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, 2003
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 Citigroup Managed Futures LLC
399 Park Avenue - 7th Fl.
New York, New York 10022
(Address and Zip Code of principal executive offices)
(212) 599-2011
(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 ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
Yes ____ No X
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition
at June 30, 2003 and December 31,
2002 (unaudited). 3
Condensed Schedules of Investments at
June 30, 2003 and December 31, 2002
(unaudited). 4 - 5
Statements of Income and Expenses
and Partners' Capital for the three
and six months ended June 30, 2003
and 2002 (unaudited). 6
Notes to Financial Statements
(unaudited) 7 - 11
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12 - 14
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 15 - 16
Item 4. Controls and Procedures 17
PART II - Other Information 18
2
PART I
ITEM 1. FINANCIAL STATEMENTS
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
2003 2002
------------- ------------
Assets:
Equity in commodity futures trading account:
Cash (restricted $11,424,955 and $10,243,181 in 2003
and 2002, respectively) $ 76,415,093 $ 64,057,301
Net unrealized (depreciation) appreciation
on open positions * (2,112,102) 4,954,354
------------ ------------
74,302,991 69,011,655
Interest receivable 51,496 53,318
------------ ------------
$ 74,354,487 $ 69,064,973
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 336,123 $ 320,817
Management fees 117,502 143,470
Incentive fees 491,756 55,035
Other 116,387 71,432
Redemptions payable 471,976 412,272
------------ ------------
1,533,744 1,003,026
------------ ------------
Partners' Capital:
General Partner, 1,276.7484 Units
equivalents outstanding in 2003 and 2002 2,018,922 1,810,978
Limited Partners, 44,774.4287 and
46,707.3718 Units of Limited Partnership
Interest outstanding in 2003 and 2002,
respectively 70,801,821 66,250,969
------------ ------------
72,820,743 68,061,947
------------ ------------
$ 74,354,487 $ 69,064,973
============ ============
*Forward contracts included in this balance are presented gross in the
accompanying Condensed Schedules of Investments
See Accompanying Notes to Unaudited Financial Statements.
3
Smith Barney Diversified Futures Fund L.P.
Condensed Schedule of Investments
June 30, 2003
(Unaudited)
Sector Contract Fair Value
- ------------- --------------------------------------------------------------------
Currencies
Futures contracts purchased (0.55)% $ (403,299)
Futures contracts sold 0.22% 158,606
-------------
Total futures contracts (0.33)% (244,693)
Unrealized appreciation on forward contracts 3.05% 2,220,614
Unrealized depreciation on forward contracts (2.64)% (1,923,373)
-------------
Total forward contracts 0.41% 297,241
-------------
Total Currencies 0.08% 52,548
-------------
Energy
Futures contracts purchased 0.26% 190,766
Futures contracts sold 0.13% 88,930
-------------
Total Energy 0.39% 279,696
-------------
Grains
Futures contracts purchased (0.18)% (127,049)
Futures contracts sold 0.10% 72,073
-------------
Total Grains (0.08)% (54,976)
-------------
Interest Rates U.S.
Futures contracts purchased (0.50)% (358,852)
Futures contracts sold 0.01% 7,158
-------------
Total Interest Rates U.S. (0.49)% (351,694)
-------------
Interest Rates Non-U.S.
Futures contracts purchased (1.29)% (936,440)
Futures contracts sold (0.00)%* (1,549)
-------------
Total Interest Rates Non-U.S. (1.29)% (937,989)
-------------
Livestock
Futures contracts purchased (0.14)% (99,239)
Futures contracts sold 0.01% 3,990
-------------
Total Livestock (0.13)% (95,249)
-------------
Metals
Futures contracts purchased (0.08)% (58,185)
Futures contracts sold 0.00%* 90
-------------
Total futures contracts (0.08)% (58,095)
Unrealized appreciation on forward contracts 0.17% 125,758
Unrealized depreciation on forward contracts (0.79)% (578,420)
-------------
Total forward contracts (0.62)% (452,662)
-------------
Total Metals (0.70)% (510,757)
-------------
Softs
Futures contracts purchased 0.02% 14,855
Futures contracts sold (0.10)% (71,927)
-------------
Total Softs (0.08)% (57,072)
-------------
Indices
Futures contracts purchased (0.57)% (411,814)
Futures contracts sold (0.03)% (24,795)
-------------
Total Indices (0.60)% (436,609)
-------------
Total Fair Value (2.90)% $ (2,112,102)
=============
Investments % of Investments
Country Composition at Fair Value at Fair Value
- ------------------------- -------------------------- ---------------
Australia $ (97,580) (4.62)%
Canada (38,555) (1.83)
Germany (439,860) (20.82)
France (6,102) (0.29)
Hong Kong (9,374) (0.44)
Italy (3,548) (0.17)
Japan (52,815) (2.50)
Spain (73,513) (3.48)
United Kingdom (745,651) (35.30)
United States (645,104) (30.55)
-------------- -------
$ (2,112,102) (100.00)%
============== =======
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Accompanying Notes to Unaudited Financial Statements.
