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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, 1996
Commission File Number 33-79244
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 13-3769020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 100,000 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 [ ]
PART I
Item 1. Business.
(a) General development of business. Smith Barney Diversified Futures Fund
L.P. II ("Partnership") is a limited partnership organized on May 10, 1994 under
the Partnership laws of the State of New York. The Partnership commenced trading
operations on January 17, 1996. The Partnership engages in speculative trading
of commodity interests, including forward contracts on foreign currencies,
commodity options and commodity futures contracts and other financial
instruments, foreign currencies and stock indices.
A Registration Statement on Form S-1 relating to the public offering
became effective on August 21, 1995. Beginning August 21, 1995, 100,000 Units of
Limited Partnership Interest ("Units") were publicly offered at $1,000 per Unit
for a period of ninety days, subject to increase for up to an additional sixty
days at the sole discretion of the General Partner. Between August 21, 1995
(commencement of the offering period) and January 16, 1996, 8529 Units of
limited partnership interest were sold at $1,000 per Unit. Proceeds of the
offering were held in an escrow account and were transferred, along with the
General Partner's contribution of $87,000 to the Partnership's trading account
on January 17, 1996 when the Partnership commenced trading. Sales of additional
Units and additional General Partner's contributions and redemptions of Units
for the year ended December 31, 1996 are reported in the Statement of Partners'
Capital on page F-5 under "Item 8.
2
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 of a Unit decreases to less than $400 as of the close of any
business day; or under certain circumstances as defined in the Limited
Partnership Agreement of the Partnership (the "Limited Partnership Agreement").
The Partnership's trading of futures contracts on commodities is done
primarily on United States and foreign commodity exchanges. It engages in such
trading through a commodity brokerage account maintained with its commodity
broker, Smith Barney Inc. ("SB").
Smith Barney Futures Management Inc., acts as the general partner of the
Partnership (the "General Partner"). SB is an affiliate of the General Partner.
Under the Limited Partnership Agreement of the Partnership (the "Limited
Partnership Agreement"), the General Partner administers the business and
affairs of the Partnership. As of December 31, 1996, all commodity trading
decisions are made for the Partnership by John W. Henry & Company, Inc. ("JWH"),
Millburn Ridgefield Corporation and Chesapeake Capital Corporation,
(collectively, the "Advisors"). None of the Advisors is affiliated with the
General Partner or SB. The
3
Advisors are not responsible for the organization or operation of the
Partnership.
Pursuant to the terms of the Management Agreements (the "Management
Agreement"), the Partnership is obligated to pay each Advisor: (i) a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year))
of the Partnership allocated to each Advisor as of the end of each month and
(ii) an incentive fee payable quarterly, equal to 20% of the New Trading Profits
(except JWH, which will receive an incentive fee of 15% of New Trading Profits)
(as defined in the Management Agreements) of the Partnership.
The Partnership has entered into a Customer Agreement with SB (the
"Customer Agreement") which provides that the Partnership will pay SB a monthly
brokerage fee equal to 1/2 of 1% of month-end Net Assets allocated to the
Advisors (6.0% per year) in lieu of brokerage commissions on a per trade basis.
SB also pays a portion of its brokerage fees to its financial consultants who
have sold Units and who are registered as associated persons with the Commodity
Futures Trading Commission (the "CFTC"). The Partnership pays for National
Futures Association ("NFA") fees, exchange and clearing fees, give-up and user
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 SB gives the Partnership the
legal right to net unrealized gains and losses.
4
In addition, SB 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 SB based on the average non-competitive
yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which
such weekly rate is determined. However, SB began paying interest to the
Partnership only after the amount of interest accrued equaled the total amount
of offering and organizational expenses paid by SB in connection with the
Partnership's offering plus interest at the prime rate quoted by The Chase
Manhattan Bank.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests (including, but not limited to, futures contracts, options and forward
contracts on U.S. Treasury Bills, other financial instruments, foreign
currencies, stock indices and physical commodities). The Partnership does not
engage in sales of goods or services. The Partnership's net income (loss) from
operations for the period from January 17, 1996 (commencement of trading
operations) to December 31, 1996 is set forth under "Item 6. Select Financial
Data." The Partnership capital as of December 31, 1996 was $55,298,004.
