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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2004
Commission File Number 000-22491
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3769020
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Citigroup Managed Futures LLC
399 Park Avenue. - 7th Fl.
New York, New York 10022
- --------------------------------------------------------------------------------
(Address and Zip Code of principal executive offices)
(212) 559-2011
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
-----
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition at
March 31, 2004 and December 31,
2003 (unaudited). 3
Condensed Schedules of Investments
at March 31, 2004 and December 31,
2003 (unaudited). 4 - 5
Statements of Income and Expenses and
Partners' Capital for the three months
ended March 31, 2004 and 2003 (unaudited). 6
Statements of Cash Flows for the three
months ended March 31, 2004 and 2003
(unaudited). 7
Notes to Financial Statements
(unaudited). 8 - 11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12 - 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk. 15 - 16
Item 4. Controls and Procedures. 17
PART II - Other Information 18
2
PART I
Item 1. Financial Statements
Smith Barney Diversified Futures Fund L.P. II
Statements of Financial Condition
(Unaudited)
March 31, December 31,
2004 2003
----------------------------
ASSETS:
Equity in commodity futures trading account:
Cash (restricted $9,894,531 and $12,384,177 in 2004
and 2003, respectively) $71,079,843 $65,423,348
Net unrealized appreciation on
open futures positions 4,832,368 2,834,001
Unrealized appreciation on
open forward contracts 1,457,040 2,980,419
----------- -----------
77,369,251 71,237,768
Interest receivable 47,737 38,512
----------- -----------
$77,416,988 $71,276,280
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Unrealized depreciation on open forward contracts $ 1,220,169 $ 1,766,851
Accrued expenses:
Commissions 387,230 354,212
Management fees 128,294 117,366
Incentive fees 1,522,062 347,867
Other 74,564 60,944
Redemptions payable 356,324 353,312
----------- -----------
3,688,643 3,000,552
----------- -----------
Partners' Capital:
General Partner, 862.6415 Unit equivalents outstanding
in 2004 and 2003 1,370,936 1,251,218
Limited Partners, 45,529.9600 and 46,209.5262 Redeemable
Units of Limited Partnership Interest outstanding
in 2004 and 2003, respectively 72,357,409 67,024,510
----------- -----------
73,728,345 68,275,728
----------- -----------
$77,416,988 $71,276,280
=========== ===========
See Accompanying Notes to Unaudited Financial Statements.
3
Smith Barney Diversified Futures Fund L.P. II
Condensed Schedule of Investements
March 31, 2004
(Unaudited)
Sector Contract Fair Value
- -------------------------------------------------------------------------------------------------------------------
Currencies
Unrealized depreciation on forward contracts (1.04)% $ (765,859)
Unrealized appreciation on forward contracts 0.82% 602,422
-----------
Total forward contracts (0.22)% (163,437)
Futures contracts sold 0.06% 43,508
Futures contracts purchased 0.20% 149,970
----------
Total futures contracts 0.26% 193,478
----------
Total Currencies 0.04% 30,041
----------
Total Energy 0.20% Futures contracts sold 0.20% 146,703
----------
Total Grains 3.15% Futures contracts purchased 3.15% 2,322,073
----------
Total U.S. Interest Rates 0.80% Futures contracts purchased 0.80% 593,193
----------
Interest Rates Non - U.S.
