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, 1998
Commission File Number 0-26132
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, 1998 and December 31,
1997. 3
Statement of Income and Expenses
and Partners' Capital for the
three and six months ended June 30,
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 - 11
Item 3. Quantitative and Qualitative
Disclosures of Market Risk 12
PART II - Other Information 13 - 14
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENT OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
ASSETS: (Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $ 134,617,932 $ 142,852,854
Net unrealized appreciation (depreciation)
on open futures contracts (729,085) 11,184,770
------------- -------------
133,888,847 154,037,624
Interest receivable 424,188 518,917
------------- -------------
$ 134,313,035 $ 154,556,541
============= =============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 600,778 $ 721,970
Management fees 312,591 359,579
Other 100,709 79,457
Incentive fees - 492,736
Redemptions payable 2,087,438 1,521,538
------------- -------------
3,101,516 3,175,280
------------- -------------
Partners' Capital:
General Partner, 2,048.9308 Unit
equivalents outstanding in 1998 and 1997 2,501,109 2,660,393
Limited Partners, 105,440.5337 and
114,539.1563 Units of Limited Partnership
Interest outstanding in 1998 and 1997,
respectively 128,710,410 148,720,868
------------- -------------
131,211,519 151,381,261
------------- -------------
$ 134,313,035 $ 154,556,541
============= =============
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net gains (losses) on trading of commodity
futures:
Realized gains (losses) on closed positions $ 3,440,075 $ (7,058,923) $ 6,899,384 $ 1,480,735
Change in unrealized gains/losses on open
positions (5,772,686) (3,733,550) (11,913,855) (2,012,893)
------------- ------------- ------------- -------------
(2,332,611) (10,792,473) (5,014,471) (532,158)
Less, brokerage commissions and clearing fees
($65,721, $80,128, $158,898 and $163,508, respectively) (2,066,837) (2,465,556) (4,324,843) (5,130,100)
------------- ------------- ------------- -------------
Net realized and unrealized losses (4,399,448) (13,258,029) (9,339,314) (5,662,258)
Interest income 1,307,257 1,608,072 2,812,424 3,318,089
------------- ------------- ------------- -------------
(3,092,191) (11,649,957) (6,526,890) (2,344,169)
------------- ------------- ------------- -------------
Expenses:
Management fees 962,005 1,107,294 1,985,152 2,310,723
Other 36,155 46,979 72,707 96,138
Incentive fees - - 242,074 747,694
------------- ------------- ------------- -------------
998,160 1,154,273 2,299,933 3,154,555
------------- ------------- ------------- -------------
Net loss (4,090,351) (12,804,230) (8,826,823) (5,498,724)
Additions 26,830 252,639 59,306 252,639
Redemptions (5,653,495) (3,737,803) (11,402,225) (9,281,574)
------------- ------------- ------------- -------------
Net decrease in Partners' capital (9,717,016) (16,289,394) (20,169,742) (14,527,659)
Partners' capital, beginning of period 140,928,535 173,348,996 151,381,261 171,587,261
------------- ------------- ------------- -------------
Partners' capital, end of period $ 131,211,519 $ 157,059,602 $ 131,211,519 $ 157,059,602
------------- ------------- ------------- -------------
Net asset value per Unit
(107,489.4645 and 130,119.5800 Units outstanding
at June 30, 1998 and 1997, respectively) $ 1,220.69 $ 1,207.04 $ 1,220.69 $ 1,207.04
------------- ------------- ------------- -------------
Net loss per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (36.39) $ (96.46) $ (77.74) $ (43.32)
------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
NOTES TO FINANCIAL STATEMENTS
June 30, 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"). On November 28, 1997, Smith Barney Holdings Inc. was merged with
Salomon Inc to form Salomon Smith Barney Holdings Inc. ("SSBH"), a wholly owned
subsidiary of Travelers Group. SB is a wholly owned subsidiary of SSBH.
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, 1998 and the results of its operations for the three and
six months ended June 30, 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 and six months ended June
30, 1998 and 1997, were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
Net realized and unrealized
losses $ (39.18) $ (99.89) $ (82.28) $ (44.70)
Interest income 11.81 12.16 24.87 24.72
Expenses (9.02) (8.73) (20.33) (23.34)
--------- --------- --------- ---------
Decrease for period (36.39) (96.46) (77.74) (43.32)
Net Asset Value per Unit,
beginning of period 1,257.08 1,303.50 1,298.43 1,250.36
--------- --------- --------- ---------
Net Asset Value per Unit,
end of period $1,220.69 $1,207.04 $1,220.69 $1,207.04
========= ========= ========= =========
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, 1998 and December 31, 1997 was $(729,085) and $11,184,770,
respectively, and the average fair value during the six and twelve months then
ended, based on monthly calculation, was $5,138,545 and $10,552,252,
respectively.
