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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 June 30, 2002
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Commission File Number 0-22491
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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
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
----- ----
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
June 30, 2002 and December 31,
2001 (unaudited). 3
Condensed Schedules of Investments
at June 30, 2002 and December 31, 2001.
(unaudited). 4 - 5
Statement of Income and Expenses
and Partners' Capital for the three
and six months ended June 30, 2002 and
2001
(unaudited). 6
Notes to Financial Statements
(unaudited) 7 - 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12 - 13
Item 3. Quantitative and Qualitative Disclosures
of Market Risk 14 - 15
PART II - Other Information 16
2
PART I
Item 1. Financial Statements
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
(Unaudited)
JUNE 30, DECEMBER 31,
2002 2001
ASSETS:
Equity in commodity futures trading account:
Cash $50,970,502 $63,266,503
Net unrealized appreciation on
open positions 8,441,295 3,633,560
Commodity options owned, at fair value
(cost $3,773,425 and $2,368,450 in 2002 and 2001, respectively) 3,460,225 1,141,550
----------- -----------
62,872,022 68,041,613
Interest receivable 60,891 77,229
----------- -----------
$62,932,913 $68,118,842
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 329,645 $ 361,453
Management fees 136,314 153,976
Incentive fees 304,167 52,446
Other 100,362 73,369
Redemptions Payable 1,489,917 860,061
----------- -----------
2,360,405 1,501,305
----------- -----------
Partners' Capital:
General Partner, 1,287.3915 Unit equivalents
in 2002 and 2001, respectively 1,383,817 1,345,402
Limited Partners, 55,064.5524 and 62,457.7597
Units of Limited Partnership
Interest outstanding in 2002 and 2001,
respectively 59,188,691 65,272,135
----------- -----------
60,572,508 66,617,537
----------- -----------
$62,932,913 $68,118,842
=========== ===========
See Notes to Financial Statements.
3
Smith Barney Diversified Futures Fund L.P. II
Condensed Schedule of Investments
June 30, 2002
(Unaudited)
Sector Number of Contracts Contract Fair Value
- ------------------- -------------------- ---------------------- ----------
Currencies Over the counter contracts purchased - 3.94% $ 2,384,872
Over the counter contracts sold - (2.63)% (1,591,257)
-----------
Total Over the counter - 1.31% 793,615
Exchange contracts purchased - 6.81%
U.S. Dollars 247 Imm British Pounds - 1.84% 1,116,763
U.S. Dollars 190 Imm Euro FX - 1.92% 1,165,125
U.S. Dollars 186 Imm Swiss Francs - 1.44% 869,588
Other - 1.61% 973,853
----------
4,125,329
Exchange contracts sold - 0.36% 218,635
------------
Total Exchange traded - 7.17% 4,343,964
------------
Total Currencies - 8.48% 5,137,579
------------
Energy Futures contracts purchased - (0.02)% (13,243)
Futures contracts sold - 0.02% 12,080
-----------
Total Energy - (0.00)% * (1,163)
-----------
Grains Futures contracts purchased - 0.67% 404,614
Futures contracts sold - (0.06)% (33,825)
-----------
Total Grains - 0.61% 370,789
-----------
Interest Rates U.S. Futures contracts purchased - 2.71% 1,643,505
Futures contracts sold - (0.03)% (22,762)
-----------
Total Interest Rates U.S. - 2.68% 1,620,743
-----------
Interest Rates Non-U.S Futures contracts purchased - 2.29% 1,386,079
Futures contracts sold - (0.04)% (21,963)
----------
Total Interest Rates Non-U.S. - 2.25% 1,364,116
---------
Livestock Futures contracts purchased - 0.01% 8,450
Futures contracts sold - (0.22)% (137,920)
-----------
Total Livestock - (0.21)% (129,470)
-----------
Metals
Futures contracts purchased - (0.46)% (278,818)
Futures contracts sold - (0.07)% (42,534)
----------
Total Metals - (0.53)% (321,352)
----------
Softs
Futures contracts purchased - 0.68% 414,502
Futures contracts sold - 0.05% 27,389
----------
Total Softs - 0.73% 441,891
----------
Indices
Futures contracts purchased - (0.07)% (41,953)
Futures contracts sold - (0.00)% * 115
----------
Total Indices - (0.07)% (41,838)
---------
Total Fair Value on Futures and Forwards - 13.94% 8,441,295
Total Currencies - 5.71% Commodity options owned - 5.71% 3,460,225
------------
Total Investments - 19.65% $ 11,901,520
============
% of Investments
Country Composition Investments at Fair Value at Fair Value
- --------------------- ------------------------ --------------------
Australia $ (13,577) (0.11)%
Canada 13,528 0.11%
France (60,178) (0.51)%
Germany 476,969 4.01%
Hong Kong (17,975) (0.15)%
Italy (104) (0.00)*
Japan 208,643 1.75%
Spain 75,018 0.63%
