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, 2004
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, 2004 and December 31,
2003 (unaudited). 3
Condensed Schedules of Investments at
June 30, 2004 and December 31, 2003
(unaudited). 4 - 5
Statements of Income and Expenses
and Partners' Capital for the three and six
months ended June 30, 2004
and 2003 (unaudited). 6
Statements of Cash Flows for the three and six
months ended June 30, 2004 and 2003
(unaudited). 7
Notes to Financial Statements
(unaudited) 8 - 12
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 13 - 15
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 16 - 17
Item 4. Controls and Procedures 18
PART II - Other Information 19
2
PART I
Item 1. Financial Statements
Smith Barney Diversified Futures Fund L.P.
Statements of Financial Condition
(Unaudited)
June 30, December 31,
2004 2003
------------------------
ASSETS:
Equity in commodity futures trading account:
Cash (restricted $7,095,145 and $13,379,393 in 2004 and 2003,
respectively) $68,452,561 $67,983,573
Net unrealized appreciation on open futures positions -- 3,677,203
Unrealized appreciation on open forward contracts 497,718 4,260,481
----------- -----------
68,950,279 75,921,257
Interest receivable 46,587 40,233
----------- -----------
$68,996,866 $75,961,490
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Net unrealized depreciation on open futures positions $ 509,608 $ --
Unrealized depreciation on open forward contracts 1,076,858 2,298,360
Accrued expenses:
Commissions 303,899 344,098
Management fees 104,335 119,768
Incentive fees -- 761,281
Other 64,119 41,458
Redemptions payable 900,288 669,179
----------- -----------
2,959,107 4,234,144
----------- -----------
Partners' Capital:
General Partner, 1,276.7484 Unit equivalents outstanding
in 2004 and 2003 2,019,024 2,089,578
Limited Partners, 40,482.7241 and 42,549.0942 Redeemable Units of
Limited Partnership Interest outstanding in 2004 and 2003,
respectively 64,018,735 69,637,768
----------- -----------
66,037,759 71,727,346
----------- -----------
$68,996,866 $75,961,490
=========== ===========
See Accompanying Notes to Unaudited Financial Statements.
3
Smith Barney Diversified Futures Fund L.P.
Condensed Schedule of Investments
June 30, 2004
(Unaudited)
Sector Contract Fair Value
- -------- ---------- ------------
Currencies
Futures contract(0.16)% $ (102,184)
Futures contracts sold (0.16)% (108,883)
-----------
Total futures contracts (0.32)% (211,067)
Unrealized appreciation on forward contracts 0.39% 254,344
Unrealized depreciation on forward contracts (0.89)% (585,783)
-----------
Total forward contracts (0.50)% (331,439)
-----------
Total Currencies (0.82)% (542,506)
-----------
Energy
Futures contracts purchased 0.23% 150,708
Futures contracts sold (0.00)%* (100)
-----------
Total Energy 0.23% 150,608
-----------
Grains
Futures contracts purchased (0.13)% (86,261)
Futures contracts sold 0.12% 79,160
-----------
Total Grains (0.01)% (7,101)
-----------
Interest Rates U.S.