Futures contracts sold 0.01% 6,646
Futures contracts purchased 1.58% 1,163,351
----------
Total Interest Rates Non - U.S. 1.59% 1,169,997
----------
Total Livestock 0.04% Futures contracts purchased 0.04% 26,500
----------
Metals
Futures contracts purchased 0.46% 339,210
Unrealized depreciation on forward contracts (0.62)% (454,310)
Unrealized appreciation on forward contracts 1.16% 854,618
----------
Total forward contracts 0.54% 400,308
----------
Total Metals 1.00% 739,518
----------
Softs
Futures contracts sold (0.02)% (14,713)
Futures contracts purchased (0.09)% (66,094)
---------
Total Softs (0.11)% (80,807)
---------
Indices
Futures contracts sold (0.00)%* (3,942)
Futures contracts purchased 0.17% 125,963
--------
Total Indices 0.17% 122,021
--------
Total Fair Value 6.88% $ 5,069,239
=================
Country Composition Investments at Fair Value % of Investments at Fair Value
- ----------------------------------------------------------------------------- -----------------------------------------
Australia $ 3,909 0.08%
Canada 4,127 0.08
France (2,611) (0.05)
Germany 1,058,814 20.89
Greece (356) (0.01)
Hong Kong 2,150 0.04
Japan 140,258 2.77
Spain 34,563 0.68
United Kingdom 416,077 8.21
United States 3,412,308 67.31
--------------------------------------- -----------------------------------------
$ 5,069,239 100.00%
--------------------------------------- -----------------------------------------
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Accompanying Notes to Unaudited Financial Statements.
4
Smith Barney Diversified Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2003
(Unaudited)
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 Unaudited Financial Statements.
5
Smith Barney Diversified Futures Fund L.P. II
Statements of Income and Expenses and Partners' Capital
(Unaudited)
Three months ended
March 31,
-------------------------
2004 2003
-------------------------
Income:
Net gains (losses) on trading
of commodity interests:
Realized gains on closed positions
and foreign currencies $ 8,457,380 $ 15,288,460
Change in unrealized gains (losses)
on open positions 1,021,670 (4,289,223)
------------ ------------
9,479,050 10,999,237
Interest income 125,876 169,817
------------ ------------
9,604,926 11,169,054
------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $62,125 and $60,066, respectively 1,205,309 1,263,050
Management fees 366,002 420,319
Incentive fees 1,522,062 1,412,147
Other expenses 25,121 20,694
------------ ------------
3,118,494 3,116,210
------------ ------------
Net income 6,486,432 8,052,844
Redemptions (1,033,815) (1,237,789)
------------ ------------
Net increase in Partners' capital 5,452,617 6,815,055
Partners' capital, beginning of period 68,275,728 65,977,951
------------ ------------
Partners' capital, end of period $ 73,728,345 $ 72,793,006
------------ ------------
Net asset value per Redeemable Unit
(46,392.6015 and 51,866.5303 Redeemable
Units outstanding at March 31, 2004
and 2003, respectively) $ 1,589.23 $ 1,403.47
------------ ------------
Net income per Redeemable Unit of
Limited Partnership Interest and
General Partner Unit equivalent $ 138.78 $ 152.55
------------ ------------
See Accompanying Notes to Unaudited Financial Statements.
6
Smith Barney Diversified Futures Fund L.P. II
Statements of Cash Flows
March 31, 2004
(Unaudited)
Three months ended
March 31,
------------------------------
2004 2003
------------------------------
Cash flows from operating activities:
Net Income $ 6,486,432 $ 8,052,844
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Net unrealized appreciation (depreciation) on
open futures positions (1,998,367) 3,693,817
Unrealized appreciation on open forward contracts 1,523,379 817,183
Increase in interest receivable (9,225) (9,057)
Unrealized depreciation on open forward contracts (546,682) (221,777)
Accrued expenses:
Increase in commissions 33,018 25,023
Increase (decrease) in management fees 10,928 (23,743)
Increase in incentive fees 1,174,195 1,412,147
Increase in other 13,620 20,695
Increase in redemptions payable 3,012 465,715
------------ ------------
Net cash provided by operating activities 6,690,310 14,232,847
------------ ------------
Cash flows from financing activities:
Payments for redemptions (1,033,815) (1,237,789)
------------ ------------
Net cash used in financing activities (1,033,815) (1,237,789)
------------ ------------
Net change in cash 5,656,495 12,995,058
Cash, at beginning of period 65,423,348 62,798,601
------------ ------------
Cash, at end of period $ 71,079,843 $ 75,793,659
============ ============
See Accompanying Notes to Unaudited Financial Statements.
