SMITH BARNEY DIVERSIFIED FUTURES FUND L P II, 10-K, 2000-03-29

SMITH BARNEY DIVERSIFIED FUTURES FUND L P II
10-K, 2000-03-29
REAL ESTATE INVESTMENT TRUSTS

Previous: SEARS CREDIT ACCOUNT MASTER TRUST II, 10-K405, 2000-03-29

Next: DOMINION RESOURCES BLACK WARRIOR TRUST, 10-K405, 2000-03-29

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the year ended December 31, 1999

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 LLC
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)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of
Limited
Partnership
Interest
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]

As of February 29, 2000 Limited Partnership Units with an aggregate value of
$96,659,726 were outstanding and held by non-affiliates.

DOCUMENTS INCORPORTED BY REFERENCE

None

<PAGE>

PART I

Item 1. Business.

(a) General development of business. Smith Barney Diversified Futures
Fund L.P. II ("Partnership") is a limited partnership organized on May 10, 1994
under the Partnership laws of the State of New York. The Partnership commenced
trading operations on January 17, 1996. The Partnership engages in speculative
trading of commodity interests, including forward contracts on foreign
currencies, commodity options and commodity futures contracts and other
financial instruments, foreign currencies and stock indices.
A Registration Statement on Form S-1 relating to the public offering
became effective on August 21, 1995. Beginning August 21, 1995, 100,000 Units of
Limited Partnership Interest ("Units") were publicly offered at $1,000 per Unit
for a period of ninety days, subject to increase for up to an additional sixty
days at the sole discretion of the general partner. Between August 21, 1995
(commencement of the offering period) and January 16, 1996, 8,529 Units were
sold at $1,000 per Unit. Proceeds of the offering were held in an escrow account
and were transferred, along with the General Partner's contribution of $87,000
to the Partnership's trading account on January 17, 1996 when the Partnership
commenced trading. Sales of additional Units and additional general partner
contributions and redemptions of Units for the year ended December 31, 1999 are
reported in the Statement of Partners' Capital on page F-6 under "Item 8.
Financial Statements and Supplementary Data." The general partner has agreed to

2
<PAGE>

make capital contributions, if necessary, so that its general partnership
interest will be equal to the greater of (i) an amount to entitle it to 1% of
each material item of Partnership income, loss, deduction or credit and (ii) the
greater of (a) 1% of the partners' contributions to the Partnership or (b)
$25,000. The Partnership will be liquidated upon the first of the following to
occur: December 31, 2014; the net asset value of a Unit decreases to less than
$400 as of the close of any business day; or under certain circumstances as
defined in the Limited Partnership Agreement of the Partnership (the "Limited
Partnership Agreement").
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form of
organization from a corporation to a limited liability company on October 1,
1999. 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.
The Partnership's trading of futures contracts on commodities is done
primarily on United States and foreign commodity exchanges. It engages in such
trading through a commodity brokerage account maintained with SSB.
As of December 31, 1999, all commodity trading decisions are made for
the Partnership by John W. Henry & Company, Inc. ("JWH"), Campbell and Company

3
<PAGE>

Inc., Willowbridge Associates Inc. and Beacon Management Corporation
(collectively, the "Advisors"). None of the Advisors is affiliated with the
General Partner or SSB. The Advisors are not responsible for the organization or
operation of the Partnership. Roy G. Neiderhoffer, Inc. was terminated as an
Advisor to the Partnership on August 31, 1999. Beacon Management Corporation was
added as an Advisor on February 1, 1999.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership is obligated to pay each Advisor: (i) a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year))
of the Partnership allocated to each Advisor as of the end of each month and
(ii) an incentive fee payable quarterly, equal to 20% of the New Trading Profits
(except JWH, which will receive an incentive fee of 15% of New Trading Profits)
(as defined in the Management Agreements) of the Partnership.
The Partnership has entered into a Customer Agreement with SSB (the
ACustomer Agreement@) which provides that the Partnership will pay SSB a monthly
brokerage fee equal to 1/2 of 1% of month-end Net Assets allocated to the
Advisors (6% per year) in lieu of brokerage commissions on a per trade basis.
SSB also pays a portion of its brokerage fees to its financial consultants who
have sold Units and who are registered as associated persons with the Commodity
Futures Trading Commission (the "CFTC"). The Partnership pays for National
Futures Association ("NFA") fees, exchange and clearing fees, give-up and user

4
<PAGE>

fees and floor brokerage fees. Brokerage fees will be paid for the life of the
Partnership, although the rate at which such fees are paid may be changed. The
Customer Agreement between the Partnership and SSB gives the Partnership the
legal right to net unrealized gains and losses.
In addition, SSB pays the Partnership interest on 80% of the average
daily equity maintained in cash in its account during each month at a 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 from
the date on which such weekly rate is determined. However, SSB began paying
interest to the Partnership only after the amount of interest accrued equaled
the total amount of offering and organizational expenses paid by SSB in
connection with the Partnership's offering plus interest at the prime rate
quoted by The Chase Manhattan Bank.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests (including, but not limited to, futures contracts, options and forward
contracts on U.S. Treasury Bills, other financial instruments, foreign
currencies, stock indices and physical commodities). The Partnership does not
engage in sales of goods or services. The Partnership's net income (loss) from
operations for the years ended December 31, 1999, 1998 and 1997 is set forth
under "Item 6. Selected Financial Data." The Partnership capital as of December
31, 1999, was $102,473,606.

