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, 2003
Commission File Number 0-22491
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
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(Exact name of registrant as specified in its charter)
New York 13-3769020
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Citigroup Managed Futures LLC
399 Park Ave - 7th Fl.
New York, New York 10022
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(Address and Zip Code of principal executive offices)
(212) 559-2011
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(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: Redeemable 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]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----
Limited Partnership Redeemable Units with an aggregate value of $70,961,018 were
outstanding and held by non-affiliates as of the last business day of the
registrants most recently completed second fiscal quarter.
As of February 29, 2004, 45,732.5014 Limited Partnership Redeemable Units were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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(File No. 033-79244) relating to the
public offering became effective on August 21, 1995. Beginning August 21, 1995,
100,000 redeemable units of Limited Partnership Interest ("Redeemable Units")
were publicly offered at $1,000 per Redeemable 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 Redeemable Units were sold at $1,000 per
Redeemable 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. An additional 100,000 Redeemable Units were registered on a
Registration Statement on Form S-1 (File No. 333-03538) effective May 29, 1996
and an additional 150,000 Redeemable Units were registered on a Registration
Statement on Form S-1 (File No. 333-25239) effective April 15, 1997.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
LLC, acts as the general partner (the "General Partner") of the Partnership.
Sales of additional Redeemable Units and additional General Partner
contributions and redemptions of Redeemable Units for the year ended December
31, 2003 are reported in the Statement of Partners' Capital on page F-9 under
"Item 8. Financial Statements and Supplementary Data."
The General Partner has agreed to 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 per Redeemable Unit falls below $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").
The Partnership's commodity broker is Citigroup Global Markets Inc.
("CGM"), formerly Salomon Smith Barney Inc. CGM is an affiliate of the General
partner. The General Partner is wholly owned by Citigroup Global Markets
Holdings Inc. ("CGMHI") formerly Salomon Smith Barney Holdings Inc., which is
the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc.
("Citigroup").
2
The Partnership's trading of futures, forwards and options contracts, if
applicable, on commodities is done primarily on United States of America and
foreign commodity exchanges. It engages in such trading through a commodity
brokerage account maintained with CGM.
As of December 31, 2003, all commodity trading decisions are made for the
Partnership by Graham Capital Management L.P. ("Graham"), Campbell and Company
Inc., Willowbridge Associates Inc., and Capital Fund Management (collectively,
the "Advisors"). None of the Advisors is affiliated with the General Partner or
CGM. The Advisors are not responsible for the organization or operation of the
Partnership. Stonebrook Structured Products LLC was terminated as an Advisor to
the Partnership on January 31, 2003.
Pursuant to the terms of the management agreements with each Advisor (the
"Management Agreements"), the Partnership pays each Advisor a monthly management
fee equal to 1/6 of 1% (2% per year) of month-end Net Assets allocated to the
Advisor. Month-end Net Assets for the purpose of calculating management fees are
Net Assets, as defined in the Limited Partnership Agreement, prior to the
reduction of redemptions and incentive fees. 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 Graham, which will receive an incentive fee
of 10% of New Trading Profits on the first $5,000,000 and 20% of New Trading
Profits for all such profits in excess of $5,000,000. For the period January 1,
2000 through June 30, 2000, the Partnership was obligated to pay John W. Henry &
Company, Inc. a monthly management fee of 1/3 of 1% (4% per year) of month-end
net assets, and an incentive fee of 15% of the new Trading Profits, as defined
in the Management Agreement.
The Partnership has entered into a customer agreement with CGM (the
"Customer Agreement"), which provides that the Partnership pays CGM 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.
Month-end Net Assets for the purpose of calculating brokerage commissions are
Net Assets, as defined in the Limited Partnership Agreement prior to the
reduction of expenses and redemptions payable. CGM also pays a portion of its
brokerage fees to its financial consultants who have sold Redeemable 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 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 CGM gives the Partnership the legal right
to net unrealized gains and losses.
3
In addition, CGM 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 CGM 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.
(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, 2003, 2002, 2001 2000, and 1999 is
set forth under "Item 6. Selected Financial Data." The Partnership's capital as
of December 31, 2003, was $68,275,728.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) 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.
(e) Available information. The Partnership does not have an Internet
address. The Partnership will provide paper copies of its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to these reports free of charge upon request.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, CGM.
Item 3. Legal Proceedings.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which Citigroup
Global Markets Holdings Inc. ("CGMHI") or its subsidiaries is a party or to
which any of their property is subject. There are no material legal proceedings
pending against the Partnership or the General Partner.
CGM is a New York corporation with its principal place of business at 388
Greenwich Street, New York, New York 10013. CGM is registered as a broker-dealer
and futures commission merchant ("FCM"), and provides futures brokerage and
clearing services for institutional and retail participants in the futures
markets. CGM and its affiliates also provide investment banking and other
financial services for clients worldwide.
4
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against CGM or any of its individual principals within the
past five years that management believes may have a material impact on CGM's
ability to act as an FCM. In the ordinary course of its business, CGM is a party
to various claims and regulatory inquiries.
Settlement of Certain Legal and Regulatory Matters
On April 28, 2003, CGM announced final agreements with the SEC, the
National Association of Securities Dealers ("NASD"), the New York Stock Exchange
("NYSE") and the New York Attorney General to resolve on a civil basis all of
their outstanding investigations into its research and IPO allocation and
distribution practices (the "Research Settlement"). To effectuate the Research
Settlement, the SEC filed a Complaint and Final Judgment in the United States
District Court for the Southern District of New York. On October 31, 2003, final
judgment was entered against CGM and nine other investment banks. The NASD has
accepted the Letter of Acceptance, Waiver and Consent entered into with CGM in
connection with the Research Settlement. In May 2003, the NYSE advised CGM that
the Hearing Panel's Decision, in which it accepted the Research Settlement, had
become final. As required by the Research Settlement, CGM has entered into
separate settlement agreements with 48 states and various U.S. territories and
is in settlement negotiations with the remaining 2 states.
Enron Corp.
In April 2002, Citigroup was named as a defendant along with, among others,
commercial and/or investment banks, certain current and former Enron officers
and directors, lawyers and accountants in a putative consolidated class action
complaint that was filed in the United States District Court for the Southern
District of Texas seeking unspecified damages. The action, brought on behalf of
individuals who purchased Enron securities (NEWBY, ET AL. V. ENRON CORP., ET
AL.), alleges violations of Sections 11 and 15 of the Securities Act of 1933, as
amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended. Citigroup's motion to dismiss the complaint was denied in December
2002, and Citigroup filed an answer in January 2003. In May 2003, plaintiffs
filed an amended consolidated class action complaint, and Citigroup filed a
motion to dismiss in June 2003. Plaintiffs filed a motion for class
certification in May 2003. Discovery is proceeding pending the Court's decision
on class certification.
Additional actions have been filed against Citigroup and certain of its
affiliates, including CGM, along with other parties, including (i) actions
brought by a number of pension and benefit plans, investment funds, mutual
funds, and other individual and institutional investors in connection with the
purchase of Enron and Enron-related equity and debt securities, alleging
violations of various state and federal securities laws, state unfair
competition statutes, common law fraud, misrepresentation, unjust enrichment,
breach of fiduciary duty, conspiracy, and other violations of state law; (ii) an
action by banks that participated in two Enron revolving credit facilities,
originally alleging fraud, gross negligence, breach of implied duties, aiding
and abetting and civil conspiracy in connection with defendants' administration
of a credit facility with Enron; the Court granted Citigroup's motion to dismiss
with respect to all claims except for certain claims of aiding and abetting and
civil conspiracy; (iii) an action brought by several funds in connection with
5
secondary market purchases of Enron debt securities, alleging violations of the
federal securities law, including Section 11 of the Securities Act of 1933, as
amended, and claims for fraud and misrepresentation; (iv) a series of putative
class actions by purchasers of NewPower Holdings common stock, alleging
violations of the federal securities law, including Section 11 of the Securities
Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of
1934, as amended; (v) a putative class action brought by clients of CGM in
connection with research reports concerning Enron, alleging breach of contract;
(vi) an action brought by a retirement and health benefits plan in connection
with the purchase of certain Enron notes, alleging violation of federal
securities law, including Section 11 of the Securities Act of 1933, as amended,
violations of state securities and unfair competition law, and common law fraud
and breach of fiduciary duty; (vii) an action brought by the Attorney General of
Connecticut in connection with various commercial and investment banking
services provided to Enron; (viii) an action brought by purchasers in the
secondary market of Enron bank debt, alleging claims for common law fraud,
conspiracy, gross negligence, negligence and breach of fiduciary duty; (ix) an
action brought by an investment company, alleging that Enron fraudulently
induced it to enter into a commodity sales contract; (x) five adversary
proceedings filed by Enron in its chapter 11 bankruptcy proceedings to recover
alleged preferential payments and fraudulent transfers involving Citigroup,
certain of its affiliates and other entities, and to disallow or to subordinate
claims that Citigroup and other entities have filed against Enron; (xi)
third-party actions brought by former Enron officers and directors, alleging
violation of state securities and other laws and a right to contribution from
Citigroup, in connection with claims under state securities and common law
brought against the officers and directors and others; and (xii) a purported
class action brought on behalf of Connecticut municipalities, alleging violation
of state statutes, conspiracy to commit fraud, aiding and abetting a breach of
fiduciary duty and unjust enrichment. Several of these cases have been
consolidated or coordinated with the NEWBY action and are now generally inactive
pending the Court's decision on the pending motion on class certification.