5
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales. The Partnership does not engage in sales of goods or services, and
therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, SB.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Partnership is a party
or to which any of its assets is subject. No material legal proceedings
affecting the Partnership were terminated during the fiscal year.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote during
the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.
(a) Market Information. The Partnership has issued no
stock. There is no public market for the Units of
6
Limited Partnership Interest.
(b) Holders. The number of holders of Units of Limited
Partnership Interest as of December 31, 1996 was 2,633.
(c) Distribution. The Partnership did not declare a
distribution in 1996.
Item 6. Select Financial Data. The Partnership commenced trading operations on
January 17, 1996. Realized and unrealized trading gains, interest income, net
income and increase in net asset value per Unit for the period from January 17,
1996 (commencement of trading operations) to December 31, 1996 and total assets
at December 31, 1996 were as follows:
1996
Realized and unrealized trading
gains net of brokerage commissions
and clearing fees of $2,169,468 $ 8,869,618
Interest Income 1,190,687
-----------
$10,060,305
===========
Net Income $ 7,582,653
===========
Increase in net asset
value per unit $185.99
===========
Total assets $56,960,922
===========
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash and cash
7
equivalents, net unrealized appreciation (depreciation) on open futures
contracts and interest receivable. Because of the low margin deposits normally
required in commodity futures trading, relatively small price movements may
result in substantial losses to the Partnership. Such substantial losses could
lead to a material decrease in liquidity. To minimize this risk, the Partnership
will follow certain policies including:
(1) Partnership funds are invested only in futures contracts which are
traded in sufficient volume to permit, in the opinion of the Advisors, ease of
taking and liquidating positions.
(2) The Partnership will not permit the churning of its commodity
trading accounts.
(3) No Advisor initiates additional positions in any commodity if such
additional positions would result in aggregate positions for all commodities
requiring as margin more than 66-2/3% of the Partnership's assets allocated to
the Advisor.
(4) The Partnership will not employ the trading technique commonly known
as "pyramiding", in which the speculator uses unrealized profits on existing
positions as margin for the purchase or sale of additional positions in the same
or related commodities.
(5) The Partnership will not utilize borrowing except short-term
borrowing if the Partnership takes delivery of any cash commodities.
(6) The Advisor may, from time to time, employ trading strategies such
as spread or straddles on behalf of the Partnership. The term "spread" or
"straddle" describes a commodity
8
futures trading strategy involving the simultaneous buying and selling of
futures contracts on the same commodity but involving different delivery dates
or markets and in which the trader expects to earn a profit from a widening or
narrowing of the difference between the prices of the two contracts.
The Partnership is party to financial instruments with off- balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures and options, whose value is based upon an underlying
asset, index, or reference rate, and generally represent future commitments to
exchange currencies or cash flows, or to purchase or sell other financial
instruments at specified terms at specified future dates. Each of these
instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
Partner monitors and controls the Partnership's risk exposure on a daily basis
through financial, credit and risk management monitoring systems and,
accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject. (See
also Item 8. Financial Statement and Supplementary Data., for further
information on financial instrument risk included in the notes to financial
statements.)
Other than the risks inherent in commodity futures trading, the
Partnership knows of no trends demands, commitments, events or uncertainties
which will result in or which are reasonably likely
9
to result in the Partnership's liquidity increasing or decreasing in any
material way. The Limited Partnership Agreement provides that the General
Partner may, at its discretion, cause the Partnership to cease trading
operations and liquidate all open positions upon the first to occur of the
following: (i) December 31, 2014; (ii) the vote dissolve the Partnership by
limited partners owning more than 50% of the Units; (iii) assignment by the
General Partner of all of its interest in the Partnership or withdrawal,
removal, bankruptcy or any other event that causes the General Partner to cease
to be a general partner under the New York Revised Limited Partnership Act
unless the Partnership is continued as described in the Limited Partnership
Agreement; (iv) Net Asset Value per Unit falls to less than $400 as of the end
of any trading day; or (v) the occurrence of any event which shall make it
unlawful for the existence of the Partnership to be continued.