United Kingdom 507,089 4.26%
United States 10,712,107 90.01%
----------- -------------------
$ 11,901,520 100.00%
=========== ===================
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Notes to Financial Statements
4
Smith Barney Diversified
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2001
(Unaudited)
Sector Contract Fair Value
- ----------------- ----------------------------- ----------
Currencies Over the counter contracts sold - 1.47% $ 979,504
Over the counter contracts purchased - 0.41% 269,940
---------
Total Over the counter - 1.88% 1,249,444
---------
Exchange contracts sold - 2.58% 1,721,800
Exchange contracts purchased - 0.24% 157,770
---------
Total Exchange traded - 2.82% 1,879,570
---------
Total Currencies - 4.70% 3,129,014
---------
Energy Futures contracts sold - 0.12% 81,683
Futures contracts purchased - (0.08)% (50,650)
---------
Total Energy - 0.04% 31,033
---------
Grains Futures contracts sold - 0.62% 416,332
Futures contracts purchased - 0.0% * (5,000)
---------
Total Grains - 0.62% 411,332
---------
Interest Rates U.S. Futures contracts sold - (0.01)% (7,322)
Futures contracts purchased - 0.15% 101,600
---------
Total Interest Rates U.S. - 0.14% 94,278
---------
Interest Rates Non-U.S. Futures contracts sold - 0.24% 157,588
Futures contracts purchased - (0.22)% (147,690)
--------
Total Interest Rates Non-U.S. - 0.02% 9,898
--------
Livestock Futures contracts sold - (0.15)% (97,500)
Futures contracts purchased - 0.04% 25,960
--------
Total Livestock - (0.11)% (71,540)
--------
Metals Futures contracts sold - (0.69)% (460,649)
Futures contracts purchased - 0.20% 131,456
--------
Total Metals - (0.49)% (329,193)
--------
Softs Futures contracts sold - 0.18% 122,603
Futures contracts purchased - 0.24% 159,445
--------
Total Softs - 0.42% 282,048
--------
Indices Futures contracts sold - 0.04% 22,395
Futures contracts purchased - 0.08% 54,295
-------
Total Indices - 0.12% 76,690
-------
Total Fair Value on Futures and Forwards - 5.46% 3,633,560
---------
Total Currencies - 1.71% Commodity options owned - 1.71% 1,141,550
---------
Total Investments - 7.17% $ 4,775,110
=========
% of Investments at
Country Composition Investments at Fair Value Fair Value
------------------------ ------------------------- ---------
Australia $ 27,934 0.58%
Canada 10,883 0.23%
Germany 134,572 2.82%
Hong Kong 70 0.00%
Japan (136,759) (2.86)%
France 18,389 0.38%
United Kingdom (327,219) (6.85)%
United States 5,047,240 105.70%
------------------------ --------
$ 4,775,110 100.00%
======================== ========
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Notes to Financial Statements.
5
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains (losses) on closed positions $ 4,739,671 $ 428,812 $ (1,774,950) $ 6,337,601
Change in unrealized gains (losses) on open
positions 3,650,604 (4,001,646) 5,721,435 (7,277,640)
------------ ------------ ------------ ------------
8,390,275 (3,572,834) 3,946,485 (940,039)
Interest income 184,484 555,344 388,740 1,369,037
------------ ------------ ------------ ------------
8,574,759 (3,017,490) 4,335,225 428,998
------------ ------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees of
$59,523, $54,279, $95,835 and $98,412, respectively 1,051,077 1,267,983 * 2,104,964 2,622,279 *
Management fees 391,689 501,482 806,526 1,037,705
Other expenses 24,569 26,776 49,141 53,002
Incentive fees 304,168 -- 304,168 341,269
------------ ------------ ------------ ------------
1,771,503 1,796,241 3,264,799 4,054,255
------------ ------------ ------------ ------------
Net income (loss) 6,803,256 (4,813,731) 1,070,426 (3,625,257)
Redemptions (5,048,018) (3,510,376) (7,115,455) (6,506,050)
------------ ------------ ------------ ------------
Net increase (decrease) in Partners' capital 1,755,238 (8,324,107) (6,045,029) (10,131,307)
Partners' capital, beginning of period 58,817,270 82,895,567 66,617,537 84,702,767
------------ ------------ ------------ ------------
Partners' capital, end of period $ 60,572,508 $ 74,571,460 $ 60,572,508 $ 74,571,460
------------ ------------ ------------ ------------
Net asset value per Unit
(56,351.9439 and 68,870.8368 Units outstanding
at June 30, 2002 and 2001, respectively) $ 1,074.90 $ 1,082.77 $ 1,074.90 $ 1,082.77
------------ ------------ ------------ ------------
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 120.21 $ (66.70) $ 29.84 $ (49.93)
------------ ------------ ------------ ------------
* Amounts reclassified for comparative purposes
See Notes to Financial Statements
6
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(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.
