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, 2000
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 LLC
388 Greenwich St. - 7th 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
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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, 2000 and December 31,
1999 (unaudited). 3
Statement of Income and Expenses
and Partners' Capital for the three
and nine months ended September 30,
2000 and 1999 (unaudited). 4
Notes to Financial Statements
(unaudited) 5 - 9
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10 - 11
Item 3. Quantitative and Qualitative
Disclosures of Market Risk 12 - 13
PART II - Other Information 14 - 17
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENT OF FINANCIAL CONDITION
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
ASSETS:
Equity in commodity futures trading account:
Cash $ 83,787,837 $ 114,347,833
Net unrealized appreciation (depreciation)
on open contracts (1,308,478) 5,310,783
Commodity options owned at fair
value (cost $0 and $663,996 in
2000 and 1999, respectively) -- 501,192
------------- -------------
82,479,359 120,159,808
Interest receivable 334,134 403,616
------------- -------------
$ 82,813,493 $ 120,563,424
============= =============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 362,278 $ 556,459
Management fees 157,037 326,697
Other 84,236 128,566
Redemptions payable 1,564,692 2,043,170
------------- -------------
2,168,243 3,054,892
------------- -------------
Partners' Capital:
General Partner, 2,048.9308 Unit
equivalents outstanding in 2000 and 1999 2,288,963 2,669,941
Limited Partners, 70,139.2689 and
88,128.2111 Units of Limited Partnership
Interest outstanding in 2000 and 1999,
respectively 78,356,287 114,838,591
------------- -------------
80,645,250 117,508,532
------------- -------------
$ 82,813,493 $ 120,563,424
============= =============
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions $ (6,755,576) $ 4,725,792 $ (4,252,861) $ 9,532,175
Change in unrealized losses on open
positions (1,930,558) (4,964,921) (6,456,457) (3,884,396)
------------- ------------- ------------- -------------
(8,686,134) (239,129) (10,709,318) 5,647,779
Less, brokerage commissions including
clearing fees of $74,785, $62,565,
$207,438 and $191,228, respective (1,329,705) (2,011,553) (4,576,349) (6,185,823)
------------- ------------- ------------- -------------
Net realized and unrealized losses (10,015,839) (2,250,682) (15,285,667) (538,044)
Interest income 1,058,961 1,196,022 3,301,526 3,559,636
------------- ------------- ------------- -------------
(8,956,878) (1,054,660) (11,984,141) 3,021,592
------------- ------------- ------------- -------------
Expenses:
Management fees 509,092 1,084,471 2,277,224 3,161,822
Other 10,801 43,278 60,168 133,202
Incentive fees -- 105,488 -- 668,443
------------- ------------- ------------- -------------
519,893 1,233,237 2,337,392 3,963,467
------------- ------------- ------------- -------------
Net loss (9,476,771) (2,287,897) (14,321,533) (941,875)
Additions 13,137 31,389 51,344 91,544
Redemptions (5,828,553) (3,549,468) (22,593,093) (13,032,161)
------------- ------------- ------------- -------------
Net decrease in Partners' capital (15,292,187) (5,805,976) (36,863,282) (13,882,492)
Partners' capital, beginning of period 95,937,437 135,827,745 117,508,532 143,904,261
------------- ------------- ------------- -------------
Partners' capital, end of period $ 80,645,250 $ 130,021,769 $ 80,645,250 $ 130,021,769
------------- ------------- ------------- -------------
Net asset value per Unit
(72,188.1997 and 93,584.9673 Units
outstanding at September 30, 2000 and
1999, respectively) $ 1,117.15 $ 1,389.34 $ 1,117.15 $ 1,389.34
------------- ------------- ------------- -------------
Net loss per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (125.65) $ (23.96) $ (185.94) $ (8.41)
------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
4
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Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2000
(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 LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner.
The General Partner is wholly owned by Salomon Smith Barney Holdings Inc.
("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of
Citigroup Inc. As of September 30, 2000, all trading decisions are made for the
Partnership by Campbell & Company, Inc., Willowbridge Associates, Inc.,
Stonebrook Capital Management, Inc., Bridgewater Associates, Inc. and Dominion
Capital Management, Inc. (collectively the "Advisors"). Effective July 1, 2000,
John W. Henry and Company, Inc. and Rabar Market Research, Inc. were terminated
as Advisors to the Partnership. Bridgewater Associates, Inc. and Dominion
Capital Management, Inc. were added as Advisors on that same date.
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, 2000 and December 31, 1999 and the results of its
operations for the three and nine months ended September 30, 2000 and 1999.
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 the Securities and Exchange Commission for the year ended
December 31, 1999.
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
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Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three and nine months ended
September 30, 2000 and 1999 were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- --------- ------- ---------
Net realized and Unrealized
losses $ (132.80) $ (23.57) $ (198.19) $ (4.22)
Interest income 14.06 12.57 40.71 36.13
Expenses (6.91) (12.96) (28.46) (40.32)
--------- --------- --------- --------
Decrease for period (125.65) (23.96) (185.94) (8.41)
Net Asset Value per Unit,
beginning of period 1,242.80 1,413.30 1,303.09 1,397.75
--------- --------- --------- ---------
Net Asset Value per Unit
end of period $ 1,117.15 $ 1,389.34 $ 1,117.15 $ 1,389.34
========= ========= ========= =========
6
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Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
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 SSB 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 average fair value during the periods ended September 30,
2000 and December 31, 1999, based on a monthly calculation, was $3,489,037 and
$6,571,306, respectively. The fair value of these commodity interests, including
options thereon, if applicable, at September 30, 2000 and December 31, 1999, was
$(1,308,478) and $5,811,975, respectively, as detailed below.