Dynegy Inc.
On June 6, 2003, the complaint in a pre-existing putative class action
pending in the United States District Court for the Southern District of Texas
(IN RE: DYNEGY INC. SECURITIES LITIGATION) brought by purchasers of publicly
traded debt and equity securities of Dynegy Inc. was amended to add Citigroup,
Citibank and CGMI as defendants. The plaintiffs allege violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against the
Citigroup defendants.
WorldCom, Inc.
Citigroup, CGM and certain executive officers and current and former
employees have been named as defendants--along with twenty-two other investment
banks, certain current and former WorldCom officers and directors, and
WorldCom's former auditors--in a consolidated class action brought on behalf of
individuals and entities who purchased or acquired publicly traded securities of
WorldCom between April 29, 1999 and June 25, 2002 (IN RE: WORLDCOM INC.
SECURITIES LITIGATION). The class action complaint asserts claims against CGM
under (i) Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, in
connection with certain bond offerings in which it served as underwriter, and
(ii) Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated under Section 10(b), alleging that it
participated in the preparation and/or issuance of misleading WorldCom
registration statements and disseminated misleading research reports concerning
6
WorldCom stock. On May 19, 2003, the Court denied CGM's motion to dismiss the
consolidated class action complaint. On October 24, 2003, the Court granted the
plaintiffs' motion for class certification. On December 31, 2003, the United
States Court of Appeals for the Second Circuit granted CGM's petition seeking
leave for an interlocutory appeal of the class certification order. The District
Court has scheduled trial to begin in January 2005.
Pursuant to an order entered May 28, 2003, the District Court consolidated
approximately seventy individual actions with the class action for pretrial
proceedings. Certain individual plaintiffs have appealed the district court's
order denying their motions to remand. The claims asserted in these individual
actions are substantially similar to the claims alleged in the class action and
assert state and federal securities law claims based on CGM's research reports
concerning WorldCom and/or CGM's role as an underwriter in WorldCom offerings.
Numerous other actions asserting claims against CGM in connection with its
research reports about WorldCom and/or its role as an investment banker for
WorldCom are pending in other federal and state courts. These actions have been
remanded to various state courts, are pending in other federal courts, or have
been conditionally transferred to the United States District Court for the
Southern District of New York to be consolidated with the class action. In
addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its WorldCom research reports are pending in numerous
arbitrations around the country. These arbitration proceedings assert claims
that are substantially similar to the claims asserted in the class action.
Global Crossing
On or about January 28, 2003, lead plaintiff in a consolidated putative
class action in the United States District Court for the Southern District of
New York (IN RE: GLOBAL CROSSING, LTD. SECURITIES LITIGATION) filed a
consolidated complaint on behalf of purchasers of the securities of Global
Crossing and Asia Global Crossing, which names as defendants, among others,
Citigroup, CGM, CGMHI and certain executive officers and current and former
employees. The putative class action complaint asserts claims against these
Citigroup defendants under (i) Sections 11, 12(a)(2) and 15 of the Securities
7
Act of 1933, as amended, and Section 14(a) of the Securities Exchange Act of
1934, as amended and Rule 14A-9A promulgated thereunder, in connection with
certain offerings in which CGM served as underwriter and in connection with
certain transactions in which CGM issued fairness opinions, and (ii) Section
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder, alleging that they disseminated misleading
research reports concerning Global Crossing and Asia Global Crossing. The
Citigroup-related defendants have moved to dismiss these claims.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its Global Crossing research reports are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the putative
class action.
Adelphia Communications Corporation
On July 6, 2003, an adversary proceeding was filed by the Official
Committee of Unsecured Creditors on behalf of Adelphia Communications
Corporation against certain lenders and investment banks, including CGMI,
Citibank, N.A., Citicorp USA, Inc., and Citigroup Financial Products, Inc.
(together, the Citigroup Parties). The complaint alleges that the Citigroup
Parties and numerous other defendants committed acts in violation of the Bank
Holding Company Act and the common law. The complaints seek equitable relief and
an unspecified amount of compensatory and punitive damages. In November 2003, a
similar adversary proceeding was filed by the Equity Holders Committee of
Adelphia.
In addition, CGM is among the underwriters named in numerous civil actions
brought to date by investors in Adelphia debt securities in connection with
Adelphia securities offerings between September 1997 and October 2001. Three of
the complaints also assert claims against Citigroup Inc. and Citibank, N.A. All
of the complaints allege violations of federal securities laws, and certain of
the complaints also allege violations of state securities laws and the common
law. The complaint seeks unspecified damages. In December 2003, a second amended
complaint was filed and consolidated before the same judge of the United States
District Court for the Southern District of New York.
8
Mutual Funds
In 2003, several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The Company has received subpoenas and
other requests for information from various government regulators regarding
market timing, fees, sales practices and other mutual fund issues in connection
with various investigations, including an investigation by the Securities and
Exchange Commission and a United States Attorney into the arrangements under
which we became the transfer agent for many of the mutual funds in the Smith
Barney fund complex. CGM is cooperating fully with all such reviews.
Research
Since May 2002, Citigroup, CGM and certain executive officers and current
and former employees have been named as defendants in numerous putative class
action complaints, individual actions, and arbitration demands by purchasers of
various securities, alleging that they violated federal securities law,
including Sections 10 and 20 of the Securities Exchange Act of 1934, as amended,
and certain state laws for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with companies in connection with published investment research,
including AT&T Corp., Winstar Communications, Inc., Rhythm NetConnections, Inc.,
Level 3 Communications, Inc., Metromedia Fiber Network, Inc., XO Communications,
Inc., Williams Communications Group Inc., and Qwest Communications International
Inc. The putative class actions relating to research of these companies are
pending before a single judge in the United States District Court for the
Southern District of New York for coordinated proceedings. The Court has
consolidated these actions into separate proceedings corresponding to the
companies named above. On January 30, 2004, plaintiffs in the Rhythm
NetConnections, Inc. action voluntarily dismissed their complaint with
prejudice.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its research reports on these companies are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the class and
individual actions.
Three additional putative class actions are pending in federal courts
against Citigroup and certain of its affiliates, including CGM, and certain of
their current and former directors, officers and employees, along with other
parties, on behalf of persons who maintained accounts with CGM. These actions
assert, among other things, common law claims, claims under state statutes, and
claims under the Investment Advisers Act of 1940, for allegedly failing to
provide objective and unbiased investment research and investment management,
seeking, among other things, return of fees and commissions. In all three of
these actions, the Citigroup-related defendants have moved to dismiss the
complaints. In two of these putative class actions, these motions were granted
and appeals are now pending.
9
In May 2003, the SEC, NYSE and NASD issued a subpoena and letters to CGM
requesting documents and information with respect to their continuing
investigation of individuals in connection with the supervision of the research
and investment banking departments of CGM. Other parties to the Research
Settlement have received similar subpoena and letters.
On June 23, 2003, the West Virginia Attorney General filed an action
against CGM and nine other firms that were parties to the Research Settlement.
The West Virginia Attorney General alleges that the firms violated the West
Virginia Consumer Credit and Protection Act in connection with their research
activities and seeks monetary penalties. CGM and the other defendants have moved
to dismiss the action.
Other
In April 2002, consolidated amended complaints were filed against CGM 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. On February 19,
2003, the Court issued an opinion denying defendants' motion to dismiss. Also
filed in the Southern District of New York against CGM and other investment
banks were several putative class actions that were 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. On November 3, 2003, the Court granted CGM's motion to dismiss
the consolidated amended complaint in the antitrust case.
Additional lawsuits containing similar claims to those described above may
be filed in the future.
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.
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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 Redeemable Units of Limited Partnership
Interest.