4
Smith Barney Diversified Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2002
Sector Contract Fair Value
Currencies Futures contracts purchased 2.42% $1,648,464
Futures contracts sold 0.06% 39,145
----------
Total futures contracts 2.48% 1,687,609
Unrealized appreciation on forward contracts 2.64% 1,794,109
Unrealized depreciation on forward contracts (2.12)% (1,442,027)
----------
Total forward contracts 0.52% 352,082
----------
Total Currencies 3.00% 2,039,691
----------
Total Energy 0.82% Futures contracts purchased 0.82% 559,848
----------
Grains Futures contracts purchased (0.03)% (17,701)
Futures contracts sold 0.31% 211,274
----------
Total Grains 0.28% 193,573
----------
Total Interest Rates U.S. 0.74% Futures contracts purchased 0.74% 504,413
----------
Interest Rates Non-U.S. Futures contracts purchased 2.39% 1,626,124
Futures contracts sold (0.02)% (14,486)
----------
Total Interest Rates Non-U.S. 2.37% 1,611,638
----------
Total Livestock 0.03% Futures contracts purchased 0.03% 20,199
----------
Metals Futures contracts purchased 0.39% 267,635
Futures contracts sold 0.00% * (38)
----------
Total Futures contracts 0.39% 267,597
Unrealized appreciation on forward contracts 0.16% 107,580
Unrealized depreciation on forward contracts (1.00)% (684,000)
----------
Total forward contracts (0.84)% (576,420)
----------
Total Metals (0.45)% (308,823)
----------
Softs Futures contracts purchased 0.22% 154,672
Futures contracts sold 0.04% 26,226
----------
Total Softs 0.26% 180,898
----------
Indices Futures contracts purchased (0.05)% (39,594)
Futures contracts sold 0.28% 192,753
----------
Total Indices 0.23% 153,159
----------
Total Lumber 0.00% * Futures contracts sold 0.00% * (242)
----------
Total Fair Value 7.28% $4,954,354
---------
Investments % of Investments
Country Composition at Fair Value at Fair Value
---------------------- ---------------- --------------
Australia $ 122,881 2.48%
Canada 79,168 1.60
France (5,648) (0.11)
Germany 688,910 13.90
Hong Kong 36,610 0.74
Japan 169,176 3.41
Spain (4,767) (0.10)
United Kingdom 137,533 2.78
United States 3,730,491 75.30
---------- -------
$4,954,354 100.00%
========= =======
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See accompanying notes to financial statements.
5
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
STATEMENTS OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
2003 2002 2003 2002
---------------------------- --------------------------
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions $ 4,897,300 $ 3,371,204 $ 19,146,319 $ (1,281,655)
Change in unrealized gains (losses) on open
positions (1,452,020) 2,979,452 (7,066,456) 5,209,659
------------ ------------ ------------ ------------
3,445,280 6,350,656 12,079,863 3,928,004
Interest income 161,006 191,622 331,868 400,359
------------ ------------ ------------ ------------
3,606,286 6,542,278 12,411,731 4,328,363
------------ ------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $37,549, $48,118 $78,881 and $96,264, respectively 1,127,920 923,101 2,262,680 1,867,693
Management fees 364,543 350,270 763,770 764,451
Incentive fees 491,755 268,774 1,497,113 268,774
Other expenses 22,248 26,172 44,954 52,286
------------ ------------ ------------ ------------
2,006,466 1,568,317 4,568,517 2,953,204
------------ ------------ ------------ ------------
Net income 1,599,820 4,973,961 7,843,214 1,375,159
Additions 2,332 2,438 4,518 4,915
Redemptions (1,723,194) (4,062,403) (3,088,936) (5,715,161)
------------ ------------ ------------ ------------
Net increase (decrease) in Partners' capital (121,042) 913,996 4,758,796 (4,335,087)
Partners' capital, beginning of period 72,941,785 61,119,658 68,061,947 66,368,741
------------ ------------ ------------ ------------
Partners' capital, end of period $ 72,820,743 $ 62,033,654 $ 72,820,743 $ 62,033,654
============ ============ ============ ============
Net asset value per Unit
(46,051.1771 and 51,902.8724 Units outstanding
at June 30, 2003 and 2002, respectively) $ 1,581.30 $ 1,195.19 $ 1,581.30 $ 1,195.19
============ ============ ============ ------------
Net income per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 33.34 $ 96.98 $ 162.87 $ 33.97
============ ========== ============= ============
See Accompanying Notes to Unaudited Financial Statements.
