FORM 10Q
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, 1997
Commission File Number 0-22491
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:
Statement of Financial Condition at
September 30, 1997 and December 31,
1996. 3
Statement of Income and Expenses and
Partners' Capital for the three and
nine months ended September 30, 1997,
the three months ended September 30, 1996
and for the period from January
17, 1996 (commencement of trading
operations) to September 30, 1996. 4
Notes to Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10 - 11
PART II - Other Information 12
2
<PAGE>
PART I
Item 1. Financial Statements
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS: ----------- -----------
(Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $95,238,956 $54,370,448
Net unrealized appreciation on
open futures contract 3,528,239 1,981,313
Commodity options owned, at market value
(cost $140,389 and $420,667 in 1997 and 1996,
respectively) 105,054 430,497
----------- -----------
98,872,249 56,782,258
Interest receivable 313,517 178,664
----------- -----------
$99,185,766 $56,960,922
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 489,135 $ 288,503
Management fees 220,227 133,127
Other 33,853 47,744
Incentive fees -- 1,036,077
Redemptions Payable 1,007,201 145,230
Commodity options written, at market value
(premiums received $28,124 in 1996) -- 12,237
----------- -----------
1,750,416 1,662,918
----------- -----------
Partners' Capital:
General Partner, 931.4431 and 498.0108
Unit equivalents outstanding
in 1997 and 1996, respectively 986,129 560,295
Limited Partners, 91,100.5787 and 48,653.0617
Units of Limited Partnership
Interest outstanding in 1997 and 1996,
respectively 96,449,221 54,737,709
----------- -----------
97,435,350 55,298,004
----------- -----------
$99,185,766 $56,960,922
=========== ===========
See Notes to Financial Statements.
3
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 17, 1996
NINE-MONTHS (COMMENCEMENT OF
THREE-MONTHS ENDED ENDED OPERATIONS) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity futures:
Realized gains (losses) on closed positions $ (2,723,046) $ 234,339 $ (3,941,384) $ (1,099,934)
Change in unrealized gains /losses on open positions 1,285,272 2,091,032 1,485,874 $4,415,240
---------------- ---------------- ---------------- ---------------
(1,437,774) 2,325,371 (2,455,510) 3,315,306
Less, brokerage commissions and clearing
fees ($43,572, $21,841, $124,772 ,
and $43,690, respectively) (1,700,785) (645,439) (4,487,373) (1,301,075)
---------------- ---------------- ---------------- ---------------
Net realized and unrealized gains (losses) (3,138,559) 1,679,932 (6,942,883) 2,014,231
Interest income 1,003,507 347,832 2,621,040 722,763
---------------- ---------------- ---------------- ---------------
(2,135,052) 2,027,764 (4,321,843) 2,736,994
---------------- ---------------- ---------------- ---------------
Expenses:
Management fees 690,769 254,010 1,815,482 508,166
Organization expense - 197,763 - 197,763
Incentive fees - 114,438 296,785 163,871
Other expense 135,403 36,431 368,073 90,232
---------------- ---------------- ---------------- ---------------
826,172 602,642 2,480,340 960,032
---------------- ---------------- ---------------- ---------------
Net income (loss) (2,961,224) 1,425,122 (6,802,183) 1,776,962
Proceeds from offering -Limited Partners 8,530,000
General Partner 87,000
Offering and organization expense (525,000)
Additions - Limited Partners 11,703,000 6,091,000 57,702,600 31,150,000
General Partner 48,000 59,000 494,000 312,000
Redemptions (6,881,254) (804,356) (9,257,071) (846,821)
---------------- ---------------- ---------------- ---------------
Net increase in Partners' Capital 1,908,522 6,770,766 42,137,346 40,484,141
Partners' Capital, beginning of period 95,526,828 33,713,375 55,298,004 -
---------------- ---------------- ---------------- ---------------
Partners' Capital, end of period $ 97,435,350 $ 40,484,141 $ 97,435,350 $ 40,484,141
================ ================ ================ ===============
Net asset value per unit
(92,032.0218 and 40,909.0829 Units outstanding
at September 30, 1997 and 1996) $ 1,058.71 $ 989.61 $ 1,058.71 $ 989.61
================ ================ ================ ===============
Net income per Unit of Limited Partnership Interest
and General Partner Unit equivalent $ (31.93) $ 32.23 $ (66.35) $ 50.54
================ ================ ================ ===============
</TABLE>
See Notes to Financial Statements. 4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO STATEMENT OF FINANCIAL CONDITION
September 30, 1997
(Unaudited)
1. General
Smith Barney Diversified Futures Fund L.P. II (the "Partnership"), is a
limited partnership which was organized on May 10, 1994 under the partnership
laws of the State of New York 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.