(b) Holders. The number of holders of Redeemable Units of Limited
Partnership Interest as of December 31, 2003 was 2,779.
(c) Distribution. The Partnership did not declare a distribution in
2003 or 2002.
(d) Use of Proceeds. There were no additional sales of Redeemable
Units in the years ended December 31, 2003, 2002 and 2001.
11
Item 6. Selected Financial Data.
Realized and unrealized trading gains (losses), interest income, net income
(loss) and increase (decrease) in Net Asset Value per Redeemable Unit for the
years ended December 31, 2003, 2002, 2001, 2000 and 1999 and total assets at
December 31, 2003, 2002, 2001, 2000 and 1999 were as follows:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
of $4,867,218, $4,514,105,
$5,109,439, $5,846,384 and
$8,857,232, respectively $ 14,129,201 $ 14,296,353 $ (5,744,771) $ 6,540,869 $ (21,027,791)
Interest income 569,919 799,484 2,121,645 3,884,319 4,658,630
------------- ------------- ------------- ------------- -------------
$ 14,699,120 $ 15,095,837 $ (3,623,126) $ 10,425,188 $ (16,369,161)
============= ============= ============= ============= =============
Net income (loss) $ 10,452,183 $ 10,902,122 $ (6,137,603) $ 7,572,583 $ (21,048,896)
============= ============= ============= ============= =============
Increase (decrease) in Net Asset
Value per Redeemable Unit
$ 199.53 $ 205.86 $ (87.64) $ 107.10 $ (193.59)
============= ============= ============= ============= =============
Total assets $ 71,276,280 $ 68,703,203 $ 68,118,842 $ 87,318,686 $ 106,012,664
============= ============= ============= ============= =============
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Partnership aims to achieve substantial capital appreciation through
speculative trading, directly and indirectly, in U.S. and international markets
for currencies, interest rates, stock indices, agricultural and energy products
and precious and base metals. The Partnership may employ futures, options on
futures, and forward contracts in those markets.
The General Partner manages all business of the Partnership. The General
Partner has delegated its responsibility for the investment of the Partnership's
assets to Campbell & Company, Inc. ("Campbell"), Capital Fund Management SA
("CFM"), Graham Capital Management, L.P. ("Graham"), Willowbridge Associates,
Inc. ("Willowbridge") and Stonebrook Structured Products, LLC ("Stonebrook"),
(collectively, the "Advisors"). Stonebrook was terminated as an Advisor to the
Partnership on January 31, 2003. The General Partner employs a team of
approximately 15 professionals whose primary emphasis is on attempting to
maintain quality control among the advisors to the partnerships operated or
managed by the General Partner. A full-time staff of due diligence professionals
use state-of-the-art technology and on-site evaluations to monitor new and
existing futures money managers. The accounting and operations staff provide
processing of trading activity and reporting to limited partners and regulatory
authorities. In selecting the Advisors for the Partnership, the General Partner
considered past performance, trading style, volatility of markets traded and fee
requirements.
Responsibilities of the General Partner include:
o due diligence examinations of the Advisors;
o selection, appointment and termination of the Advisors;
o negotiation of the management agreements; and
o monitoring the activity of the Advisors.
In addition, the General Partner prepares the books and records and
provides the administrative and compliance services that are required by law or
regulation from time to time in connection with operation of the Partnership.
These services include the preparation of required books and records and reports
to limited partners, government agencies and regulators; computation of net
asset value; calculation of fees; effecting subscriptions, redemptions and
limited partner communications; and preparation of offering documents and sales
literature.
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The General Partner seeks the best prices and services available in its
commodity futures brokerage transactions. The General Partner reviews at least
annually, the brokerage rates charged to commodity pools similar to the
Partnership' to determine whether the brokerage fee the Partnership pays is
competitive with other rates.
The programs traded by each Advisor on behalf of the Partnership are:
Campbell - Financial, Metal & Energy Large Portfolio ("FME Large"), CFM - Discus
Program ("Discus"), Graham - Global Diversified Program ("GDP") and Graham
Selective Trading Program ("GST"), and Willowbridge - Argo and Vulcan Trading
Systems. Stonebrook traded its Volatility Hedge Program until January 31, 2003
when Stonebrook was terminated as an Advisor to the Partnership. As of December
31, 2003, the Partnership's assets were allocated among the Advisors in the
following approximate percentages: Campbell, 31%, CFM, 19%, Graham, 32%, and
Willowbridge, 18%.
Campbell & Company, Inc.
Campbell trades its FME Large Portfolio for the Partnership. Campbell's
trading models are designed to detect and exploit medium-term to long-term price
changes, while also applying risk management and portfolio management
principles.
Campbell believes that utilizing multiple trading models provides an
important level of diversification, and is most beneficial when multiple
contracts of each market are traded. Every trading model may not trade every
market. It is possible that one trading model may signal a long position while
another trading model signals a short position in the same market. It is
Campbell's intention to offset those signals to reduce unnecessary trading, but
if the signals are not simultaneous, both trades will be taken and since it is
unlikely that both positions would prove profitable, in retrospect, one or both
trades will appear to have been unnecessary. It is Campbell's policy to follow
trades signaled by each trading model independently of the other models.
Capital Fund Management SA
CFM will trade the Partnership's assets allocated to it in accordance with
its Discus Program. All of the trading decisions result from proprietary trading
and risk management programs developed by CFM. Discus is 100% statistical and
systematic in nature. The only information fed into the system are historical
price statistics. The system does not use any form of qualitative information
and, most importantly, the system is never overridden by human opinion. The
program continuously applies proprietary filters to review price data in an
attempt to select the most efficient trading strategy with respect to a
particular time frame (short, medium or long term), contracts traded, contract
and market sector concentration and risk exposure. Discus trades more than 50
futures contracts on exchanges around the world.
14
Graham Capital Management, L.P.
Graham currently trades both GDP and GST on behalf of the Partnership. Of
the Partnership's assets allocated to Graham, 45% is currently traded using GDP
and 55% is currently traded using GST, each of which is described below.
Graham trades actively in both U.S. and foreign markets, primarily in
futures contracts, forward contracts, spot contracts and associated derivative
instruments such as options and swaps. Graham engages in exchange for physical
transactions, which involve the exchange of a futures position for the
underlying physical commodity without making an open competitive trade on an
exchange. Graham at times will trade certain instruments, such as forward
foreign currency contracts, as a substitute for futures or options traded on
futures exchanges.
Graham's trading systems rely primarily on technical rather than
fundamental information as the basis for their trading decisions. Graham's
systems are based on the expectation that they can over time successfully
anticipate market events using quantitative mathematical models to determine
their trading activities, as opposed to attempting properly to forecast price
trends using subjective analysis of supply and demand.
GDP utilizes multiple computerized trading models designed to participate
in potential profit opportunities during sustained price trends. This program
features broad diversification in both financial and non-financial markets. The
strategies that are utilized are primarily long-term in nature and are intended
to generate significant returns over time with an acceptable degree of risk and
volatility. The computer models on a daily basis analyze the recent price
action, the relative strength and the risk characteristics of each market and
compare statistically the quantitative results of this data to years of
historical data on each market. GDP trades in approximately 80 markets.
15
GST uses a mathematical model to identify certain price patterns that have
very specific characteristics indicating that there is a high probability that a
significant directional move will occur. Although the program does not trade
against the market trend, it is not a true trend-following system inasmuch as it
will only participate in specific types of market moves that meet the
restrictive criteria of the model. In general, this program will participate
only in significant market moves that are characterized by a substantial
increase in volatility. As a result, it frequently will not participate in a
market trend in which virtually all trend-following systems would have a
position. GST trades in approximately 70 markets.
Willowbridge Associates, Inc.
Willowbridge trades the Partnership's assets allocated to it in accordance
with its Select Investment Program, whereby the General Partner determined the
initial allocation of the Partnership's assets among one or more of
Willowbridge's strategies and may determine subsequent reallocations (if any).
Of the Partnership's assets allocated to Willowbridge, 0% is currently traded
using the Vulcan Trading System and 100% is currently traded using the Argo
Trading System, each of which is described below.
For each of these systems, risk is managed on a market by market level as
well as on an overall portfolio level. On the market level, risk is managed
primarily by utilizing proprietary volatility filters. When these filters detect
a certain excessive level of volatility in the markets traded, they will signal
that the systems should no longer be trading in the markets in which the filters
have detected excessive volatility. In this way, the systems do not participate
in markets in which there are extremes in market action. On the portfolio level,
risk is managed by utilizing a proprietary portfolio cutback rule. When
cumulative profits have reached a certain level, this rule determines that
positions should be halved across the entire portfolio. In this way, risk is
reduced while allowing the systems to continue to participate in the markets,
albeit at a reduced level. After the portfolio has been traded at half, the
portfolio cutback rule will then determine when to increase positions to again
trade at the full level.
