<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number: 0-26004
DIVERSIFIED FUTURES TRUST I
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3780260
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One New York Plaza, 13th Floor, New York, New York 10292
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 778-7866
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check CK 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 _CK_ No __
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash $54,892,489 $55,481,234
Net unrealized gain on open commodity positions 1,775,779 6,197,212
------------- ------------
Net equity 56,668,268 61,678,446
Other receivables 24,461 8,874
------------- ------------
Total assets $56,692,729 $61,687,320
------------- ------------
------------- ------------
LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 2,783,349 $ 2,543,697
Management fee payable 188,976 205,624
------------- ------------
Total liabilities 2,972,325 2,749,321
------------- ------------
Commitments
Trust capital
Limited interests (276,117.926 and 290,423.624 interests
outstanding) 53,183,213 58,348,534
General interests (2,789 and 2,934 interests outstanding) 537,191 589,465
------------- ------------
Total trust capital 53,720,404 58,937,999
------------- ------------
Total liabilities and trust capital $56,692,729 $61,687,320
------------- ------------
------------- ------------
Net asset value per limited and general interest ('Interests') $ 192.61 $ 200.91
------------- ------------
------------- ------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
2
<PAGE>
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1999 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
REVENUES
Net realized gain (loss) on commodity transactions $ 3,022,787 $ (521,288)
Change in net unrealized gain on open commodity positions (4,421,433) (2,652,483)
Interest income 657,112 906,660
----------- -----------
(741,534) (2,267,111)
----------- -----------
EXPENSES
Commissions 1,120,563 1,272,583
Management fees 572,149 645,018
----------- -----------
1,692,712 1,917,601
----------- -----------
Net loss $(2,434,246) $(4,184,712)
----------- -----------
----------- -----------
ALLOCATION OF NET LOSS
Limited interests $(2,409,900) $(4,142,862)
----------- -----------
----------- -----------
General interests $ (24,346) $ (41,850)
----------- -----------
----------- -----------
NET LOSS PER WEIGHTED AVERAGE
LIMITED AND GENERAL INTEREST
Net loss per weighted average limited and general interest $ (8.30) $ (11.88)
----------- -----------
----------- -----------
Weighted average number of limited and general interests outstanding 293,358 352,174
----------- -----------
----------- -----------
- ---------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN TRUST CAPITAL
(Unaudited)
<TABLE>
<CAPTION>
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Trust capital--December 31, 1998 293,357.624 $58,348,534 $589,465 $58,937,999
Net loss -- (2,409,900) (24,346 ) (2,434,246)
Redemptions (14,450.698) (2,755,421) (27,928 ) (2,783,349)
------------ ----------- --------- -----------
Trust capital--March 31, 1999 278,906.926 $53,183,213 $537,191 $53,720,404
------------ ----------- --------- -----------
------------ ----------- --------- -----------
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
A. General
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of Diversified Futures Trust I (the 'Trust') as of March 31, 1999 and
the results of its operations for the three months ended March 31, 1999 and
1998. However, the operating results for the interim periods may not be
indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Trust's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1998 (the 'Annual Report').
B. Related Parties
The managing owner of the Trust is Prudential Securities Futures Management
Inc. (the 'Managing Owner'), a wholly owned subsidiary of Prudential Securities
Incorporated ('PSI'). The Managing Owner and its affiliates perform services for
the Trust which include, but are not limited to: brokerage services, accounting
and financial management, registrar, transfer and assignment functions, investor
communications, printing and other administrative services. Except for costs
related to brokerage services, PSI or its affiliates pay the costs of these
services in addition to its routine operational, administrative, legal and
auditing fees as well as costs paid to organize the Trust and offer its
interests. As described in the Annual Report, all commissions for brokerage
services are paid to PSI.
The Trust's assets are maintained either in trading or cash accounts with
PSI, the Trust's commodity broker, or for margin purposes, with the various
exchanges on which the Trust is permitted to trade. PSI credits the Trust
monthly with 100% of the interest it earns on the net assets in these accounts.
The Trust, acting through its trading manager, executes over-the-counter,
spot, forward and/or option foreign exchange transactions with PSI. PSI then
engages in back-to-back trading with an affiliate, Prudential-Bache Global
Markets, Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions.
PBGM keeps its prices on foreign currency competitive with other interbank
currency trading desks. All over-the-counter currency transactions are conducted
between PSI and the Trust pursuant to a line of credit. PSI may require that
collateral be posted against the marked-to-market positions of the Trust.
