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, 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
<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, 1998 and December 31,
1997 3
Statement of Income and Expenses and
Partners' Capital for the
three and nine months ended September 30,
1998 and 1997. 4
Notes to Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10 - 12
Item 3. Quantitative and Qualitative Disclosures
of Market Risk 13
PART II - Other Information 14 - 16
<PAGE>
PART I
Item 1. Financial Statements
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS: ------------ ------------
(Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $136,719,424 $104,013,967
Net unrealized appreciation on open
futures contracts 22,560,919 8,931,038
Commodity options owned, at market value
(cost $0 and $144,827 in 1998 and 1997,
respectively) 0 219,299
------------ ------------
159,280,343 113,164,304
Interest receivable 440,474 383,130
------------ ------------
$159,720,817 $113,547,434
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 787,664 $ 578,625
Management fees 343,234 263,105
Incentive fees 1,761,523 67,467
Other 16,512 18,146
Redemptions Payable 1,732,119 1,040,399
------------ ------------
4,641,052 1,967,742
------------ ------------
Partners' Capital:
General Partner, 1,287.3916 and 1,003.8833
Unit equivalents outstanding
in 1998 and 1997, respectively 1,572,884 1,128,124
Limited Partners, 125,643.9566 and 98,287.8866
Units of Limited Partnership
Interest outstanding in 1998 and 1997,
respectively 153,506,881 110,451,568
------------ ------------
155,079,765 111,579,692
------------ ------------
$159,720,817 $113,547,434
============ ============
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>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains (losses) on closed positions $ (569,836) $ (2,723,046) $ 7,089,497 $ (3,941,384)
Change in unrealized gains/(losses) on open
positions 21,783,790 1,285,272 13,555,409 1,485,874
_____________ _____________ _____________ _____________
21,213,954 (1,437,774) 20,644,906 (2,455,510)
Less, brokerage commissions and clearing fees
($49,708, $43,572, $155,495 and $124,772, respectively) (2,468,728) (1,700,785) (6,406,016) (4,487,373)
_____________ _____________ _____________ _____________
Net realized and unrealized gains/(losses) 18,745,226 (3,138,559) 14,238,890 (6,942,883)
Interest income 1,333,924 1,003,507 3,679,100 2,621,040
_____________ _____________ _____________ _____________
20,079,150 (2,135,052) 17,917,990 (4,321,843)
_____________ _____________ _____________ _____________
Expenses:
Management fees 955,328 690,769 2,547,383 1,815,482
Incentive fees 1,761,523 - 1,761,523 296,785
Other 100,794 135,403 268,139 368,073
_____________ _____________ _____________ _____________
2,817,645 826,172 4,577,045 2,480,340
_____________ _____________ _____________ _____________
Net Income (loss) 17,261,505 (2,961,224) 13,340,945 (6,802,183)
Additions- Limited Partners 12,666,000 11,703,000 41,602,000 57,702,600
- - General Partner 101,000 48,000 311,000 494,000
Redemptions (3,715,467) (6,881,254) (11,753,872) (9,257,071)
_____________ _____________ _____________ _____________
Net increase in Partners' capital 26,313,038 1,908,522 43,500,073 42,137,346
Partners' capital, beginning of period 128,766,727 95,526,828 111,579,692 55,298,004
_____________ _____________ _____________ _____________
Partners' capital, end of period $ 155,079,765 $ 97,435,350 $ 155,079,765 $ 97,435,350
------------- ------------- ------------- -------------
Net asset value per Unit
(126,931.3482 and 92,032.0218 Units outstanding
at September 30, 1998 and 1997, respectively) $ 1,221.76 $ 1,058.71 $ 1,221.76 $ 1,058.71
------------- ------------- ------------- -------------
Net gain (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 135.67 $ (31.93) $ 98.00 $ (66.35)
------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
September 30, 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, 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. On September 1, 1998, the Partnership's
commodity broker, Smith Barney Inc., merged with Salomon Brothers Inc and
changed its name to Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of
the General Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings Inc. ("SSBH"), which is the sole owner of SSB. SSBH is a wholly owned
subsidiary of Travelers Group Inc. 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"). (see Note 5)
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, 1998 and the results of its operations for the three
and nine months ended September 30, 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
5
<PAGE>
entire year.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three and nine months ended
September 30, 1998 and 1997, were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
Net realized and unrealized
gains (losses) $ 147.34 $ (33.86) $ 104.27 $ (65.90)
Interest income 10.67 10.92 32.24 33.08
Expenses (22.34) (8.99) (38.51) (33.53)
--------- --------- --------- ---------
Increase (decrease)
for period 135.67 (31.93) 98.00 (66.35)
Net Asset Value per Unit,
beginning of period 1,086.09 1,090.64 1,123.76 1,125.06
--------- --------- --------- ---------
Net Asset Value per Unit,
end of period $1,221.76 $1,058.71 $1,221.76 $1,058.71
========= ========= ========= =========
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 SSB 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, 1998 and December 31, 1997 was $22,560,919 and
$9,150,337, respectively, and the average fair value during the nine and twelve
months then ended, based on monthly calculation, was $7,268,423 and $5,938,920,
respectively.