The Vulcan Trading System, which commenced trading in 1988, is a
computerized technical trading system. It is not a trend-following system, but
does ride a trend when the opportunity arises. Vulcan uses the concepts of
pattern recognition, support/resistance levels, and counter-trend liquidations
in making trading decisions. In effect, Vulcan is more akin to a systematic
technical charting system, as opposed to most computer systems which are based
on pure trend-following calculations.
16
The Vulcan System is based on general technical trading principles. It
applies these principles to a diversified portfolio of commodities and
currencies. Given that the system is based on general principles, the system
parameters used are the same for all items in the portfolio and are not
optimized. In this manner, the Vulcan System minimizes the problem of
data-fitting.
The Argo Trading System commenced trading in 1988. Argo essentially
incorporates Vulcan's concepts of pattern recognition, support/resistance levels
and counter-trend liquidations to trade a portfolio similar to Vulcan. However,
Argo has a relatively slower time horizon than Vulcan and attempts to capture
longer-term price moves.
Pattern recognition, support/resistance levels and counter-trend
liquidations are defined as follows:
Pattern recognition is the ability to identify patterns that appear to have
acted as precursors of price advances or declines in the past.
A support level is a previous low--a price level under the current market
price at which point buying interest is expected to be sufficiently strong to
overcome selling pressure.
A resistance level is a previous high--a price level over the current
market price at which point selling pressure is expected to overcome buying
pressure and a price advance is expected to be turned back.
A counter-trend liquidation is the closing out of a position after a
significant price move on the assumption that the market is due for a
correction.
No assurance is given that an Advisor's trading program will be profitable
or that it will not experience losses.
17
(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 and cash equivalents, net unrealized appreciation (depreciation) on open
futures positions, unrealized appreciation on open forward contracts and
interest receivable. Because of the low margin deposits normally required in
commodity futures trading, relatively small price movements may result in
substantial losses to the Partnership. Such substantial losses could lead to a
material loss in liquidity.
To minimize this risk relating to low margin deposits, the Partnership
follows certain trading policies, including:
(i) The Partnership invests its assets only in commodity interests that an
Advisor believes are traded in sufficient volume to permit ease of
taking and liquidating positions. Sufficient volume, in this context,
refers to a level of liquidity that the Advisor believes will permit
it to enter and exit trades without noticeably moving the market.
(ii) No Advisor will initiate additional positions in any commodity
interest if these positions would result in aggregate positions
requiring a margin of more than 66 2/3% of the Partnership's net
assets allocated to that Advisor.
(iii)The Partnership may accassionally accept delivery of a commodity.
Unless such delivery is disposed of promptly by retendering the
warehouse receipt representing the delivery to the appropiate
clearinghouse, the physical commodity position is fully hedge.
(iv)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 purchases or sale of additional
positions in the same or related commodities.
(v) The Partnership will not utilize borrowings, commodities except
short-term borrowings, commodities if the Partnership takes delivery
of any cash commodities.
(vi) The Advisors may, from time to time, employ trading strategies such as
spreads 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.
18
(vi) The Partnership will not permit the churning of its commodity trading
account. The term "churning" refers to the practice of entering and
exiting trades with a frequency unwarranted by legitimate efforts to
profit from the trades, driven by the desire to generate commission
income.
In the normal course of business, the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments
include forwards, futures, options and swaps, 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 specified 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, swaps and certain options. Each of these instruments is
subject to various risks similar to those relating 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 counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statements of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has credit risk and concentration risk because the sole counterparty
or broker with respect to the Partnership's assets is CGM.
19
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. (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 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 to dissolve the Partnership by limited partners owning more than
50% of the Redeemable 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
Redeemable 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 trading and by
expenses, interest income, redemptions of Redeemable Units and distributions of
profits, if any. Gains or losses on trading cannot be predicted. Market moves in
commodities are dependent upon fundamental and technical factors which the
Advisors may or may not be able to identify, such as changing supply and demand
relationships, weather, government agricultural, commercial and trade programs
and policies, national and international political and economic events and
changes in interest rates. Partnership expenses consist of, among other things,
brokerage, advisory and administrative fees. The level of these expenses is
dependent upon the level of trading 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 CGM is dependent upon interest rates over which the Partnership has
no control.
20
No forecast can be made as to the level of redemptions in any given period.
A limited partner may cause all of their Redeemable 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, 2003, 5,671.3005 Redeemable Units
were redeemed totaling $8,154,406. For the year ended December 31, 2002,
11,001.6830 Redeemable Units were redeemed totaling $11,541,708. For the year
ended December 31, 2001, 11,034.5654 Redeemable Units were redeemed totaling
11,947,627.
(c) Results of Operations.
For the year ended December 31, 2003, the Net Asset Value per Redeemable
Unit increased 16.0% from $1,250.92 to $1,450.45. For the year ended December
31, 2002 the Net Asset Value per Redeemable Unit increased 19.7% from $1,045.06
to $1,250.92. For the year ended December 31, 2001 the Net Asset Value per
Redeemable Unit decreased 7.7% from $1,132.70 to $1,045.06.
The Partnership experienced a net trading gain of $18,996,419 before
commissions and expenses for the year ended December 31, 2003. Gains were
primarily attributable to the trading of currencies, grains, livestock, metals
and indices and were partially offset by the losses incurred in the trading of
energy, U.S. and non-U.S. interest rates and softs.
On a very broad basis, the year 2003 can be divided into three periods: the
time leading up to and shortly after the Iraq War (January through May), the
transition to greater world economic growth (June through October), and the
renewed dollar decline (November and December).
The Iraq war was the focus for much of the first half of the year. With
uncertainty concerning when hostilities would begin and the possible impact of
these events, investors showed a desire to move to a defensive and conservative
stance. Equity markets moved lower, as did the dollar against other major
currencies, gold prices rose, bond markets rallied, and the energy markets
exhibited a risk premium concerning potential supply disruptions. This was a
continuation of many of the trends carried over from 2002. During the first two
months of the year, the Advisors had strong performance, up nearly 19%.
21
Just prior to the inception of the hostilities in Iraq, several of the
Advisors reduced leverage in expectation of higher volatility in the markets.
Markets were more volatile with a reduction of liquidity in response to events
in March. During this period, bond prices declined, the dollar stabilized, crude
oil prices declined significantly, and the stock market started to rally. Even
with this reduced leverage the markets were volatile and prior trends were
disrupted leading to losses for the month of March. Positions returned to normal
leverage in late April and May saw a substantial recovery in the Partnerships
performance with profits coming from short dollar, long interest rate and long
commodity positions.
In a transition to economic recovery and growth, the major markets began to
reflect changing expectations in the middle of June. Consistently positive
macroeconomic news led to the unexpected pronouncement of no further easing
actions by the European Central Bank and the U.S. Federal Reserve Bank.
Consequently, there was a trend change, as interest rates moved up off 40 year
lows and the dollar rallied reversing the decline from earlier in the
year.
While there were gains in stock index futures trading, the Advisors'
exposure in these markets has been relatively low; hence they were not able to
make a substantial impact on performance. In addition to the negative market
action in interest rates and currencies, there were further increases in
volatility in the energy sector and growing volatility within a relatively tight
range for many agricultural markets. The second quarter ended unprofitably and
this carried through the summer and into the early fall as the Partnership
alternated between profits and losses on a monthly basis.
The final period of 2003 marked by another decline in the dollar beginning
in late November. The dollar began a new significant decline against both the
euro and yen. This led to significant fourth quarter profits, which boosted
performance for many of the Advisors and the Partnership ended the year up
16.0%.
In the General Partner's opinion, the Advisors continue to employ trading
methods and produce results consistent with the objectives of the Partnership
and expectations for the Advisors' programs. The General Partner continues to
monitor the Advisors' performance on a daily, weekly, monthly and annual basis
to assure these objectives are met.
22
The Partnership experienced net trading gains of $18,810,458 before
commissions and expenses in 2002. Gains were primarily attributable to the
trading in indices, U.S. and non-U.S. interest rates, energy, grains, livestock
and currencies and were partially offset by losses incurred in the trading of
metals and softs.
The Partnership experienced net trading losses of $635,332 before
commissions and expenses in 2001. Losses were primarily attributable to trading
in currencies, energy, grains, indices, metals and livestock and were partially
offset by gains incurred in U.S. and non-U.S. interest rates and softs.
It should be noted that commodity 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 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.