5
<PAGE>

(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does
not engage in sales of goods or services or own any long lived assets, and
therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
There have been no material administrative, civil or criminal actions
within the past five years against SSB or any of its individual principals and
no such actions are currently pending, except as follows.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust), Ameritech Corporation, and an officer of Ameritech
sued Salomon Brothers Inc ("SBI") and Salomon Brothers Realty Corporation
("SBRC") in the U.S. District Court for the Northern District of Illinois
(Harris Trust Savings Bank, not individually but solely as trustee for the
Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v. Salomon
Brothers Inc and Salomon Brothers Realty Corp.). The complaint alleged that
purchases by Ameritech Pension Trust from the Salomon entities of approximately

6
<PAGE>

$20.9 million in participations in a portfolio of motels owned by Motels of
America, Inc. and Best Inns, Inc. violated the Employee Retirement Income
Security Act ("ERISA"), the Racketeer Influenced and Corrupt Organization Act
("RICO") and state law. SBI had acquired the participations issued by Motels of
America and Best Inns to finance purchases of motel portfolios and sold 95% of
three such issues and 100% of one such issue to Ameritech Pension Trust.
Ameritech Pension Trust's complaint sought (1) approximately $20.9 million on
the ERISA claim, and (2) in excess of $70 million on the RICO and state law
claims as well as other relief. In various decisions between August 1993 and
July 1999, the courts hearing the case have dismissed all of the allegations in
the complaint against the Salomon entities. In October 1999, Ameritech appealed
to the U.S. Supreme Court and in January 2000, the Supreme Court agreed to hear
the case and oral argument will be heard April 17, 2000. The appeal seeks review
of the decision of the U.S. Court of Appeals for the Seventh Circuit that
dismissed the sole remaining ERISA claim against the Salomon entities.
Both the Department of Labor and the Internal Revenue Service ("IRS")
have advised SBI that they were or are reviewing the transactions in which
Ameritech Pension Trust acquired such participations. With respect to the IRS
review, SSBHI, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. As of the date of this report,
the IRS has not issued such 30-day letters to SSBHI, SBI or SBRC.

7
<PAGE>

In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California.
(County of Orange et al. v. Bear Stearns & Co. Inc. et al.) The complaint
alleged, among other things, that the brokerage firms recommended and sold
unsuitable securities to Orange County. SSB and the remaining brokerage firms
settled with Orange County in mid 1999.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the IRS denies tax exempt
status to the City's General Obligation Refunding Bonds Series 1991. The
complaints were subsequently amended. SSB has asked the court to dismiss the
amended complaints. In May 1999, the Court denied SSB's motion to dismiss, but
stayed the litigation because the matter was not ripe. In March 2000, the city
filed a notice of discontinuance dismissing the complaint.
In November 1998, a class action complaint was filed in the United States
District Court for the Middle District of Florida (Dwight Brock as Clerk for
Collier County v. Merrill Lynch, et al.). The complaint alleged that, pursuant
to a nationwide conspiracy, 17 broker-dealer defendants, including SSB, charged

8
<PAGE>

excessive mark-ups in connection with advanced refunding transactions. Among
other relief, plaintiffs sought compensatory and punitive damages, restitution
and/or rescission of the transactions and disgorgement of alleged excessive
profits. In October 1999, the plaintiff filed a second amended complaint. SSB
has asked the court to dismiss the amended complaint.
In connection with the Louisiana and Florida matters, the IRS and SEC
have been conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions.
In December 1998, SSB was one of twenty-eight market making firms that
reached a settlement with the SEC in the matter titled In the Matter of Certain
Market Making Activities on NASDAQ. As part of the settlement of that matter,
SSB, without admitting or denying the factual allegations, agreed to an order
that required that it: (i) cease and desist from committing or causing any
violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934
and Rules 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000, and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed
by a hedge fund and its investment advisor against SSB in the Supreme Court of
the State of New York, County of New York (MKP Master Fund, LDC et al. v.
Salomon Smith Barney Inc.). The complaint included allegations that, while
acting as prime broker for the hedge fund, SSB breached its contracts with
plaintiffs, misused their monies, and engaged in tortious (wrongful) conduct,

9
<PAGE>

including breaching its fiduciary duties. SSB asked the court to dismiss the
complaint in full. In October 1999, the court dismissed the tort claims,
including the breach of fiduciary duty claims. The court allowed the breach of
contract and misuse of money claims to stand. In December 1999, SSB filed an
answer and asserted counterclaims against the investment advisor. In response to
plaintiff's motion to strike the counterclaims, in January 2000, SSB amended its
counterclaims against the investment advisor to seek indemnification and
contribution. Plaintiffs moved to strike SSB's amended counterclaims in February
2000. SSB will continue to contest this lawsuit vigorously.
In the course of its business, SSB, as a major futures commission
merchant and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings that the general partner believes do not have a
material effect on the business of SSB. Item 4. Submission of Matters to a Vote
of Security Holders.
There were no matters submitted to the security holders for a vote
during the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information. The Partnership has issued no stock. There is no
public market for the Units of Limited Partnership Interest.

10
<PAGE>

(b) Holders. The number of holders of Units of Limited Partnership
Interest as of December 31, 1999 was 5,050.
(c) Distribution. The Partnership did not declare a distribution in 1999
or 1998.
(d) Use of Proceeds. There were no additional sales during the twelve
months ended December 31, 1999. For the twelve months ended December
31, 1998, there were additional sales of 38,309.9229 Units totaling
$42,074,000 and contributions by the General Partner representing
283.5082 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.