Fair Value
September 30, December 31,
2000 1999
------------- ----------------
Currency:
- Exchange Traded $ 41,285 $ 423,503
- OTC Contracts (381,529) 196,398
Energy (966,563) 1,095,761
Grains 72,410 64,492
Interest Rates U.S. 74,788 1,352,098
Interest Rates Non-U.S (319,263) 220,653
Livestock 13,880 (19,700)
Metals 73,688 941,009
Softs (36,877) 493,230
Indices 119,703 1,044,531
----------- -----------
Total $(1,308,478) $ 5,811,975
=========== ===========
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
7
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Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
business. These financial instruments may 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, through physical delivery 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 SSB.
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
8
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Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
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. The majority of these instruments mature
within one year of September 30, 2000. However, due to the nature of the
Partnership's business, these instruments may not be held to maturity.
9
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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, net unrealized appreciation (depreciation) on open futures and forward
contracts, commodity options 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 2000.
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, 2000, Partnership capital
decreased 31.4% from $117,508,532 to $80,645,250. This decrease was attributable
to the redemption of 18,029.3153 Units totaling $22,593,093 coupled with net
loss from operations of $14,321,533 which was partially offset by additional
sales of 40.3731 Units totaling $51,344. 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 third quarter of 2000, the net asset value per
unit decreased 10.1% from $1,242.80 to $1,117.15 as compared to a decrease of
1.7% in the third of 1999. The Partnership experienced a net trading loss before
brokerage commissions and related fees in the third quarter of 2000 of
$8,686,134. Losses were primarily attributable to the trading of commodity
contracts in currencies, U.S. and non-U.S. interest rates, livestock, softs and
indices and were partially offset by gains in energy, grains and metals. The
Partnership experienced a net trading loss before commissions and related fees
in the third quarter of 1999 of $239,129. Losses were primarily attributable to
the trading of commodity contracts in grains, livestock, indices, U.S. and non-
U.S. interest rates, metals and were partially offset by gains in currencies,
softs and energy.
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
10
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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 SSB based on the non-competitive 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 nine months ended September 30, 2000 decreased
by $137,061 and $258,110, respectively, as compared to the corresponding periods
in 1999. The decrease in interest income is primarily due to the effect of
redemptions on the Partnership's equity maintained in cash during the nine month
period ended September 30, 2000.
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. Accordingly, they must be compared in relation to
the fluctuations in monthly net asset values. Commissions and fees for the three
and nine months ended September 30, 2000 decreased by $681,848 and $1,609,474,
respectively, as compared to the corresponding periods in 1999.
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 nine months ended September 30, 2000 decreased by $575,379 and
$884,598, respectively, as compared to the corresponding periods in 1999.
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. There were no incentive
fees earned for the three and nine months ending September 30, 2000. Trading
performance for the three and nine months ended September 30, 1999 resulted in
incentive fees of $105,488 and $668,443, respectively.
11
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Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk
component, which is not relevant to Value at Risk.
12
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The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of September 30, 2000.
All open position trading risk exposures of the Partnership have been included
in calculating the figures set forth below. As of September 30, 2000, the
Partnership's total capitalization was approximately $80,645,250. There has been
no material change in the trading Value at Risk information previously disclosed
in the Form 10-K for the year ended December 31, 1999.
September 30, 2000
(Unaudited)
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk
-------------------------------------------------------------------------------
Currencies:
- Exchange Traded Contracts $1,570,649 1.95% $2,346,347 $ 211,754
- OTC Contracts 1,176,521 1.46% 3,722,194 998,265
Energy 1,296,400 1.61% 5,401,200 684,400
Grains 40,100 0.05% 1,183,900 25,650
Interest Rates U.S. 515,500 0.64% 2,104,984 197,900
Interest Rates Non-U.S 1,996,475 2.47% 6,211,403 1,114,191
Livestock 30,400 0.04% 115,375 11,400
Metals 460,450 0.57% 1,916,625 204,500
Softs 98,400 0.12% 1,489,882 43,600
Indices 1,480,073 1.83% 2,703,115 358,641
---------- ----------
Total $8,664,968 10.74%
========== ==========
12
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PART II OTHER INFORMATION
Item 1. Legal Proceedings -
For information concerning the matter entitled MKP Master Fund,
LDC et al. v. Salomon Smith Barney Inc., see the description that
appears in the ninth paragraph under the caption "Legal Proceedings"
of the Annual Report on Form 10-K of the Partnership for the year
ended December 31, 1999. In September 2000, the court denied
plaintiffs' motion to dismiss SSB's counterclaims based on
indemnification and contribution.
Item 2. Changes in Securities and Use of Proceeds -
Additional Units offered represent a reduced brokerage fee to
existing limited partners who invest $1,000,000 or more. For the nine
months ended September 30, 2000, there were additional sales of
40.3731 Units totaling $51,344. For the nine months ended September
30, 1999, there were additional sales of 66.1740 Units totaling
$91,544.
Proceeds from the sale of additional Units are used in the
trading of commodity interest including futures contracts, options and
forward contracts.
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
13
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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 LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/14/00
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 LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/14/00
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 11/14/00
14
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