<PAGE>
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, 1996
Commission File Number 33-79244
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 13-3769020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition
at June 30, 1996 and December 31, 1995 3
Statements of Income and Expenses and
Partners' Capital for the three months
ended June 30, 1996 and the period from
January 17, 1995 (commencement of
operations) to June 30, 1996. 4
Notes to Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 - 10
PART II - Other Information 11
<PAGE>
PART I
Item 1. Financial Statements
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
1996 1995
-------------- -----------
ASSETS
(Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $31,716,489 $ 2,000
Net unrealized appreciation open futures
contracts 2,297,119 --
Commodity options owned, at market value
(cost $176,546) 203,635 --
----------- -----------
$34,217,243 $ 2,000
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued expenses:
Commissions $ 168,282 --
Management fees 74,041 --
Other 19,578 --
Incentive fees 49,433 --
Due to SB 150,069 --
Redemptions Payable 42,465 --
----------- -----------
503,868 --
----------- -----------
Partners' Capital
General Partner, 353.2982 and 1
Unit equivalents outstanding
in 1996 and 1995, respectively 338,241 1,000
Limited Partners, 34,860.7697 and 1
Units of Limited Partnership
Interest outstanding in 1996 and 1995,
respectively 33,375,134 1,000
----------- -----------
33,713,375 2,000
----------- -----------
$34,217,243 $ 2,000
=========== ===========
See Notes to Financial Statements.
3
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENTS OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 17, 1996
THREE-MONTHS (COMMENCEMENT OF
ENDED OPERATIONS) TO
JUNE 30, JUNE 30,
1996 1996
-------------- --------------
<S> <C> <C>
Income:
Net gains (losses) on trading of commodity futures:
Realized losses on closed positions $ (302,034) $(1,334,273)
Change in unrealized gains/losses on open positions 1,612,164 2,324,208
1,310,130 989,935
Less, brokerage commissions and clearing fees
($16,348 and $21,849, respectively) (479,445) (655,636)
-------------- --------------
Net realized and unrealized gains 830,685 334,299
Interest income 275,780 374,931
-------------- --------------
1,106,465 709,230
-------------- --------------
Expenses:
Management fees 186,714 254,156
Incentive fees 49,433 49,433
Other expense 25,976 53,801
-------------- --------------
262,123 357,390
-------------- --------------
Net income 844,342 351,840
-------------- --------------
Proceeds from offering - Limited Partner 8,530,000
General Parnter 87,000
Offering and organization expense (525,000)
Additions - Limited Partner 17,243,000 25,059,000
General Partner 174,000 253,000
Redemptions (42,465) (42,465)
-------------- --------------
Net increase in Partner's Capital 18,218,877 33,713,375
Partner's Capital, beginning of period 15,494,498 -
-------------- --------------
Partners' capital, end of period $33,713,375 $33,713,375
============== ==============
Net asset value per Unit
(35,214.0679 Units outstanding at June 30, 1996) $957.38 $957.38
============== ==============
Net gain per Unit of Limited Partnership Interest
and General Partnership Unit equivalent $38.94 $18.31
============== ==============
Redemption net asset value per Unit $961.65 $961.65
============== ==============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
1. General:
Smith Barney Diversified Futures Fund L.P. II (the "Partnership"), was
formed under the laws of the State of New York, on May 10, 1994 with the name
Consulting Group Managed Futures Fund L.P. The Partnership engages in the
speculative trading of commodity interests including forward contracts on
foreign currencies, commodity options and commodity futures contracts on U.S.
Treasury Bills and other financial instruments, foreign currencies and stock
indices. The commodity interests that are traded by the Partnership are volatile
and involve a high degree of market risk.
Between August 21, 1995 (commencement of the offering period) and January
16, 1996, 8,529 Units of limited partnership interest were sold at $1,000 per
unit. The proceeds of the offering were held in an escrow account until January
17, 1996, at which time they were turned over to the Partnership for trading.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. Smith Barney Inc. ("SB"), an affiliate of
the General Partner, acts as commodity broker for the Partnership. All trading
decisions are made for the Partnership by John W. Henry & Co., Millburn
Ridgefield Corporation and Chesapeake Capital Corporation (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, 1996 and the results of its operations for the period from
January 17, 1996 (commencement of operations) to June 30, 1996 and the three
months ended June 30, 1996. These financial statements present the results of
interim periods and do not include all disclosures normally provided in annual
financial statements. It is suggested that these financial statements be read in
conjunction with the financial statements and notes included in the
Partnership's annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1995.
Due to the nature of commodity trading, the results of operations for the
interim period presented should not be considered indicative of the results that
may be expected for the entire year.
5
<PAGE>
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three months ended June 30,
1996 and for the period from January 17, 1996 (commencement of operations) to
June 30, 1996 were as follows:
PERIOD FROM
JANUARY 17, 1996
THREE-MONTHS (COMMENCEMENT OF
ENDED OPERATIONS) TO
JUNE 30, 1996 JUNE 30, 1996
------------- -------------
Net realized and unrealized
gains (losses) $ 27.12 $(21.00)
Interest income 9.38 16.96
Expenses (9.17) (17.35)
Other 11.61 39.70
-------- -------
Increase for period 38.94 18.31
Net asset value per Unit,
beginning of period 918.44 939.07
-------- -------
Net asset value per Unit,
end of period $957.38 $957.38
======== =======
Redemption net asset
value per Unit * $961.65 $961.65
======== =======
* For the purpose of a redemption, any accrued liability for reimbursement of
offering and organization expenses will not reduce redemption net asset value
per unit.