Futures contracts purchased 0.04% 26,375
Futures contracts sold (0.59)% (390,310)
-----------
Total Interest Rates U.S. (0.55)% (363,935)
-----------
Interest Rates Non-U.S
Futures contracts purchased (0.01)% (3,158)
Futures contracts sold (0.42)% (277,863)
-----------
Total Interest Rates Non-U.S. (0.43)% (281,021)
-----------
Total Livestock (0.06)% Futures contract (0.06)% (37,927)
-----------
Metals
Futures contracts purchased 0.00%* 400
Futures contracts sold (0.04)% (24,445)
-----------
Total futures contracts (0.04)% (24,045)
Unrealized appreciation on forward contracts 0.36% 243,374
Unrealized depreciation on forward contracts (0.74)% (491,075)
-----------
Total forward contracts (0.38)% (247,701)
-----------
Total Metals (0.42)% (271,746)
-----------
Softs
Futures contracts purchased (0.09)% (61,321)
Futures contracts sold 0.22% 144,859
----------
Total Softs 0.13% 83,538
-----------
Indices
Futures contract 0.29% 189,789
Futures contracts sold (0.01)% (8,447)
-----------
Total Indices 0.28% 181,342
-----------
Total Fair Value (1.65)% $(1,088,748)
===========
Country Investments at % of Investments at
Composition Fair Value Fair Value
------------------- ------------- ---------------
Australia $ 12,828 1.18%
Canada (2,757) (0.25)
Germany (57,773) (5.31)
France (17,832) (1.64)
Hong Kong (974) (0.09)
Italy 6,096 0.56
Japan 24,367 2.24
Spain (5,421) (0.50)
United Kingdom (366,264) (33.64)
United States (681,018) (62.55)
-------------- -------
$ (1,088,748) (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, 2003
(Unaudited)
Sector Contract Fair Value
- ------------------------------------------------ -------------------------------------------------- -----------------------
Currencies Futures contracts purchased 2.31% $1,653,934
Futures contracts sold (0.14)% (100,293)
----------
Total futures contracts 2.17% 1,553,641
Unrealized appreciation on forward contracts 2.65% 1,897,711
Unrealized depreciation on forward contracts (1.56)% (1,116,272)
----------
Total forward contracts 1.09% 781,439
----------
Total Currencies 3.26% 2,335,080
----------
Total Energy (0.11)% Futures contracts purchased (0.11)% (76,535)
----------
Grains Futures contracts purchased 0.95% 680,144
Futures contracts sold (0.09)% (66,550)
----------
Total Grains 0.86% 613,594
----------
Total Interest Rates U.S. (0.17)% Futures contracts purchased (0.17)% (119,927)
----------
Interest Rates Non-U.S. Futures contracts purchased 0.22% 159,634
Futures contracts sold (0.04)% (28,643)
----------
Total Interest Rates Non-U.S. 0.18% 130,991
----------
Livestock Futures contracts purchased (0.02)% (13,500)
Futures contracts sold 0.01% 9,408
----------
Total Livestock (0.01)% (4,092)
----------
Total Lumber 0.01% Futures contracts purchased 0.01% 6,402
----------
Metals Futures contracts purchased 0.58% 413,768
Futures contracts sold (0.00)% * (1,550)
----------
Total futures contracts 0.58% 412,218
Unrealized appreciation on forward contracts 3.29% 2,362,770
Unrealized depreciation on forward contracts (1.65)% (1,182,088)
----------
Total forward contracts 1.64% 1,180,682
----------
Total Metals 2.22% 1,592,900
----------
Softs Futures contracts purchased (0.14)% (99,050)
Futures contracts sold 0.03% 22,953
----------
Total Softs (0.11)% (76,097)
----------
Indices Futures contracts purchased 1.67% 1,195,478
Futures contracts sold 0.06% 41,530
----------
Total Indices 1.73% 1,237,008
----------
Total Fair Value 7.86% $5,639,324
=========
Investments % of Investments
Country Composition at Fair Value at Fair Value
----------------------------- ------------- ---------------
Australia $ 57,663 1.02%
Canada 35,485 0.63
France 33,586 0.60
Germany 312,479 5.54
Hong Kong 3,903 0.07
Italy (10,477) (0.19)
Japan 27,224 0.48
Spain 113,433 2.01
United Kingdom 1,411,139 25.02
United States 3,654,889 64.82
------------ -------
$5,639,324 100.00%
============= =======
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Accompanying Notes to Unaudited Financial Statements.
5
Smith Barney Diversified Futures Fund L.P.