11
<PAGE>

Item 6. Selected Financial Data. The Partnership commenced trading operations on
January 17, 1996. Realized and unrealized trading gains (losses), interest
income, net income (loss) and increase (decrease) in net asset value per Unit
for the years ended December 31, 1999 and 1998, 1997 and for the period from
January 17, 1996 (commencement of trading operations) to December 31, 1996 and
total assets at December 31, 1999, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998 1997 1996
------------- -------------- -------------- -------------
Realized and unrealized trading gains
(losses) net of brokerage commissions and
clearing fees of $8,857,532, $8,891,659,
$6,257,856 and $2,169,468,
respectively $ (21,027,791) $ 14,064,160 $ (461,654) $ 8,869,618
Interest income 4,658,630 4,818,279 3,634,245 1,190,687
------------- ------------- ------------- -------------
$ (16,369,161) $ 18,882,439 $ 3,172,591 $ 10,060,305
============= ============= ============= =============
Net Income (loss) $ (21,048,896) $ 12,979,536 $ (313,824) $ 7,582,653
============= ============= ============= =============
Increase (decrease) in net
asset value per unit $ (193.59) $ 95.43 $ (1.30) $ 185.99
============= ============= ============= =============
Total assets $ 106,012,664 $ 154,692,651 $ 113,547,434 $ 56,960,922
============= ============= ============= =============
</TABLE>

12
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash, net unrealized appreciation (depreciation) on open
futures 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. Such substantial losses
could lead to a material decrease in liquidity. To minimize this risk, the
Partnership follows certain policies including:
(1) Partnership funds are invested only in futures contracts which
are traded in sufficient volume to permit, in the opinion of the Advisors, ease
of taking and liquidating positions.
(2) The Partnership will not permit the churning of its commodity
trading accounts. (3) No Advisor initiates additional positions in
any commodity if such additional positions would
result in aggregate positions for all commodities requiring as margin more than
66-2/3% of the Partnership's assets allocated to the Advisor.
(4) The Partnership will not employ the trading technique commonly
known as "pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchase or sale of additional positions in
the same or related commodities.

13
<PAGE>

(5) The Partnership will not utilize borrowing except short-term borrowing if
the Partnership takes delivery of any cash commodities. (6) The Advisor may,
from time to time, employ trading strategies such as spread or straddles on
behalf of the Partnership. The term "spread" or "straddle" describes a commodity
futures trading strategy involving the simultaneous buying and selling of
futures contracts on the same commodity but involving different delivery dates
or markets and in which the trader expects to earn a profit from a widening or
narrowing of the difference between the prices of the two contracts.
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, or to purchase or sell other
financial instruments at specified terms at specified future dates. Each of
these instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. 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

14
<PAGE>

and market risks to which the Partnership is subject. (See also Item 8.
Financial Statements and Supplementary Data. for further information on
financial instrument risk included in the notes to financial statements.)
Other than the risks inherent in commodity futures trading, the
Partnership knows of no trends demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the Partnership will cease trading
operations and liquidate all open positions upon the first to occur of the
following: (i) December 31, 2014; (ii) the vote dissolve the Partnership by
limited partners owning more than 50% of the Units; (iii) assignment by the
General Partner of all of its interest in the Partnership or withdrawal,
removal, bankruptcy or any other event that causes the General Partner to cease
to be a general partner under the New York Revised Limited Partnership Act
unless the Partnership is continued as described in the Limited Partnership
Agreement; (iv) net asset value per Unit falls to less than $400 as of the end
of any trading day; or (v) the occurrence of any event which shall make it
unlawful for the existence of the Partnership to be continued.
(b) Capital resources. (i) The Partnership has made no material
commitments for capital expenditures.
(ii) The Partnership's capital consists of the capital
contributions of the partners as increased or decreased by gains or losses on
commodity trading, and by expenses, interest income, redemptions of Units and

15
<PAGE>

distributions of profits, if any. Gains or losses on commodity futures trading
cannot be predicted. Market moves in commodities are dependent upon fundamental
and technical factors which the Partnership may or may not be able to identify.
Partnership expenses will consist of, among other things, commissions,
management fees and incentive fees. The level of these expenses is dependent
upon the level of trading gains or losses and the ability of the Advisors to
identify and take advantage of price movements in the commodity markets, in
addition to the level of net assets maintained. In addition, the amount of
interest income payable by SSB is dependent upon interest rates over which the
Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. Beginning June 30, 1996 a Limited Partner may cause all of his Units to
be redeemed by the Partnership at the Net Asset Value thereof as of the last day
of each month on ten days' written notice to the General Partner. No fee will be
charged for redemptions. For the year ended December 31, 1999, 24,591.7470 Units
were redeemed totaling $28,275,280. For the year ended December 31, 1998,
13,377.6641 Units were redeemed totaling 15,146,446. For the year ended December
31, 1997, 11,519.2474 Units were redeemed totaling $12,684,088.
The Partnership ceased to offer Units effective March 1, 1998. For
the year ended December 31, 1998, there were additional sales of 38,309.9229
Units totaling $42,074,000 and contributions by the General Partner representing
283.5082 Units equivalents totaling $311,000. For the year ended December 31,

16
<PAGE>

1997, there were additional sales of 61,154.0723 Units totaling $68,708,600 and
contributions by the General Partner representing 505.8725 Unit equivalents
totaling $571,000.
(c) Results of Operations. For the year ended December 31, 1999 the
net asset value per unit decreased 15.9% from $1,219.19 to $1,025.60. For the
year ended December 31, 1998 the net asset value per Unit increased 8.5% from
$1,123.76 to $1,219.19. For the year ended December 31, 1997, the net asset
value per Unit decreased 0.1% from $1,125.06 to $1,123.76.
The Partnership experienced net trading losses of $12,170,259 before
commissions and expenses in 1999. These losses were primarily attributable to
losses incurred in the trading of non-U.S. interest rates, indices, metals,
gains, softs, livestock and currencies and were partially offset by gains
experienced in the trading of U.S. interest rates and energy.
The Partnership experienced net trading gains of $22,955,819 before
commissions and expenses in 1998. These gains were primarily attributable to
trading in currencies, U.S. and non-U.S. interest rates products and livestock
and were partially offset by losses in grains, metals, softs and indices.
The Partnership experienced net trading gains of $5,796,202 before
commissions and expenses in 1997. These gains were primarily attributable to the
trading of U.S. and non-U.S. interest rates, metals, indices and foreign
currencies. However, these trading gains were partially offset by losses
experienced in the trading of energy, grains, livestock and softs.