4. Financial Instrument Risk:
The Partnership is party to financial instruments with off- balance sheet
risk, including derivative financial instruments and
6
<PAGE>
derivative commodity instruments, in the normal course of its 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 June 30, 1998, the notional or contractual
amounts of the Partnership's commitment to purchase and sell these instruments
was $919,099,955 and $978,596,441, respectively, as detailed below. All of these
instruments mature within one year of June 30, 1998. However, due to the nature
of the Partnership's business, these instruments may not be held to maturity. At
June 30, 1998, the fair value of the Partnership's derivatives, including
options thereon, was $(729,085), as detailed below.
JUNE 30, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 6,445,788 $ 28,958,535 $ 250,258
- - OTC Contracts 196,371,141 268,658,636 (3,390,994)
Energy 2,059,100 25,838,888 876,198
Grains 1,115,855 15,471,445 (111,223)
Interest rate U.S. 267,989,785 4,607,562 792,918
Interest rate Non U.S. 415,373,678 560,811,659 289,930
Livestock - 2,199,640 35,518
Metals 6,211,175 39,535,562 (331,640)
Softs 5,527,250 14,958,713 873,395
Indices 18,006,183 17,555,801 (13,445)
------------ ------------ ------------
Totals $919,099,955 $978,596,441 $ (729,085)
============ ============ ============
At December 31, 1997, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $825,601,374
and $788,720,477, respectively, and fair value of the Partnership's derivatives,
including options thereon, was $11,184,770, as detailed below.
DECEMBER 31,1997
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 11,004,227 $ 85,052,231 $ 710,480
- - OTC Contracts 91,780,207 172,891,448 430,261
Energy 2,293,498 51,019,266 2,859,466
Interest Rates U.S. 221,651,270 - 1,004,688
Interest Rates Non U.S. 450,921,559 320,673,268 1,205,068
Grains 1,900,330 34,874,210 884,824
Metals 23,394,060 69,472,845 2,414,000
Indices 3,912,480 25,990,658 499,992
Softs 18,743,743 20,872,968 934,676
Livestock - 7,873,583 241,315
------------ ------------ ------------
Totals $825,601,374 $788,720,477 $ 11,184,770
============ ============ ============
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 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 six months ended June 30, 1998, Partnership capital decreased 13.3%
from $151,381,261 to $131,211,519. This decrease was attributable to a net loss
from operations of $8,826,823 coupled with the redemption of 9,145.6004 units
totaling $11,402,225 which was partially offset by additional sales of 46.9778
units totaling $59,306. 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.
Operational Risk
The General Partner administers the business of the Partnership through
various systems and processes maintained by SSBH. SSBH has analyzed the impact
of the year 2000 on its systems and processes and modifications for compliance
are proceeding according to plan. All modifications necessary for year 2000
compliance are expected to be completed by the first quarter of 1999. In July
1998, SB participated in successful industry-wide testing coordinated by the
Securities Industry Association and plans to participate in such tests in the
future. The purpose of industry-wide testing is to confirm that exchanges,
clearing organizations, and other securities industry participants are prepared
for the year 2000. The failure of vendors, clients, or regulators to resolve
their own Year 2000 compliance issues in a timely manner could result in
material financial risk to the Partnership.
9
<PAGE>
Results of Operations
During the Partnership's second quarter of 1998, the net asset value per
Unit decreased 2.9% from $1,257.08 to $1,220.69, as compared to an decrease of
7.4% in the second quarter of 1997. The Partnership experienced a net trading
loss before commissions and expenses in the second quarter of 1998 of
$2,332,611. Losses were recognized in livestock, grains, U.S. and non U.S.
interest rates and metals and were partially offset by gains in indices,
currencies, energy and softs products. 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, U.S. and non U.S. interest rates, energy products and livestock and
were partially offset by gains recognized in the trading of grains, indices,
metals and softs.
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 and six months ended June 30, 1998 decreased by
$300,815 and $505,665, respectively, as compared to the corresponding periods 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 and six months ended June
30, 1998 decreased by $398,719 and $805,257 respectively, as compared to the
corresponding periods 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
10
<PAGE>
and redemptions. Management fees for the three and six months ended June 30,
1998 decreased by $145,289 and $ 325,571, respectively, as compared to the
corresponding periods 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
resulted in incentive fees for the three and six months ended June 30, 1998 of $
0 and $242,074, respectively. Trading performance for the three and six months
ended June 30, 1997 resulted in incentive fees of $0 and $747,694, respectively.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The fund is subject to SEC Financial Reporting Release No. 48, Quantitative
and Qualitative Disclosures of Market Risk and will comply with the disclosure
and reporting requirements in its form 10K as of December 31, 1998.
12
<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
13
<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 was argued in March 1998 and
was affirmed in August 1998.
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 Stearns & Co.
Inc. et al.) had been subject to a stay by agreement of the parties
which will expire on August 21, 1998.
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
14
<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: 8/14/98
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: 8/14/98
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 8/14/98
15
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<NAME> SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 134,617,931
<SECURITIES> (729,084)
<RECEIVABLES> 424,188
<ALLOWANCES> 0
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<CURRENT-ASSETS> 134,313,035
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<OTHER-SE> 131,211,519
<TOTAL-LIABILITY-AND-EQUITY> 134,313,035
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