As of March 31, 1999, a non-U.S. affiliate of the Managing Owner owns
2,463.953 limited interests of the Trust.
C. Credit and Market Risk
Since the Trust's business is to trade futures and forward (including foreign
exchange transactions) contracts, its capital is at risk due to changes in the
value of these contracts (market risk) or the inability of counterparties to
perform under the terms of the contracts (credit risk).
Futures and forward contracts involve varying degrees of off-balance sheet
risk; and changes in the level or volatility of interest rates, foreign currency
exchange rates or the market values of the contracts (or commodities underlying
the contracts) frequently result in changes in the Trust's unrealized gain
(loss) on open commodity positions reflected in the statements of financial
condition. The Trust's exposure to market risk is influenced by a number of
factors including the relationships among the contracts held by the Trust as
well as the liquidity of the markets in which the contracts are traded.
Futures contracts are traded on organized exchanges and are thus
distinguished from forward contracts which are entered into privately by the
parties. The credit risks associated with futures contracts are typically
perceived to be less than those associated with forward contracts, because
exchanges typically provide clearinghouse arrangements in which the collective
credit (subject to certain limitations) of the members of
4
<PAGE>
the exchanges is pledged to support the financial integrity of the exchange. On
the other hand, the Trust must rely solely on the credit of its broker (PSI)
with respect to forward transactions. The Trust presents unrealized gains and
losses on open forward positions as a net amount in the statements of financial
condition because it has a master netting agreement with PSI.
The Managing Owner attempts to minimize both credit and market risks by
requiring the Trust's trading manager to abide by various trading limitations
and policies. The Managing Owner monitors compliance with these trading
limitations and policies which include, but are not limited to, executing and
clearing all trades with creditworthy counterparties (currently, PSI is the sole
counterparty or broker); limiting the amount of margin or premium required for
any one commodity or all commodities combined; and generally limiting
transactions to contracts which are traded in sufficient volume to permit the
taking and liquidating of positions. The Managing Owner may impose additional
restrictions (through modifications of such trading limitations and policies)
upon the trading activities of the trading manager as it, in good faith, deems
to be in the best interests of the Trust.
PSI, when acting as the Trust's futures commission merchant in accepting
orders for the purchase or sale of domestic futures contracts, is required by
Commodity Futures Trading Commission ('CFTC') regulations to separately account
for and segregate as belonging to the Trust all assets of the Trust relating to
domestic futures trading and is not to commingle such assets with other assets
of PSI. At March 31, 1999, such segregated assets totalled $44,407,332. Part
30.7 of the CFTC regulations also requires PSI to secure assets of the Trust
related to foreign futures trading which totalled $11,782,787 at March 31, 1999.
There are no segregation requirements for assets related to forward trading.
As of March 31, 1999, the Trust's open futures and forward contracts mature
within one year.
At March 31, 1999 and December 31, 1998, gross contract amounts of open
futures and forward contracts were:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Financial Futures Contracts:
Commitments to purchase $150,581,147 $241,713,301
Commitments to sell 403,930,809 450,175,973
Currency Futures Contracts:
Commitments to purchase -- 29,926,525
Commitments to sell 68,212,813 22,716,988
Other Futures Contracts:
Commitments to purchase 6,094,835 2,666,083
Commitments to sell 21,759,419 15,300,056
Currency Forward Contracts:
Commitments to purchase 6,237,265 464,787
Commitments to sell 32,118,793 7,297,275
</TABLE>
The gross contract amounts represent the Trust's potential involvement in a
particular class of financial instrument (if it were to take or make delivery on
an underlying futures or forward contract). The gross contract amounts
significantly exceed the future cash requirements as the Trust intends to close
out open positions prior to settlement and thus is generally subject only to the
risk of loss arising from the change in the value of the contracts. As such, the
Trust considers the 'fair value' of its futures and forward contracts to be the
net unrealized gain or loss on the contracts. Thus, the amount at risk
associated with counterparty nonperformance of all contracts is the net
unrealized gain included in the statements of financial condition. The market
risk associated with the Trust's commitments to purchase commodities is limited
to the gross contract amounts involved, while the market risk associated with
its commitments to sell is unlimited since the Trust's potential involvement is
to make delivery of an underlying commodity at the contract price; therefore, it
must repurchase the contract at prevailing market prices.