(b) Capital resources. (i) The Partnership has made no material
commitments for capital expenditures.
(ii) The Partnership's capital consists of the capital contributions
of the partners as increased or decreased by gains or losses on commodity
trading, and by expenses, interest income, redemptions of Units and
distributions of profits, if any. Gains or losses on commodity futures trading
cannot be predicted. Market moves in commodities are dependent upon fundamental
and technical factors which the Partnership may or may not be able to identify.
Partnership expenses will consist of, among other things, commissions,
management fees and incentive fees. The
10
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 SB is dependent upon interest
rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. Beginning June 30, 1996 a Limited Partner may cause all of his Units to
be redeemed by the Partnership at the Net Asset Value thereof as of the last day
of each month on ten days' written notice to the General Partner. No fee will be
charged for redemptions. For the period ended December 31, 1996, 1,911.1385
Units were redeemed totaling $1,968,649.
The Partnership continues to offer Units at the Net Asset Value per Unit
as of the end of each month. For the period ended December 31, 1996, there were
additional sales of 42,034.2002 Units totaling $41,190,000 and contributions by
the General Partner representing 411.0108 Unit equivalents totaling $402,000.
(c) Results of Operations.
For the period from January 17, 1996 (commencement of trading
operations) to December 31, 1996, the net asset value per Unit increased 19.8%
from $939.07 to $1,125.06. There were no operations in 1995 and 1994. The net
asset value of $939.07 at commencement of trading operations is reflective of
charging offering and organizational expenses against the initial capital of the
Partnership for financial reporting purposes.
11
The Partnership experienced net trading gains of $11,039,086 before
commissions and expenses in 1996. These gains were attributable to gains
incurred in the trading of interest rates, metals, energy and foreign
currencies. However, these trading gains were partially offset by losses
experienced in the trading of stock indices and agricultural commodity futures.
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify those price trends correctly. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
12
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Accountants. F-2
Financial Statements:
Statement of Financial Condition at
December 31, 1996 and 1995. F-3
Statement of Income and Expenses for
the period from January 17, 1996
(commencement of trading operations)
to December 31, 1996. F-4
Statement of Partners' Capital for
the years ended December 31,
1996 and 1995 and for the period
from May 10, 1994 (date
Partnership was organized) to
December 31, 1994. F-5
Notes to Financial Statements. F-6 - F-11
F-1
Continued
Report of Independent Accountants
To the Partners of
Smith Barney Diversified Futures Fund L.P. II:
We have audited the accompanying statement of financial condition of SMITH
BARNEY DIVERSIFIED FUTURES FUND L.P. II (a New York Limited Partnership) as of
December 31, 1996 and 1995, and the related statements of income and expenses
for the period from January 17, 1996 (commencement of trading operations) to
December 31, 1996, and of partners' capital for the years ended December 31,
1996 and 1995 and for the period from May 10, 1994 (date Partnership was
organized) to December 31, 1994. These financial statements are the
responsibility of the management of the General Partner. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the
management of the General Partner, 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, 1996 and 1995, and the results of its
operations for the period from May 10, 1994 (date Partnership was organized) to
December 31, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
February 28, 1997
F-2
Smith Barney Diversified Futures Fund L.P. II
Statement of Financial Condition
December 31, 1996
Assets: 1996 1995
Equity in commodity futures
trading account:
Cash and cash equivalents (Note 3c) $54,370,448 $ 2,000
Net unrealized appreciation
on open futures contracts 1,981,313
Commodity options owned, at
market value (cost $420,667) 430,497
---------- ----------
56,782,258 2,000
Interest receivable 178,664
---------- ----------
$56,960,922 $ 2,000
========== ==========
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 288,503
Management fees 133,127
Incentive fees 1,036,077
Other 47,744
Redemptions payable (Note 5) 145,230
Commodity options written, at market
value (premiums received $28,124) 12,237
----------
1,662,918
----------
Partners' capital (Notes 1 and 7):
General Partner, 498.0108 and 1 Unit
equivalents outstanding in 1996 and 560,295 $ 1,000
1995, respectively
Limited Partners, 48,653.0617 and 1
Units of Limited Partnership
Interest outstanding in 1996 and
1995, respectively 54,737,709 1,000
---------- ----------
55,298,004 2,000
---------- ----------
$56,960,922 $ 2,000
========== ==========
See notes to financial statements.