17
<PAGE>

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 those price trends correctly. 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.
(d)Operational Risk
The Partnership is directly exposed to market risk and credit risk,
which arise in the normal course of its business activities. Slightly less
direct, but of critical importance, are risks pertaining to operational and back
office support. This is particularly the case in a rapidly changing and
increasingly global environment with increasing transaction volumes and an
expansion in the number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss and
legal liability attributable to operational problems, such as inaccurate pricing
of transactions, untimely trade execution, clearance and/or settlement, or the
inability to process large volumes of transactions. The Partnership is subject

18
<PAGE>

to increased risks with respect to its trading activities in emerging market
securities, where clearance, settlement, and custodial risks are often greater
than in more established markets.
Technological Risk - the risk of loss attributable to technological limitations
or hardware failure that constrain the Partnership's ability to gather, process,
and communicate information efficiently and securely, without interruption, with
customers, among units within the Partnership, and in the markets where the
Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Partnership's
unitholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
SSBHI's computer systems and business processes successfully
handled the date change from December 31, 1999 to January 1, 2000. SSBHI is not

19
<PAGE>

aware of any significant year 2000 problems encountered internally or with the
third parties with which it interfaces, including customers and counterparties,
the global financial market infrastructure, and the utility infrastructure on
which all corporations rely.
Based on operations since January 1, 2000, SSBHI does not
expect any significant impact to its ongoing business as a result of the year
2000 issue. However, it is possible that the full impact of year 2000 issues has
not been fully recognized and no assurances can be given that year 2000 problems
will not emerge.
The pretax costs associated with required system modifications
and conversions totaled approximately $130 million. These costs were funded
through operating cash flow and expensed in the period in which they were
incurred.
The expenditures and the General Partner's resources dedicated
to the preparation for Year 2000 did not have a material impact on the operation
or results of the Partnership.
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.

20
<PAGE>

(e) New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No.
133 ("SFAS 133"), Accounting For Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize all
derivative instruments in the statement of financial condition and measure those
financial instruments at fair value. SFAS 133 has no impact on Partners' Capital
and operating results as all derivative instruments are recorded at fair value,
with changes therein reported in the statement of income and expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
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

21
<PAGE>

diversification results 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.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within the meaning of

22
<PAGE>

the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).
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. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. 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.

23
<PAGE>

In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, certain of the Advisors trade
commodity options. The Value at Risk associated with options is reflected in the
following table as the margin requirement attributable to the instrument
underlying each option. Where this instrument is a futures contract, the futures
margin, and where this instrument is a physical commodity, the
futures-equivalent maintenance margin has been used. This calculation is
conservative in that it assumes that the fair value of an option will decline by
the same amount as the fair value of the underlying instrument, whereas, in
fact, the fair values of the options traded by the Partnership in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has

24
<PAGE>

been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
Value at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected.

25
<PAGE>

The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1999. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1999, the
Partnership's total capitalization was $102,473,606.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ----------------------------------------------------------------------------------
Currencies
- - OTC Contracts $ 1,720,429 1.68% $ 3,072,042 $ 2,199,833
- - Exchange Traded Contracts 1,049,175 1.03% 2,724,264 1,125,696
Energy 2,328,200 2.27% 3,097,700 2,287,000
Grains 382,900 0.37% 1,066,275 403,800
Interest rates U.S. 1,902,900 1.86% 3,125,500 1,504,634
Interest rates Non-U.S 2,606,214 2.54% 6,364,023 4,304,901
Livestock 133,625 0.13% 496,796 253,575
Metals 1,510,250 1.47% 3,103,800 1,354,300
Softs 1,494,803 1.46% 2,485,987 1,245,255
Stock Indices 1,324,983 1.29% 5,983,258 2,566,317
----------- ----
Total $14,453,479 14.10%
=========== ======
</TABLE>

<PAGE>

As of December 31, 1998, the Partnership's total capitalization was
$151,797,782.

December 31, 1998

% of Total
Market Sector Value at Risk Capitalization

Currencies
- - OTC Contracts $ 3,585,707 2.36%
- - Exchange Traded Contracts 407,950 0.27%
Energy 1,783,000 1.17%
Grains 434,400 0.29%
Interest rate U.S. 1,261,900 0.83%
Interest rates Non-U.S 4,400,489 2.90%
Livestock 169,300 0.11%
Metal 1,666,300 1.10%
Softs 1,260,507 0.83%
Indices 1,999,807 1.32%
----------- ---------

Total $16,969,360 11.18%
=========== =========

Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership
is typically many times the applicable maintenance margin requirement (margin
requirements generally range between 2% and 15% of contract face value) as well
as many times the capitalization of the Partnership. The magnitude of the
Partnership's open positions creates a "risk of ruin" not typically found in
most other investment vehicles. Because of the size of its positions, certain
market conditions -- unusual, but historically recurring from time to time --
could cause the Partnership to incur severe losses over a short period of time.
The foregoing Value at Risk table -- as well as the past performance of the
Partnership -- give no indication of this "risk of ruin."
27
<PAGE>

Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, these balances (as well as any market
risk they represent) are immaterial.
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Partnership's
market sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price

28
<PAGE>

relationships, an influx of new market participants, increased regulation and
many other factors could result in material losses as well as in material
changes to the risk exposures and the management strategies of the Partnership.
There can be no assurance that the Partnership's current market exposure and/or
risk management strategies will not change materially or that any such
strategies will be effective in either the short- or long- term. Investors must
be prepared to lose all or substantially all of their investment in the
Partnership
The following were the primary trading risk exposures of the
Partnership as of December 31, 1999, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of
the Partnership. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium- to long-term rates to remain steady.