23
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, to customers, among Redeemable 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
Redeemable Unit holders, creditors, and regulators, is free of material errors.
(e) Critical Accounting Policies.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make 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
statements 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 or other measures of fair value deemed
appropriate by management of the General Partner for those commodity interests
and foreign currencies for which market quotations are not readily available,
including dealer quotes for swaps and certain option contracts. 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.
24
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 future 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 dates of entry into the contracts and the forward rates at the
reporting dates, is included in the statements 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 statements of income and expenses and partners'
capital.
The General Partner believes that the accounting policies that will be most
critical to the Partnership's financial condition and results of operations
relate to the valuation of the Partnership's positions. The majority of the
Partnership's positions will be exchange-traded futures contracts, which will be
valued daily at settlement prices published by the exchanges. Swap contracts
generally will be valued by reference to published settlement prices or dealers'
quotes in related markets or other measures of fair value deemed appropriate by
the General Partner. The General Partner expects that under normal circumstances
substantially all of the Partnership's assets will be valued by objective
measures and without difficulty.
25
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.
The risk to the limited partners that have purchased interests in the
Partnership is limited to the amount of their capital contributions to the
Partnership and their share of the Partnership assets and undistributed profits.
This limited liability is a consequence of the organization of the Partnership
as a limited partnership under applicable law.
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification 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.
26
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 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 and
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.
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
27
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 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.
28
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, 2003 and the
highest and lowest value at any point during the year. All open position trading
risk exposures of the Partnership have been included in calculating the figures
set forth below. As of December 31, 2003, the Partnership's total capitalization
was $68,275,728.
December 31, 2003
Year to Date
---------------------------------------------
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Average*
------------- ------------- -------------- ------------- ------------- --------
Currencies
-Exchange Traded Contracts $1,455,853 2.13% $1,896,311 $195,698 $1,129,827
-OTC Contracts 1,088,448 1.59% 1,939,876 799,040 1,162,301
Energy 1,785,450 2.62% 2,285,200 116,500 1,087,954
Grains 305,750 0.45% 443,050 132,100 311,429
Interest rates U.S. 668,100 0.98% 1,380,050 52,825 607,219
Interest rates Non-U.S. 843,405 1.24% 2,711,474 371,657 1,214,876
Livestock 36,800 0.05% 168,800 25,200 59,760
Metals
- Exchange Traded Contracts 174,000 0.25% 309,500 40,500 197,750
- OTC Contracts 225,534 0.33% 485,830 4,600 287,273
Softs 111,132 0.16% 415,533 40,886 192,922
Indices 2,734,855 4.01% 5,010,346 42,662 2,117,267
--------- -----
Total $9,429,327 13.81%
========== ======
* Monthly average based on month-end value at risk.
29
As of December 31, 2002, the Partnership's total capitalization was
approximately $65,977,951.
December 31, 2002
Year to Date
---------------------------------------------
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Average*
------------- ------------- -------------- ------------- ------------- --------
Currencies
- Exchange Traded Contracts $846,920 1.28% $3,063,120 $438,135 $1,594,477
- OTC Contracts 793,608 1.20% 1,195,876 793,608 1,173,995
Energy 1,400,000 2.13% 2,363,000 143,050 1,441,275
Grains 183,200 0.28% 889,500 183,200 489,713
Interest rates U.S. 547,150 0.83% 1,365,400 354,500 806,163
Interest rates Non-U.S. 1,179,771 1.79% 2,663,879 753,975 1,622,564
Livestock 29,600 0.04% 406,750 29,600 189,795
Metals
- Exchange Traded Contracts 118,000 0.18% 1,303,600 118,000 609,725
- OTC Contracts 85,975 0.13% 426,700 17,700 257,800
Softs 88,700 0.13% 971,444 88,700 634,944
Indices 72,725 0.11% 2,967,881 72,725 1,396,996
------ -----
Total $5,345,649 8.10%
========== =====
* Quarterly average
30
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."
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
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.
31
The following were the primary trading risk exposures of the Partnership as
of December 31, 2003, by market sector.
Interest Rates. 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-8 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia.
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 U.S. dollar-based Partnership in
expressing Value at Risk in a functional currency other than U.S. dollars.
Stock Indices. The Partnership's primary equity exposure is to equity price
risk in the G-8 countries. The stock index futures traded by the Partnership are
limited to futures on broadly based indices. As of December 31, 2003, the
Partnership's primary exposures were in the S&P 500, Financial Times (England),
Nikkei (Japan) and EUREX (Germany) 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, silver and copper. Although certain of the Advisors will
from time to time trade base metals such as nickel and aluminum, the principal
market exposures of the Partnership have consistently been in the precious
metals, gold and silver. 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, orange juice and sugar accounted for
the substantial bulk of the Partnership's commodity exposure as of December 31,
2003.
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.
32
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership
as of December 31, 2003.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, Euro dollar, British pounds and Swiss francs. 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 into programs 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
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
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
Independent Auditors' Report. F-3 - F-4
Financial Statements:
Statements of Financial Condition at
December 31, 2003 and 2002. F-5
Condensed Schedules of Investments at
December 31, 2003 and 2002. F-6 - F-7
Statements of Income and Expenses for
the years ended December 31, 2003,
2002 and 2001. F-8
Statements of Partners' Capital for
the years ended December 31, 2003, 2002
and 2001. F-9
Notes to Financial Statements. F-10 - F-14
Select Unaudited Quarterly Financial Data. F-15
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.
/s/ Daniel R. McAuliffe, Jr
---------------------------
By: Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Citigroup Managed Futures LLC
General Partner, Smith Barney Diversified
Futures Fund L.P. II
Citigroup Managed Futures LLC
399 Park Avenue
7th Floor
New York, N.Y. 10022
212-559-2011
F-2
Independent Auditors' Report
To the Partners of
Smith Barney Diversified Futures Fund L.P. II:
We have audited the accompanying statements of financial condition of Smith
Barney Diversified Futures Fund L.P. II (the Partnership), including the
condensed schedules of investments, as of December 31, 2003 and 2002, and
the related statements of income and expenses, and partners' capital for
the years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audits. The statements of income
and expenses and partners' capital of the Partnership for the year ended
December 31, 2001 were audited by other auditors whose report dated
February 28, 2002 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Barney
Diversified Futures Fund L.P. II as of December 31, 2003 and 2002, and the
results of its operations and its partners' capital for the years then
ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/KPMG LLP
KPMG LLP
New York, New York
February 27, 2004
F-3
Report of Independent Auditors
To the Partners of
Smith Barney Diversified Futures Fund L.P. II:
In our opinion, the accompanying statements of income and expenses and
partners' capital present fairly, in all material respects, the results of
Smith Barney Diversified Futures Fund L.P. II's operations for the year
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. 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 audit. We conducted our audit of these financial statements in
accordance with auditing standards generally accepted in the United States
of America, 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 audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-4
Smith Barney Diversified
Futures Fund L.P. II
Statements of Financial Condition
December 31, 2003 and 2002
2003 2002
------------- -------------
Assets:
Equity in commodity futures trading account:
Cash (restricted $12,384,177 and $6,861,874 in 2003
and 2002, respectively) (Note 3c) $65,423,348 $62,798,601
Net unrealized appreciation on open futures positions 2,834,001 4,029,612
Unrealized appreciation on open forward contracts 2,980,419 1,823,092
------------- -------------
71,237,768 68,651,305
Interest receivable (Note 3c) 38,512 51,898
------------- -------------
$71,276,280 $68,703,203
------------- -------------
Liabilities and Partners' Capital:
Liabilities:
Unrealized depreciation on open forward contracts $1,766,851 $1,907,569
Accrued expenses:
Commissions (Note 3c) 354,212 359,772
Management fees (Note 3b) 117,366 151,201
Incentive fees (Note 3b) 347,867 --
Professional fees 47,907 55,026
Other 13,037 14,029
Redemptions payable (Note 5) 353,312 237,655
------------- -------------
3,000,552 2,725,252
------------- -------------
Partners' capital (Notes 1 and 5)
General Partner, 862.6415 Unit equivalents outstanding
in 2003 and 2002 1,251,218 1,079,096
Limited Partners, 46,209.5262 and 51,880.8267
Redeemable Units of Limited Partnership Interest
outstanding in 2003 and 2002, respectively 67,024,510 64,898,855
------------- -------------
68,275,728 65,977,951
------------- -------------
$71,276,280 $68,703,203
------------- -------------
See accompanying notes to financial statements.