Statements of Income and Expenses and Partners' Captial
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
2004 2003 2004 2003
--------------------------- ------------------------------
Income:
Net gains (losses) on trading of
commodity interests:
Realized gains (losses) on
closed positions $ (3,160,991) $ 4,897,300 $ 9,027,671 $ 19,146,319
Change in unrealized losses on
open positions (6,803,613) (1,452,020) (6,728,072) (7,066,456)
------------ ------------ ----------- -----------
(9,964,604) 3,445,280 2,299,599 12,079,863
Interest income 133,034 161,006 266,322 331,868
------------ ------------ ------------ ------------
(9,831,570) 3,606,286 2,565,921 12,411,731
------------ ------------ ------------ ------------
Expenses:
Brokerage commissions including
clearing fees of $28,999, $37,549,
$60,800 and $78,881, respectively 1,016,094 1,127,920 2,159,132 2,262,680
Management fees 329,924 364,543 704,906 763,770
Incentive fees -- 491,755 1,880,089 1,497,113
Other expenses 21,781 22,248 44,237 44,954
----------- ----------- ------------ ------------
1,367,799 2,006,466 4,788,364 4,568,517
----------- ------------ ------------ ------------
Net income (loss) (11,199,369) 1,599,820 (2,222,443) 7,843,214
Additions 194 2,332 1,995 4,518
Redemptions (1,765,681) (1,723,194) (3,469,139) (3,088,936)
---------- ------------ ------------ ------------
Net increase (decrease) in
Partners' capital (12,964,856) (121,042) (5,689,587) 4,758,796
Partners' capital, beginning of
period 79,002,615 72,941,785 71,727,346 68,061,947
----------- ------------ ------------ ------------
Partners' capital, end of period $ 66,037,759 $ 72,820,743 $ 66,037,759 $ 72,820,743
=========== ============ ============ ============
Net asset value per Redeemable
Unit (41,759.4725 and 46,051.1771
Redeemable Units outstanding at June 30,
2004 and 2003, respectively) $ 1,581.38 $ 1,581.30 $ 1,581.38 $ 1,581.30
============ ============ ============ ============
Net income (loss) per Redeemable
Unit of Limited Partnership Interest
and General Partner Unit equivalent $ (262.34) $ 33.34 $ (55.26) $ 162.87
============ ============ ============ ============
See Accompanying Notes to Unaudited Financial Statements.
6
Smith Barney Diversified Futures Fund L.P.
Statements of Cash Flows
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
2004 2003 2004 2003
------------------------------ --------------------------
Cash flows from operating activities:
Net income (loss) $(11,199,369) $1,599,820 $ (2,222,443) $ 7,843,214
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Changes in operating assets and liabilities:
Net unrealized appreciation
(depreciation) on open futures
positions 5,831,346 1,923,272 4,186,811 7,135,373
Unrealized appreciation on open
forward contracts 1,342,464 (1,219,280) 3,762,763 (444,683)
(Increase) decrease in interest
receivable 4,276 10,067 (6,354) 1,822
Unrealized depreciation on open
forward contracts (370,197) 748,028 (1,221,502) 375,766
Accrued expenses:
Increase (decrease) in
commissions (77,279) (15,078) (40,199) 15,306
Decrease in management fees (26,715) (4,301) (15,433) (25,968)
Increase (decrease) in
incentive fees (1,880,089) (513,602) (761,281) 436,721
Increase (decrease) in other 10,006 22,248 22,661 44,955
Increase (decrease) in redemptions
payable 524,535 (197,396) 231,109 59,704
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (5,841,022) 2,353,778 3,936,132 15,442,210
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from additions L.P. 194 2,332 1,995 4,518
Payments for redemptions (1,765,681) (1,723,194) (3,469,139) (3,088,936)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (1,765,487) (1,720,862) (3,467,144) (3,084,418)
------------ ------------ ------------ ------------
Net change in cash (7,606,509) 632,916 468,988 12,357,792
Cash, at beginning of period 76,059,070 75,782,177 67,983,573 64,057,301
----------- ------------ ------------ ------------
Cash, at end of period $ 68,452,561 $ 76,415,093 $ 68,452,561 $ 76,415,093
============ ============ ============ ============
See Accompanying Notes to Unaudited Financial Statements.
7
Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(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.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
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, 2004, 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, 2004 and December 31, 2003 and the results of its
operations and cash flows for the three and six months ended June 30, 2004 and
2003. 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, 2003.
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.
