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, 2000
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
(Stateor other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th 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, 2000 and December 31,
1999 (unaudited). 3
Statement of Income and Expenses and
Partners' Capital for the three and
nine months ended September 30, 2000
and 1999 (unaudited). 4
Notes to Financial Statements
(unaudited) 5 - 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10 - 11
Item 3. Quantitative and Qualitative Disclosures
of Market Risk 12 - 13
PART II - Other Information 14
2
<PAGE>
PART I
Item 1. Financial Statements
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- -----------------
<S> <C> <C>
ASSETS:
Equity in commodity futures
trading account:
Cash $ 81,256,442 $ 101,629,135
Net unrealized appreciation
(depreciation) on open contracts (1,055,427) 4,026,105
----------------- ------------------
80,201,015 105,655,240
Interest receivable 328,664 357,424
----------------- ------------------
$ 80,529,679 $ 106,012,664
================= ==================
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 398,560 $ 540,229
Management fees 172,545 238,436
Other 65,884 93,976
Redemptions Payable 1,672,366 2,666,417
----------------- ------------------
2,309,355 3,539,058
----------------- ------------------
Partners' Capital:
General Partner, 1,287.3915 Unit
equivalents outstanding in 2000 and 1999 1,264,115 1,320,349
Limited Partners, 78,373.3398 and
98,628.3984 Units of Limited Partnership
Interest outstanding in 2000 and 1999,
respectively 76,956,209 101,153,257
----------------- ------------------
78,220,324 102,473,606
----------------- ------------------
$ 80,529,679 $ 106,012,664
================= ==================
</TABLE>
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,
--------------------------------- ----------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains (losses) on closed positions $ 2,047,952 $ (4,363,468) $ 4,667,564 $ (950,787)
Change in unrealized losses on open
positions (2,683,938) (5,581,961) (5,081,532) (2,781,008)
------------- ------------- ------------- -------------
(635,986) (9,945,429) (413,968) (3,731,795)
Less, brokerage commissions including
clearing fees of $43,410, $100,276,
$171,924 and $267,007respectively (1,354,030) (2,191,259) (4,490,709) (7,106,468)
------------- ------------- ------------- -------------
Net realized and unrealized losses (1,990,016) (12,136,688) (4,904,677) (10,838,263)
Interest income 989,866 1,162,582 2,937,610 3,656,230
------------- ------------- ------------- -------------
(1,000,150) (10,974,106) (1,967,067) (7,182,033)
------------- ------------- ------------- -------------
Expenses:
Management fees 537,469 849,684 1,934,715 2,750,749
Other 24,535 39,400 92,291 134,103
Incentive fees - 117,051 - 1,024,143
------------- ------------- ------------- -------------
562,004 1,006,135 2,027,006 3,908,995
------------- ------------- ------------- -------------
Net loss (1,562,154) (11,980,241) (3,994,073) (11,091,028)
Redemptions (5,710,573) (11,954,414) (20,259,209) (22,503,140)
------------- ------------- ------------- -------------
Net decrease in Partners' capital (7,272,727) (23,934,655) (24,253,282) (33,594,168)
Partners' capital, beginning of period 85,493,051 142,138,269 102,473,606 151,797,782
------------- ------------- ------------- -------------
Partners' capital, end of period $ 78,220,324 $ 118,203,614 $ 78,220,324 $ 118,203,614
------------- ------------- ------------- -------------
Net asset value per Unit
(79,660.7313 and 105,579.4608 Units
outstanding at September 30, 2000
and 1999, respectively) $ 981.92 $ 1,119.57 $ 981.92 $ 1,119.57
------------- ------------- ------------- -------------
Net loss per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (18.11) $ (108.82) $ (43.68) $ (99.62)
------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
4
<PAGE>
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2000
(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 LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
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. ("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned
subsidiary of Citigroup Inc. As of September 30, 2000, all trading decisions
are made for the Partnership by Graham Capital Management L.P., Campbell &
Co., Inc., Willowbridge Associates Inc., Stonebrook Capital Management, Inc.
and Beacon Management Corporation (collectively, the "Advisors"). Effective
July 1, 2000, John W. Henry and Company, Inc. was terminated as an Advisor.
Graham Capital Management L.P. and Beacon Management Corporation were added as
Advisors on the same date.
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, 2000 and December 31, 1999 and the results of its
operations for the three and nine months ended September 30, 2000 and 1999.
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, 1999.
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>
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three and nine months ended
September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net realized and unrealized
losses $ (23.25) $ (110.25) $ (53.96) $ (97.63)
Interest income 11.86 10.56 32.72 31.18
Expenses (6.72) (9.13) (22.44) (33.17)
---------- --------- ---------- ----------
Decrease for period (18.11) (108.82) (43.68) (99.62)
Net Asset Value per Unit,
beginning of period 1,000.03 1,228.39 1,025.60 1,219.19
---------- ---------- ---------- ---------
Net Asset Value per Unit
end of period $ 981.92 $1,119.57 $ 981.92 $1,119.57
========== ========== ========== =========
</TABLE>
6
<PAGE>
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
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 average fair value during the periods ended September 30,
2000 and December 31, 2000, based on a monthly calculation, was $4,324,364 and
$7,397,780, respectively. The fair value of these commodity interests, including
options thereon, if applicable, at September 30, 2000 and December 31, 1999, was
$(1,055,427) and $4,026,105, respectively, as detailed below.