F-5
Smith Barney Diversified
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2003
Sector Contract Fair Value
-------------------------- --------------------------------------- ----------
Currencies Unrealized appreciation on forward contracts 2.54% $1,738,596
Unrealized depreciation on forward contracts (1.48)% (1,010,885)
----------
Total forward contracts 1.06% 727,711
Futures contracts sold (0.12)% (82,710)
Futures contracts purchased 2.23% 1,520,460
----------
Total futures contracts 2.11% 1,437,750
----------
Total Currencies - 3.17% 2,165,461
----------
Energy - (0.15)% Futures contracts purchased (0.15)% (99,330)
----------
Grains Futures contracts sold 0.98% 667,231
Futures contracts purchased (0.09)% (60,625)
----------
Total Grains - 0.89% 606,606
----------
Interest Rates U.S. - (0.22)% Futures contracts purchased (0.22)% (147,378)
----------
Interest Rates Non-U.S. Futures contracts sold (0.04)% (29,333)
Futures contracts purchased (0.04)% (28,952)
----------
Total Interest Rates Non-U.S. - (0.08)% (58,285)
----------
Total Livestock - 0.02% Futures contracts sold 0.02% 10,951
----------
Metals Futures contracts purchased 0.37% 250,200
Unrealized appreciation on forward contracts 1.82% 1,241,823
Unrealized depreciation on forward contracts (1.11)% (755,966)
----------
Total forward contracts 0.71% 485,857
----------
Total Metals - 1.08% 736,057
----------
Softs Futures contracts sold 0.01% 7,338
Futures contracts purchased (0.14)% (96,920)
----------
Total Softs - (0.13)% (89,582)
----------
Indices Futures contracts sold 0.05% 36,230
Futures contracts purchased 1.30% 886,839
----------
Total Indices - 1.35% 923,069
----------
Total Fair Value - 5.93% $4,047,569
==========
Investments at % of Investments at
Country Composition Fair Value Fair Value
- -------------------------------- -------------------- ----------------------
Australia $(6,239) (0.15)%
Canada 3,093 0.08
France 16,957 0.42
Germany 194,296 4.80
Hong Kong 2,228 0.05
Italy (2,956) (0.07)
Japan 8,023 0.20
Spain 84,091 2.07
United Kingdom 541,601 13.38
United States 3,206,475 79.22
-------------------- ----------------------
$4,047,569 100.00%
==================== ======================
Percentages are based on Partners' capital unless otherwise indicated
See accompanying notes to financial statements.
F-6
Smith Barney Diversified
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2002
Sector Contract Fair Value
-------------------------- --------------------------------------- ------------
Currencies Unrealized depreciation on forward contracts (2.18)% $(1,439,765)
Unrealized appreciation on forward contracts 2.69% 1,773,212
----------
Total forward contracts 0.51% 333,447
Futures contracts sold (0.06)% (42,212)
Futures contracts purchased 2.39% 1,579,903
----------
Total futures contracts 2.33% 1,537,691
----------
Total Currencies - 2.84% 1,871,138
----------
Energy - 0.57% Futures contracts purchased 0.57% 374,747
----------
Grains Futures contracts sold 0.14% 94,600
Futures contracts purchased (0.01)% (9,108)
----------
Total Grains - 0.13% 85,492
----------
Interest Rates U.S. Futures contracts sold (0.01)% (9,275)
Futures contracts purchased 0.72% 479,889
----------
Total Interest Rates U.S. - 0.71% 470,614
----------
Interest Rates Non-U.S. Futures contracts sold (0.04)% (28,984)
Futures contracts purchased 1.62% 1,072,951
----------
Total Interest Rates Non-U.S. - 1.58% 1,043,967
----------
Total Livestock - 0.04% Futures contracts purchased 0.04% 30,300
----------
Metals Futures contracts purchased 0.31% 205,285
Unrealized depreciation on forward contracts (0.71)% (467,804)
Unrealized appreciation on forward contracts 0.08% 49,880
----------
Total forward contracts (0.63)% (417,924)
----------
Total Metals - (0.32)% (212,639)
----------
Softs Futures contracts sold 0.00% * (2,700)
Futures contracts purchased 0.12% 78,972
----------
Total Softs - 0.12% 76,272
----------
Indices Futures contracts sold 0.33% 218,656
Futures contracts purchased (0.02)% (13,412)
-----------
Total Indices - 0.31% 205,244
----------
Total Fair Value - 5.98% $3,945,135
==========
Investments at % of Investments at
Country Composition Fair Value Fair Value
- -------------------------------- -------------------- ----------------------
Australia $ 8,692 0.22%
Canada 15,101 0.38
France 2,268 0.06
Germany 510,574 12.94
Hong Kong 45,977 1.17
Japan 183,163 4.64
Spain (7,733) (0.19)
United Kingdom 54,111 1.37
United States 3,132,982 79.41
-------------------- ----------------------
$3,945,135 100.00%
==================== ======================
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See accompanying notes to financial statements.
F-7
Smith Barney Diversified
Futures Fund L.P. II
Statements of Income and Expenses
for the years ended
December 31, 2003, 2002, and 2001
2003 2002 2001
----------- ---------- ------------
Income:
Net gains (losses) on trading of commodity interests:
Realized gains on closed positions and
foreign currencies $18,893,985 $17,271,983 $6,814,630
Change in unrealized gains (losses) on open positions 102,434 1,538,475 (7,449,962)
------------ ------------ ------------
18,996,419 18,810,458 (635,332)
Interest income (Note 3c) 569,919 799,484 2,121,645
------------ ------------ ------------
19,566,338 19,609,942 1,486,313
------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees of
$276,506, $197,990 and $199,455, respectively (Note 3c)
4,867,218 4,514,105 5,109,439
Management fees (Note 3b) 1,492,670 1,732,210 1,997,773
Incentive fees (Note 3b) 2,663,950 2,374,309 408,145
Professional fees 67,078 67,763 69,515
Other expenses 23,239 19,433 39,044
------------ ------------ ------------
9,114,155 8,707,820 7,623,916
------------ ------------ ------------
Net income (loss) $10,452,183 $10,902,122 $(6,137,603)
------------ ------------ -------------
Net income (loss) per Redeemable Unit of Limited
Partnership Interest and General Partner Unit
equivalent (Notes 1 and 6) $199.53 $205.86 $(87.64)
------------ ------------ -------------
See accompanying notes to financial statements.
F-8
Smith Barney Diversified
Futures Fund L.P. II
Statements of Partners' Capital
for the years ended
December 31, 2003, 2002 and 2001
Limited General
Partners Partner Total
------------- ----------- -------------
Partners' capital at December 31, 2000 $83,244,539 $1,458,228 $84,702,767
Net loss (6,024,777) (112,826) (6,137,603)
Redemption of 11,034.5654 Redeemable Units
of Limited Partnership Interest (11,947,627) -- (11,947,627)
------------- ----------- -------------
Partners' capital at December 31, 2001 65,272,135 1,345,402 66,617,537
Net income 10,665,826 236,296 10,902,122
Redemption of 10,576.9330 Redeemable Units of
Limited Partnership Interest and 424.7500 Units
of General Partnership Interest (11,039,106) (502,602) (11,541,708)
------------- ----------- -------------
Partners' capital at December 31, 2002 64,898,855 1,079,096 65,977,951
Net income 10,280,061 172,122 10,452,183
Redemption of 5,671.3005 Redeemable Units of
Limited Partnership Interest (8,154,406) -- (8,154,406)
------------- ----------- -------------
Partners' capital at December 31, 2003 $67,024,510 $1,251,218 $68,275,728
------------- ----------- --------------
See accompanying notes to financial statements.
F-9
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. The Partnership was authorized to sell 100,000 redeemable units of
Limited Partnership Interest ("Redeemable Units") during its initial
offering period.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
LLC, acts as the general partner (the "General Partner") of the
Partnership. The Partnership's commodity broker is Citigroup Global Markets
Inc. ("CGM"), formerly Salomon Smith Barney Inc. CGM is an affiliate of the
General Partner. The General Partner is wholly owned by Citigroup Global
Markets Holdings Inc. ("CGMHI"), formerly Smith Barney Holdings Inc., which
is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup
Inc. ("Citigroup").
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 their 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 Redeemable Unit
decreases to less than $400 per Redeemable Unit 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 statements 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 gains (losses) on open positions
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. The Partnership may purchase and write (sell) options. An option is a
contract allowing, but not requiring, its holder to buy (call) or sell
(put) a specific or standard commodity or financial instrument at a
specified price during a specified time period. The option premium is
the total price paid or received for the option contract. When the
Partnership writes an option, the premium received is recorded as a
liability in the statements of financial condition and marked to
market daily. When the Partnership purchases an option, the premium
paid is recorded as an asset in the statements of financial condition
and marked to market daily.