6
Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2003
(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.
On April 7, 2003, Smith Barney Futures Management LLC changed its name to
Citigroup Managed Futures LLC. Citigroup Managed Futures LLC acts as the general
partner (the "General Partner") of the Partnership. The Partnership's commodity
broker is Citigroup Global Markets Inc. ("CGM"), formerly Salomon Smith Barney
Inc. CGM is an affiliate of the General Partner. The General Partner is wholly
owned by Citigroup Global Markets Holdings Inc. ("CGMHI"), formerly Salomon
Smith Barney Holdings Inc., which is the sole owner of CGM. CGMHI is a wholly
owned subsidiary of Citigroup Inc ("Citigroup"). As of June 30, 2003, all
trading decisions are made for the Partnership by Campbell & Company, Inc.,
Willowbridge Associates, Inc., Winton Capital Management and Graham Capital
Management L.P. (each an "Advisor" and collectively, the "Advisors").
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Partnership's financial
condition at June 30, 2003 and December 31, 2002 and the results of its
operations for the three and six months ended June 30, 2003 and 2002. These
financial statements present the results of interim periods and do not include
all disclosures normally provided in annual financial statements. You should
read these financial statements together 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, 2002.
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.
(Continued)
7
Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2003
(Unaudited)
(continued)
2. Financial Highlights:
Changes in net asset value per Unit for the three and six months ended June
30, 2003 and 2002 were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2003 2002 2003 2002
-------- -------- ------- --------
Net realized and unrealized
gains * $ 48.50 $ 105.47 $ 204.09 $ 46.53
Interest income 3.45 3.54 7.02 7.21
Expenses ** (18.61) (12.03) (48.24) (19.77)
-------- -------- ------- --------
Increase for period 33.34 96.98 162.87 33.97
Net Asset Value per Unit,
beginning of period 1,547.96 1,098.21 1,418.43 1,161.22
-------- -------- ------- --------
Net Asset Value per Unit,
end of period $1,581.30 $1,195.19 $1,581.30 $1,195.19
-------- -------- ------- --------
* Includes brokerage commissions.
** Excludes brokerage commissions.
8
Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2003
(Unaudited)
(continued)
Financial Highlights continued:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2003 2002 2003 2002
-------- -------- ------- --------
Ratio to average net assets: ***
Net investment loss before
incentive fees **** (7.4)% (7.6)% (7.5)% (7.6)%
Operating expenses 8.3% 8.9% 8.4% 8.9%
Incentive fees 2.7% 1.8% 4.1% 0.9%
Total expenses 11.0% 10.7% 12.5% 9.8%
Total return:
Total return before incentive fees 2.8% 9.3% 13.8% 3.4%
Incentive fees (0.6)% (0.5)% (2.3)% (0.5)%
Total return after incentive fees 2.2% 8.8% 11.5% 2.9%
*** Annualized
**** Interest income less total expenses (exclusive of incentive fees).
The above ratios may vary for individual investors based on the timing of
capital transactions during the period.
9
Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2003
(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
activities are shown in the Statements of Income and Expenses and Partners'
Capital and are discussed in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The Customer Agreement between the Partnership and CGM 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 values during the six and twelve months ended
June 30, 2003 and December 31, 2002, based on a monthly calculation, were
$3,923,368 and $4,063,172, respectively. The fair values of these commodity
interests, including options thereon, if applicable, at June 30, 2003 and
December 31, 2002, were $(2,112,102) and $4,954,354, respectively. Fair values
for exchange traded commodity futures and options are based on quoted market
prices for those futures and options. Fair values for all other financial
instruments for which market quotations are not readily available are based on
calculations approved by the General Partner.