F-3
Smith Barney Diversified Futures Fund L.P. II
Statement of Income and Expenses
for the period from January 17, 1996 (commencement of
trading operations) to December 31, 1996
1996
Income:
Net gains (losses) on trading of
commodity interests:
Realized gains on closed
positions $ 9,032,056
Change in unrealized
gains on open positions
2,007,030
----------
11,039,086
Less, Brokerage commissions
and clearing fees ($67,406)
(Note 3c) 2,169,468
----------
Net realized and unrealized
gains 8,869,618
Interest income (Notes 3c
and 6) 1,190,687
----------
10,060,305
----------
Expenses:
Management fees (Note 3b) 866,887
Organization expense (Note 6) 291,264
Incentive fees (Note 3b) 1,199,948
Other expenses 119,553
----------
2,477,652
----------
Net income $ 7,582,653
==========
Net income per Unit of Limited
Partnership Interest and
General Partner Unit
equivalent (Notes 1 and 7) $ 185.99
==========
See notes to financial statements.
F-4
Smith Barney Diversified
Futures Fund L.P. II
Statement of Partners' Capital
for the years ended December 31, 1996 and 1995 and
for the period from May 10, 1994 (date Partnership was
organized) to December 31, 1994
Limited General
Partners Partner Total
Initial capital contributions $ 1,000 $ 1,000 $ 2,000
---------- ----------- ----------
Partners' capital at
December 31, 1994 1,000 1,000 2,000
---------- ----------- ----------
Partners' capital at
December 31, 1995 1,000 1,000 2,000
Proceeds from offering of 8,529
Units of Limited Partnership
Interest and General Partner's
contribution representing
86 Unit equivalents (Note 1) 8,529,000 86,000 8,615,000
Offering and organization costs
(Note 6) (519,700) (5,300) (525,000)
---------- ----------- ----------
Opening Partnership capital
for operations 8,010,300 81,700 8,092,000
Net Income 7,506,058 76,595 7,582,653
Sale of 42,034.2002 Units of Limited
Partnership Interest and General
Partner's contribution representing
411.0108 Unit equivalents 41,190,000 402,000 41,592,000
Redemption of 1,911.1385 Units of
Limited Partnership Interest (1,968,649) -- (1,968,649)
---------- ----------- ----------
Partners' capital at
December 31, 1996 $54,737,709 $ 560,295 $55,298,004
========== =========== ==========
See notes to financial statements
F-5
Smith Barney Diversified
Futures Funds L.P. II
Notes to Financial Statements
1. Partnership Organization:
Smith Barney Diversified Futures Fund L.P. II (the "Partnership") is a
limited partnership which was organized on May 10, 1994 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by the
Partnership are volatile and involve a high degree of market risk.
Between August 21, 1995 (commencement of the offering period) and January 16,
1996, 8,529 Units of Limited Partnership Interest ("Units") were sold at
$1,000 per Unit. The proceeds of the initial offering were held in an escrow
account until January 17, 1996, at which time they were turned over to the
Partnership for trading. The Partnership continues to offer Units during the
continuous offering period. The Partnership is authorized to sell 100,000
Units during the public offering period of the Partnership.
Smith Barney Futures Management Inc. is the general partner (the "General
Partner") of the Partnership. Smith Barney Inc. ("SB"), an affiliate of the
General Partner, acts as commodity broker for the Partnership (see Note 3c).
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of the
Partnership in excess of his initial capital contribution and profits, if
any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2014; the net asset value of a Unit decreases to less than $400
as of a close of any business day; or under certain other circumstances as
defined in the Limited Partnership Agreement.
2. Accounting Policies:
a.All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at market value for those
commodity interests for which market quotations are readily available or at
fair value on the last business day of the year. Investments in commodity
interests denominated in foreign currency are translated into U.S. dollars
at the exchange rates prevailing on the last business day of the year.