Fair Value
September 30, December 31,
2000 1999
------------- ------------
Currency:
- Exchange Traded Contracts $ 34,120 $ 320,385
- OTC Contracts (453,987) 305,278
Energy (876,605) 880,171
Grains 88,254 93,138
Interest Rates U.S. 748,174 1,254,924
Interest Rates Non-U.S. (236,655) (106,494)
Livestock (220,860) (71,300)
Metals 306,415 318,282
Softs (93,973) 548,382
Indices (350,310) 483,339
----------- ----------
Total $(1,055,427) $4,026,105
============ ==========
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 may 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
7
<PAGE>
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
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, through physical delivery or with another
financial instrument. These instruments may be traded on an exchange or
over-the-counter ("OTC"). Exchange traded instruments are standardized and
include futures and certain option contracts. OTC contracts are negotiated
between contracting parties and include forwards and certain options. Each of
these instruments is subject to various risks similar to those related to the
underlying financial instruments including market and credit risk. In general,
the risks associated with OTC contracts are greater than those associated with
exchange traded instruments because of the greater risk of default by the
counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is 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 collateral positions.
8
<PAGE>
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
September 30, 2000
(Unaudited)
(Continued)
The notional or contractual amounts of these instruments, while not not
recorded in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. The majority of these instruments mature
within one year of September 30, 2000. However, due to the nature of the
Partnership's business, these instruments may not be held to maturity.
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 2000.
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, 2000, Partnership capital
decreased 23.7% from $102,473,606 to $78,220,324. This decrease was attributable
to the redemption of 20,255.0586 Units resulting in an outflow of $20,259,209
coupled with a net loss from operations of $3,994,073 for the nine months ended
September 30, 2000. Future redemptions can impact the amount of funds available
for investments in commodity contract positions in subsequent periods.
Results of Operations
During the Partnership's third quarter of 2000, the net asset value per unit
decreased 1.8% from $1,000.03 to $981.92, as compared to an decrease of 8.9% in
the third quarter of 1999. The Partnership experienced a net trading loss before
brokerage commissions and related fees in the third quarter of 2000 of $635,986.
Losses were primarily attributable to the trading of commodity contracts in
currencies, non-U.S. interest rates, softs, livestock and indices and were
partially offset by gains in grains, U.S. interest rates, metals and energy. The
Partnership experienced a net trading loss before brokerage commissions and
related fees in the third quarter of 1999 of $9,945,429. Losses were primarily
attributable to the trading of commodity contracts in currencies, energy,
grains, U.S. and non-U.S. interest rates, softs, indices and metals and were
partially offset by gains in the trading of livestock.
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
10
<PAGE>
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 SSB
based on the average non-competitive yield on 3-month U.S. Treasury bills
maturing in 30 days. Interest income for the three and nine months ended
September 30, 2000 decreased by $172,716 and $718,620, respectively, as compared
to the corresponding periods in 1999. The decrease in interest income is
primarily due to the effect of redemptions on the Partnership's equity
maintained in cash during the nine month period ended September 30, 2000.
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, 2000
decreased by $837,229 and $2,615,759, respectively, as compared to the
corresponding periods in 1999.
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
for the three and nine months ended September 30, 2000 decreased by $312,215 and
$816,034, respectively, as compared to the corresponding periods in 1999.
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. No incentive fees were earned for the three
and nine months ended September 30, 2000. Trading performance for the three and
nine months ended September 30, 1999 resulted in incentive fees of $117,051 and
$1,024,143, respectively.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Exchange maintenance margin requirements have been used by the Partnership
as the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk
component, which is not relevant to Value at Risk.
12
<PAGE>
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category at September 30, 2000. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of September 30, 2000, the
Partnership's total capitalization was $78,220,324. There has been no material
change in the trading Value at Risk information previously disclosed in the Form
10-K for the year ended December 31, 1999.
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Currencies:
- Exchange Traded Contracts $1,168,206 1.49% $2,848,182 $ 480,391
- OTC Contracts 1,092,952 1.40% 2,855,526 1,092,952
Energy 2,175,600 2.78% 3,867,500 1,311,450
Grains 451,275 0.58% 1,362,550 325,200
Interest Rates U.S. 869,400 1.11% 2,045,100 330,300
Interest Rates Non-U.S. 877,454 1.12% 5,017,546 877,454
Livestock 203,400 0.26% 363,300 45,194
Metals 1,383,300 1.77% 1,847,100 677,250
Softs 647,300 0.83% 1,615,154 454,300
Indices 1,641,684 2.10% 2,659,715 1,240,264
----------- ------
Total $10,510,571 13.44%
=========== ======
</TABLE>
13
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
For information concerning the matter entitled MKP Master Fund, LDC et
al. v. Salomon Smith Barney Inc., see the description that appears in
the ninth paragraph under the caption "Legal Proceedings" of the Annual
Report on Form 10-K of the Partnership for the year ended December 31,
1999. In September 2000, the court denied plaintiffs' motion to dismiss
SSB's counterclaims based on indemnification and contribution.
Item 2. Changes in Securities and Use of Proceeds - 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
14
<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 LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/14/00
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 LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/14/00
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 11/14/00
15