7
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
March 31, 2004
(Unaudited)
1. General
Smith Barney Diversified Futures Fund L.P. II (the "Partnership") is a
limited partnership which was organized on May 10, 1994 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by the
Partnership are volatile and involve a high degree of market risk.
Citigroup Managed Futures 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 Salomon Smith Barney
Holdings Inc., which is the sole owner of CGM. CGMHI is a wholly owned
subsidiary of Citigroup Inc. As of March 31, 2004, all trading decisions are
made for the Partnership by Capital Fund Management SA, Graham Capital
Management L.P., Campbell & Co., Inc. and Willowbridge Associates Inc. (each an
"Advisor" and collectively, the "Advisors").
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Partnership's financial
condition at March 31, 2004 and December 31, 2003, the results of its operations
and cash flows for the three months ended March 31, 2004 and 2003. These
financial statements present the results of interim periods and do not include
all disclosures normally provided in annual financial statements. You should
read these financial statements together with the financial statements and notes
included in the Partnership's annual report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2003.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
8
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
March 31, 2004
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in Net Asset Value per Redeemable Unit of Partnership Interest for
the three months ended March 31, 2004 and 2003 were as follows:
Three Months Ended
March 31,
------------------------
2004 2003
------------------------
Net realized and unrealized gains* $ 177.03 $ 184.44
Interest income 2.69 3.23
Expenses** (40.94) (35.12)
--------- ---------
Increase for the period 138.78 152.55
Net Asset Value per Redeemable Unit,
beginning of period 1,450.45 1,250.92
--------- ---------
Net Asset Value per Redeemable Unit,
end of period $ 1,589.23 $ 1,403.47
========= =========
Ratio to average net assets: ***
Net investment loss before incentive fees**** (8.3)% (8.7)%
========= =========
Operating expenses 9.0% 9.6%
Incentive fees 2.1% 7.9%
--------- ---------
Total expenses 11.1% 17.5%
========= =========
Total return:
Total return before incentive fees 11.9% 14.2%
Incentive fees (2.3)% (2.0)%
--------- ---------
Total return after incentive fees 9.6% 12.2%
========= =========
* Includes brokerage commissions
** Excludes brokerage commissions
*** Annualized (other than incentive fees)
**** 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 period. Additionally, these ratios are
calculated for the Limited Partner class using the Limited Partners' share of
income, expenses and average net assets.
9
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
March 31, 2004
(Unaudited)
(Continued)
3. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activities are shown in the Statements of Income and Expenses and Partners'
Capital and are discussed in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The Customer Agreement between the Partnership and CGM gives the
Partnership the legal right to net unrealized gains and losses on open futures
positions.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair values during the three and twelve months
ended March 31, 2004 and December 31, 2003, based on a monthly calculation, were
$6,108,069 and $4,134,488, respectively. The fair values of these commodity
interests, including options thereon, if applicable, at March 31, 2004 and
December 31, 2003, were $5,069,239 and $4,047,569, respectively. Fair values for
exchange traded commodity futures and options are based on quoted market prices
for those futures and options. Fair values for all other financial instruments
for which market quotations are not readily available are based on calculations
approved by the General Partner.
4. Financial Instrument Risk:
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, 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.
10
Smith Barney Diversified Futures Fund L.P. II
Notes to Financial Statements
March 31, 2004
(Unaudited)
(Continued)
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized as unrealized appreciation in the 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 March 31, 2004.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its equity in its commodity futures trading account, consisting of
cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures and forward contracts, commodity options and interest receivable.