6
<PAGE>
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 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 SSB.
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
7
<PAGE>
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, 1998, the notional or
contractual amounts of the Partnership's commitment to purchase and sell these
instruments was $1,782,830,036 and $309,559,623, respectively, as detailed
below. All of these instruments mature within one year of September 30, 1998.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity. At September 30, 1998, the fair value of the
Partnership's derivatives, including options thereon, was $22,560,919, as
detailed below.
SEPTEMBER 30, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 55,419,231 $ 2,862,460 $ 1,191,084
- - OTC Contracts 369,000,827 215,959,288 2,492,549
Energy 28,648,791 - 388,908
Grains 2,642,256 11,871,423 1,244,021
Interest Rates U.S. 521,974,149 - 7,884,641
Interest Rates Non-U.S. 769,470,157 - 8,700,752
Livestock - 1,899,950 51,800
Metals 28,600,292 32,275,065 (777,289)
Softs 7,074,333 16,687,795 299,104
Indices - 28,003,642 1,085,349
--------------- ------------ ----------
Totals $1,782,830,036 $309,559,623 $22,560,919
=============== ============ ===========
At December 31, 1997, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $529,827,193
and $562,544,334, respectively, and the fair value of the Partnership's
derivatives, including options thereon, was $9,150,337, as detailed below.
DECEMBER 31, 1997
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded Contracts $ 16,384,721 $107,228,370 $ 480,324
- - OTC Contracts 51,178,514 103,210,400 451,488
Energy - 35,726,058 1,910,464
Grains 7,962,725 10,551,808 79,029
Interest Rates U.S. 140,875,215 11,765,610 717,418
Interest Rates Non-U.S. 262,803,653 198,052,010 1,149,142
Livestock - 7,732,038 262,598
Metals 21,841,650 52,955,116 2,665,247
Softs 26,105,281 19,193,510 888,328
Indices 2,675,434 16,129,414 546,299
----------- ----------- ----------
Totals $529,827,193 $562,544,334 $9,150,337
============ ============ ==========
8
<PAGE>
5. Subsequent Event:
On October 8, 1998, Travelers Group Inc. merged with Citicorp Inc.
and changed its name to Citigroup Inc.
9
<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, commodity options 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 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 nine months ended September 30, 1998, Partnership capital
increased 39.0% from $111,579,692 to $155,079,765. This increase was
attributable to the addition of 38,207.1032 Units totaling $41,913,000 coupled
with net income from operations of $13,340,945 and was partially offset by the
redemption of 10,567.5249 Units resulting in an outflow of $11,753,872 for the
nine months ended September 30, 1998.
Operational Risk
The General Partner administers the business of the Partnership through
various systems and processes maintained by SSBH. SSBH has analyzed the impact
of the year 2000 on its systems and processes and modifications for compliance
are proceeding according to plan. All modifications necessary for year 2000
compliance are expected to be completed by the first quarter of 1999. In July
1998, SSB participated in successful industry-wide testing coordinated by the
Securities Industry Association and plans to participate in such tests in the
future. The purpose of industry-wide testing is to confirm that exchanges,
clearing organizations, and other securities industry participants are prepared
for the year 2000.
The most likely and most significant risk to the Partnership associated
with the lack of year 2000 readiness is the failure of outside organizations,
including the commodities exchanges, clearing organizations or regulators with
which the Partnership interacts to resolve their year 2000 issues in a timely
manner. This risk could involve the inability to determine the value of the
Partnership at some point in time and would make effecting purchases or
redemptions of Units in the Partnership infeasible until such valuation was
determinable.
10
<PAGE>
In addition, the General Partner is addressing the technological
implications that will result from regulatory and market changes due to Europe's
Economic and Monetary Union ("EMU").