29
<PAGE>

Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1999, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's primary metal market exposure is to
fluctuations in the price of gold and silver. Although certain of the Advisors

30
<PAGE>

will from time to time trade base metals such as aluminum and copper, the
principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver. The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Partnership.

Softs. The Partnership's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
1999.
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle East.
Oil prices can be volatile and substantial profits and losses have been and are
expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership
as of December 31, 1999.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds and French francs.

31
<PAGE>

The Advisor regularly converts foreign currency balances to dollars in an
attempt to control the Partnership's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure.
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.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter programs traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
Each Advisor applies its own risk management policies to its trading. The
Advisors often follow diversification guidelines, margin limits and stop loss
points to exit a position. The Advisors' research of risk management often
suggests ongoing modifications to their trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to

32
<PAGE>

look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.

33
<PAGE>

Item 8. Financial Statements and Supplementary Data

SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS

Page
Number

Oath or Affirmation F-2

Report of Independent Accountants. F-3

Financial Statements:
Statement of Financial Condition at
December 31, 1999 and 1998. F-4

Statement of Income and Expenses for
the years ended December 31, 1999,
1998 and 1997. F-5

Statement of Partners' Capital for
the years ended December 31, 1999, 1998
and 1997. F-6

Notes to Financial Statements. F-7 - F-10

F-1
Continued

<PAGE>

To The Limited Partners of
Smith Barney Diversified Futures Fund L.P. II

To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.

By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management LLC
General Partner, Smith Barney Diversified
Futures Fund L.P. II

Smith Barney Futures Management LLC
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424

F-2
<PAGE>

Report of Independent Accountants

To the Partners of
Smith Barney Diversified Futures Fund L.P. II:

In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Smith Barney
Diversified Futures Fund L.P. II at December 31, 1999 and 1998, and the results
of its operations for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the management of
the General Partner; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the management of
the General Partner, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

PricewaterhouseCoopers LLP

New York, New York
February 25, 2000

F-3
<PAGE>

Smith Barney Diversified Futures Fund L.P. II
Statement of Financial Condition
December 31, 1999 and 1998

Assets: 1999 1998
Equity in commodity futures trading account:
Cash (Note 3c) $101,629,135 $146,338,218
Net unrealized appreciation on open
futures contracts 4,026,105 7,931,171
------------ ------------
105,655,240 154,269,389
Interest receivable 357,424 423,262
------------ ------------
$106,012,664 $154,692,651
------------ ------------

Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 540,229 $ 788,297
Management fees 238,436 344,022
Incentive fees -- 236,839
Professional fees 80,860 48,443
Other 13,116 11,537
Redemptions payable (Note 5) 2,666,417 1,465,731
------------ ------------
3,539,058 2,894,869
------------ ------------
Partners' capital (Notes 1 and 6):
General Partner, 1,287.3915 Unit equivalents
outstanding in 1999 and 1998 1,320,349 1,569,575
Limited Partners, 98,628.3984 and
123,220.1454 Units of Limited
Partnership Interest outstanding in
1999 and 1998, respectively 101,153,257 150,228,207
------------ ------------
102,473,606 151,797,782
------------ -----------
$106,012,664 $154,692,651
------------ ------------

See notes to financial statements.

F-4
<PAGE>

Smith Barney Diversified Futures Fund L.P. II
Statement of Income and Expenses
for the years ended
December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions $ (8,265,193) $ 24,030,158 $ (1,202,278)
Change in unrealized gains (losses) on open positions (3,905,066) (1,074,339) 6,998,480
------------ ------------ ------------
(12,170,259) 22,955,819 5,796,202
Less, Brokerage commissions including clearing fees
of $321,934, $201,707 and $164,059, respectively
(Note 3c) (8,857,532) (8,891,659) (6,257,856)
------------ ------------ ------------
Net realized and unrealized gains (losses) (21,027,791) 14,064,160 (461,654)
Interest income (Note 3c) 4,658,630 4,818,279 3,634,245
------------ ------------ ------------
(16,369,161) 18,882,439 3,172,591
------------ ------------ ------------
Expenses:
Management fees (Note 3b) 3,463,948 3,553,437 2,545,702
Incentive fees (Note 3b) 1,024,143 1,998,362 314,930
Professional fees 157,460 318,739 575,843
Other expenses 34,184 32,365 49,940
------------ ------------ ------------
4,679,735 5,902,903 3,486,415
------------ ------------ ------------
Net income (loss) $(21,048,896) $ 12,979,536 $ (313,824)
------------ ------------ ------------

Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent (Notes 1 $ (193.59) $ 95.43 $ (1.30)
and 6) -------------- ----------- -------------
</TABLE>

See notes to financial statements.