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on their share of the Partnership's
income and expenses.
F-10
d. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent 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.
e. Certain prior period amounts have been reclassified to conform to
current year presentation.
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 Graham Capital Management L.P. ("Graham"),
Capital Fund Management SA ("CFM"), Campbell & Co., Inc. ("Campbell"),
Willowbridge Associates Inc. ("Willowbridge") and Stonebrook
Structured Products, LLC. ("Stonebrook") (collectively, the
"Advisors"), registered commodity trading advisors. The Advisors are
not affiliated with one another, are not affiliated with the General
Partner or CGM 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. Month-end Net Assets, for the
purpose of calculating management fees are Net Assets, as defined in
the Limited Partnership Agreement, prior to the reduction of
redemptions and incentive fees.
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 Graham, which will receive an
incentive fee of 10% of New Trading Profits on the first $5,000,000
and 20% of New Trading Profits for all such profits in excess of
$5,000,000. Effective January 31, 2003, Stonebrook was terminated as
an advisor to the Partnership.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides
that the Partnership will pay CGM a monthly brokerage fee equal to 1/2
of 1% (6% per year) of month-end Net Assets, in lieu of brokerage
commissions on a per trade basis. CGM will pay a portion of brokerage
fees to its financial consultants who have sold Redeemable Units in
this Partnership. Month-end Net Assets, for the purpose of calculating
commissions are Net Assets, as defined in the Limited Partnership
Agreement, prior to the reduction of accrued expenses and redemptions
payable. 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 fees as well as
exchange, clearing, user, give-up and floor brokerage fees. All of the
F-11
Partnership's assets are deposited in the Partnership's account at
CGM. The Partnership's cash is deposited by CGM in segregated bank
accounts to the extent required by Commodity Futures Trading
Commission regulations. At December 31, 2003 and 2002, the amount of
cash held for margin requirements was $12,384,177 and $6,861,874,
respectively. CGM 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 CGM
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 CGM
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 activities are shown in the statements of income and expenses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair value during the years ended December
31, 2003 and 2002, based on a monthly calculation, was $4,134,488 and
$5,286,046, respectively.
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 their
Redeemable 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 Redeemable Units after
the redemption is effected. There is no fee charged to limited partners in
connection with redemptions.
F-12
6. Financial Highlights:
Changes in the Net Asset Value per Redeemable Unit of Limited Partnership
Interest for the years ended December 31, 2003, 2002 and 2001 were as
follows:
2003 2002 2001
--------- --------- ---------
Net realized and unrealized gains (losses) * $ 271.30 $ 266.34 $ (81.80)
Interest income 11.32 13.87 30.06
Expenses ** (83.09) (74.35) (35.90)
--------- --------- ---------
Increase (decrease) for the year 199.53 205.86 (87.64)
Net asset value per Redeemable Unit, beginning of year 1,250.92 1,045.06 1,132.70
--------- --------- ---------
Net asset value per Redeemable Unit, end of year $ 1,450.45 $ 1,250.92 $ 1,045.06
--------- --------- ---------
* Includes brokerage commissions
** Excludes brokerage commissions
Ratios to average net assets:
Net investment loss before incentive fees *** (8.3)% (8.8)% (6.7)%
--------- --------- ---------
Operating expenses 9.1% 10.1% 9.6%
Incentive fees 3.8% 3.8% 0.5%
--------- --------- ---------
Total expenses 12.9% 13.9% 10.1%
--------- --------- ---------
Total return:
Total return before incentive fees 20.5% 24.0% (7.2)%
Incentive fees (4.5)% (4.3)% (0.5)%
--------- --------- ---------
Total return after incentive fees 16.0% 19.7% (7.7)%
--------- --------- ---------
*** Interest income less total expenses (exclusive of incentive fees)
The above ratios may vary for individual investors based on the timing of
capital transactions during the year. Additionally, these ratios are
calculated for the Limited Partner class using the Limited Partners' share
of income, expenses and average net assets.
F-13
7. Financial Instrument Risks:
In the normal course of its business, the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. 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, 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 are negotiated between contracting parties and include forwards
and certain options. Each of these instruments is subject to various risks
similar to those related to the underlying financial instruments including
market and credit risk. In general, the risks associated with OTC contracts
are greater than those associated with exchange traded instruments because
of the greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that
an exchange or clearing organization acts as a counterparty to the
transactions. The Partnership's risk of loss in the event of counterparty
default is typically limited to the amounts recognized in the statements of
financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has credit risk and concentration risk
because the sole counterparty or broker with respect to the Partnership's
assets is CGM.
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 majority of these instruments mature within one year of December 31,
2003. However, due to the nature of the Partnership's business, these
instruments may not be held to maturity.
F-14
Selected unaudited quarterly financial data for the years ended December
31, 2003 and 2002 are summarized below:
For the period from For the period from For the period from For the period from
October 1, 2003 to July 1, 2003 to April 1, 2003 to January 1, 2003 to
December 31, 2003 September 30, 2003 June 30, 2003 March 31, 2003
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $ 4,218,043 $ (4,261,243) $ 4,836,316 $ 9,906,004
Net Income (loss) $ 3,508,014 $ (4,631,123) $ 3,522,448 $ 8,052,844
Increase (decrease) in Net Asset
Value per Redeemable Unit $ 73.80 $ (94.77) $ 67.95 $ 152.55
For the period from For the period from For the period from For the period from
October 1, 2002 to July 1, 2002 to April 1, 2002 to January 1, 2002 to
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
Net realized and unrealized trading
gains(losses) net of brokerage
commissions and clearing fees
including interest income $ (3,534,468) $ 16,400,044 $ 7,523,682 $ (5,293,421)
Net Income (loss) $ (3,998,506) $ 13,830,202 $ 6,803,256 $ (5,732,830)
Increase (decrease) in Net Asset
Value per Redeemable Unit $ (72.95) $ 248.97 $ 120.21 $ (90.37)
F-15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the principal accountant for the
Partnership. On July 9, 2002, that firm was dismissed as principal accountant
and KPMG LLP was engaged as principal accountant. The decision to change
accountants was approved by the General Partner of the Partnership.
In connection with the audit of the fiscal year ended December 31, 2001,
and through July 9, 2002, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference thereto in their report on the financial statements for the year.
The audit report of PricewaterhouseCoopers LLP on the financial statements
of the Partnership as of and for the year ended December 31, 2001 did not
contain any adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope, or accounting principle.
Item 9A. Controls and Procedures.
Based on their evaluation of the Partnership's disclosure controls and
procedures as of year end the Chief Executive Officer and Chief Financial
Officer of the General Partner have concluded that such controls and procedures
are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls during the fourth
quarter of 2003.
34
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, Citigroup Managed Futures LLC. As of December 31, 2003,
investment decisions were being made by Graham Capital Management L.P., Campbell
and Company Inc., Willowbridge Associates Inc., and Capital Fund Management .
The Partnership has not adopted a code of ethics that applies to officers
because it has no officers.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by
the General Partner. CGM, 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 $4,867,218 were earned by CGM for the year ended December 31, 2003.
Management fees and incentive fees of $1,492,670 and $2,663,950, respectively,
were earned by the Advisors for the year ended December 31, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners. As of March 1, 2004,
the Partnership knows of no person who beneficially owns more than 5%
of the Redeemable 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 862.6415 (1.8%) Unit equivalents as of December
31, 2003.
(c) Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Citigroup Global Markets Inc. and Citigroup Managed Futures 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 "Item 11. Executive Compensation."
Item 14. Principal Accountant Fees and Services.
(1) Audit Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by KPMG LLP for the audit of the
Partnership's annual financial statements, review of financial statements
included in the Partnership's Forms 10-Q and other services normally provided in
connection with regulatory filings or engagements are as follows:
2003 $32,236
2002 $35,154
(2) Audit-Related Fees. None.
(3) Tax Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by KPMG LLP for tax compliance and tax
advice given in the preparation of the Partnership's Schedule K1s, the
preparation of the Partnership's Form 1065 and preparation of all State Tax
Returns are as follows:
2003 $4,809
2002 $4,809
(4) All Other Fees. None.
(5) Not Applicable.
(6) Not Applicable.
35
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statements of Financial Condition at December 31, 2003 and 2002.
Condensed Schedules of Investments at December 31, 2003 and 2002.
Statements of Income and Expenses for the years ended December 31,
2003, 2002 and 2001.
Statements of Partners' Capital for the years ended December 31, 2003,
2002 and 2001.
