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 March 31, 1997
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
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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
March 31, 1997 and December 31, 1996. 3
Statement of Income and Expenses and
Partners' Capital for the three Months
ended March 31, 1997 and the period
from January 17, 1996 (commencement of
trading operations) to March 31, 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
STATEMENT OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
1997 1996
ASSETS: ---------- ----------
(Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $78,782,419 $54,370,448
Net unrealized appreciation on open
futures contracts 3,380,218 1,981,313
Commodity options owned, at market value
(cost $201,759 and $420,667 in 1997 and 1996,
respectively) 250,499 430,497
----------- -----------
82,413,136 56,782,258
Interest receivable 278,683 178,664
----------- -----------
$82,691,819 $56,960,922
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 421,388 $ 288,503
Management fees 190,829 133,127
Other 4,317 47,744
Incentive fees 296,784 1,036,077
Redemptions Payable 182,304 145,230
Commodity options written, at market value
(premiums received $28,124) - 12,237
----------- -----------
1,095,622 1,662,918
----------- -----------
Partners' Capital:
General Partner, 707.9920 and 498.0108
Unit equivalents outstanding
in 1997 and 1996, respectively 823,038 560,295
Limited Partners, 69,482.5418 and 48,653.0617
Units of Limited Partnership
Interest outstanding in 1997 and 1996,
respectively 80,773,159 54,737,709
----------- -----------
81,596,197 55,298,004
----------- -----------
$82,691,819 $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)
PERIOD FROM
JANUARY 17, 1996
THREE MONTHS (COMMENCEMENT OF
ENDED TRADING OPERATIONS)
MARCH 31, TO MARCH 31,
1997 1996
------------ ------------
Income:
Net gains (losses) on trading of
commodity interests:
Realized gains (losses) on
closed positions $ 1,882,146 $ (1,032,239)
Change in unrealized gains/losses
on open positions 1,421,928 712,044
------------ ------------
3,304,074 (320,195)
Less, brokerage commissions and clearing fees
( $33,150 and $5,501, respectively) (1,216,630) (176,191)
------------ ------------
Net realized and unrealized gains (losses) 2,087,444 (496,386)
Interest income 704,173 99,151
------------ ------------
2,791,617 (397,235)
------------ ------------
Expenses:
Management fees 498,697 67,442
Other expenses 31,826 27,825
Incentive fees 296,784
------------ ------------
827,307 95,267
------------ ------------
Net income (loss) 1,964,310 (492,502)
------------ ------------
Proceeds from offering - Limited Partners - 8,530,000
General Partner - 87,000
Offering and organization expense - (525,000)
Additions - Limited Partners 25,288,600 7,816,000
General Partner 243,000 79,000
Redemptions (1,197,717) -
------------ ------------
Net increase in Partners' Capital 26,298,193 15,494,498
Partners' Capital, beginning of period 55,298,004 -
------------ ------------
Partners' capital, end of period $ 81,596,197 $ 15,494,498
============ ============
Net asset value per Unit
(70,190.5338 and 16,870.3713 Units
outstanding at March 31, 1997 and
1996, respectively) $ 1,162.50 $ 918.44
============ ============
Net income (loss) per Unit of Limited
Partnership Interest and General
Partner Unit equivalent $ 37.44 $ (20.63)
============ ============
Redemption net asset value per Unit $ 1,162.50 $ 943.69
============ ============
See Notes to Financial Statements.
4
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SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO STATEMENT OF FINANCIAL CONDITION
MARCH 31, 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 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 March 31, 1997 and the results of its operations for the three
months ended March 31, 1997 and for the period from January 17, 1996
(commencement of trading operations) to March 31, 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
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2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three months ended March 31,
1997 and for the period from January 17, 1996 (commencement of trading
operations) to March 31, 1996 were as follows:
PERIOD FROM
JANUARY 17, 1996
(COMMENCEMENT OF
THREE-MONTHS TRADING OPERATIONS)
ENDED TO
MARCH 31, 1997 MARCH 31, 1996
Net realized and unrealized
gains (losses) $ 40.87 $ (48.12)
Interest income 11.19 7.59
Expenses (14.62) (8.19)
Other - 28.09
----------- ---------
Increase (decrease)for period 37.44 (20.63)
Net asset value per Unit,
beginning of period 1,125.06 939.07
---------- ---------
Net asset value per Unit,
end of period $ 1,162.50 $ 918.44
========== ==========
Redemption net asset
value per Unit * $ 1,162.50 $ 943.69
=========== =========
* 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 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. As of 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.