Because of the low margin deposits normally required in commodity futures
trading, relatively small price movements may result in substantial losses to
the Partnership. While substantial losses could lead to a decrease in liquidity,
no such losses occurred during the first quarter of 2004.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by realized and/or unrealized gains or losses
on commodity futures trading, expenses, interest income, additions and
redemptions of Redeemable Units and distributions of profits if any.
For the three months ended March 31, 2004, Partnership capital increased
8.0% from $68,275,728 to $73,728,345. This increase was attributable to net
income from operations of $6,486,432, which was partially offset by the
redemption of 679.5662 Redeemable Units of limited Partnership interest
resulting in a outflow of $1,033,815. Future redemptions can impact the amount
of funds available for investment in commodity contract positions in subsequent
periods.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
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.
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 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.
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 date of entry into the contracts and the forward rates at the
12
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statements of income and expenses and partners'
capital.
Results of Operations
During the Partnership's first quarter of 2004 the Net Asset Value per
Redeemable Unit increased 9.6% from $1,450.45 to $1,589.23 as compared to an
increase of 12.2% in the first quarter of 2003. The Partnership experienced a
net trading gain before brokerage commissions and related fees in the first
quarter of 2004 of $9,479,050. Gains were primarily attributable to the trading
of commodity futures in currencies, energy, U.S. and non-U.S. interest rates,
livestock and metals, and were partially offset by losses in softs and indices.
The Partnership experienced a net trading gain before brokerage commissions and
related fees in the first quarter of 2003 of $10,999,237. Gains were primarily
attributable to the trading of commodity futures in currencies, non U.S.
interest rates, energy and indices, and were partially offset by losses in
grains, livestock, metals, softs and U.S. interest rates.
The Partnership had a strong first quarter as the financial and commodity
trends that had carried performance in 2003 continued into the first quarter
providing profits across nearly all market sectors. The major contributors to
performance were lower interest rates both in the U.S. and internationally,
weakness in the U.S. dollar for much of the quarter and continued upward trends
in commodity prices, particularly for base metals, energy, and grains.
Lower interest rate trends provided substantial profits for positions in
U.S. and international interest rate contracts in January and February. Lower
U.S. interest rates combined with rising fiscal and trade deficits pushed the
U.S. dollar lower through mid-February producing profits for the Fund's advisors
but then began a sharp correction that led to losses in March as the dollar
regained nearly 10% against the euro and other major currencies. Trading in
stock market indices was unprofitable for the quarter as global stock markets
were fairly directionless.
In the commodity markets, increased global demand for the raw materials of
economic development, namely base metals, like copper, nickel and aluminum
produced profitable trading. Bullish price trends in gold, silver and palladium
were also profitable for the advisors. Concurrently, the demand for foodstocks
in developing countries generated profits for positions in grains, specifically
soybeans, corn and wheat. Each of these sectors produced profits for the
quarter. Energy trading was also profitable for the quarter as prices of crude
oil moved to the high $30s range and natural gas prices followed their normal
volatile seasonal patterns with mixed trading results for the Advisors.
Commodity futures markets are highly volatile. The potential for broad and
rapid price fluctuations increases the risks involved in commodity trading, but
also increases the possibility of profit. The profitability of the Partnership
depends on the existence of major price trends and the ability of the Advisors
to correctly identify those price trends. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
13
Interest income on 80% of the Partnership's daily equity maintained in cash
was earned at the 30-day U.S. Treasury bill rate determined weekly by CGM based
on the average non-competitive yield on 3-month U.S. Treasury bills maturing in
30 days. CGM may continue to maintain the Partnership's assets in cash and/or
place all of the Partnership's assets in 90-day Treasury bills and pay the
Partnership 80% of the interest earned on the Treasury bills purchased. CGM will
retain 20% of any interest earned on Treasury bills. Interest income for the
three months ended March 31, 2004 decreased by $43,941, as compared to the
corresponding period in 2003. The decrease in interest income is primarily due
to the reduction in interest rates during the three months ended March 31, 2004.