Risks to the Partnership exist in the lack of experience with this new
currency and the potential impact it can have on the Advisors' trading programs.
Risks also exist in the failure of external information technology and
accounting systems to adequately prepare for the conversion. This issue is
particularly acute in the area of the exchanges, clearing houses and
over-the-counter foreign exchange markets where the futures interests are
traded. If the necessary changes are not properly implemented, the Partnership
could suffer failed trade settlements, inability to reconcile trading positions
and funding disruptions. Such events could result in erroneous entries in the
Partnership's accounts, mispriced transactions, and a delay or inability to
provide timely pricing of Units for the purpose of effecting purchases and
redemptions.
SSB has evaluated its internal systems and made the necessary changes to
accommodate EMU transactions on behalf of the Partnership. The General Partner
will continue to monitor and communicate with the Advisors and related
third-party entities to assure preparation for the EMU conversion and advanced
notification of impending issues or problems.
Results of Operations
During the Partnership's third quarter of 1998, the net asset value per
Unit increased 12.5% from $1,086.09 to $1,221.76, as compared to the third
quarter of 1997 in which the net asset value per Unit decreased 2.9%. The
Partnership experienced a net trading gain before brokerage commissions and
related fees in the third quarter of 1998 of $21,213,954. Gains were recognized
in the trading of commodity futures in U.S. and non-U.S. interest rates, grains
and livestock and were partially offset by losses recognized in the trading of
currencies, energy, metals, softs and indices. The Partnership experienced a net
trading loss before brokerage commissions and related fees 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.
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 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
11
<PAGE>
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 SSB
based on the average non-competitive yield on 3-month U.S. Treasury bills
maturing in 30 days. Interest income increased by $330,417 and $1,058,060,
respectively, for the three and nine months ended September 30, 1998 as compared
to the corresponding periods in 1997. The increase in interest income is
primarily due to an increase in Partnership capital as a result of positive
trading performance and net additions through the third 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. Accordingly, they must be compared in
relation to the fluctuations in the monthly net asset values. Brokerage
commissions and fees for the three and nine months ended September 30, 1998
increased by $767,943 and $1,918,643, respectively, as compared to the
corresponding periods 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 $264,559 and $731,901 for the three and nine months ended September
30, 1998, respectively, as compared to the corresponding periods in 1997.
Incentive fees are based on the new trading profits generated by each
Advisor 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, 1998 resulted in incentive fees of $1,761,523.
Trading performance for the three and nine months ended September 30, 1997
resulted in incentive fees of $0 and $296,785, respectively.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Partnership is subject to SEC Financial Reporting Release No. 48,
regarding quantitative and qualitative disclosures of market risk and will
comply with the disclosure and reporting requirements in its Form 10-K as of
December 31, 1998.
13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
Between May 1994 and the present, Salomon Brothers Inc. ("SBI"),
Smith Barney Inc. ("SB") and The Robinson Humphrey Company, Inc.
("R-H"), all currently subsidiaries of Salomon Smith Barney Holdings
Inc. ("SSBH"), 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 understanding arose among NASDAQ market makers which worked
to keep quote spreads in NASDAQ stocks artificially wide.
Contemporaneous with the filing of
14
<PAGE>
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 was argued in March 1998 and
was affirmed in August 1998.
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 Stearns & Co.
Inc. et al.) has been subject to a stay 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
September 30, 1998, there were additional sales of 1,500.1638 Units
totaling $12,666,000 and contributions by the General Partner
representing 91.4754 Unit equivalents totaling $101,000. For the
nine months ended September 30, 1998, there were additional sales of
37,923.5950 Units totaling $41,602,000 and contributions by the
General Partner representing 283.5073 Unit equivalents totaling
$311,000.
Proceeds from the sale of additional Units are used in the trading
of commodity interests including futures contracts, options and
forward contracts.
15
<PAGE>
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
16
<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: 11/12/98
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: 11/12/98
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 11/12/98
18
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 136,719,424
<SECURITIES> 22,560,919
<RECEIVABLES> 440,474
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 159,720,817
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 159,720,817
<CURRENT-LIABILITIES> 4,641,052
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 155,079,765
<TOTAL-LIABILITY-AND-EQUITY> 159,720,817
<SALES> 0
<TOTAL-REVENUES> 17,917,990
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,577,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,340,945
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,340,945
<EPS-PRIMARY> 98.00
<EPS-DILUTED> 0
</TABLE>