3. Offering and Organization Costs:
Offering and organization expenses of $525,000 relating to the issuance and
marketing of Units offered were initially paid by SB. The accrued liability for
reimbursement of offering and organization expenses will not reduce Net Asset
Value per Unit for any purpose (other than financial reporting), including
calculation of advisory and brokerage fees and the redemption value of Units.
Interest earned by the Partnership will be used to reimburse SB for the offering
and organization expenses of the Partnership until such time as such expenses
are fully reimbursed. As of June 30, 1996, the Partnership has reimbursed SB for
$358,658 of offering and organization expenses.
4. 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
6
<PAGE>
results of the Partnership's trading activity are shown in the
statements of income and expenses.
The Customer Agreement between the Partnership and SB gives the Partnership
the legal right to net unrealized gains and losses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The fair value of these commodity interests, including options
thereon, at June 30, 1996 was $2,500,754 and the average fair value during the
period from January 17, 1996 (commencement of operations) to June 30, 1996,
based on monthly calculation, was $1,097,698.
5. Financial Instrument Risk:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures and options, whose value is based upon an underlying
asset, index, or reference rate, and generally represent future commitments to
exchange currencies or cash flows, to purchase or sell other financial
instruments at specific terms at specified future dates, or, in the case of
derivative commodity instruments, to have a reasonable possibility to be settled
in cash or with another financial instrument. These instruments may be traded on
an exchange or over-the-counter ("OTC"). Exchange traded instruments are
standardized and include futures and certain option contracts. OTC contracts are
negotiated between contracting parties and include forwards and certain options.
Each of these instruments is subject to various risks similar to those related
to the underlying financial instruments including market and credit risk. In
general, the risks associated with OTC contracts are greater than those
associated with exchange traded instruments because of the greater risk of
default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is SB.
7
<PAGE>
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, gains and loss transactions and collateral positions.
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At June 30, 1996, the notional or contractual
amounts of the Partnership's commitment to purchase and sell these instruments
was approximately $156,996,176 and $170,573,563, respectively, as detailed
below. All of these instruments mature within one year of June 30, 1996.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity. At June 30, 1996, the Partnership had net unrealized
trading gains of $2,500,754, as detailed below.
NOTIONAL OR CONTRACTUAL NET
AMOUNT OF COMMITMENTS UNREALIZED
TO PURCHASE TO SELL GAIN/(LOSS)
----------- ------------- ------------
Currencies
- - Exchange Traded Contracts $ 6,476,089 $ 10,396,480 $ 155,798
- - OTC Contracts 28,335,874 39,588,658 283,265
Energy 14,004,919 - 835,055
Grains 2,437,855 1,092,641 122,202
Interest Rates US 3,642,256 39,516,744 (105,281)
Interest Rates Non US 77,375,018 41,855,117 156,414
Livestock 817,870 - 5,230
Metals 4,552,602 24,466,412 620,764
Softs 5,255,166 8,206,533 356,960
Indices 14,098,527 5,450,978 70,347
------------ ------------ ---------
Totals $156,996,176 $170,573,563 $2,500,754
============ ============ ==========
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its equity in its commodity futures trading account, consisting of
cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures contracts and interest receivable. Because of the low margin deposits
normally required in commodity futures trading, relatively small price movements
may result in substantial losses to the Partnership. While substantial losses
could lead to a decrease in liquidity, no such losses occurred during the second
quarter of 1996.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity futures
trading, expenses, interest income, additions and redemptions of Units and
distributions of profits if any.
Results of Operations
During the Partnership's second quarter of 1996, the net asset value per
Unit increased 4.2% form $918.44 to $957.38. The Partnership experienced a net
trading gain before commissions and expenses in the second quarter of 1996 of
$1,310,130. Gains were recognized in the trading of commodity futures in metals,
energy products, agricultural products and currencies. These gains were
partially offset by losses recognized in the trading of interest rates and
indices.
Commodity futures markets are highly volatile. Broad price fluctuations and
rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify correctly those price trends. These price trends are influenced by,
among other things, changing supply and demand relationships, weather,
governmental, agricultural, commercial and trade programs and policies, national
and international political and economic events and changes in interest rates.
To the extent that market trends exist and the Advisors are able to identify
them, the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership's daily equity maintained in cash
was earned on a 30-day Treasury bill rate determined weekly by SB based on the
average non-competitive yield on 3-month U.S. Treasury bills maturing in 30
days.
9
<PAGE>
Brokerage commissions are calculated on the Partnership's net asset value
as of the last day of each month and therefore, are affected by trading
performance, subscriptions and redemptions.
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, subscriptions and redemptions.
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.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - None
Item 6. (a) Exhibits - None
(b) Reports on Form 8-K - None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
-----------------------------------
David J. Vogel, President
Date: 8/14/96
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
-----------------------------------
David J. Vogel, President
Date: 8/14/96
By: /s/ Daniel A. Dantuono
------------------------------------
Daniel A. Dantuono
Chief Financial Officer and
Treasurer
Date: 8/14/96
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000923660
<NAME> SB DIVERSIFIED FUTURES FUND L.P. II
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 31,716,489
<SECURITIES> 2,500,754
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,217,243
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,217,243
<CURRENT-LIABILITIES> 503,868
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 33,713,375
<TOTAL-LIABILITY-AND-EQUITY> 34,217,243
<SALES> 0
<TOTAL-REVENUES> 709,230
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 357,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 351,840
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351,840
<EPS-PRIMARY> 18.31
<EPS-DILUTED> 0
</TABLE>
