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 March 31, 1998
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
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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, 1998 and December 31, 1997 3
Statement of Income and Expenses and
Partners' Capital for the three months
ended March 31, 1998 and 1997. 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 - 13
<PAGE>
PART I
Item 1. Financial Statements
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
1998 1997
ASSETS: ------------ ------------
Equity in commodity futures trading account:
Cash and cash equivalents $115,343,055 $104,013,967
Net unrealized appreciation
on open futures contracts 4,442,054 8,931,038
Commodity options owned, at market value
(cost $460,241 and $144,827
in 1998 and 1997, respectively) 453,269 219,299
------------ ------------
120,238,378 113,164,304
Interest receivable 421,165 383,130
------------ ------------
$120,659,543 $113,547,434
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 614,868 $ 578,625
Management fees 273,364 263,105
Other 53,981 18,146
Incentive fees 57,104 67,467
Redemptions Payable 2,732,963 1,040,399
------------ ------------
3,732,280 1,967,742
------------ ------------
Partners' Capital:
General Partner, 1,083.6716 and 1,003.8833
Unit equivalents outstanding
in 1998 and 1997, respectively 1,200,643 1,128,124
Limited Partners, 104,452.4720 and
98,287.8866 Units of Limited Partnership
Interest outstanding in 1998 and 1997,
respectively 115,726,620 110,451,568
------------ ------------
116,927,263 111,579,692
------------ ------------
$120,659,543 $113,547,434
============ ============
See Notes to Financial Statements.
3
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SMITH BARNEY DIVERSIFIED FUTURES FUND II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
-------------- --------------
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains on closed positions $ 4,592,869 $ 1,882,146
Change in unrealized gains/losses on open
positions (4,570,428) 1,421,928
_____________ _____________
22,441 3,304,074
Less, brokerage commissions and clearing fees
($56,840 and $33,150, respectively) (1,937,175) (1,216,630)
_____________ _____________
Net realized and unrealized gains (losses) (1,914,734) 2,087,444
Interest income 1,173,548 704,173
_____________ _____________
(741,186) 2,791,617
_____________ _____________
Expenses:
Management fees 778,007 498,697
Other 68,072 31,826
Incentive fees 57,104 296,784
_____________ _____________
903,183 827,307
_____________ _____________
Net income (loss) (1,644,369) 1,964,310
Additions-Limited Partners 11,570,000 25,288,600
-General Partner 89,000 243,000
Redemptions (4,667,060) (1,197,717)
_____________ _____________
Net increase in Partners' capital 5,347,571 26,298,193
Partners' capital, beginning of period 111,579,692 55,298,004
_____________ _____________
Partners' capital, end of period $ 116,927,263 $ 81,596,197
------------- -------------
Net asset value per Unit
(105,536.1436 and 70,190.5338 Units
outstanding at March 31, 1998 and
1997, respectively) $ 1,107.94 $ 1,162.50
------------- -------------
Net income (loss) per Unit of Limited
Partnership Interest and General
Partner Unit equivalents $ (15.82) $ 37.44
------------- -------------
4
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SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO STATEMENT OF FINANCIAL CONDITION
March 31, 1998
(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, 1997, 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, 1997, 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, Campbell & Co., Inc., Willowbridge Associates
Inc. and ARA Portfolio Management Company, L.L.C. (collectively, the
"Advisors"). Campbell & Co., Inc. was added as an Advisor on February 1, 1998.
Chesapeake Capital Corporation ceased trading for the Partnership effective
January 31, 1998.
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, 1998 and the results of its operations for the three
months ended March 31, 1998 and 1997. 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, 1997.
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,
1998 and 1997 were as follows:
THREE-MONTHS ENDED
MARCH 31,
1998 1997
Net realized and unrealized
gains (losses) $ (18.42) $ 40.87
Interest income 11.25 11.19
Expenses (8.65) (14.62)
---------- ----------
Increase (decrease)for period (15.82) 37.44
Net asset value per Unit,
beginning of period 1,123.76 1,125.06
---------- ---------
Net asset value per Unit,
end of period $1,107.94 $1,162.50
========== =========
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
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, 1998 and 1997 was $4,895,323 and $3,630,717, respectively,
and the average fair value during the three months then ended, based on monthly
calculation, was $4,466,239 and $5,226,762, respectively.
4. 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
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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 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, 1998, the notional or
contractual amounts of the Partnership's commitment to purchase and sell these
instruments was $697,528,546 and $640,038,075, respectively, as detailed below.
All of these
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instruments mature within one year of March 31, 1998. However, due to the nature
of the Partnership's business, these instruments may not be held to maturity. At
March 31, 1998, the fair value of the Partnership's derivatives, including
options thereon, was $4,895,323, as detailed below.
MARCH 31, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 16,490,090 $ 21,163,975 $ 929,927
- - OTC Contracts 110,593,712 210,777,910 2,819,278
Energy 7,958,659 17,527,520 521,566
Grains 7,682,469 11,976,701 476,737
Interest Rates U.S. 33,197,082 235,485,829 (249,756)
Interest Rates Non U.S. 466,037,844 93,359,376 260,823
Livestock 776,890 1,649,760 7,510
Metals 22,786,317 29,493,362 (233,325)
Softs 12,151,769 16,878,431 222,808
Stock Indices 19,853,714 1,725,211 139,755
------------ ------------ ----------
Totals $697,528,546 $640,038,075 $4,895,323
============ ============ ==========
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, and the fair value of the Partnership's
derivatives, including options thereon, was $3,630,717, as detailed below.
