partnership is party to financial instruments with off- balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures
6
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and options, whose value is based upon an underlying asset, index, or reference
rate, and generally represent future commitments to exchange currencies or cash
flows, to purchase or sell other financial instruments at specific terms at
specified future dates, or, in the case of derivative commodity instruments, to
have a reasonable possibility to be settled in cash or with another financial
instrument. These instruments may be traded on an exchange or over-the-counter
("OTC"). Exchange traded instruments are standardized and include futures and
certain option contracts. OTC contracts are negotiated between contracting
parties and include forwards and certain options. Each of these instruments is
subject to various risks similar to those related to the underlying financial
instruments including market and credit risk. In general, the risks associated
with OTC contracts are greater than those associated with exchange traded
instruments because of the greater risk of default by the counterparty to an OTC
contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is SB.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems and, accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At September 30, 1997, the notional or
contractual amounts of the
7
<PAGE>
Partnership's commitment to purchase and sell these instruments was
$1,419,810,733 and $406,122,482, respectively, as detailed below. All of these
instruments mature within one year of September 30, 1997. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity. At September 30, 1997, the fair value of the Partnership's
derivatives, including options thereon, was $7,604,645, as detailed below.
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 8,792,183 $ 64,240,005 $ (41,361)
- - OTC Contracts 143,530,634 167,377,796 (200,063)
Energy 54,737,660 6,811,070 (307,495)
Interest Rates U.S. 875,912,056 72,892,025 6,135,266
Interest Rates Non U.S. 264,007,932 0 593,822
Grains 11,685,485 15,608,828 330,875
Metals 36,195,935 34,939,209 (6,673)
Indices 31,887,249 19,114,314 1,252,424
Softs 16,097,679 21,722,255 (206,241)
Livestock 334,890 3,416,980 54,091
-------------- -------------- --------------
Totals $1,419,810,733 $ 406,122,482 $ 7,604,645
============== ============== ==============
5. Pending Merger:
On September 24, 1997, Travelers Group Inc. ("Travelers") and Salomon
Inc ("Salomon") announced an agreement and plan of merger pursuant to which
Salomon will become a wholly owned subsidiary of Travelers and Smith Barney
Holdings Inc., the parent company of Smith Barney Inc. and Smith Barney Futures
Management Inc., will be merged into Salomon forming Salomon Smith Barney
Holdings Inc. The transaction is expected to be completed by year-end 1997.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its equity in its commodity futures trading account, consisting of
cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures contracts and interest receivable. Because of the low margin deposits
normally required in commodity futures trading, relatively small price movements
may result in substantial losses to the Partnership. While substantial losses
could lead to a decrease in liquidity, no such losses occurred during the third
quarter of 1997.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity futures
trading, expenses, interest income, additions and redemptions of Units and
distributions of profits, if any.
For the nine months ended September 30, 1997, Partnership capital
decreased 12.9% from $171,587,261 to $149,524,287. This decrease was
attributable to a net loss from operations of $3,433,291 coupled with the
redemption of 15,140.4279 Units totaling $18,924,943 which was partially offset
by the addition of 229.5334 Units totaling $295,260 for the nine months ended
September 30, 1997. Future redemptions can impact the amount of funds available
for investments in commodity contract positions in subsequent periods.
Results of Operations
During the Partnership's third quarter of 1997, the net asset value per
Unit increased 1.3% from $1,207.04 to $1,222.41, as compared to an increase of
2.7% in the third quarter of 1996. The Partnership experienced a net trading
gain before commissions and expenses in the third quarter of 1997 of $4,113,795.
Gains were recognized in the trading of commodity futures in currencies, U.S.
and non U.S. interest rates and indices and were partially offset by losses in
grains, livestock, metals, energy products and softs. The Partnership
experienced a net trading gain before commissions and expenses in the third
quarter of 1996 of $6,063,075. Gains were recognized in interest rates, metals
and energy products and were partially offset by losses in indices, agricultural
products and currencies.
Commodity futures markets are highly volatile. Broad price
fluctuations and rapid inflation increase the risks involved in
9
<PAGE>
commodity trading, but also increase the possibility of profit. The
profitability of the Partnership depends on the existence of major price trends
and the ability of the Advisors to identify correctly those price trends. Price
trends are influenced by, among other things, changing supply and demand
relationships, weather, governmental, agricultural, commercial and trade
programs and policies, national and international political and economic events
and changes in interest rates. To the extent that market trends exist and the
Advisors are able to identify them, the Partnership expects to increase capital
through operations.
Interest income on 80% of the Partnership's daily equity maintained in
cash was earned on the monthly average 30-day Treasury bill rate. Interest
income for the three months ended September 30, 1997 increased by $25,541 as
compared to the corresponding period in 1996. This increase is the result of a
higher average daily cash balance during the third quarter of 1997 as compared
to 1996. Interest income for the nine months ended September 30, 1997 decreased
by $120,150 as compared to the corresponding period in 1996 primarily due to the
effect of negative trading performance and redemptions on the Partnership's
equity maintained in cash.
Brokerage commissions are calculated on the Partnership's net asset value
as of the last day of each month and, therefore, vary according to trading
performance and redemptions. Commissions for the three and nine months ended
September 30, 1997 decreased by $26,309 and $470,773, respectively, as compared
to the corresponding periods in 1996.
Management fees are calculated on the portion of the Partnership's net
asset value allocated to each Advisor at the end of the month and, therefore,
are affected by trading performance and redemptions. Management fees for the
three months ended September 30, 1997 increased by $14,301 as compared to the
corresponding period in 1996. Management fees for the nine months ended
September 30, 1997 decreased by $51,020 as compared to the corresponding period
in 1996.
Incentive fees are based on the new trading profits generated by each
Advisor at the end of the quarter, as defined in the advisory agreements between
the Partnership, the General Partner and each Advisor. Trading performance
resulted in incentive fees for the three and nine months ended September 30,
1997 of $61,032 and $361,954, respectively. Trading performance for the nine
months ended September 30, 1996 resulted in incentive fees of $446,772.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - None
Item 6. (a) Exhibits - None
(b) Reports on Form 8-K - None
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. SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/12/97
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 and on the dates indicated.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/12/97
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 11/12/97
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911503
<NAME> Smith Barney Diversified Futures Fund L.P.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 145,091,046
<SECURITIES> 7,604,645
<RECEIVABLES> 479,837
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 153,175,528
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,175,528
<CURRENT-LIABILITIES> 3,651,241
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 149,524,287
<TOTAL-LIABILITY-AND-EQUITY> 153,175,528
<SALES> 0
<TOTAL-REVENUES> 897,966
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,331,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,433,291)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,433,291)
<EPS-PRIMARY> (27.95)
<EPS-DILUTED> 0
</TABLE>