F-5
<PAGE>

Smith Barney Diversified
Futures Fund L.P. II
Statement of Partners' Capital
for the years ended
December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
Limited Partners General Partner Total
<S> <C> <C> <C>
Partners' capital at December 31, 1996 $ 54,737,709 $ 560,295 $ 55,298,004
Net loss (310,653) (3,171) (313,824)
Sale of 61,154.0723 Units of Limited Partnership
Interest and General Partner's contribution
representing 505.8725 Unit equivalents 68,708,600 571,000 69,279,600
Redemption of 11,519.2474 Units of Limited
Partnership Interest (12,684,088) -- (12,684,088)
------------- ------------- -------------
Partners' capital at December 31, 1997 110,451,568 1,128,124 111,579,692
Net income 12,849,085 130,451 12,979,536
Sale of 38,309.9229 Units of Limited Partnership
Interest and General Partner's contribution
representing 283.5082 Unit equivalents 42,074,000 311,000 42,385,000
Redemption of 13,377.6641 Units of Limited
Partnership Interest (15,146,446) -- (15,146,446)
------------- ------------- -------------
Partners' capital at December 31, 1998 150,228,207 1,569,575 151,797,782
Net loss (20,799,670) (249,226) (21,048,896)
Redemption of 24,591.7470 Units of Limited
Partnership Interest (28,275,280) -- (28,275,280)
------------- ------------- -------------
Partners' capital at December 31, 1999 $ 101,153,257 $ 1,320,349 $ 102,473,606
------------- ------------- -------------
</TABLE>

See notes to financial statements.

F-6
<PAGE>

Smith Barney Diversified
Futures Fund L.P. II
Notes to Financial Statements

1. Partnership Organization:
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 ("Units") were
sold at $1,000 per Unit. The proceeds of the initial offering were held in
an escrow account until January 17, 1996, at which time they were turned
over to the Partnership for trading. The Partnership continued to offer
Units during the continuous offering period. The Partnership is authorized
to sell 100,000 Units during the public offering period of the Partnership.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form
of organization from a corporation to a limited liability company on October
1, 1999. 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. The
General Partner and each limited partner share in the profits and losses of
the Partnership in proportion to the amount of partnership interest owned by
each except that no limited partner shall be liable for obligations of the
Partnership in excess of his initial capital contribution and profits, if
any, net of distributions. The Partnership will be liquidated upon the first
to occur of the following: December 31, 2014; the net asset value of a Unit
decreases to less than $400 as of a close of any business day; or under
certain other circumstances as defined in the Limited Partnership Agreement.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments
and derivative commodity instruments) are used for trading purposes.
The commodity interests are recorded on trade date and open contracts
are recorded in the statement of financial condition at fair value on
the last business day of the year, which represents market value for
those commodity interests for which market quotations are readily
available. Investments in commodity interests denominated in foreign
currencies are translated into U.S. dollars at the exchange rates
prevailing on the last business day of the year. Realized gains
(losses) and changes in unrealized values on commodity interests are
recognized in the period in which the contract is closed or the
changes occur and are included in net gains (losses) on trading of
commodity interests.
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.

c. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.

F-7
<PAGE>
Smith Barney Diversified
Futures Fund L.P. II
Notes to Financial Statements
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading
decisions for the Partnership.
b. Management Agreements:
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with John W. Henry & Company, Inc. ("JWH"),
Campbell & Co., Inc., Willowbridge Associates Inc. and Beacon Management
Corporation (collectively, the "Advisors"), registered commodity trading
advisors. The Advisors are not affiliated with one another and none is
affiliated with the General Partner or SSB and are not responsible for
the organization or operation of the Partnership. The Partnership will
pay each Advisor a monthly management fee equal to 1/6 of 1% (2% per
year) of month-end Net Assets allocated to the Advisor except JWH, which
will receive a monthly management fee equal to 1/3 of 1% (4% per year) of
month-end Net Assets. In addition, the Partnership is obligated to pay
each Advisor an incentive fee payable quarterly equal to 20% of the New
Trading Profits, as defined in the Management Agreements, earned by each
Advisor for the Partnership, except JWH, which will receive an incentive
fee of 15% of New Trading Profits. Millburn Ridgefield Corporation and
ARA Portfolio Management Company, L.L.C. were terminated as Advisors to
the Partnership on January 31, 1999. Beacon Management Corporation and
Roy G. Niederhoffer Co., Inc. were added as Advisors on February 1, 1999.
Roy G. Neiderhoffer, Inc. was terminated as an advisor to the Partnership
on August 31, 1999.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SSB a monthly brokerage fee equal to 1/2 of 1%
(6% per year) of month-end Net Assets, as defined, in lieu of brokerage
commissions on a per trade basis. SSB will pay a portion of brokerage
fees to its financial consultants who have sold Units in this
Partnership. Brokerage fees will be paid for the life of the Partnership,
although the rate at which such fees are paid may be changed. The
Partnership will pay for National Futures Association ("NFA") fees,
exchange, clearing, user, give-up and floor brokerage fees. All of the
Partnership's assets are deposited in the Partnership's account at SSB.
The Partnership's cash is deposited by SSB in segregated bank accounts to
the extent required by Commodity Futures Trading Commission regulations.
At December 31, 1999 and 1998, the amount of cash held for margin
requirements was $17,283,509 and $18,983,738, respectively. SSB has
agreed to pay the Partnership interest on 80% of the average daily equity
maintained in cash in its account during each month at a 30-day U.S.
Treasury bill rate determined weekly by SSB based on the average
noncompetitive yield on 3-month U.S. Treasury bills maturing in 30 days
from the date on which such weekly rate is determined. The Customer
Agreement between the Partnership and SSB gives the Partnership the legal
right to net unrealized gains and losses. The Customer Agreement may be
terminated upon notice by either party.
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 interests. The results of the Partnership's trading
activity are shown in the statement of income and expenses. All of the
commodity interests, owned by the Partnership, are held for trading

F-8
<PAGE>
Smith Barney Diversified
Futures Fund L.P. II
Notes to Financial Statements

purposes. The average fair value during the years ended December 31, 1999
and 1998, based on a monthly calculation, was $7,397,780 and $8,531,763,
respectively. The fair value of these commodity interests, including options
thereon, if applicable, at December 31, 1999 and 1998 was $4,026,105 and
$7,931,171, respectively, as detailed below.

