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 September 30, 1997
Commission File Number 0-22489
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 13-3862967
(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)
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
<PAGE>
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statement of Financial Condition at
September 30, 1997 and December 31,
1996. 3
Statement of Income and Expenses and
Partners' Capital for the Three and Nine
Months ended September 30, 1997 and
for the period from August 9, 1996
(commencement of trading operations)
to September 30, 1996. 4
Notes to Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10 - 11
PART II - Other Information 12
2
<PAGE>
PART I
Item 1. Financial Statements
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.II
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
ASSETS:
(Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $ 8,146,882 $ 9,941,903
Net unrealized appreciation
on open futures contracts 606,024 241,456
Zero Coupons, $19,556,000 and $20,100,000
principal amount in 1997 and 1996, repectively,
due November 15, 2003 at market value
(amortized cost $13,273,244 and $13,012,176
in 1997 and 1996, respectively) 13,544,681 13,093,140
----------- -----------
22,297,587 23,276,499
Receivable from SB on sale of
Zero Coupons 177,257 --
----------- -----------
$22,474,844 $23,276,499
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 71,957 $ 74,500
Management fees 32,736 33,970
Incentive fees -- 421,541
Due to Smith Barney 177,963 449,877
Other 28,370 39,050
Redemptions payable 288,689
----------- -----------
599,715 1,018,938
----------- -----------
Partners' Capital:
General Partner, 203 Unit
equivalents outstanding in 1997 and 1996 227,074 224,790
Limited Partners, 19,353 and 19,897
Units of Limited Partnership Interest
outstanding in 1997 and 1996, respectively 21,648,055 22,032,771
----------- -----------
21,875,129 22,257,561
----------- -----------
$22,474,844 $23,276,499
=========== ===========
See Notes to Financial Statements
3
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SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 9, 1996
THREE-MONTHS (COMMENCEMENT OF NINE-MONTHS
ENDED TRADING OPERATIONS) ENDED
SEPTEMBER 30, TO SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997
---------------- -------------------- -----------------
<S> <C> <C> <C>
Income:
Net gains (losses) on trading of
commodity interests:
Realized (losses) on closed positions $ (382,602) $ (918,870) $ 39,578
Change in unrealized gains/losses on
open positions 288,368 1,223,871 364,568
---------------- -------------------- -----------------
(94,234) 305,001 404,146
Less, brokerage commissions and clearing
fees ($4,847, $2,459 and $11,666, respectively) (242,201) (110,991) (722,871)
---------------- -------------------- -----------------
Net realized and unrealized gains (losses) (336,435) 194,010 (318,725)
Gain on sale of Zero Coupons 3,431 14
Unrealized appreciation (depreciation)
on Zero Coupons 317,996 (200,543) 190,473
Interest income 301,060 152,666 898,278
---------------- -------------------- -----------------
286,052 146,133 770,040
---------------- -------------------- -----------------
Expenses:
Management fees 99,525 46,580 303,910
Other 13,600 21,371 41,271
Incentive fees - 22,339 190,380
---------------- -------------------- -----------------
113,125 90,290 535,561
---------------- -------------------- -----------------
Net income 172,927 55,843 234,479
Proceeds from offering - Limited Partners 19,897,000
General Partner 203,000
Offering and organization expense (650,000)
Redemptions (288,689) (616,911)
---------------- -------------------- -----------------
Net Increase (decrease) in Partners' capital (115,762) 19,505,843 (382,432)
Partners' capital, beginning of period 21,990,891 - 22,257,561
---------------- -------------------- -----------------
Partners' capital, end of period $ 21,875,129 $ 19,505,843 $ 21,875,129
================ ==================== =================
Net Asset Value per Unit
(19,556 and 20,100 Units outstanding at
September 30, 1997 and 1996, respectively) $ 1,118.59 $ 970.44 $ 1,118.59
================ ==================== =================
Net income per Unit of Limited Partnership
Interest and General Partnership Unit equivalent $ 8.61 $ 2.78 $ 11.25
================ ==================== =================
Redemption Net Asset Value per Unit $ 1,127.69 $ 1,001.03 $ 1,127.69
================ ==================== =================
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
NOTES TO STATEMENT OF FINANCIAL CONDITION
September 30, 1997
(UNAUDITED)
1. General
Smith Barney Principal Plus Futures Fund L.P. II (the "Partnership") was
formed under the laws of the State of New York on November 16, 1995. The
Partnership engages 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 maintains a portion of its
assets in interest payments stripped from U.S. Treasury Bonds under the
Treasury's STRIPS program which payments are due approximately seven years from
the date trading commenced ("Zero Coupons").