6
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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 March 31, 1997 was $3,630,717 and the average fair value during the
three months then ended, based on monthly calculation, was $5,226,762.
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 counterpaty 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
7
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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
involvements in these instruments. At March 31, 1997, the notional or
contractual amounts of the Partnership's commitment to purchase and sell these
instruments was $171,119,832 and $630,826,286, respectively, as detailed below.
All of these instruments mature within one year of March 31, 1997. However, due
to the nature of the Partnership's business, these instruments may not be held
to maturity. At March 31, 1997, the fair value of the Partnership's derivatives,
including options thereon, was $3,630,717, as detailed below.
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 798,500 $ 19,640,280 $ (5,223)
- - OTC Contracts 45,973,800 76,704,025 (418,600)
Energy 117,820 9,279,667 194,057
Grains 12,561,188 231,888 947,246
Interest Rates U.S. 83,782 158,191,425 1,005,016
Interest Rates Non U.S. 66,672,033 322,213,647 739,350
Livestock 1,070,660 0 1,230
Metals 25,095,113 16,687,595 (88,471)
Softs 9,193,608 14,071,704 1,246,565
Indices 9,553,328 13,806,055 9,547
------------ ------------ ----------
Totals $171,119,832 $630,826,286 $3,630,717
============ ============ ==========
6. Subsequent Event:
The General Parnter has added ARA Portfolio Management Company, L.L.C.
and Willowbridge Associates, Inc. as Advisors to the Partnership effective May
1, 1997.
8
<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
first 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 three months ended March 31, 1997, Partnership capital increased
47.6% from $55,298,004 to $81,596,197. This increase was attributable to the
addition of 22,060.6825 Units totaling $25,531,600 coupled with net income from
operations of $1,964,310 and partially offset by the redemption of 1,021.2212
Units resulting in an outflow of $1,197,717 for the quarter ended March 31,
1997.
Results of Operations
During the Partnership's first quarter of 1997, the net asset value per
Unit increased 3.3% from $1,125.06 to $1,162.50, as compared to the first
quarter of 1996 in which the net asset value per Unit decreased 2.2%. The
Partnership experienced a net trading gain before commissions and expenses in
the first quarter of 1997 of $3,304,074. Gains were recognized in the trading of
commodity futures in currencies, indices, softs, grains and domestic interest
rates and were partially offset by losses recognized in the trading of foreign
interest rates, metals, livestock and energy products. The Partnership
experienced a net trading loss before commissions and expenses in the first
quarter of 1996 of $320,195. Losses were recognized in the trading of commodity
futures in metals, interest rates, indices, agricultural products and currencies
and were offset by gains recognized in the trading of energy products.
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
9
<PAGE>
major price trends and the ability of the Advisors to identify 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 $605,022 for the three months ended March
31, 1997 as compared to the corresponding period in 1996. The increase in
interest income is primarily due to an increase in Partnership capital as a
result of net additions during 1996 and through the first 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 months ended March 31, 1997 increased by $1,040,439, as compared
to the corresponding period 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 $431,255 for the three months ended March 31, 1997 as compared to
the corresponding period 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 months ended March 31, 1997 resulted in an incentive fee of $296,784.
No incentive fees were earned in the corresponding period in 1996.
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: 5/12/97
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: 5/12/97
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 5/12/97
12
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<NAME> SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.II
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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<SECURITIES> 3,630,717
<RECEIVABLES> 278,683
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