4. Financial Instrument Risk:
In the normal course of its business, the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments
may include forwards, futures and options, whose values are 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
10
Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2003
(Unaudited)
(continued)
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 as unrealized appreciation in the statement of
financial condition and not represented by the contract or notional amounts of
the instruments. The Partnership has credit risk and concentration risk because
the sole counterparty or broker with respect to the Partnership's assets is CGM.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk-adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of June 30, 2003.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity.
11
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
second quarter of 2003.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by realized and/or unrealized 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, 2003, Partnership capital increased 7.0%
from $68,061,947 to $72,820,743. This increase was attributable to net income
from operations of $7,843,214, coupled with additional sales of 2.8778 Units
totaling $4,518 which was partially offset by the redemption of 1,935.8209 Units
of Limited Partnership Interest totaling $3,088,936. Persons investing
$1,000,000 or more will pay a reduced brokerage fee, receiving the differential
in the form of additional Units. Future redemptions can impact the amount of
funds available for investment in commodity contract positions in subsequent
periods.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The commodity
interests are recorded on trade date and open contracts are recorded in the
statement of financial condition at fair value on the last business day of the
period, which represents market value for those commodity interests for which
market quotations are readily available or other measures of fair value deemed
appropriate by management of the General Partner for those commodity interests
12
and foreign currencies for which market quotations are not readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the period. Realized gains (losses) and changes in unrealized
values on open positions are recognized in the period in which the contract is
closed or the changes occur and are included in net gains (losses) on trading of
commodity interests.
Foreign currency contracts are those contracts where the Partnership agrees
to receive or deliver a fixed quantity of foreign currency for an agreed-upon
price on an agreed future date. Foreign currency contracts are valued daily, and
the Partnership's net equity therein, representing unrealized gain or loss on
the contracts as measured by the difference between the forward foreign exchange
rates at the date of entry into the contracts and the forward rates at the
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statement of income and expenses and partners'
capital.
Results of Operations
During the Partnership's second quarter of 2003, the net asset value per
Unit increased 2.2% from $1,547.96 to $1,581.30 as compared to an increase of
8.8% in the second quarter of 2002. The Partnership experienced a net trading
gain before brokerage commissions and related fees in the second quarter of 2003
of $3,445,280. Gains were primarily attributable to the trading of commodity
contracts in currencies and U.S. and non-U.S. interest and were partially offset
by losses in grains, softs, energy, livestock, metals and indices. The
Partnership experienced a net trading gain before brokerage commissions and
related fees in the second quarter of 2002 of $6,350,656. Gains were primarily
attributable to the trading of commodity contracts in currencies, U.S. interest
rates, grains and livestock and were partially offset by losses in energy,
softs, metal, indices and non-U.S. interest rates.
Commodity futures markets are highly volatile. The potential for broad and
rapid price fluctuations increases the risks involved in commodity trading, but
also increases the possibility of profit. The profitability of the Partnership
depends on the existence of major price trends and the ability of the Advisors
to correctly identify 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
13
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 at the monthly average 30-day U.S. Treasury bill rate determined
weekly by CGM based on the non-competitive yield on three month U.S. Treasury
bills maturing 30 days from the date in which such weekly rate is determined.
CGM may continue to maintain the Partnership assets in cash and/or place all of
the Partnership assets in 90-day Treasury bills and pay the Partnership 80% of
the interest earned on the Treasury bills purchased. CGM will retain 20% of any
interest earned on Treasury bills. Interest income for the three and six months
ended June 30, 2003 decreased by $30,616 and $68,491, respectively, as compared
to the corresponding periods in 2002. The decrease in interest income are
primarily due to decreases in interest rates during the three and six months
ended June 30, 2003 as compared to 2002.
Brokerage commissions are calculated on the Partnership's net asset value
as of the last day of each month and are affected by 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 six months
ended June 30, 2003 increased by $204,819 and $394,987, respectively as compared
to the corresponding periods in 2002. The increase in brokerage commissions is
due to an increase in assets during the three and six months ended June 30, 2003
as compared to 2002.
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 June 30, 2003 increased by $14,273 as compared to the
corresponding period in 2002. Management fees for the six months ended June 30,
2003 decreased by $681 as compared to the corresponding period in 2002.
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 and six months ended June 30, 2003 resulted in incentive fees of
$491,755 and $1,497,113, respectively. Trading performance for the three and six
months ended June 30, 2002 resulted in incentive fees of $268,774.
14
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 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 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 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
interval. 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.