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, Chesapeake Capital Corporation, Willowbridge
Associates Inc. and ARA Portfolio Management Company, L.L.C. (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, 1997 and the results of its operations for the three
and nine months ended September 30, 1997, the three months ended September 30,
1996 and for the period from January 17, 1996 (commencement of trading
operations) to 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, 1996.
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 and nine months ended
September 30, 1997, the three months ended September 30, 1996 and for the period
from January 17, 1996 (commencement of trading operations) to September 30, 1996
were as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 17, 1996
(COMMENCEMENT OF
THREE MONTHS THREE MONTHS NINE MONTHS TRADING OPERATIONS)
ENDED ENDED ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net realized and unrealized
gains (losses) $ (33.86) $ 38.12 $ (65.90) $ 17.12
Interest income 10.92 8.83 33.08 25.79
Expenses (8.99) (15.04) (33.53) (32.38)
Other 0 .32 0 40.01
--------- --------- --------- ---------
Increase (decrease)for period (31.93) 32.23 (66.35) 50.54
Net asset value per Unit,
beginning of period 1,090.64 957.38 1,125.06 939.07
--------- --------- --------- ---------
Net asset value per Unit,
end of period $1,058.71 $ 989.61 $1,058.71 $ 989.61
========= ========= ========= =========
</TABLE>
6
<PAGE>
3. Offering and Organization Costs:
Offering and organization expenses of approximately $525,000
relating to the issuance and marketing of Units during the initial offering
period were initially paid by SB and were charged against the initial capital of
the Partnership. In addition, expenses of $291,264 related to the continuous
offering of Units have been incurred through December 31, 1996. The Partnership
had reimbursed SB for all such expenses incurred during the initial offering and
continuous offering period (in addition to interest at the prime rate quoted by
the Chase Manhattan Bank totaling approximately $20,929) from interest earned on
funds held in its account. The Partnership continues to incur expenses related
to the continuous offering of Units and has included such charges in other
expenses. For the nine months ended September 30, 1997 these expenses totaled
$290,778.
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
activity are shown in the statement 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 September 30, 1997 was $3,633,293 and the average fair value
during the nine months then ended, based on monthly calculation, was $4,816,214.
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.
7
<PAGE>
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 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, 1997, the notional or
contractual amounts of the Partnership's commitment to purchase and sell these
instruments was $826,514,469 and $304,383,268, respectively, as detailed below.
All of these instruments mature within one year of September 30, 1997. However,
due to the nature of the Partnership's business, these instruments may not be
held to maturity. At September 30, 1997, the fair value of the Partnership's
derivatives, including options thereon, was $3,633,293, as detailed below.
