FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 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 September 30, 1996 and December 31,
1995 3
Statements of Income and Expenses and
Partners' Capital for the three months
ended September 30, 1996 and the period
from January 17, 1995 (commencement of
operations) to September 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
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
ASSETS (Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $36,424,770 $ 2,000
Net unrealized appreciation open futures
contracts 4,404,296
Commodity options owned, at market value
(cost $369,970) 380,914
----------- -----------
41,209,980 2,000
Interest receivable 127,047 -
----------- -----------
$41,337,027 $ 2,000
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued expenses:
Commissions $ 202,672
Management fees 92,092
Other 42,395
Incentive fees 114,438
Organization expense 127,047
Redemptions Payable 274,240
----------- -----------
852,884 -
----------- -----------
Partners' Capital
General Partner, 416.0003 and 1
Unit equivalents outstanding
in 1996 and 1995, respectively 411,678 $ 1,000
Limited Partners, 40,493.0826 and 1
Units of Limited Partnership
Interest outstanding in 1996 and 1995,
respectively 40,072,465 1,000
----------- -----------
40,484,143 2,000
----------- -----------
$41,337,027 $ 2,000
=========== ===========
See Notes to Financial Statements.
3
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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
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
--------------- --------------
<S> <C> <C>
Income:
Net gains (losses) on trading of commodity futures:
Realized gains (losses) on closed positions $ 234,339 $ (1,099,934)
Change in unrealized gains /losses on open positions 2,091,032 4,415,240
--------------- --------------
2,325,371 3,315,306
Less, brokerage commissions and clearing
fees ($21,841 and $43,690, respectively) (645,439) (1,301,075)
--------------- --------------
Net realized and unrealized gains 1,679,932 2,014,231
Interest income 347,832 722,763
--------------- --------------
2,027,764 2,736,994
Expenses:
Management fees 254,010 508,166
Organization expense 197,763 197,763
Incentive fees 114,438 163,871
Other expense 36,431 90,232
--------------- --------------
602,642 960,032
--------------- --------------
Net income 1,425,122 1,776,962
Proceeds from offering - Limited Partners 8,529,000
General Partner 86,000
Offering and organization expense (525,000)
Additions - Limited Partners 6,091,000 31,150,000
General Partner 59,000 312,000
Redemptions (804,356) (846,821)
--------------- --------------
Net increase in Partners' Capital 6,770,766 40,482,141
Partners' Capital, beginning of period 33,713,375 2,000
--------------- --------------
Partners' Capital, end of period $ 40,484,141 $ 40,484,141
=============== ==============
Net asset value per unit
(40,909.0829 Units outstanding at September 30, 1996) $ 989.61 $ 989.61
=============== ==============
Net income per Unit of Limited Partnership Interest
and General Partnership Unit equivalent $ 32.23 $ 50.54
=============== ==============
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
September 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 & Company, Inc.,
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 September 30, 1996 and the results of its operations for the period
from January 17, 1996 (commencement of operations) to September 30, 1996 and for
the three months ended September 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 periods 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 September
30, 1996 and for the period from January 17, 1996 (commencement of operations)
to September 30, 1996 were as follows:
PERIOD FROM
JANUARY 17, 1996
THREE-MONTHS (COMMENCEMENT OF
ENDED OPERATIONS) TO
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
Net realized and unrealized
gains (losses) $ 38.12 $ 17.12
Interest income 8.83 25.79
Expenses (15.04) (32.38)
Other .32 40.01
------- -------
Increase for period 32.23 50.54
Net asset value per Unit,
beginning of period 957.38 939.07
------- -------
Net asset value per Unit,
end of period $989.61 $989.61
======= =======
3. Offering and Organization Costs:
Offering and organization expenses of approximately $518,000 relating to
the issuance and marketing of Units during the initial offering period were
initially paid by SB. As of September 30, 1996, the Partnership had reimbursed
SB for all offering and organization expenses incurred during the initial
offering period. Expenses incurred during the initial offering period were
estimated at $525,000 and charged against the initial capital of the fund. The
difference between the estimated and the actual offering and organization
expense of approximately $7,000 has been applied to continuous offering
expenses. Expenses of approximately $295,000 related to the continuous offering
of Units have been incurred. As of September 30, 1996, the Partnership had
reimbursed SB for $127,047 relating to the continuous offering of Units.
Interest earned by the Partnership will be used to reimburse SB for the offering
and organization expenses of the Partnership related to the continuous offering
until such time as such expenses are fully reimbursed.
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 results of the Partnership's trading
activities are shown in the statements of income and expenses.
6
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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 September 30, 1996 was $4,785,210 and the average fair value during
the period from January 17, 1996 (commencement of operations) to September 30,
1996, based on monthly calculation, was $1,868,844.
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.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk
7
<PAGE>
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 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 September 30, 1996, the notional or
contractual amounts of the Partnership's commitment to purchase and sell these
instruments was $346,193,892 and $127,791,888, respectively, as detailed below.
All of these instruments mature within one year of September 30, 1996. However,
due to the nature of the Partnership's business, these instruments may not be
held to maturity. At September 30, 1996, the Partnership had net unrealized
trading gains of $4,415,240, as detailed below.
NOTIONAL OR CONTRACTUAL NET
AMOUNT OF COMMITMENTS UNREALIZED
TO PURCHASE TO SELL GAIN/(LOSS)
----------- ------- -----------
Currencies
- - Exchange Traded Contracts $ 6,954,287 $ 14,577,316 $ 190,438
- - OTC Contracts 36,051,058 57,585,430 391,418
Energy 14,225,106 1,468,500 1,247,416
Grains 1,683,186 5,466,336 230,277
Interest Rates US 24,245,988 8,110,281 (148,819)
Interest Rates Non US 239,772,249 1,836,746 2,141,034
Livestock 1,012,600 23,160 31,140
Metals 5,683,960 29,084,775 497,426
Softs 3,236,734 7,761,568 (126,506)
Indices 13,328,724 1,877,776 (38,584)
------------ ------------ ------------
Total $346,193,892 $127,791,888 $ 4,415,240
============ ============ ============
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 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
third 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.
For the three months ended September 30, 1996, Partnership capital
increased 20.1% from $33,713,375 to $40,484,141. This increase was attributable
to the addition of 6,544.4818 Units totaling $6,150,000 coupled with net income
from operations of $1,425,122 and partially offset by the redemption of 849.4668
Units resulting in an outflow of $804,356 for the quarter ended September 30,
1996.
Results of Operations
During the Partnership's third quarter of 1996, the net asset value per
Unit increased 3.4% from $957.38 to $989.61. The Partnership experienced a net
trading gain before commissions and expenses in the third quarter of 1996 of
$2,325,371. Gains were recognized in the trading of commodity futures in energy
products interest rates and metals and were partially offset by losses
recognized in the trading of agricultural products, indices and currencies.
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. 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
9
<PAGE>
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 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.
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: 11/11/96
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: 11/11/96
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Treasurer
Date: 11/11/96
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000923660
<NAME> Smith Barney Diversified Futures Fund L.P. II
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 36,424,770
<SECURITIES> 4,785,210
<RECEIVABLES> 127,047
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,337,027
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,337,027
<CURRENT-LIABILITIES> 852,884
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 40,484,143
<TOTAL-LIABILITY-AND-EQUITY> 41,337,027
<SALES> 0
<TOTAL-REVENUES> 2,736,994
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 960,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,776,962
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776,962
<EPS-PRIMARY> 50.54
<EPS-DILUTED> 0
</TABLE>