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 June 30, 2002, all trading decisions are made for the
Partnership by Capital Fund Management SA, Graham Capital Management L.P.,
Campbell & Co., Inc., Willowbridge Associates Inc., Stonebrook Structured
Products, LLC and Beacon Management Corporation (collectively, the "Advisors").
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Partnership's financial
condition at June 30, 2002 and December 31, 2001 and the results of its
operations for the three and six months ended June 30, 2002 and 2001. These
financial statements present the results of interim periods and do not include
all disclosures normally provided in annual financial statements. You should
read these financial statements together 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, 2001.
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.
7
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in net asset value per Unit for the three and six months ended
June 30, 2002 and 2001 were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2002 2001 2002 2001
Net realized and unrealized
gains(losses) * $129.39 $(67.08) $42.74 $(49.05)
Interest income 3.10 7.80 6.34 18.81
Expenses ** (12.28) (7.42) (19.24) (19.69)
--------- --------- --------- ---------
Increase(decrease) for period 120.21 (66.70) 29.84 (49.93)
Net Asset Value per Unit,
beginning of period 954.69 1,149.47 1,045.06 1,132.70
--------- --------- --------- ---------
Net Asset Value per Unit,
end of period $1,074.90 $1,082.77 $1,074.90 $1,082.77
========= ========= ========= =========
* Net realized and unrealized gains (losses) is net of commission expense.
** Expenses exclude commission expense.
8
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(Unaudited)
(Continued)
Financial Highlights continued:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
Ratio to average net assets: ***
Net income(loss) before
incentive fee 50.1% (24.9)% 4.6% (8.3)%
Incentive fee (2.1)% 0.0% (1.0)% (0.9)%
---- ---- ---- ----
Net income(loss) after
incentive fee 48.0% (24.9)% 3.6% (9.2)%
==== ==== ==== ====
Operating expenses 10.3% 9.3% 10.0% 9.4%
Incentive fee 2.1% 0.0% 1.0% 0.9%
---- ---- ---- ----
Total expenses and incentive fees 12.4% 9.3% 11.0% 11.3%
==== ==== ==== ====
Total return:
Total return before incentive fee 13.2% (5.8)% 3.4% (4.0)%
Incentive fee (0.6)% 0.0% (0.5)% (0.4)%
---- ---- ---- ----
Total return after incentive fee 12.6% (5.8)% 2.9% (4.4)%
==== ==== ==== ====
*** Annualized
9
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(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 and partners'
capital.
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 values during the six and twelve months ended
June 30, 2002 and December 31, 2001, based on a monthly calculation, was
$5,230,314 and $5,739,090, respectively. The fair value of these commodity
interests, including options thereon, if applicable, at June 30, 2002 and
December 31, 2001, was $11,901,520 and $4,775,110, respectively. Fair values for
exchange traded commodity futures and options are based on quoted market prices
for those futures and options. Fair values for all other financial instruments
for which market quotations are not readily available are based on calculations
approved by the General Partner.
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 values are based upon an underlying asset,
index, or reference rate, and generally represent future commitments to exchange
currencies or cash flows, to purchase or sell other financial instruments at
specific terms at specified future dates, or, in the case of derivative
commodity instruments, to have a reasonable possibility to be settled in cash,
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
10
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(Unaudited)
(Continued)
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 as unrealized appreciation 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 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 June 30, 2002. However, due to the nature of the
Partnership's business, these instruments may not be held to maturity.
11
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 second quarter of 2002.
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 six months ended June 30, 2002, Partnership capital decreased 9.1%
from $66,617,537 to $60,572,508. This decrease was attributable to the
redemption of 7,393.2073 Units resulting in the outflow of $7,115,455 which was
partially offset by net income from operations of $1,070,426. Future redemptions
can impact the amount of funds available for investments in commodity contract
positions in subsequent periods.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities in
the financial statements and accompanying notes.
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
period, 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 period. Realized gains
(losses) and changes in unrealized values on commodity interests and foreign
currencies 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.
12
Foreign currency contracts are those contracts where the Partnership agrees
to receive or deliver a fixed quantity of foreign currency for an agreed-upon
price on an agreed futures date. Foreign currency contracts are valued daily,
and the Partnership's net equity therein, representing unrealized gain or loss
on the contracts as measured by the difference between the forward foreign
exchange rates at the date of entry into the contracts and the forward rates at
the reporting dates, is included in the statement of financial condition.
Realized gains(losses) and changes in unrealized values on foreign currency
contracts are recognized in the period in which the contract is closed or the
changes occur and are included in the statement of income and expenses and
partners' capital.