Fair Value
December 31, December 31,
1999 1998
Currencies:
-Exchange Traded Contracts $ 320,385 $ (260,990)
-OTC Contracts 305,278 (1,219,718)
Energy 880,171 316,796
Grains 93,138 446,680
Interest Rates U.S. 1,254,924 (588,909)
Interest Rates Non-U.S (106,494) 7,311,953
Livestock (71,300) 214,540
Metals 318,282 790,656
Softs 548,382 853,554
Indices 483,339 66,609
----------- -----------
Total $ 4,026,105 $ 7,931,171
----------- -----------
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner; however, beginning with the quarter ended June 30, 1996, a
limited partner may require the Partnership to redeem his Units at their Net
Asset Value as of the last day of any month on 10 days' notice to the
General Partner provided that no redemption may result in the limited
partner holding fewer than 3 Units after redemption is effected. There is no
fee charged to limited partners in connection with redemptions.

6. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 1999, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997

Net realized and unrealized gains (losses) $ (193.82) $ 103.15 $ (0.92)
Interest income 40.81 41.25 43.48
Expenses (40.58) (48.97) (43.86)
--------- --------- ---------
Increase (decrease) for period (193.59) 95.43 (1.30)
Net asset value per Unit, beginning of year 1,219.19 1,123.76 1,125.06
--------- --------- ---------
Net asset value per Unit, end of year $1,025.60 $1,219.19 $1,123.76
--------- --------- ---------
</TABLE>

7. Financial Instrument Risks:
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, or 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, 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

F-9
<PAGE>
Smith Barney Diversified
Futures Fund L.P. II
Notes to Financial Statements

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
(see table in Note 4). 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. The notional or contractual amounts of these
instruments, while appropriately 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 December 31,
1999. However, due to the nature of the Partnership's business, these
instruments may not be held to maturity.
8. Subsequent Event:
On January 31, 2000 there were additional redemptions of 2,044.0347 Units
totaling $2,134,831.
9. New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize
all derivative instruments in the statement of financial condition and
measure those financial instruments at fair value. SFAS 133 has no impact on
Partners' Capital and operating results as all derivative instruments are
recorded at fair value, with changes therein reported in the statement of
income and expenses.

F-10

<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim
period, no independent accountant who was engaged as the principal accountant to
audit the Partnership's financial statements has resigned or was dismissed.

PART III

Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are
managed by its General Partner, Smith Barney Futures Management LLC. As of
December 31, 1999, investment decisions were being made by John W. Henry &
Company Inc., Campbell and Company Inc., Willowbridge Associates Inc. and Beacon
Management Corporation (collectively, the "Advisors").
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management LLC, its General Partner. SSB, an
affiliate of the General Partner, is the commodity broker for the Partnership
and receives brokerage commissions for such services, as described under "Item
1. Business." Brokerage commissions and clearing fees of $8,857,532 were paid
for the year ended December 31, 1999. Management fees and incentive fees of
$3,463,948 and $1,024,143, respectively, were paid to the Advisors for the year
ended December 31, 1999.

34
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. As of
March 1, 2000, the Partnership knows of no person who beneficially owns more
than 5% of the Units outstanding.
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership interest
equivalent to 1,287.3915 Units (1.3%) of Limited Partnership Interest as of
December 31, 1999.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures
Management LLC would be considered promoters for purposes of item 404 (d) of
Regulation S-K. The nature and the amounts of compensation each promoter will
receive from the Partnership are set forth under "Item 1. Business", "Item 8.
Financial Statements and Supplementary Data." and AItem 11. Executive
Compensation."

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1999
and 1998.
Statement of Income and Expenses for the years ended
December 31, 1999, 1998 and 1997.

35
<PAGE>

Statement of Partners' Capital for the years ended December
31, 1999, 1998 and 1997.
(2) Financial Statement Schedules: Financial Data Schedule for
the year ended December 31, 1999.
(3) Exhibits:
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (FileNo. 33-79244 and
incorporated herein by reference).
3.2 - Certificate of Limited Partnership of the Partnership as
filed in the office of the County Clerk of New York County
(filed as Exhibit 3.2 to the Registration Statement on Form
S-1 (Filed No. 33-79244) and incorporated herein by
reference).
10.1-Customer Agreement between the Partnership and Smith Barney
(filed as Exhibit 10.1 to the Registration Statement on Form
S-1 (File No. 33-79244) and incorporated herein by
reference).
10.2-Subscription Agreement (filed as Exhibit 10.2 to the
Registration Statement on Form S-1 (File No. 33-29144) and
incorporated herein by reference).
10.3-Escrow Instructions relating to escrow of subscription
funds (filed as Exhibit 10.3 to the Registration Statement
on Form S-1 (File No. 33-79244) and incorporated herein by
reference).
10.4-Management Agreement among the Partnership, the General
Partner and Chesapeake Capital Corporation (filed as

36
<PAGE>

Exhibit 10.5 to the Registration Statement on Form S-1
(File No.
33-79244) and incorporated herein by reference).
10.5-Management Agreement among the Partnership, the General
Partner and John W. Henry & Co. Inc. (filed as Exhibit
10.6 to the Registration Statement on Form S-1 (File
No. 33-79244) and incorporated herein by reference)
10.6-Management Agreement among the Partnership, the General
Partner and Millburn Ridgefield Corporation (filed as
Exhibit 10.7 to the Registration Statement on Form S-1
(File No. 33-79244) and incorporated herein by
reference).
10.7-Management Agreement among the Partnership, the General
Partner and Willowbridge Associates Inc. (filed as
Exhibit 10.7 to the Form 10-K for the year ended
December 31, 1997).
10.8-Management Agreement among the Partnership, the
General Partner and ARA Portfolio Management Company,
L.L.C. (filed as Exhibit 10.8 to the Form 10-K for the
year ended December 31, 1997).
10.9-Letter from General Partner terminating Management
Agreement with Chesapeake Capital Corporation (filed as
Exhibit 10.9 to the Form 10-K for the year ended
December 31, 1997).