5
<PAGE>
At March 31, 1999 and December 31, 1998, the fair value of open futures and
forward contracts was:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 531,929 $ -- $ 59,531 $ 607,294
Currencies 558,988 297,150 969,688 187,500
Other 505,660 218,904 589,283 134,120
Foreign exchanges
Financial 574,110 526,196 5,991,154 385,014
Other 173,395 4,202 114,259 11,014
Forward Contracts:
Currencies 550,266 72,117 5,365 207,126
---------- ----------- ---------- -----------
$2,894,348 $ 1,118,569 $7,729,280 $ 1,532,068
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The following table presents the average fair value of futures and forward
contracts during the three months ended March 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Assets Liabilities Assets Liabilities
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 305,122 $ 216,686 $ 520,973 $ 78,874
Currencies 826,378 167,994 -- --
Other 462,673 158,693 1,182,189 222,577
Foreign exchanges
Financial 3,556,620 395,097 1,446,647 349,807
Other 93,973 19,449 67,634 16,550
Forward Contracts:
Currencies 557,261 261,720 1,268,767 1,476,705
---------- ----------- ---------- -----------
$5,802,027 $ 1,219,639 $4,486,210 $ 2,144,513
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The following table presents the trading revenues from futures and forward
contracts for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Futures Contracts:
Domestic exchanges
Financial $ 1,681,629 $ (466,472)
Currencies (407,625) --
Other (807,080) (1,298,880)
Foreign exchanges
Financial (3,910,954) (483,272)
Other 213,697 187,783
Forward Contracts:
Currencies 1,831,687 (1,112,930)
----------- -----------
$(1,398,646) $(3,173,771)
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Trust commenced operations on January 5, 1995 with gross proceeds of
$25,262,800 allocated to commodities trading. The Trust continued to offer
interests on a monthly basis until the continuous offering period ended on
August 31, 1996, resulting in additional gross proceeds to the Trust of
$41,129,100.
At March 31, 1999, 100% of the Trust's net assets were allocated to
commodities trading. A significant portion of the net assets was held in cash
which is used as margin for the Trust's trading in commodities. Inasmuch as the
sole business of the Trust is to trade in commodities, the Trust continues to
own such liquid assets to be used as margin. PSI credits the Trust monthly with
100% of the interest it earns on the net assets in these accounts.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in certain commodity futures contract
prices during a single day by regulations referred to as 'daily limits.' During
a single day, no trades may be executed at prices beyond the daily limit. Once
the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Trust from promptly liquidating its commodity
futures positions.
Since the Trust's business is to trade futures and forward contracts, its
capital is at risk due to change in the value of these contracts (market risk)
or the inability of counterparties to perform under the terms of the contracts
(credit risk). The Trust's exposure to market risk is influenced by a number of
factors including the volatility of interest rates and foreign currency exchange
rates, the liquidity of the markets in which the contracts are traded and the
relationships among the contracts held. The inherent uncertainty of the Trust's
speculative trading as well as the development of drastic market occurrences
could result in monthly losses considerably beyond the Trust's experience to
date and could ultimately lead to a loss of all or substantially all of
investors' capital. The Managing Owner attempts to minimize these risks by
requiring the Trust's trading manager to abide by various trading limitations
and policies. See Note C to the financial statements for a further discussion on
the credit and market risks associated with the Trust's futures and forward
contracts.
The Trust does not have, nor does it expect to have, any capital assets.
Redemptions of limited and general interests for the three months ended March
31, 1999 were $2,755,421 and $27,928, respectively. Redemptions of limited and
general interests from commencement of operations, January 5, 1995 to March 31,
1999 totalled $45,318,444 and $327,943, respectively. Future redemptions will
impact the amount of funds available for investment in commodity contracts in
subsequent periods.
Results of Operations
The net asset value per Interest as of March 31, 1999 was $192.61, a decrease
of 4.13% from the December 31, 1998 net asset value per Interest of $200.91.
First quarter trading resulted in net losses for the Trust. The financial,
metal, soft, grain and meat sectors incurred losses which were mitigated by
gains generated in the currency, energy, and index sectors.
In the financial sector, the bear market trend in Japanese bonds reversed
when the Ministry of Finance announced that the Bank of Japan would continue
supporting the bond market by purchasing sizable quantities of Japanese
government bonds ('JGBs'). As a result, the Trust sustained sizable losses in
JGBs. In reaction to the International Monetary Fund's threat to sell gold, gold
prices declined during the quarter leading to losses in the metal sector.