Realized gain (loss) and changes in unrealized values on commodity
interests are recognized in the period in which the contract is closed or
the changes occur and are included in net gains (losses) on trading of
commodity interests.
F-6
Smith Barney Diversified
Futures Funds L.P. II
Notes to Financial Statements
b.Income taxes have not been provided as each partner is individually liable
for the taxes, if any, on his share of the Partnership's income and
expenses.
c.The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.
3. Agreements:
a.Limited Partnership Agreement:
The General Partner administers the business and affairs of the Partnership
including selecting one or more advisors to make trading decisions for the
Partnership.
b.Management Agreements:
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with John W. Henry & Company, Inc. ("JWH"), Millburn
Ridgefield Corporation and Chesapeake Capital Corporation, (collectively,
the "Advisors"), registered commodity trading advisors. The Advisors are
not affiliated with one another and none is affiliated with the General
Partner or SB and are not responsible for the organization or operation of
the Partnership. The Partnership will pay each Advisor a monthly management
fee equal to 1/6 of 1% (2% per year) of month-end Net Assets allocated to
the Advisor (except JWH, which will receive a monthly management fee equal
to 1/3 of 1% (4% per year) of month-end Net Assets). In addition, the
Partnership is obligated to pay each Advisor an incentive fee payable
quarterly equal to 20% of the New Trading Profits earned by each Advisor
for the Partnership (except JWH, which will receive an incentive fee of 15%
of New Trading Profits).
F-7
Smith Barney Diversified
Futures Funds L.P. II
Notes to Financial Statements
c.Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SB a monthly brokerage fee equal to 1/2 of 1% (6%
per year) of month-end Net Assets, as defined, in lieu of brokerage
commissions on a per trade basis. SB will pay a portion of brokerage fees
to its financial consultants who have sold Units in this Partnership.
Brokerage fees will be paid for the life of the Partnership, although the
rate at which such fees are paid may be changed. The Partnership will pay
for National Futures Association ("NFA") fees, exchange, clearing, user,
give-up and floor brokerage fees. All of the Partnership's assets are
deposited in the Partnership's account at SB. The Partnership's cash is
deposited by SB in segregated bank accounts as required by Commodity
Futures Trading Commission regulations. At December 31, 1996, the amount of
cash held for margin requirements was $6,904,509. SB 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 deter-
mined weekly by SB 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. The Customer Agreement between the Partnership and SB
gives the Partnership the legal right to net unrealized gains and losses.
The Customer Agreement may be terminated upon notice by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity interests. The results of the Partnership's trading
activity are shown in the statement of income and expense.
All of the commodity interests, owned by the Partnership, are held for
trading purposes. The fair value of these commodity interests, including
options thereon at December 31, 1996 was, $2,399,573 and the average fair
value during the year then ended, based on monthly calculation was
$2,965,883.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner; however, beginning with the quarter ended June 30, 1996, a
limited partner may require the Partnership to redeem his Units at their Net
Asset Value as of the last day of any month on 10 days' notice to the General
Partner provided that no redemption may result in the limited partner holding
fewer than 3 Units after redemption is effected. There is no fee charged to
limited partners in connection with redemptions.
F-8
Smith Barney Diversified
Futures Funds L.P. II
Notes to Financial Statements
6. Organization and Offering Costs:
Offering and organization expenses of approximately $525,000 relating to the
issuance and marketing of Units during the initial offering period were
initially paid by SB and were charged against the initial capital of the
Partnership. In addition, expenses of $291,264 related to the continuous
offering of Units have been incurred. As of December 31, 1996, the
Partnership had reimbursed SB for all such expenses incurred during the
initial offering and continuous offering period (in addition to interest at
the prime rate quoted by The Chase Manhattan Bank totaling approximately
$20,929) from interest earned on funds held in its account.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit for the period from January 17, 1996
(commencement of trading operations) to December 31, 1996 were as follows:
1996
Net realized and
unrealized gains $ 177.40
Interest income 36.09
Expenses (67.51)
Other 40.01
------------
Increase for period 185.99
Net asset value
per Unit,
beginning of period 939.07
------------
Net asset value
per Unit,
end of period $ 1,125.06
============
8. Financial Instrument Risk:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments include forwards, futures and options, whose value is based upon
an underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, 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 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.
