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 March 31, 1998
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 March 31, 1998 and December 31,
1997. 3
Statement of Income and Expenses
and Partners' Capital for the
three months ended March 31,
1998 and 1997. 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 - 12
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS: (Unaudited)
<S> <C> <C>
Equity in commodity futures trading account:
Cash and cash equivalents $138,611,787 $142,852,854
Net unrealized appreciation on open futures
contracts 5,043,601 11,184,770
------------ ------------
143,655,388 154,037,624
Interest receivable 513,598 518,917
------------ ------------
$144,168,986 $154,556,541
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 673,447 $ 721,970
Management fees 346,780 359,579
Incentive fees 242,074 492,736
Other 78,375 79,457
Redemptions payable 1,899,775 1,521,538
------------ ------------
3,240,451 3,175,280
Partners' Capital:
General Partner, 2,048.9308 Unit
equivalents outstanding in 1998 and 1997 2,575,670 2,660,393
Limited Partners, 110,059.0267 and
114,539.1563 Units of Limited Partnership
Interest outstanding in 1998 and 1997,
respectively 138,352,865 148,720,868
------------ ------------
140,928,535 151,381,261
------------ ------------
$144,168,986 $154,556,541
============ ============
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains on closed positions $ 3,459,309 $ 8,539,658
Change in unrealized gains/losses on open
positions (6,141,169) 1,720,657
------------- -------------
(2,681,860) 10,260,315
Less, brokerage commissions and clearing fees
($93,177 and $83,380, respectively) (2,258,006) (2,664,544)
------------- -------------
Net realized and unrealized gains (losses) (4,939,866) 7,595,771
Interest income 1,505,167 1,710,017
------------- -------------
(3,434,699) 9,305,788
------------- -------------
Expenses:
Management fees 1,023,147 1,203,429
Other 36,552 49,159
Incentive fees 242,074 747,694
------------- -------------
1,301,773 2,000,282
------------- -------------
Net income (loss) (4,736,472) 7,305,506
Additions 32,476 --
Redemptions (5,748,730) (5,543,771)
------------- -------------
Net increase (decrease) in Partners' capital (10,452,726) 1,761,735
Partners' capital, beginning of period 151,381,261 171,587,261
------------- -------------
Partners' capital, end of period $ 140,928,535 $ 173,348,996
------------- -------------
Net asset value per Unit
(112,107.9575 and 132,986.9975 Units
outstanding at March 31, 1998 and
1997, respectively) $ 1,257.08 $ 1,303.50
------------- -------------
Net income (loss) per Unit of Limited
Partnership Interest and General
Partner Unit equivalent $ (41.35) $ 53.14
------------- -------------
</TABLE>
4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(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., Trendview Management Inc., Telesis Management Inc., Rabar
Market Research, Inc. and AIS Futures Management, Inc. (collectively, the
"Advisors"). Chesapeake Capital Corporation and Abraham Trading Co. ceased
trading for the Partnership effective January 31, 1998.
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 March 31, 1998 and the results of its operations for the three
months ended March 31, 1998 and 1997. 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, 1997.
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 months ended March
31, 1998 and 1997, were as follows:
THREE-MONTHS ENDED
MARCH 31
1998 1997
Net realized and unrealized
gains (losses) $ (43.10) $ 55.19
Interest income 13.06 12.56
Expenses (11.31) (14.61)
--------- ---------
Increase (decrease) for period (41.35) 53.14
Net Asset Value per Unit,
beginning of period 1,298.43 1,250.36
--------- ---------
Net Asset Value per Unit,
end of period $ 1,257.08 $ 1,303.50
========= =========
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 March 31, 1998 and 1997 was $5,043,601 and $8,522,812, respectively,
and the average fair value during the three months then ended, based on monthly
calculation, was $5,233,659 and $13,780,877, respectively.
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
6
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business. These financial instruments include forwards, futures and options,
whose value is based upon an underlying asset, index, or reference rate, and
generally represent future commitments to exchange currencies or cash flows, to
purchase or sell other financial instruments at specific terms at specified
future dates, or, in the case of derivative commodity instruments, to have a
reasonable possibility to be settled in cash or with another financial
instrument. These instruments may be traded on an exchange or over-the-counter
("OTC"). Exchange traded instruments are standardized and include futures and
certain option contracts. OTC contracts are negotiated between contracting
parties and include forwards and certain options. Each of these instruments is
subject to various risks similar to those related to the underlying financial
instruments including market and credit risk. In general, the risks associated
with OTC contracts are greater than those associated with exchange traded
instruments because of the greater risk of default by the counterparty to an OTC
contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure
of a counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the transactions.
The Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is SB.
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.
7
<PAGE>
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 March 31, 1998, the notional or contractual
amounts of the Partnership's commitment to purchase and sell these instruments
was $906,727,667 and $668,931,029, respectively, as detailed below. All of these
instruments mature within one year of March 31, 1998. However, due to the nature
of the Partnership's business, these instruments may not be held to maturity. At
March 31, 1998, the fair value of the Partnership's derivatives, including
options thereon, was $5,043,601, as detailed below.
MARCH 31, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded contracts $ 14,305,004 $ 39,857,760 $ 967,157
- - OTC Contracts 123,902,516 204,375,043 2,688,924
Energy 9,083,300 27,813,630 (228,003)
Grains 12,423,430 27,493,245 865,257
Interest Rates U.S. 40,087,572 154,827,598 (375,640)
Interest Rates Non U.S. 632,458,368 167,136,760 157,448
Livestock -- 1,667,140 (4,497)
Metals 21,360,136 29,745,708 (672,495)
Softs 6,185,930 15,463,180 424,535
Indices 46,921,411 550,965 1,220,915
------------ ------------ ------------
Totals $906,727,667 $668,931,029 $ 5,043,601
============ ============ ============
At March 31, 1997, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $344,823,521
and $1,258,341,081, respectively, and the fair value of the Partnership's
derivatives, including options thereon, was $8,522,812, as detailed below.
MARCH 31, 1997
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded contracts $ 22,189,840 $ 89,080,665 $ 98,733
- - OTC Contracts 55,478,615 85,124,469 (766,933)
Energy 14,203,779 18,907,399 (521,654)
Interest Rates U.S. -- 324,516,241 2,404,849
Interest Rates Non U.S. 76,628,913 678,338,113 742,551
Grains 58,856,993 1,782,480 5,077,801
Metals 57,372,543 34,104,056 586,576
Indices 38,211,998 9,376,219 (1,212,892)
Softs 15,283,370 16,207,989 2,211,801
Livestock 6,597,470 903,450 (98,020)
-------------- -------------- --------------
Totals $ 344,823,521 $1,258,341,081 $ 8,522,812
============== ============== ==============
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 first
quarter of 1998.
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 three months ended March 31, 1998, Partnership capital decreased
6.9% from $151,381,261 to $140,928,535. This decrease was attributable to a net
loss from operations of $4,736,472 coupled with the redemptions of 4,505.3006
units totaling $5,748,730 which was partially offset by additional sales of
25.1710 units totaling $32,476. Additional Units offered represent a reduced
brokerage fee to existing limited partners investing $1,000,000 or more. 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 first quarter of 1998, the net asset value per
Unit decreased 3.2% from $1,298.43 to $1,257.08, as compared to an increase of
4.2% in the first quarter of 1997. The Partnership experienced a net trading
loss before commissions and expenses in the first quarter of 1998 of $2,681,860.
Losses were recognized in currencies, softs, grains, U.S. interest rates, metals
and energy products and were partially offset by gains in indices, livestock and
non-U.S. interest rates. The Partnership experienced a net trading gain before
commissions and expenses in the first quarter of 1997 of $10,260,315. Gains were
recognized in the trading of commodity futures in currencies, grains, softs,
indices, metals and U.S. interest rates and were partially offset by losses
recognized in the trading of energy products, livestock and non-U.S. interest
rates.
9
<PAGE>
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify 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 U.S. Treasury bill rate determined
weekly by SB based on the noncompetitive yield on three month U.S. Treasury
bills maturing in 30 days from the date in which such weekly rate is determined.
Interest income for the three months ended March 31, 1998 decreased by $204,850
as compared to the corresponding period in 1997. The decrease in interest income
is primarily due to the effect of 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 months ended March 31,
1998 decreased by $406,538, as compared to the corresponding period in 1997.
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 March 31, 1998 decreased by $180,282 as compared to the
corresponding period in 1997.