Notes to Financial Statements
(2) Financial Statement Schedules: Financial Data Schedule for the year
ended December 31, 2003.
(3) Exhibits:
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 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 (File 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 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).
36
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).
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).
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 (previously filed).
10.18- Letter from the General Partner terminating Management Agreement
with Roy G. Neiderhoffer Co., Inc. (previously filed).
10.19- Letter from the General Partner terminating Management Agreement
with John W. Henry & Company Inc. (previously filed).
10.20- Management Agreement among the Partnership, the General Partner and
Stonebrook Structured Products, LLC (previously filed).
10.21- Management Agreement among the Partnership, the General Partner and
Graham Capital Management L.P. (previously filed).
37
10.22- Letters extending the Management Agreements with Campbell & Company,
Inc., Willowbridge Associates Inc. and Beacon Management Corporation
for 2000 (previously filed).
10.23- Letters extending the Management Agreements with Campbell & Company,
Inc., Willowbridge Associates Inc., Beacon Management Corporation,
Stonebrook Structured Products and Graham Capital Management L.P. for
2001 (previously filed).
10.24- Management Agreement among the Partnership, the General Partner and
Capital Fund Management (previously filed).
10.25- Letters extending the Management Agreements with Campbell & Company
Inc., Willowbridge Associates Inc., Beacon Management Corporation,
Stonebrook Structured Products and Graham Capital Management L.P. for
2002 (previously filed).
10.26- Letter from the General Partner Terminating Management Agreement
with Beacon Capital Management (previously filed).
10.27- Letters extending the management Agreements with Campbell & Company
Inc., Willowbridge Associates Inc. Capital Fund Management and Graham
Capital Management L.P. for 2003 (filed herein).
10.28- Letter from the General Partner Terminating Management Agreement
with Stonebrook Structured Products LLC filed herein).
16.1 - Letter from PricewaterhouseCoopers LLP (filed herein).
The exhibits required to be filed by Item 601 of regulation S-K are
incorporated herein by reference
31.1 - Rule 13a-14(a)/15d-14(a) Certification (Certification of President
and Director).
31.2 - Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief
Financial Officer and Director).
32.1 - Section 1350 Certification (Certification of President and
Director).
32.2 - Section 1350 Certification (Certification of Chief Financial Officer
and Director)
(b) Reports on Form 8-K: None Filed.
38
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
No proxy material has been sent to Limited Partners.
39
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 29th day of March 2004.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
By: Citigroup Managed Futures 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/ Shelley Ullman
- -------------------- --------------------
David J. Vogel Shelley Ullman
President and Director Director
/s/ Maureen O'Toole /s/ Steve J. Keltz
- -------------------- ------------------
Maureen O'Toole Steve J. Keltz
Director Secretary and Director
/s/ Daniel R. McAuliffe, Jr.
- ----------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
40
Exhibit 31.1
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this Annual Report on Form 10-K of Smith Barney Diversified
Futures Fund L.P. II (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition and results of operations of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 29, 2004 /s/ David J. Vogel
-------------- -----------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
41
Exhibit 31.2
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this Annual Report on form 10-K of Smith Barney Diversified
Futures Fund L.P. II (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition and results of operations of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 29, 2004 /s/ Daniel R. McAuliffe, Jr.
-------------- -----------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
42
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Smith Barney Diversified Futures
Fund L.P. II (the "Partnership") on Form 10-K for the year ending December 31,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, David J. Vogel, President and Director of Citigroup Managed
Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/ David J. Vogel
- --------------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
March 29, 2004
- --------------
Date
43
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Smith Barney Diversified Futures
Fund L.P. II (the "Partnership") on Form 10-K for the year ending December 31,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Daniel R. McAuliffe, Jr., Chief Financial Officer and
Director of Citigroup Managed Futures LLC, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
/s/ Daniel R. McAuliffe, Jr.
- --------------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
March 29, 2004
- --------------
Date
44
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
Graham Capital Management, L.P.
Stamford Harbour Park
333 Ludlow Street
Stamford, Ct. 06902
Attention: Mr. Kenneth G. Tropin
Re: Management Agreement Renewal
Dear Mr. Tropin:
We are writing with respect to your management agreements concerning the
commodity pools to which reference is made below (the "Management Agreements").
We are extending the term of the Management Agreements through June 30, 2003 and
all other provisions of the Management Agreements will remain unchanged.
o Smith Barney Global Markets Futures Fund
o Smith Barney Diversified Futures Fund L.P. II
o Smith Barney Diversified Futures Fund L.P.
o Salomon Smith Barney Diversified 2000 Futures Fund L.P.
o AURORA 2001
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
Graham Capital Management L.P.
By: /s/ Kenneth Tropin
-------------------------
Print Name: Kenneth Tropin
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
Capital Fund Management
109-11 Rue V. Hugo
92532 Levallois
France
Attention: Jean-Pierre Aguilar, CFO
Re: Management Agreement Renewals
Dear Mr. Aguilar:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made below (the "Management Agreement"). We
are extending the term of the Management Agreement through June 30, 2003 and all
other provisions of the Management Agreement will remain unchanged.
o Smith Barney Diversified Futures Fund L.P. II
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
CAPITAL FUND MANAGEMENT
By: /s/ Jean-Pierre Aguilar
-------------------------
Print Name: Jean-Pierre Agular
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
Campbell & Company, Inc.
Court Tower Building, Towson
210 West Pennsylvania Avenue
Suite 770
Baltimore, MD 212104
Attn: Mrs. Theresa D. Becks
Re: Management Agreement Renewals
Dear Mrs. Becks:
We are writing with respect to your management agreements concerning the
commodity pools to which reference is made below (the "Management Agreements").
We are extending the term of the Management Agreements through June 30, 2003 and
all other provisions of the Management Agreements will remain unchanged.
o Smith Barney Potomac Futures Fund L.P.
o Smith Barney Diversified Futures Fund L.P.
o Smith Barney Diversified Futures Fund L.P. II
o Smith Barney Global Markets Futures Fund
o Smith Barney Global Diversified Futures Fund L.P.
o Smith Barney Diversified 2000 Futures Fund L.P.
o Smith Barney Campbell F.M. and Energy Fund plc
o AURORA 2001
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
CAMPBELL & COMPANY, INC.
By: /s/ Theresa Becks
-------------------------
Print Name: Theresa Becks
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
Willowbridge Associates Inc.
101 Morgan Lane - Suite 180
Plainsboro, N.J. 08536
Attention: Ms. Bonnie Huff / Ms. Janet Boyer
Re: Management Agreement Renewals
Dear Ms. Huff and Ms. Boyer:
We are writing with respect to your management agreements concerning the
commodity pools to which reference is made below (the "Management Agreements").
We are extending the term of the Management Agreements through June 30, 2003 and
all other provisions of the Management Agreements will remain unchanged.
o Salomon Smith Barney Orion Futures Fund L.P.
o Smith Barney Principal Plus Futures Fund L.P. II
o Smith Barney Diversified Futures Fund L.P.
o Smith Barney Diversified Futures Fund L.P. II
o
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
WILLOWBRIDGE ASSOCIATES INC
By: /s/ Bonnie Huff
-------------------------
Print Name: Bonnie Huff
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
Stonebrook Structured Products LLC
17 State Street 38th Floor
New York, N.Y. 10004
Attention: Mr. Jerome Abernathy
Re: Management Agreement Renewals
Dear Mr. Abernathy:
We are writing with respect to your management agreements concerning the
commodity pools to which reference is made below (the "Management Agreements").
We are extending the term of the Management Agreements through June 30, 2003 and
all other provisions of the Management Agreements will remain unchanged.
o Smith Barney Diversified Futures Fund L.P.
o Salomon Smith Barney Equity Plus Futures Fund L.P.
o Smith Barney Diversified Futueres Fund L.P. II
o Smith Barney Stonebrook FX Fund plc.
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
STONEBROOK STRUCTURED PRODUCTS LLC
By: /s/ Jerome Abernathy
-------------------------
Print Name: Jerome Abernathy
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
January 31, 2003
Stonebrook Structured Procucts LLC
17 State Street
New York, New York 10004
Attn: Mr. Jerome Abernathy
Re: SB Diversified Futures Fund (Acct. #258-43075)
SB Diversified Futures Fund II (Acct. #258-58075)
Dear Mr. Abernathy:
Please liquidate all of your positions in the above referenced account in
an orderly fashion beginning immediately. This will effectively terminate your
management agreement with this entity. Thank you for your service and we look
forward to the possibility of working together in the future.
If you have any questions, please call myself or Jennifer Magro at
(212)723-5413.
Very truly yours,
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer
DRMcA/sr