F-9
Smith Barney Diversified
Futures Funds L.P. II
Notes to Financial Statements
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity or
security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the transactions.
The Partnership's risk of loss in the event of counterparty default is
typically limited to the amounts recognized in the statement of financial
condition and not represented by the contract or notional amounts of the
instruments. The Partnership has concentration risk because the sole
counterparty or broker with respect to the Partnership's assets is SB.
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.
F-10
Smith Barney Diversified
Futures Funds L.P. II
Notes to Financial Statements
The notional or contractual amounts of these instruments, while appropriately
not recorded in the financial statements, reflect the extent of the
Partnership's involvement in these instruments. At December 31, 1996, the
Partnership's commitment to purchase and sell these instruments was
$287,865,518 and $181,348,343, respectively, as detailed below. All of these
instruments mature within one year of December 31, 1996. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity. At December 31, 1996, the fair value of the Partnership's
derivatives, including options thereon, was $2,399,573, as detailed below.
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair
Value
Currencies:
-Exchange Traded Contracts $ 12,752,114 $ 15,672,967 $ 596,711
-OTC Contracts 48,300,653 72,590,507 393,543
Energy 12,060,803 -- 328,180
Grains 175,750 4,560,014 148,525
Interest Rate U.S. 54,062,085 4,098,651 (55,803)
Interest Rate
Non-U.S. 137,083,934 42,405,484 (44,169)
Livestock 385,930 -- 840
Metals 7,349,851 23,421,538 416,746
Softs 7,984,383 8,534,913 28,892
Indices 7,710,015 10,064,269 586,108
------------ ------------ ------------
Total $287,865,518 $181,348,343 $ 2,399,573
============ ============ ============
F-11
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
During the last two fiscal years and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed
by its General Partner, Smith Barney Futures Management Inc. Investment
decisions will be made by John W. Henry & Company, Inc., Chesapeake Capital
Corporation and Millburn Ridgefield Corporation (collectively, the "Advisors").
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management Inc., its General Partner, which
receives compensation for its services, as set forth under "Item 1. Business."
SB, 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 $2,169,468
were paid for the period ended December 31, 1996. Management fees and incentive
fees of $866,887 and $1,199,948, respectively, were paid to the Advisors for the
period ended December 31, 1996.
13
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a). Security ownership of certain beneficial owners. As of March 1,
1997, the Partnership knows of no person who beneficially owns more than 5% of
the Units outstanding.
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership interest
equivalent to 498.0108 Units (1.0%) of Limited Partnership Interest as of
December 31, 1996.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Smith Barney Inc. and Smith Barney Futures Management Inc. 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" and "Item 11. Executive Compensation."
14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1996 and
1995.
Statement of Income and Expenses for the period from
January 17, 1996 (commencement of trading operations) to
December 31, 1996.
Statement of Partners' Capital for the
years ended December 31, 1996 and 1995 and for the period from
May 10, 1994 (date Partnership was organized) to December 31,
1994.
(2) Financial Statement Schedules: None.
(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 (Filed No.
33-79244) and incorporated herein by reference).
10.1- Customer Agreement between the Partnership and Smith
Barney (filed as Exhibit 10.1 to the Registration
Statement on Form S-1 (File No. 33-79244) and
15
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).
(b) Reports on 8-K: None Filed.
16
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
17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement 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 24th day of March 1997.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
By: Smith Barney Futures Management Inc.
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel, Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael Schaefer /s/ Daniel A. Dantuono
Michael Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Philip M. Waterman, Jr. /s/ Daniel R. McAuliffe, Jr.
Philip M. Waterman, Jr. Daniel R. McAuliffe, Jr.
Director and Vice-Chairman Director
/s/ Steve J. Keltz /s/ Shelley Ullman
Steve J. Keltz Shelley Ullman
Secretary and Director Director
18