7
<PAGE>
The Trust captured gains from the strength of the U.S. dollar as it benefited
from the considerable slow down in European growth and market sentiment that the
European Central Bank will have to smooth the transition to the Euro by cutting
rates. Specifically, profits were derived from long U.S. dollar crossrate
positions against the Deutsche mark and Swiss franc.
Additional gains were generated from long positions in the energy sector as
OPEC announced substantial cuts in crude oil exports.
Interest income is earned on the net assets held at PSI and, therefore,
varies monthly according to interest rates, trading performance, and
redemptions. Interest income decreased approximately $250,000 for the three
months ended March 31, 1999 compared to the corresponding period in 1998. This
decrease was primarily due to declining interest rates as well as lower net
assets in the Trust as a result of redemptions during 1998.
Commissions are calculated on the Trust's net asset value at the beginning of
each month and, therefore, vary according to trading performance and
redemptions. Commissions for the three months ended March 31, 1999 decreased
approximately $152,000 compared to the corresponding period in 1998. This
decrease was primarily due to lower monthly net asset values as a result of
redemptions during 1998.
All trading decisions for the Trust are made by John W. Henry & Company, Inc.
(the 'Trading Manager'). Management fees are calculated on the Trust's net asset
value at the end of each month and, therefore, are affected by trading
performance and redemptions. Management fees for the three months ended March
31, 1999 decreased approximately $73,000 compared to the corresponding period in
1998 for the same reasons commissions decreased as discussed above.
Incentive fees are based on the New High Net Trading Profits generated by the
Trading Manager, as defined in the Advisory Agreement among the Trust, the
Managing Owner and the Trading Manager. No incentive fees were generated during
the three months ended March 31, 1999 and 1998.
Year 2000 Risk
A discussion of Year 2000 risk and its effect on the operations of the Trust
is included in the Trust's Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes exist between the period covered by this report and the
Registrant's most recent fiscal year end. Therefore, pursuant to Item 305(c) of
Regulation S-K, information regarding quantitative and qualitative disclosures
about market risk is not required.
8
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings--There are no material legal proceedings pending by or
against the Registrant or the Managing Owner.
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--Effective April 1999, Eleanor L. Thomas and Joseph A.
Filicetti were elected by the Board of Directors of the Managing Owner
as directors. In addition, Mr. Filicetti has also been elected by the
Board of Directors as President of the Managing Owner replacing Thomas
M. Lane. Mr. Filicetti joined Prudential Securities Incorporated in
September 1998 and is the Director of Sales and Marketing for Managed
Futures. Ms. Thomas was elected by the Board of Directors of the
Managing Owner as Executive Vice President. Ms. Thomas joined Prudential
Securities Incorporated in February 1993 and is primarily responsible
for origination, asset allocation, and due diligence for Managed
Futures.
Item 6. (a) Exhibits--
3.1
and
4.1--Amended and Restated Declaration of Trust and Trust Agreement of
the Registrant dated as of August 25, 1994, as amended and
restated as of September 14, 1994 (incorporated by reference to
Exhibits 3.1 and 4.1 of the Registrant's Form 10-Q for the period
ended September 30, 1994)
4.2--Subscription Agreement (incorporated by reference to
Exhibit C to the Registrant's Registration Statement on
Form S-1, File No. 33-81534)
4.3--Request for Redemption (incorporated by reference to
Exhibit D to the Registrant's Registration Statement
on Form S-1, File No. 33-81534)
27.1--Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K--None
9
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Diversified Futures Trust I
By: Prudential Securities Futures Management Inc.
A Delaware corporation, Managing Owner
By: /s/ Steven Carlino Date: May 14, 1999
----------------------------------------
Steven Carlino
Vice President and Treasurer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial
information extracted from the financial
statements for Diversified Futures Trust I
and is qualified in its entirety by reference
to such financial statements
</LEGEND>
<RESTATED>
<CIK> 0000926805
<NAME> Diversified Futures Trust I
<MULTIPLIER> 1
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Mar-31-1999
<PERIOD-TYPE> 3-Mos
<CASH> 54,892,489
<SECURITIES> 1,775,779
<RECEIVABLES> 24,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,692,729
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,692,729
<CURRENT-LIABILITIES> 2,972,325
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 53,720,404
<TOTAL-LIABILITY-AND-EQUITY> 56,692,729
<SALES> 0
<TOTAL-REVENUES> (741,534)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,692,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,434,246)
<EPS-PRIMARY> (8.30)
<EPS-DILUTED> 0
</TABLE>