MARCH 31, 1997
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 - 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
============ ============ ==========
8
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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 1998.
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, 1998, Partnership capital increased
4.8% from $111,579,692 to $116,927,263. This increase was attributable to the
addition of 10,446.5449 Units totaling $11,659,000 partially offset by net loss
from operations of $1,644,369 and the redemption of 4,202.1712 Units resulting
in an outflow of $4,667,060 for the quarter ended March 31, 1998.
Results of Operations
During the Partnership's first quarter of 1998, the net asset value per
Unit decreased 1.4% from $1,123.76 to $1,107.94, as compared to the first
quarter of 1997 in which the net asset value per Unit increased 3.3%. The
Partnership experienced a net trading gain before commissions and expenses in
the first quarter of 1998 of $22,441. Gains were recognized in the trading of
commodity futures in energy, non-U.S. interest rates and livestock and were
partially offset by losses recognized in the trading of softs, currencies,
indices, grains and U.S. interest rates. 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.
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.
9
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The profitability of the Partnership depends on the existence of 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 U.S. 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 $469,375 for the three months
ended March 31, 1998 as compared to the corresponding period in 1997. The
increase in interest income is primarily due to an increase in Partnership
capital as a result of net additions during 1997 and through the first quarter
of 1998.
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, 1998 increased by $720,545, as compared to
the corresponding period in 1997.
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 $279,310 for the three months ended March 31, 1998 as compared to
the corresponding period in 1997.
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, 1998 and 1997 resulted in incentive fees of
$57,104 and $296,784, respectively.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
Between May 1994 and the present, Salomon Brothers Inc. ("SBI"), SB and
The Robinson Humphrey Company, Inc. ("R- H"), all currently subsidiaries
of Salomon Smith Barney Holdings Inc. ("SSBHI"), along with a number of
other broker-dealers, were named as defendants in approximately 25
federal court lawsuits and two state court lawsuits, principally
alleging that companies that make markets in securities traded on NASDAQ
violated the federal antitrust laws by conspiring to maintain a minimum
spread of $.25 between the bid and asked price for certain securities.
The federal lawsuits and one state court case were consolidated for
pre-trial purposes in the Southern District of New York in the fall of
1994 under the caption In re NASDAQ Market- Makers Antitrust Litigation,
United States District Court, Southern District of New York No.
94-CIV-3996 (RWS); M.D.L. No. 1023. The other state court suit, Lawrence
A. Abel v. Merrill Lynch & Co., Inc. et al.; Superior Court of San
Diego, Case No. 677313, has been dismissed without prejudice in
conjunction with a tolling agreement.
In consolidated action, the plaintiffs purport to represent a class of
persons who bought one or more of what they currently estimate to be
approximately 1,650 securities on NASDAQ between May 1, 1989 and May 27,
1994. They seek unspecified monetary damages, which would be trebled
under the antitrust laws. The plaintiffs also seek injunctive relief, as
well as attorney's fees and the costs of the action. (The state cases
seek similar relief.) Plaintiffs in the consolidated action filed an
amended consolidated complaint that defendants answered in December
1995. On November 26, 1996, the Court certified a class composed of
retail purchasers. A motion to include institutional investors in the
class and to add class representatives was granted. In December 1997,
SBI, SB and R-H, along with several other broker-dealer defendants,
executed a settlement agreement with the plaintiffs. This agreement has
been preliminarily approved by the U.S. District Court for the Southern
District of New York but is subject to final approval.
On July 17, 1996, the Antitrust Division of the Department of Justice
filed a complaint against a number of firms that act as market makers in
NASDAQ stocks. The complaint basically alleged that a common
11
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understanding arose among NASDAQ market makers which worked to keep
quote spreads in NASDAQ stocks artificially wide. Contemporaneous with
the filing of the complaint, SBI, SB and other defendants entered into a
stipulated settlement agreement, pursuant to which the defendants would
agree not to engage in certain practices relating to the quoting of
NASDAQ securities and would further agree to implement a program to
ensure compliance with federal antitrust laws and with the terms of the
settlement. In entering into the stipulated settlement, SBI and SB did
not admit any liability. There are no fines, penalties, or other
payments of monies in connection with the settlement. In April 1997, the
U.S. District Court for the Southern District of New York approved the
settlement. In May 1997, plaintiffs in the related civil action (who
were permitted to intervene for limited purposes) appealed the district
court's approval of the settlement. The appeal is pending.
The Securities and Exchange Commission ("SEC") is also conducting a
review of the NASDAQ marketplace, during which it has subpoenaed
documents and taken the testimony of various individuals including SBI
and SB personnel. In July 1996, the SEC reached a settlement with the
National Association of Securities Dealers and issued a report detailing
certain conclusions with respect to the NASD and the NASDAQ market.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms,
including SB, in the U.S. Bankruptcy Court for the Central District of
California. Plaintiff alleged, among other things, that the defendants
recommended and sold to plaintiff unsuitable securities. The case
(County of Orange et al. v. Bear Sterns & Co. Inc. et al.) Has been
stayed by agreement of the parties.
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 three months ended March 31,
1997, there were additional sales of 21,850.7013 Units totaling
$25,288,600 and contributions by the General Partner representing
209.9812 Unit equivalents totaling $243,000. For the three months ended
March 31, 1998, there were additional sales of 10,366.7566 Units
totaling $11,570,000 and contributions by the General Partner
representing 79.7883 Unit equivalents totaling $89,000.
12
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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
13
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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: 5/15/98
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: 5/15/98
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 5/15/98
14
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<NAME> SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.II
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<PERIOD-START> JAN-01-1998
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