8
Smith Barney Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in Net Asset Value per Redeemable Unit of Limited Partnership
Interest for the three and six months ended June 30, 2004 and 2003 were as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2004 2003 2004 2003
--------- ---------- ---------- ---------
Net realized and unrealized
gains (losses)* $ (257.21) $ 48.50 $ (0.66) $ 204.09
Interest income 3.12 3.45 6.19 7.02
Expenses ** (8.25) (18.61) (60.79) (48.24)
--------- --------- --------- ---------
Increase (decrease) for the period (262.34) 33.34 (55.26) 162.87
Net Asset Value per Redeemable
Unit, beginning of period 1,843.72 1,547.96 1,636.64 1,418.43
--------- --------- --------- ---------
Net Asset Value per Redeemable
Unit, end of period $ 1,581.38 $ 1,581.30 $ 1,581.38 $ 1,581.30
========= ========= ========= =========
* Includes brokerage commissions.
** Excludes brokerage commissions.
9
Financial Highlights (continued):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2004 2003 2004 2003
--------- ---------- ---------- ---------
Ratio to average net assets: ***
Net investment loss before
incentive fees **** (6.9)% (7.4)% (7.3)% (7.5)%
==== ==== ==== ====
Operating expenses 7.7% 8.3% 8.0% 8.4%
Incentive fees 0.0% 2.7% 2.6% 4.1%
---- ---- ---- ----
Total expenses 7.7% 11.0% 10.6% 12.5%
==== ==== ==== ====
Total return:
Total return before incentive fees (14.2)% 2.8% (0.6)% 13.8%
Incentive fees (0.0)% (0.6)% (2.8)% (2.3)%
---- ---- ---- ----
Total return after incentive fees (14.2)% 2.2% (3.4)% 11.5%
==== ==== ==== ====
*** Annualized (other than incentive fees)
**** 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. Additionally, these ratios are
calculated for the Limited Partner class using the Limited Partners' share of
income, expenses and average net assets.
10
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 on open futures
positions.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair values of these interests during the six and
twelve months ended June 30, 2004 and December 31, 2003, based on a monthly
calculation, were $3,514,395 and $4,386,216, respectively. The fair values of
these commodity interests, including options thereon, if applicable, at June 30,
2004 and December 31, 2003, were $(1,088,748) and $5,639,324, 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.
11
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 as unrealized appreciation in the statements
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, 2004.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity.
12
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 on open futures and forward contracts and
interest receivable. Because of the low margin deposits normally required in
commodity futures trading, relatively small price movements may result in
substantial losses to the Partnership. While substantial losses could lead to a
decrease in liquidity, no such losses occurred during the second quarter of
2004.
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 Redeemable Units and distributions of profits, if any.
For the six months ended June 30, 2004, Partnership capital decreased 7.9%
from $71,727,346 to $66,037,759. This decrease was attributable to a net loss
from operations of $2,222,443 and the redemption of 2,067.5549 Redeemable Units
totaling $3,469,139, partially offset by additional sales of 1.1848 Redeemable
Units of Limited Partnership Interest totaling $1,995. Persons investing
$1,000,000 or more will pay a reduced brokerage fee, receiving the differential
in the form of additional Redeemable 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
statements 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
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
13
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 statements of income and expenses and partners'
capital.
Results of Operations
During the Partnership's second quarter of 2004, the Net Asset Value per
Redeemable Unit decreased 14.2% from $1,843.72 to $1,581.38 as compared to an
increase of 2.2% in the second quarter of 2003. The Partnership experienced a
net trading loss before brokerage commissions and related fees in the second
quarter of 2004 of $9,964,604. Losses were primarily attributable to the trading
of commodity contracts in currencies, grains, U.S. and non-U.S. interest rates,
metals, softs and indices and were partially offset by gains in energy,
livestock and lumber. 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, U.S. and non-U.S. interest rates and were partially
offset by losses in energy, grains, softs, livestock, metals and indices.