Brokerage commissions are calculated on the Partnership's net asset value
as of the last day of each month and are affected by trading performance and
redemptions. Accordingly, they must be compared in relation to the fluctuations
in the monthly net asset values. Brokerage commissions and fees for the three
months ended March 31, 2004 decreased by $57,741, as compared to the
corresponding period in 2003.
Management fees are calculated on the portion of the Partnership's net
asset value allocated to each Advisor at the end of the month and are affected
by trading performance and redemptions. Management fees for the three months
ended March 31, 2004 decreased by $54,317 as compared to the corresponding
period in 2003.
Incentive fees are based on the new trading profits generated by each
Advisor as defined in the advisory agreements between the Partnership, the
General Partner and each Advisor. Trading performance for the three months ended
March 31, 2004 and 2003, resulted in incentive fees of $1,522,062 and
$1,412,147, respectively.
14
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
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 value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification in this
section should not be considered to constitute any assurance or representation
that the Partnership's losses in any market sector will be limited to Value at
Risk or by the Partnership's attempts to manage its market risk.
Exchange maintenance margin requirements have been used by the Partnership
as the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
interval. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk
component, which is not relevant to Value at Risk.
15
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category at March 31, 2004 and the
highest and lowest value at any point during the three months ended March 31,
2004. All open position trading risk exposures of the Partnership have been
included in calculating the figures set forth below. As of March 31, 2004, the
Partnership's total capitalization was $73,728,345. There has been no material
change in the trading Value at Risk information previously disclosed in the Form
10-K for the year ended December 31, 2003.
March 31,2004
(Unaudited)
Year to Date
----------------------------------------------------
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Value at Risk
- ------------------ ------------ -------------- ------------- ------------- -------------
Currencies:
-Exchange Traded Contracts $ 508,332 0.69% $1,461,188 $ 444,654 $ 797,787
-OTC Contracts 474,689 0.64% 1,060,705 474,689 791,859
Energy 1,227,000 1.67% 1,859,700 1,059,700 1,307,883
Grains 531,750 0.72% 534,950 253,250 457,550
Interest Rates U.S. 1,014,000 1.38% 1,163,900 417,300 1,033,033
Interest Rates Non -U.S 2,366,079 3.21% 3,163,467 802,887 2,512,093
Livestock 90,000 0.12% 90,000 800 56,667
Metals
-Exchange Traded Contracts 260,500 0.35% 260,500 75,000 170,167
-OTC Contracts 31,200 0.04% 237,490 20,800 89,213
Softs 184,580 0.25% 257,987 34,915 181,061
Indices 1,262,282 1.71% 3,990,418 909,561 2,328,077
---------- ---------
Total $7,950,412 10.78%
========= =========
16
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of March 31, 2004, the Chief Executive Officer and Chief Financial
Officer 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 first
quarter of 2004.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information supplements and amends our discussion set forth
under Part I, Item 3 "Legal Proceedings" in the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.
REGULATORY MATTERS
Both the Department of Labor and the IRS have advised CGM that they were or
are reviewing transactions in which Ameritech Pension Trust purchased from CGM
and certain affiliates approximately $20.9 million in participations in a
portfolio of motels owned by Motels of America, Inc. and Best Inns, Inc. With
respect to the IRS review, CGM and certain affiliated entities have consented to
extensions of time for the assessment of excise taxes that may be claimed to be
due with respect to the transactions for the years 1987, 1988 and 1989.
ENRON CORP
In July 2002, Citigroup, CGM and certain officers were named as defendants
in an alleged class action filed in the United States District Court for the
Southern District of New York, brought on behalf of purchasers of Citigroup
common stock between July 24, 1999 and July 23, 2002. The complaint seeks
unspecified compensatory and punitive damages for alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and for common law
fraud. Fourteen virtually identical complaints have been filed and consolidated.