Results of Operations
During the Partnership's second quarter of 2002 the net asset value per
unit increased 12.6% from $954.69 to $1,074.90 as compared to a decrease of 5.8%
in the second quarter of 2001. The Partnership experienced a net trading gain
before brokerage commissions and related fees in the second quarter of 2002 of
$8,390,275. Gains were primarily attributable to the trading of commodity
futures in currencies, U.S. interest rates, grains, and livestock and were
partially offset by losses in energy, non-U.S. interest rates, metals, softs and
indices. The Partnership experienced a net trading loss before brokerage
commissions and related fees in the second quarter of 2001 of $3,572,834. Losses
were primarily attributable to the trading of commodity futures in currencies,
U.S. and non-U.S. interest rates, livestock, metals and softs and were partially
offset by gains in energy, grains and indices.
Commodity futures markets are highly volatile. The potential for broad and
rapid price fluctuations increases the risks involved in commodity trading, but
also increases the possibility of profit. The profitability of the Partnership
depends on the existence of major price trends and the ability of the Advisors
to correctly identify those price 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. Salomon Smith Barney may continue to maintain the Partnership assets in
cash and/or to place all of the Partnership assets in 30-day Treasury bills and
pay the Partnership 80% of the interest earned on the Treasury bills purchased.
13
Salomon Smith Barney will retain 20% of any interest earned on Treasury bills.
Interest income for the three and six months ended June 30, 2002 decreased by
$370,860 and $980,297, respectively, as compared to the corresponding periods in
2001. The decrease in interest income is primarily due to the reduction in
interest rates and the effect of redemptions on the Partnership's equity
maintained in cash during the three and six months ended June 30, 2002.
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 six months ended June 30, 2002 decreased
by $216,906 and $517,315, respectively, as compared to the corresponding periods
in 2001. The decrease in brokerage commissions and fees is due to a decrease in
net assets during the three and six months ended June 30, 2002.
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 are affected
by trading performance, additions and redemptions. Management fees for the three
and six months ended June 30, 2002 decreased by $109,793 and $231,179,
respectively, as compared to the corresponding periods in 2001. The decrease in
management fees is due to a decrease in net assets during the three and six
months ended June 30, 2002
Incentive fees are based on the new trading profits generated by each
Advisor as defined in the advisory agreements between the Partnership, the
General Partner and each Advisor. Trading performance for the six months ended
June 30, 2002 and 2001, resulted in incentive fees of $304,168 and $341,269,
respectively.
14
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 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 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 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.
15
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category at June 30, 2002. All open
position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of June 30, 2002, the Partnership's
total capitalization was $60,572,508. 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, 2001.
June 30, 2002
(Unaudited)
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ------------------------------------------------------------------------------------------
Currencies:
- Exchange Traded Contracts $ 2,847,626 4.70% $ 2,923,678 $ 811,058
- OTC Contracts 1,223,425 2.02% 1,331,128 874,859
Energy 221,300 0.37% 2,363,000 143,050
Grains 304,800 0.50% 629,450 256,900
Interest Rates U.S. 1,276,700 2.11% 1,276,700 354,500
Interest Rates Non-U.S 2,200,361 3.63% 2,200,361 753,975
Livestock 169,400 0.28% 406,750 93,600
Metals:
- Exhange Traded Contracts 692,000 1.14% 1,303,600 210,400
- OTC Contracts 300,600 0.50% 367,350 17,700
Softs 520,507 0.86% 865,121 247,886
Indices 1,333,467 2.20% 2,967,881 831,684
----------- --------
Total $11,090,186 18.31%
=========== ========
16
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
In April 2002, consolidated amended complaints were filed against
Salomon Smith Barney Inc and other investment banks named in numerous
putative class actions filed in the United States District Court for
the Southern District of New York alleging violations of certain
federal securities laws (including Section 11 of the Securities Act of
1933, as amended, and Section 10(b) of the Securities Exchange Act of
1934, as amended) with respect to the allocation of shares for certain
initial public offerings and related aftermarket transactions and
damage to investors caused by allegedly biased research analyst
reports. Also pending in the Southern District of New York against
Salomon Smith Barney Inc and other investment banks are several
putative class actions which have been consolidated into a single
class action alleging violations of certain federal and state
antitrust laws in connection with the allocation of shares in initial
public offerings when acting as underwriters.
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) Exhibit - 99.1 Certificate of Chief Executive Officer.
Exhibit - 99.2 Certificate of Chief Financial Officer.
(b) Reports on Form 8-K - None with respect to the second quarter of
2002. On July 17, 2002 the Partnership filed a notice on Form 8-K
to report a change in accountants from PricewaterhouseCoopers LLP
to KPMG LLP.
17
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: 8/14/02
---------
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: 8/14/02
---------
By: /s/ Daniel R. McAuliffe, Jr.
---------------------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 8/14/02
---------
18