15
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of June 30, 2003 and the
highest and lowest value at any point during the three and six months ended June
30, 2003. All open position trading risk exposures of the Partnership have been
included in calculating the figures set forth below. As of June 30, 2003, the
Partnership's total capitalization was $72,820,743. 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, 2002.
June 30, 2003
(Unaudited)
Quarter Ended
June 30, 2003 Year to Date
Market Value at % of Total High Value Low Value High Value Low Value
Sector Risk Capitalization at Risk at Risk at Risk at Risk
- ------------- ---------- ------------ ---------- --------- --------- ----------
Currencies:
- - Exchange Traded
Contracts $1,044,780 1.43% 1,465,624 701,576 $1,621,311 $701,576
- OTC Contracts 1,024,593 1.41% 1,505,589 778,909 1,568,776 766,266
Energy 1,017,450 1.40% 2,153,090 176,700 2,554,300 125,200
Grains 291,765 0.40% 524,832 233,980 524,832 209,531
Interest Rates U.S. 920,350 1.26% 1,252,908 415,238 1,346,600 415,238
Interest Rates Non-U.S. 1,848,968 2.54% 3,238,751 535,816 3,238,751 535,816
Livestock 93,600 0.13% 148,000 21,410 148,800 21,410
Metals:
- Exchange Traded
Contracts 136,900 0.19% 299,400 89,500 313,900 76,600
- OTC Contracts 254,800 0.35% 430,550 69,450 676,175 36,750
Softs 327,318 0.45% 334,870 121,243 334,870 121,243
Indices 3,278,986 4.50% 3,278,986 384,713 3,278,986 120,907
---------- -----
Total $10,239,510 14.06%
========== ======
16
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of June 30, 2003, the Chief Executive Officer and Chief Financial
Officer of the General Partner have concluded that such controls and procedures
are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
17
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
The following information supplements and amends our discussion set forth
under Part I, Item 3 "Legal Proceedings" in the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 and under Part II, Item 1
"Legal Proceedings" in the Partnership's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2003.
Enron
On July 28, 2003, Citigroup entered into a final settlement agreement with the
Securities and Exchange Commission ("SEC") to resolve the SEC's outstanding
investigations into Citigroup transactions with Enron and Dynegy. Pursuant to
the settlement, Citigroup has, among other terms, (1) consented to the entry of
an administrative cease and desist order, which bars Citigroup from committing
or causing violations of provisions of the federal securities laws, and (2)
agreed to pay $120 million ($101.25 million allocable to Enron and $18.75
million allocable to Dynegy). Citigroup entered into this settlement without
admitting or denying any wrongdoing or liability, and the settlement does not
establish wrongdoing or liability for purposes of any other proceeding. On July
28, 2003, Citibank, N.A. entered into an agreement with the Office of the
Comptroller of the Currency ("OCC") and Citigroup entered into an agreement with
the Federal Reserve Bank of New York ("FED") to resolve their inquiries into
certain of Citigroup's transactions with Enron. Pursuant to the agreements,
Citibank and Citigroup have agreed to submit plans to the OCC and FED,
respectively, regarding the handling of complex structured finance transactions.
Also on July 28, 2003, Citigroup entered into a settlement agreement with the
Manhattan District Attorney's Office to resolve its investigation into certain
of Citigroup's transactions with Enron; pursuant to the settlement, Citigroup
has agreed to pay $25.5 million and to abide by its agreements with the SEC, OCC
and FED.
Additional Actions Several additional actions, previously identified, have been
consolidated with the Newby action and are stayed, except with respect to
certain discovery, until after the Court's decision on class certification.
Also, in July 2003, an action was brought by purchasers in the secondary market
of Enron bank debt against Citigroup, Citibank, Citigroup Global Markets Inc.
("CGM"), and others, alleging claims for common law fraud, conspiracy, gross
negligence, negligence and breach of fiduciary duty.
Research
On June 23, 2003, the West Virginia Attorney General filed an action against CGM
and nine other firms that were parties to the April 28, 2003 settlement with the
SEC, the National Association of Securities Dealers ("NASD"), the New York Stock
Exchange ("NYSE") and the New York Attorney General (the "Research Settlement").
The West Virginia Attorney General alleges that the firms violated the West
Virginia Consumer Credit and Protection Act in connection with their research
activities and seeks monetary penalties.
