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 June 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
June 30, 1997 and December 31, 1996. 3
Statement of Income and Expenses and
Partners' Capital for the three and
six months ended June 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
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENT OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS: (Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $153,983,471 $170,574,018
Net unrealized appreciation on open
futures contracts 4,784,924 6,887,203
Commodity options owned, at market
value (cost $103,817 and $607,539, in
1997 and 1996, respectively) 70,217 442,696
------------ ------------
158,838,612 177,903,917
Interest receivable 495,679 558,298
------------ ------------
$159,334,291 $178,462,215
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 720,278 $ 831,169
Management fees 356,401 412,599
Other 91,919 108,043
Incentive fees - 3,476,717
Redemptions payable 1,106,091 2,005,213
Commodity options written, at market value
(premiums received $83,070 in 1996) - 41,213
------------ ------------
2,274,689 6,874,954
------------ ------------
Partners' Capital:
General Partner, 2,048.9308 Unit
equivalents outstanding in 1997 and 1996 2,473,141 2,561,901
Limited Partners, 128,070.6492 and
135,181.6379 Units of Limited Partnership
Interest outstanding in 1997 and 1996,
respectively 154,586,461 169,025,360
------------ ------------
157,059,602 171,587,261
------------ ------------
$159,334,291 $178,462,215
============ ============
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 ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Income:
Net gains on trading of commodity futures:
Realized gains (losses) on closed positions $ (7,058,923) $ 11,020,258 $ 1,480,735 $ 10,177,362
Change in unrealized gains/losses on open positions (3,733,550) (2,260,925) (2,012,893) (11,092,765)
------------- ------------- ------------- -------------
(10,792,473) 8,759,333 (532,158) (915,403)
Less, brokerage commissions and clearing fees
( $80,128, $96,741, $163,508 and $219,643,
respectively) (2,465,556) (2,677,183) (5,130,100) (5,574,564)
------------- ------------- ------------- -------------
Net realized and unrealized gains (losses) (13,258,029) 6,082,150 (5,662,258) (6,489,967)
Interest income 1,608,072 1,710,394 3,318,089 3,463,780
------------- ------------- ------------- -------------
(11,649,957) 7,792,544 (2,344,169) (3,026,187)
------------- ------------- ------------- -------------
Expenses:
Management fees 1,107,294 1,158,733 2,310,723 2,376,044
Incentive fees 0 446,772 747,694 446,772
Other expense 46,979 66,353 96,138 154,972
------------- ------------- ------------- -------------
1,154,273 1,671,858 3,154,555 2,977,788
------------- ------------- ------------- -------------
Net income (loss) (12,804,230) 6,120,686 (5,498,724) (6,003,975)
Additions 252,639 0 252,639 2,035,483
Redemptions (3,737,803) (13,674,871) (9,281,574) (25,381,740)
------------- ------------- ------------- -------------
Net decrease in Partners' capital (16,289,394) (7,554,185) (14,527,659) (29,350,232)
Partners' capital, beginning of period 173,348,996 172,394,381 171,587,261 194,190,428
------------- ------------- ------------- -------------
Partners' capital, end of period $ 157,059,602 $ 164,840,196 $ 157,059,602 $ 164,840,196
============= ============= ============= =============
Net asset value per Unit
( 130,119.5800 and 155,566.8362 Units outstanding
at June 30, 1997 and 1996, respectively) $ 1,207.04 $ 1,059.61 $ 1,207.04 $ 1,059.61
============= ============= ============= =============
Net income (loss) per Unit of Limited Partnership
Interest and General Partnership Unit equivalent $ (96.46) $ 36.37 $ (43.32) $ (32.05)
============= ============= ============= =============
</TABLE>
4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 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. and AIS Futures Management, Inc. (collectively, the
"Advisors").
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 June 30, 1997 and the results of its operations for the three and
six months ended June 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 six months ended
June 30, 1997 and 1996, were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
Net realized and unrealized
gains (losses) $ (99.89) $ 36.12 $ (44.70) $ (34.85)
Interest income 12.16 10.32 24.72 20.26
Expenses (8.73) (10.07) (23.34) (17.46)
---------- ---------- ---------- ----------
Increase (decrease) for
period (96.46) 36.37 (43.32) (32.05)
Net Asset Value per Unit,
beginning of period 1,303.50 1,023.24 1,250.36 1,091.66
---------- ---------- ---------- ----------
Net Asset Value per Unit,
end of period $ 1,207.04 $ 1,059.61 $ 1,207.04 $ 1,059.61
========== ========== ========== ==========
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 statements 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 June 30, 1997 was $4,855,141 and the average fair value during the
six months then ended, based on monthly calculation, was $9,389,130.