During the Partnership's six months ended June 30, 2004, the Net Asset
Value per Redeemable Unit decreased 3.4% from $1,636.64 to $1,581.38 as compared
to an increase of 11.5% for the six months ended June 30, 2003. The Partnership
experienced a net trading gain before brokerage commissions and related fees for
the six months ended June 30, 2004 of $2,299,599. Gains were primarily
attributable to the trading of commodity contracts in energy, grains, non-U.S.
interest rates, livestock, metals and lumber and were partially offset by losses
in currencies, U.S. interest rates, softs and indices. The Partnership
experienced a net trading gain before brokerage commissions and related fees for
the six months ended June 30, 2003 of $12,079,863. Gains were primarily
attributable to the trading of commodity contracts in currencies, energy, U.S.
and non-U.S. interest rates and were partially offset by losses in grains,
softs, livestock, metals, softs and indices.
The lack of persistent trends resulted in a difficult environment for the
Advisors which began precisely as the second quarter of 2004 got underway.
Trends in both financial and commodity futures markets had been clear for the
previous three quarters. In the second quarter of 2004, however, substantially
opposing fundamental considerations along with benign short-term volatility
greatly reduced the opportunities for the Advisors resulting in a particularly
difficult trading environment.
The directionless behavior of so many markets can be explained in terms of
a perception that a significant change may be underway in the global economic
cycle. Some of the primary drivers of these conditions have been: softer than
expected U.S. economic data creating confusion with regard to forecasting the
pace of Federal Reserve tightening; U.S. and international bonds, equity and
currency markets coping with indications of rising inflation, but at the same
time, an apparent pause in growth; and a fragile Eurozone recovery keeping
European Central Bank monetary intervention on hold.
14
Trading in nearly all market sectors was unprofitable for the Partnership
except for positions in the energy sector, base metals, soybean and longer-term
European interest rates. The Asian interest rate and currency markets, global
stock indices and precious metals were the primary contributors to the losses
while trading in crude oil, soybeans and copper provided some profits to
mitigate the other losses.
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
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's assets in cash and/or place all
of the Partnership's 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, 2004 decreased by $27,972 and $65,546, respectively, as
compared to the corresponding periods in 2003. The decrease in interest income
is primarily due to decreases in interest rates and net assets during the three
and six months ended June 30, 2004 as compared to the corresponding periods in
2003.
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, 2004 decreased by $111,826 and $103,548, respectively, as
compared to the corresponding periods in 2003. The decrease in brokerage
commissions is due to a decrease in net assets during the three and six months
ended June 30, 2004 as compared to the corresponding periods in 2003.
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 six months ended June 30, 2004 decreased by $34,619 and $58,864,
respectively, as compared to the corresponding periods in 2003. The decrease in
management fees is due to a decrease in net assets during the three and six
months ended June 30, 2004 as compared to the corresponding periods in 2003.
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, 2004 resulted in incentive fees of $0
and $1,880,089, respectively. Trading performance for the three and six months
ended June 30, 2003 resulted in incentive fees of $491,755 and $1,497,113,
respectively.
15
Item 3. Quantitative and Qualitative Disclosures about 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.
16
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of June 30, 2004 and the
highest, lowest and average value during the three months ended June 30, 2004.
All open position trading risk exposures of the Partnership have been included
in calculating the figures set forth below. As of June 30, 2004, the
Partnership's total capitalization was $66,037,759. There has been no material
change in the trading Value at Risk information previously disclosed in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 2003.
June 30, 2004
(Unaudited)
Three Months Ended June 30, 2004
-------------------------------------------------
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Value at Risk
- --------------------------------------------------------------------------------------------------------------------------
Currencies:
Exchange Traded
Contracts $ 475,249 0.72% $1,582,785 $553,365 $628,166
- OTC Contracts 755,971 1.15% 755,971 422,027 602,562
Energy 858,075 1.30% 1,977,750 858,075 1,383,505
Grains 97,696 0.15% 638,578 87,177 237,431
Interest Rates U.S. 598,400 0.91% 1,249,450 384,771 630,100
Interest Rates Non-U.S. 1,243,210 1.88% 2,426,145 953,440 1,196,173
Livestock 146,800 0.22% 148,100 94,964 118,555
Metals:
- Exchange Traded
Contracts 101,000 0.15% 452,100 97,000 104,667
- OTC Contracts 94,715 0.14% 186,485 45,015 118,092
Softs 194,396 0.29% 280,684 186,284 205,438
Indices 1,537,042 2.33% 1,537,042 863,109 1,325,390
Lumber - - 2,200 - 1,467
---------- -----
Total $6,102,554 9.24%
=========== =====
17
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of June 30, 2004, the Chief Executive Officer and Chief Financial
Officer have concluded that such controls and procedures are effective.