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 8,751,799 $ 77,634,409 $ (134,498)
- - OTC Contracts 82,775,800 93,747,409 (71,153)
Energy 36,102,794 6,112,349 261,554
Grains 10,858,573 1,150,054 (177,815)
Interest Rates U.S. 150,270,571 0 244,878
Interest Rates Non U.S. 464,287,555 45,472,306 3,755,080
Livestock 1,499,600 2,368,350 (7,845)
Metals 42,610,515 38,586,408 (836,356)
Softs 15,795,559 19,485,336 (67,953)
Indices 13,561,703 19,826,647 667,401
------------- ------------- ----------
Totals $826,514,469 $304,383,268 $3,633,293
============= ============= ==========
8
<PAGE>
6. Pending Merger:
On September 24, 1997, Travelers Group Inc. ("Travelers") and Salomon Inc
("Salomon") announced an agreement and plan of merger pursuant to which Salomon
will become a wholly owned subsidiary of Travelers and Smith Barney Holdings
Inc., the parent company of Smith Barney Inc. and Smith Barney Futures
Management Inc., will be merged into Salomon forming Salomon Smith Barney
Holdings Inc. The transaction is expected to be completed by year-end 1997.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition.
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
second quarter of 1997.
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 nine months ended September 30, 1997, Partnership capital
increased 76.2% from $55,298,004 to $97,435,354. This increase was attributable
to the addition of 51,230.5481 Units totaling $58,196,600 which was partially
offset by net loss from operations of $6,802,183 and by the redemption of
8,349.5988 Units resulting in an outflow of $9,257,071 for the nine months ended
September 30, 1997.
Results of Operations
During the Partnership's third quarter of 1997, the net asset value per
Unit decreased 2.9% from $1,090.64 to $1,058.71, as compared to the third
quarter of 1996 in which the net asset value per Unit increased 3.4%. The
Partnership experienced a net trading loss before commissions and expenses in
the third quarter of 1997 of $1,437,774. Losses were recognized in the trading
of commodity futures in currencies, energy products, U.S. interest rates,
livestock, metals, grains, indices and softs and were partially offset by gains
in non U.S. interest rates. 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 metals, energy
products and interest rates and were offset by losses recognized in the trading
of indices, agricultural products 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
10
<PAGE>
correctly those prices 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 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. Interest income increased by $655,675 and $1,898,277, respectively, for
the three and nine months ended September 30, 1997 as compared to the
corresponding periods in 1996. The increase in interest income is primarily due
to an increase in Partnership capital as a result of net additions through the
third quarter of 1997.
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, additions and redemptions. Brokerage commissions and clearing fees
for the three and nine months ended September 30, 1997 increased by $1,055,346
and $3,186,298, respectively, as compared to the corresponding periods in 1996.
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, additions and redemptions. Management fees
increased by $436,759 and $1,307,316 for the three and nine months ended
September 30, 1997, respectively, as compared to the corresponding periods in
1996.
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 nine months ended September 30, 1997 resulted in incentive fees of
$0 and $296,785, respectively. Trading performance for the three months ended
September 30, 1996 and for the period from January 17, 1996 (commencement of
trading operations) to September 30, 1996 resulted in incentive fees of $114,438
and $163,871, respectively.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds -
The Partnership continues to offer Units at the net asset value per
Unit as of the end of each month. For the period ended December 31,
1996, there were additional sales of 42,034.2002 Units totaling
$41,190,000 and contributions by the General Partner representing
411.0801 Unit equivalents totaling $402,000. For the nine months ended
September 30, 1997, there were additional sales of 50,797.1158 Units
totaling $57,702,600 and contributions by the General Partner
representing 433.4323 Unit equivalents totaling $494,000.
Proceeds from the sale of additional Units are used in the trading of
commodity interests including futures contracts, options and forward
contracts.
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
12
<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: 11/12/97
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: 11/12/97
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 11/12/97
13
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 95,238,956
<SECURITIES> 3,633,293
<RECEIVABLES> 313,517
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 99,185,766
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 99,185,766
<CURRENT-LIABILITIES> 1,750,416
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 97,435,350
<TOTAL-LIABILITY-AND-EQUITY> 99,185,766
<SALES> 0
<TOTAL-REVENUES> (4,321,843)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,480,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,802,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,802,183)
<EPS-PRIMARY> (66.35)
<EPS-DILUTED> 0
</TABLE>