Between April 3, 1996 (commencement of offering period) and August 8,
1996, 19,897 Units of limited partnership interest were sold at $1,000 per unit.
The proceeds of the offering were held in an escrow account until August 9,
1996, at which time they were turned over to the Partnership for trading.
Smith Barney Futures Management Inc. acts as 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. All trading
decisions are currently being made for the Partnership by John W. Henry &
Company, Inc. and Willowbridge Associates Inc. (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 September 30, 1997 and the results of its operations for the three
and nine months ended September 30, 1997. These financial statements present the
results of interim periods and do not include all disclosures normally provided
in annual financial statements. It is suggested that these financial statements
be read in conjunction with the Partnership's annual report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
1996.
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.
5
<PAGE>
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three and nine months ended
September 30, 1997 and for the period from August 9, 1996 (commencement of
trading operations, to September 30, 1996 were as follows:
PERIOD FROM
AUGUST 9, 1996
(COMMENCEMENT
THREE-MONTHS OF TRADING NINE-MONTHS
ENDED OPERATIONS) TO ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997
Net realized and unrealized
gains (losses) $ (16.98) $ 9.65 $ (16.46)
Realized and unrealized
gains (losses) on Zero
Coupons 16.22 (9.98) 9.81
Interest income 15.20 7.60 45.00
Expenses (5.71) (4.49) (26.76)
Other (0.12) 0 (0.34)
--------- --------- ---------
Increase for period 8.61 2.78 11.25
Net Asset Value per Unit,
beginning of period 1,109.98 967.66 1,107.34
--------- --------- ---------
Net Asset Value per Unit,
end of period $1,118.59 $ 970.44 $1,118.59
========= ========= =========
Redemption Net Asset
Value per Unit* $1,127.69 $1,001.03 $1,127.69
========= ========= =========
* For the purpose of a redemption, any accrued liability for reimbursement of
offering and organization expenses will not reduce redemption net asset value
per unit.
3. Offering and Organization Costs:
Offering and organization expenses of $560,000 relating to the issuance
and marketing of Units offered were initially paid by SB. The accrued liability
for reimbursement of offering and organization expenses will not reduce Net
Asset Value per Unit for any purpose (other than financial reporting), including
calculation
6
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of advisory and brokerage fees and the redemption value of Units. Interest
earned by the Partnership will be used to reimburse SB for the offering and
organization expenses of the Partnership plus interest at the prime rate quoted
by the Chase Manhattan Bank until such time as such expenses are fully
reimbursed. As of September 30, 1997, the Partnership has reimbursed SB for
$382,037 of offering and organization expenses and $34,531 of interest.
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 instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
The Customer Agreement between the Partnership and SB gives the
Partnership the legal right to net unrealized gains and losses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The fair value of these commodity interests, including options
thereon, at September 30, 1997 was $606,024 and the average fair value during
the nine months ended September 30, 1997, based on monthly calculation, was
$718,759.
5. 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, 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.
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
7
<PAGE>
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.
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At September 30, 1997, the notional or
contractual amounts of the Partnership's commitment to purchase and sell these
instruments was $113,974,807 and $33,461,540, respectively, as detailed below.
All of these instruments mature within one year of September 30, 1997. However,
due to the nature of the Partnership's business, these instruments may not be
held to maturity. At September 30, 1997, the fair value of the Partnership's
derivatives, including options thereon, was $606,024, as detailed below.