37
<PAGE>

10.10- Management Agreement among the Partnership, the
General Partner and Campbell & Co., Inc. (filed as
Exhibit 10.10 to the Form 10-K for the year ended
December 31, 1997).

10.11- Letters extending Management Agreements with John W.
Henry & Company Inc., Chesapeake Capital Corporation
and Millburn Ridgefield Corporation for 1996 and 1997
(filed as Exhibit 10.11 to the Form 10-K for the year
ended December 31, 1997).

10.12- Letters from the General Partner terminating
Management Agreement with Millburn Ridgefield
Corporation
(previously filed).

10.13- Letter from the General Partner terminating
Management Agreement with ARA Portfolio Management
(previously filed)

10.14- Management Agreement among the Partnership, the
General Partner and Beacon Management Corporation
(previously filed).

10.15- Management Agreement among the Partnership, the
General Partner and Roy G. Neiderhoffer Co., Inc.
(previously filed).

10.16- Letters extending Management Agreements with John W.
Henry & Company Inc., Campbell & and Company, Inc. and
Willowbridge Associates Inc. for 1998 (previously
filed).

38
<PAGE>

10.17- Letters extending the Management Agreements with John
W. Henry & Company Inc., Campbell & Company, Inc.,
Willowbridge Associates Inc. and Beacon Management
Corporation for 1999 (filed herein)

10.18- Letter from the General Partner terminating
Management Agreement with Roy G. Neiderhoffer Co., Inc.
(filed herein)

(b) Reports on 8-K: None Filed.

39
<PAGE>

Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.

Annual Report to Limited Partners

40
<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 annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 30th day of March 2000.

SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II

By: Smith Barney Futures Management LLC
(General Partner)

By /s/ David J. Vogel
David J. Vogel, President & Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual
report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.

/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President

/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director

/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director

/s/ Shelley Ullman
Shelley Ullman
Director

<ARTICLE> 5
<CIK> 0000923660
<NAME> Smith Barney Diversified Futures Fund L.P. II

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 101,629,135
<SECURITIES> 4,026,105
<RECEIVABLES> 357,424
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 106,012,664
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 106,012,664
<CURRENT-LIABILITIES> 3,539,058
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 102,473,606
<TOTAL-LIABILITY-AND-EQUITY> 106,012,664
<SALES> 0
<TOTAL-REVENUES> (16,369,161)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,679,735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (21,048,896)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,048,896)
<EPS-BASIC> (193.59)
<EPS-DILUTED> 0

</TABLE>

June 1, 1999

Beacon Management Corporation
47 Hulfish Street
Princeton, N.J. 08542

Attention: Mr. Grant Schaumberg

RE: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II

Dear Mr. Schaumberg:

We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 2000
and all other provisions of the Management Agreement will remain unchanged.

Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.

Very truly yours,

SMITH BARNEY FUTURES MANAGEMENT INC.

By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer

AGREED AND ACCEPTED

BEACON MANAGEMENT CORPORATION

By:

Print Name:

DAD/sr

June 1, 1999

Campbell & Co. Inc.
210 West Pennsylvania Avenue
Baltimore, MD 21204

Attention: Ms. Terry Livesey

RE: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II

Dear Ms. Livesey:

Very truly yours,

SMITH BARNEY FUTURES MANAGEMENT INC.

By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer

AGREED AND ACCEPTED

CAMPBELL & CO. INC.

By:

Print Name:

DAD/sr

June 22, 1999

John W. Henry & Company, Inc.
One Glendinning Place
Westport, Ct. 06880
Attn: Ms. Beth Kenton

Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II

Dear Ms. Kenton:

We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
are extending the term of the Management Agreement through June 30, 2000 and all
other provisions of the Management Agreement will remain unchanged.

Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel Dantuono at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5416.

Very truly yours,

SMITH BARNEY FUTURES MANAGEMENT INC.

By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer

RECEIVED

JOHN W. HENRY & COMPANY, INC.

By:

Print Name:

DAD/sr

June 1, 1999

Willowbridge Associates Inc.
101 Morgan Lane - Suite 180
Plainsboro, N.J. 07036

Attention: Ms. Theresa Morris

Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II

Dear Ms. Morris:

Very truly yours,

SMITH BARNEY FUTURES MANAGEMENT INC.

By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer

AGREED AND ACCEPTED

WILLOWBRIDGE ASSOCIATES INC.

By:

Print Name:

DAD/sr

August 24, 1999

R. G. Neiderhoffer Capital
Management Inc.
145 West 57th Street - 10th Floor
New York, New York 10019

Attention: Mr. Roy Neiderhoffer

Re: Smith Barney Diversified Futures Fund L.P. II
Salomon Smith Barney Orion Futures Fund L.P.

Dear Roy:

Please liquidate all of your positions for the above mentioned funds in
an orderly fashion by the close of business Friday, August 27, 1999.

If you have any questions, please call me at 212-723-5418.

Very truly yours,

SMITH BARNEY FUTURES MANAGEMENT

Daniel A. Dantuono
Chief Financial Officer & Director

DAD/sr