During the Partnership's last fiscal quarter, no changes occurred in the
Partnership's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Partnership's
internal control over financial reporting.
18
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, 2003 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, 2004.
WorldCom, Inc.
On May 10, 2004, Citigroup announced that it had agreed to pay $2.65
billion to settle the WorldCom class action suits.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities -
Additional Redeemable Units offered represent a reduced brokerage fee to
existing limited partners who invested $1,000,000 or more. For the three
months ended June 30, 2004 and 2003, there were additional sales of 0 and
2.8778 Redeemable Units totaling $0 and $4,518, respectively.
Proceeds from the sale of additional Redeemable Units are used in the
trading of commodity interests including futures contracts, options and
forward contracts.
The following chart sets forth the purchases of Redeemable Units by the
Partnership.
- ---------------------------- ------------------------ ---------------------- -------------------- ----------------------
Period (a) Total Number of (b) Average Price (c) Total Number (d) Maximum Number
Shares (or Units) Paid per Share (or of Shares (or (or Approximate
Purchased* Unit)** Units) Purchased Dollar Value) of
as Part of Shares (or Units)
Publicly Announced that May Yet Be
Plans or Programs Purchased Under the
Plans or Programs
- ---------------------------- ------------------------ ---------------------- -------------------- ----------------------
April 1, 2004 - April 30, 194.0964 $1,670.08 N/A N/A
2004
- ---------------------------- ------------------------ ---------------------- -------------------- ----------------------
May 1, 2004 - May 31, 2004 326.8056 $1,656.14 N/A N/A
- ---------------------------- ------------------------ ---------------------- -------------------- ----------------------
June 1, 2004 - June 30, 569.3053 $1,581.38 N/A N/A
2004
- ---------------------------- ------------------------ ---------------------- -------------------- ----------------------
Total 1,090.2073 $1,635.87 N/A N/A
- ---------------------------- ------------------------ ---------------------- -------------------- ----------------------
* Generally, Limited Partners are permitted to redeem their Redeemable Units as
of the end of each month on 10 days' notice to the General Partner. Under
certain circumstances, the General Partner can compel redemption but to date the
General Partner has not exercised this right. Purchases of Redeemable Units by
the Partnership reflected in the chart above were made in the ordinary course of
the Partnership's business in connection with effecting redemptions for Limited
Partners.
19
** Redemptions of Redeemable Units are effected as of the last day of each month
at the Net Asset Value per Redeemable Unit as of that day.
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. Exhibits and Reports of Form 8-K
(a) 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 Annual Report on Form 10-K for the year ended December
31, 2003.
Exhibit - 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Certification
of President and Director).
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Certification
of Chief Financial Officer and Director).
Exhibit - 32.1 - Section 1350 Certification (Certification of
President and Director).
Exhibit - 32.2 - Section 1350 Certification (Certification of Chief
Financial Officer and Director).
(b) Reports on Form 8-K - None
20
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.
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: 8/13/04
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Date: 8/13/04
21
Exhibit 31.1
CERTIFICATION
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, results of operations and cash flows 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 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 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):
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 13, 2004
/s/ David J. Vogel
----------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
22
Exhibit 31.2
CERTIFICATION
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, results of operations and cash flows 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 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 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):
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 13, 2004
/s/ Daniel R. McAuliffe, Jr.
---------------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
23
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, 2004
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 13, 2004
24
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, 2004
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 13, 2004
25