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 for
the three months ended March 31, 1998 and 1997 resulted in incentive fees of
$242,074 and and $747,694, respectively.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Between May 1994 and the present, Salomon Brothers Inc. ("SBI"), SB and
The Robinson Humphrey Company, Inc. ("R- H"), all currently subsidiaries
of Salomon Smith Barney Holdings Inc. ("SSBHI"), along with a number of
other broker-dealers, were named as defendants in approximately 25
federal court lawsuits and two state court lawsuits, principally
alleging that companies that make markets in securities traded on NASDAQ
violated the federal antitrust laws by conspiring to maintain a minimum
spread of $.25 between the bid and asked price for certain securities.
The federal lawsuits and one state court case were consolidated for
pre-trial purposes in the Southern District of New York in the fall of
1994 under the caption In re NASDAQ Market-Makers Antitrust Litigation,
United States District Court, Southern District of New York No.
94-CIV-3996 (RWS); M.D.L. No. 1023. The other state court suit, Lawrence
A. Abel v. Merrill Lynch & Co., Inc. et al.; Superior Court of San
Diego, Case No. 677313, has been dismissed without prejudice in
conjunction with a tolling agreement.
In consolidated action, the plaintiffs purport to represent a class of
persons who bought one or more of what they currently estimate to be
approximately 1,650 securities on NASDAQ between May 1, 1989 and May 27,
1994. They seek unspecified monetary damages, which would be trebled
under the antitrust laws. The plaintiffs also seek injunctive relief, as
well as attorney's fees and the costs of the action. (The state cases
seek similar relief.) Plaintiffs in the consolidated action filed an
amended consolidated complaint that defendants answered in December
1995. On November 26, 1996, the Court certified a class composed of
retail purchasers. A motion to include institutional investors in the
class and to add class representatives was granted. In December 1997,
SBI, SB and R-H, along with several other broker-dealer defendants,
executed a settlement agreement with the plaintiffs. This agreement has
been preliminarily approved by the U.S. District Court for the Southern
District of New York but is subject to final approval.
On July 17, 1996, the Antitrust Division of the Department of Justice
filed a complaint against a number of firms that act as market makers in
NASDAQ stocks. The complaint basically alleged that a common
understanding
11
<PAGE>
arose among NASDAQ market makers which worked to keep quote spreads in
NASDAQ stocks artificially wide. Contemporaneous with the filing of the
complaint, SBI, SB and other defendants entered into a stipulated
settlement agreement, pursuant to which the defendants would agree not
to engage in certain practices relating to the quoting of NASDAQ
securities and would further agree to implement a program to ensure
compliance with federal antitrust laws and with the terms of the
settlement. In entering into the stipulated settlement, SBI and SB did
not admit any liability. There are no fines, penalties, or other
payments of monies in connection with the settlement. In April 1997, the
U.S. District Court for the Southern District of New York approved the
settlement. In May 1997, plaintiffs in the related civil action (who
were permitted to intervene for limited purposes) appealed the district
court's approval of the settlement. The appeal is pending.
The Securities and Exchange Commission ("SEC") is also conducting a
review of the NASDAQ marketplace, during which it has subpoenaed
documents and taken the testimony of various individuals including SBI
and SB personnel. In July 1996, the SEC reached a settlement with the
National Association of Securities Dealers and issued a report detailing
certain conclusions with respect to the NASD and the NASDAQ market.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms,
including SB, in the U.S. Bankruptcy Court for the Central District of
California.Plaintiff alleged, among other things, that the defendants
recommended and sold to plaintiff unsuitable securities. The case
(County of Orange et al. v. Bear Sterns & Co. Inc. et al.) Has been
stayed by agreement of the parties.
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
12
<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: 5/15/98
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: 5/15/98
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 5/15/98
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911503
<NAME> SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 138,611,787
<SECURITIES> 5,043,601
<RECEIVABLES> 513,598
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 144,168,986
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 144,168,986
<CURRENT-LIABILITIES> 3,240,451
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 140,928,535
<TOTAL-LIABILITY-AND-EQUITY> 144,168,986
<SALES> 0
<TOTAL-REVENUES> (3,434,699)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,301,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,736,472)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,736,472)
<EPS-PRIMARY> (41.35)
<EPS-DILUTED> 0
</TABLE>