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
<PAGE>
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 June 30, 1997, the notional or contractual
amounts of the Partnership's
7
<PAGE>
commitment to purchase and sell these instruments was $1,584,917,211 and
$571,741,956, respectively, as detailed below. All of these instruments mature
within one year of June 30, 1997. However, due to the nature of the
Partnership's business, these instruments may not be held to maturity. At June
30, 1997, the fair value of the Partnership's derivatives, including options
thereon, was $4,855,141, as detailed below.
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 56,217,194 $ 87,536,459 $ 50,820
- - OTC Contracts 151,990,765 113,182,957 (478,530)
Energy 598,580 45,225,589 (1,378,922)
Interest Rates U.S. 359,634,615 0 1,096,912
Interest Rates Non U.S. 840,496,113 183,632,090 1,238,355
Grains 5,898,845 54,949,909 2,464,714
Metals 49,323,803 82,856,899 1,111,146
Indices 79,957,470 0 25,295
Softs 37,602,093 4,155,333 659,168
Livestock 3,197,733 202,720 66,183
-------------- -------------- --------------
Totals $1,584,917,211 $ 571,741,956 $ 4,855,141
============== ============== ==============
5. Subsequent Event:
Telesis Management Inc. was added as an advisor to the
Partnership effective August 1, 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 second
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 six months ended June 30, 1997, Partnership capital decreased 8.5%
from $171,587,261 to $157,059,602. This decrease was attributable to a net loss
from operations of $5,498,724 coupled with redemptions of 7,306.1774 units
totaling $9,281,574 which was partially offset by the addition of 195.1887 Units
totaling $252,639 for the six months ended June 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 second quarter of 1997, the net asset value per
Unit decreased 7.4% from $1,303.50 to $1,207,04, as compared to an increase of
3.6% in the second quarter of 1996. The Partnership experienced a net trading
loss before commissions and expenses in the second quarter of 1997 of
$10,792,473. Losses were recognized in the trading of commodity futures in
currencies, energy products, U.S. and non U.S. interest rates and livestock and
were partially offset by gains in grains, indices, metals and softs. The
Partnership experienced a net trading gain before commissions and expenses in
the second quarter of 1996 of $8,759,333. Gains were recognized in currencies,
metals, energy and agricultural products and were partially offset by losses in
indices and interest rates.
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit.
9
<PAGE>
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 and six months ended June 30, 1997 decreased by $102,322
and $145,691, respectively, as compared to the corresponding periods in 1996.
The decrease in interest income is 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 six months ended June
30, 1997 decreased by $211,627 and $444,464, 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 and six months ended June 30, 1997 decreased by $51,439 and $65,321,
respectively, as compared to the corresponding periods 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 six months ended June 30, 1997 of
$0 and $747,694, respectively. Trading performance for the three months ended
June 30, 1996 resulted in incentive fees of $446,772. There were no incentive
fees earned in the first quarter of 1996.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - None
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 - None
Item 6. (a) Exhibits
10.8 Letter dated June 24, 1997 from the General Partner to Rabar
Market Research revising the terms of incentive fee payment.
(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: 8/13/97
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: 8/13/97
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 8/13/97
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911503
<NAME> Smith Barney Diversified Futures Fund L.P.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 153,983,471
<SECURITIES> 4,855,141
<RECEIVABLES> 495,679
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 159,334,291
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 159,334,291
<CURRENT-LIABILITIES> 2,274,689
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 157,059,602
<TOTAL-LIABILITY-AND-EQUITY> 159,334,291
<SALES> 0
<TOTAL-REVENUES> (2,344,169)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,154,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,498,724)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,498,724)
<EPS-PRIMARY> (43.32)
<EPS-DILUTED> 0
</TABLE>
June 24, 1997
Rabar Market Research
10 Bank St. - Suite 830
White Plain, N.Y. 10606
Attention: Mr. John Dreyer &
Mr. Paul Rabar
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund
Dear Mr. Dreyer & Mr. Rabar:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1998.
The incentive fee will now be paid annually instead of quarterly. All other
provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
RABAR MARKET RESEARCH
By:
Print Name:
DAD/sr
rw/1