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies
- OTC Contracts $ 11,519,030 $15,435,479 $(20,116)
Energy 4,439,487 0 70,073
Interest Rates U.S. 12,505,219 0 7,406
Interest Rates Non-U.S. 78,257,382 14,927,474 426,554
Grains 1,538,412 0 (33,720)
Livestock 571,830 0 (8,190)
Softs 1,260,248 835,215 (9,874)
Metals 3,883,199 200,571 105,383
Indices 0 2,062,801 68,508
------------ ------------ --------
Totals $113,974,807 $33,461,540 $606,024
============= ============ ========
8
<PAGE>
6. Pending Merger:
On September 24, 1997, Travelers Group Inc. ("Travelers") and Salomon
Inc ("Salomon") announced an agreement and plan of merger pursuant to which
Salomon will become a wholly owned subsidiary of Travelers and Smith Barney
Holdings Inc., the parent company of Smith Barney Inc. and Smith Barney Futures
Management Inc., will be merged into Salomon forming Salomon Smith Barney
Holdings Inc. The transaction is expected to be completed by year-end 1997.
9
<PAGE>
PART I
Item 2. Management's Discussion and Analysis of Financial
Condition.
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, Zero Coupons, net unrealized appreciation
(depreciation) on open futures and forward contracts, commodity options and
interest receivable. Because of the low margin deposit 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
substantial decrease in liquidity no such losses occurred during the third
quarter of 1997.
The Partnership's capital consists of capital contributions, as increased
or decreased by gains or losses on commodity futures trading and Zero Coupons,
expenses, interest income, redemptions of Units and distributions of profits, if
any.
For the nine months ended September 30, 1997, Partnership capital
decreased 1.7% from $22,257,561 to $21,875,129. This decrease was attributable
to the redemption of 544 Units resulting in an outflow of $616,911 which was
partially offset by net income from operations of $234,479 for the nine months
ended September 30, 1997.
Results of Operations
During the Partnership's third quarter of 1997, the net asset value per
Unit increased 0.8% from $1,109.98 to $1,118.59 as compared to the period ended
September 30, 1996 in which the net asset value per unit increased 0.3%. The
Partnership experienced a net trading loss before commissions and expenses in
the third quarter of 1997 of $94,234. Losses were recognized in the trading of
commodity futures in currencies, energy products, grains, U.S. interest rates,
softs and livestock and were partially offset by gains in metals, non-U.S.
interest rates and indices. The Partnership experienced a net trading gain
before commissions and expenses in the period ended September 30, 1996 of
$305,001. Gains were recognized in the trading of commodity futures in energy
products, interest rates, and metals and were partially offset by losses
recognized in agricultural products, currencies, and indices. The Partnership
commenced trading operations on August 9, 1996, and, as a result, comparative
information for the period ending September 30, 1996 is not reflective of a full
three months.
10
<PAGE>
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify correctly those price trends. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
Interest Income on 80% of the Partnership's daily equity maintained in
cash was earned at the 30-day 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. Interest income for the three months ended September 30, 1997 increased
by $148,394 as compared to the period ended September 30, 1996.
Brokerage commissions are calculated on the adjusted net asset value on
the last day of each month and are affected by trading performance and
redemptions. Commissions and clearing fees for the three months ended September
30, 1997 increased by $131,210 as compared to the period ended September 30,
1996.
Management fees are calculated as a percentage of the Partnership's net
asset value as of the end of each month and are affected by trading performance
and redemptions. Management fees for the three months ended September 30, 1997
increased by $52,945 as compared to the period ended September 30, 1996.
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. Incentive fees of $0 and $190,380 were earned
for the three and nine months ended September 30, 1997. Incentive fees of
$22,339 were earned in the period ended September 30, 1996.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - None
Item 6. (a) Exhibits - None
(b) Reports on Form 8-K - None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/12/97
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/12/97
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 11/12/97
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001005335
<NAME> Smith Barney Principal Plus Futures Fund L.P. II
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,146,882
<SECURITIES> 14,150,705
<RECEIVABLES> 177,257
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,474,844
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,474,844
<CURRENT-LIABILITIES> 599,715
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 21,875,129
<TOTAL-LIABILITY-AND-EQUITY> 22,474,844
<SALES> 0
<TOTAL-REVENUES> 770,040
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 535,561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 234,479
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234,479
<EPS-PRIMARY> 11.25
<EPS-DILUTED> 0
</TABLE>