18
In May 2003, the SEC, NYSE and NASD issued a subpoena and letters to CGM
requesting documents and information with respect to their continuing
investigation of individuals in connection with the supervision of the research
and investment banking departments of CGM. Other parties to the Research
Settlement have received similar subpoena and letters.
In April 2003, to effectuate the Research Settlement, the SEC filed a Complaint
and Final Judgment in the United States District Court for the Southern District
of New York. The Final Judgment has not yet been entered by the court, and the
court has asked for certain additional information. Also in April 2003, the NASD
accepted the Letter of Acceptance, Waiver and Consent entered into with CGM in
connection with the Research Settlement; and in May 2003, the NYSE advised CGM
that the Hearing Panel's Decision, in which it accepted the Research Settlement,
had become final. CGM is currently in discussion with various of the states with
respect to completion of the state components of the Research Settlement.
Payment will be made in conformance with the payment provisions of the Final
Judgment.
WorldCom, Inc.
On May 19, 2003, a motion to dismiss an amended complaint in the WorldCom, Inc.
Securities Litigation was denied.
Dynegy Inc.
On June 6, 2003, the complaint in a pre-existing putative class action pending
in the United States District Court for the Southern District of Texas, brought
by purchasers of publicly traded debt and equity securities of Dynegy Inc., was
amended to add Citigroup, Citibank and CGM, as well as other banks, as
defendants. The plaintiffs allege violations of the federal securities laws
against the Citigroup defendants.
Adelphia Communications Corporation
- -----------------------------------
On July 6, 2003, an adversary proceeding was filed by the Official Committee of
Unsecured Creditors on behalf of Adelphia against certain lenders and investment
banks, including CGM, Citibank, N.A., Citicorp USA, Inc., and Citigroup
Financial Products, Inc. (together, the Citigroup Parties). The Complaint
alleges that the Citigroup Parties and numerous other defendants committed acts
in violation of the Bank Company Holding Act and the common law. The complaint
seeks equitable relief and an unspecified amount of compensatory and punitive
damages.
In addition, Salomon Smith Barney Inc. (predecessor of Citigroup Global Markets
Inc.) is among the underwriters named in numerous civil actions brought to date
by investors in Adelphia debt securities in connection with Adelphia securities
offerings between September 1997 and October 2001. Three of the complaints also
assert claims against Citigroup and Citibank, N.A. All of the complaints allege
violations of federal securities laws, and certain of the complaints also allege
violations of state securities laws and the common law. The complaints seek
unspecified damages.
Other
MKP Master Fund, LDC et al. v. Salomon Smith Barney Inc.
- --------------------------------------------------------
In July 2003, CGM's motion for summary judgment was granted.
Item 2. Changes in Securities and Use of Proceeds -
Additional Units offered represent a reduced brokerage fee to
existing limited partners who invested $1,000,000 or more. For the six
months ended June 30, 2003 and 2002, there were additional sales of
2.8778 and 4.4897 Units totaling $4,518 and $4,915, respectively.
Proceeds from the sale of additional Units are used in the
trading of commodity interests including futures contracts, options
and forward contracts.
19
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 The exhibits required to be filed by Item 601 of Regulation S-K are
incorporated herein by reference to the exhibit index of the
Partnership's Report on Form 10-K for the period ended December 31, 2002.
(a) Exhibit - 31.1 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of President and Director)
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of Chief financial Officer and Director)
Exhibit - 32.1 - Section 1350 Certifications (Certification of
President and Director).
Exhibit - 32.2 - Section 1350 Certifications (Certification of Chief
Financial Officer and Director).
(b) Reports on Form 8-K - None
20
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: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel, President and Director
Date: 8/14/03
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: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel, President and Director
Date: 8/14/03
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Date: 8/14/03
21
Exhibit 31.1
CERTIFICATIONS
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney
Diversified Futures Fund L.P. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
22
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 14, 2003
/s/ David J. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
23
Exhibit 31.2
CERTIFICATIONS
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney
Diversified Futures Fund L.P. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
24
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: August 14, 2003
/s/Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
25
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney Diversified Futures Fund
L.P. (the "Partnership") on Form 10-Q for the period ending June 30, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David J. Vogel, President and Director of Citigroup Managed
Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/David J. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
August 14, 2003
26
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney Diversified Futures Fund
L.P. (the "Partnership") on Form 10-Q for the period ending June 30, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Daniel R. McAuliffe, Jr., Chief Financial Officer and Director of
Citigroup Managed Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
August 14, 2003
27