The complaints allege that Citigroup misstated the extent of its Enron-related
exposure, and that Citigroup's stock price fell once the true extent of the
company's Enron involvements became known. Plaintiffs filed an amended complaint
on March 10, 2003, which incorporated the allegations in the 15 separate actions
and added new material as well. The amended complaint focuses on certain
transaction Citigroup did with Enron and alleged analyst conflicts of interest.
The class period for the consolidated amended complaint is July 24, 1999 to
December 11, 2002. On June 2, 2003, Citigroup filed a motion to dismiss the
consolidated amended complaint. Plaintiffs' response was filed on July 30, and
Citigroup's reply was filed on October 3, 2003. Oral argument before Judge Swain
was held on November 20, 2003.
18
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities - None
The following chart sets forth the purchases of Redeemable Units by the
Partnership.
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Period (a) Total Number of (b) Average Price (c) Total Number of (d) Maximum Number
Shares (or Units) Paid per Share (or Shares (or Units) (or Approximate
Purchased* Unit)** Purchased as Part of Dollar Value) of
Publicly Announced Shares (or Units)
Plans or Programs that May Yet Be
Purchased Under the
Plans or Programs
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
January 1, 2004 - January 31, 379.3644 $1,465.22 N/A N/A
2004
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
February 1, 2004 - February 75.9899 $1,600.72 N/A N/A
29, 2004
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
March 1, 2004 - March 31, 2004 224.2119 $1,589.23 N/A N/A
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Total 679.5662 $1,551.72 N/A N/A
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
* Generally, Limited Partners are permitted to redeem their Redeemable Units as
of the end of each month on 10 days' notice to the General Partner. Under
certain circumstances, the General Partner can compel redemption but to date the
General Partner has not exercised this right. Purchases of Redeemable Units by
the Partnership reflected in the chart above were made in the ordinary course of
the Partnership's business in connection with effecting redemptions for Limited
Partners.
** Redemptions of Redeemable Units are effected as of the last day of each month
at the Net Asset Value per Redeemable Unit as of that day.
19
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits required to be filed by Item 601 of Regulation S-K are
incorporated herein by reference to the exhibit index of the
Partnership's Annual Report on Form 10-K for the year ended December
31, 2003.
Exhibit - 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Certification
of President and Director)
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Certification
of Chief Financial Officer and Director)
Exhibit - 32.1 - Section 1350 Certification (Certification of
President and Director).
Exhibit - 32.2 - Section 1350 Certification (Certification of Chief
Financial Officer and Director).
(b) Reports on Form 8-K - None
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
By: Citigroup Managed Futures LLC
-----------------------
(General Partner)
By: /s/ David J. Vogel
-----------------------
David J. Vogel, President and Director
Date: 5/10/04
-----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: Citigroup Managed Futures LLC
-----------------------
(General Partner)
By: /s/ David J. Vogel
-------------------
David J. Vogel
President and Director
Date: 5/10/04
--------------------------
By: /s/ Daniel R. McAuliffe, Jr.
---------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Date: 5/10/04
------------------------
21
Exhibit 31.1
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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, results of operations and cash flows 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 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: May 10, 2004
/s/ David J. Vogel
-----------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
22
Exhibit 31.2
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q 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, results of operations and cash flows 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 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: May 10, 2004
/s/ Daniel R. McAuliffe, Jr.
------------------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
23
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 Quarterly Report of Smith Barney Diversified Futures
Fund L.P. II (the "Partnership") on Form 10-Q for the period ending March 31,
2004 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, results of operations and
cash flows of the Partnership.
/s/ David J. Vogel
- --------------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
May 10, 2004
24
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 Quarterly Report of Smith Barney Diversified Futures
Fund L.P. II (the "Partnership") on Form 10-Q for the period ending March 31,
2004 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, results of operations and
cash flows of the Partnership.
/s/ Daniel R. McAuliffe, Jr.
- -------------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
May 10, 2004
25