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, 1998
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
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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
March 31, 1998 and December 31, 1997. 3
Statement of Income and Expenses
and Partners' Capital for the three
months ended March 31, 1998 and 1997. 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 - 13
2
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PART I
Item 1. Financial Statements
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.II
STATEMENT OF FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
ASSETS:
(Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $ 8,070,628 $ 8,500,216
Net unrealized appreciation
on open futures contracts 566,020 720,274
Zero Coupons, $18,204,000 and $18,968,000
principal amount in 1998 and 1997, respectively,
due November 15, 2003 at market value
(amortized cost $12,755,134 and $13,081,092
in 1998 and 1997, respectively) 13,257,973 13,577,673
----------- -----------
21,894,621 22,798,163
Receivable from SB on sale of
Zero Coupons 555,206 419,702
Interest income 13,453 -
=========== ===========
$22,463,280 $23,217,865
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 71,358 $ 74,685
Management fees 32,174 34,365
Incentive fees - 1,244
Due to Smith Barney - 77,269
Other 38,006 30,223
Redemptions payable 899,083 693,875
----------- -----------
1,040,621 911,661
----------- -----------
Partners' Capital:
General Partner, 203 Unit
equivalents outstanding in 1998 and 1997 238,893 238,726
Limited Partners, 18,001 and 18,765
Units of Limited Partnership Interest
outstanding in 1998 and 1997, respectively 21,183,766 22,067,478
----------- -----------
21,422,659 22,306,204
----------- -----------
$22,463,280 $23,217,865
=========== ===========
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)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
------------ --------------
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains on closed positions $ 195,199 $ 1,040,385
Change in unrealized gains/losses on open
positions (154,254) 362,734
____________ ____________
40,945 1,403,119
Less, brokerage commissions and clearing fees
($4,951 and $3,508, respectively) (234,722) (242,260)
____________ ____________
Net realized and unrealized gains (losses) (193,777) 1,160,859
Gain (loss) on sale of Zero Coupons 19,889 (2,275)
Unrealized appreciation (depreciation)
on Zero Coupons 6,258 (435,703)
Interest income 300,083 297,608
____________ ____________
132,453 1,020,489
____________ ____________
Expenses:
Management fees 98,430 103,869
Incentive fees - 190,380
Other 18,485 13,759
------------ ------------
116,915 308,008
____________ ____________
Net income 15,538 712,481
Redemptions (899,083) (146,228)
____________ ____________
Net increase (decrease) in Partners' capital (883,545) 566,253
Partners' capital, beginning of period 22,306,204 22,257,561
____________ ____________
Partners' capital, end of period $ 21,422,659 $ 22,823,814
------------ ------------
Net asset value per Unit
(18,204 and 19,974 Units outstanding
at March 31, 1998 and 1997, respectively) $ 1,176.81 $ 1,142.68
------------ ------------
Net income per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 0.82 $ 35.34
------------ ------------
Redemption Net Asset Value Per Unit $ 1,176.81 $ 1,160.54
------------ ------------
See Notes To Financial Statements.
4
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SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
NOTES TO STATEMENT OF FINANCIAL CONDITION
March 31, 1998
(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, 19,896 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 March 31, 1998 and the results of its operations for the three
months ended March 31, 1998 and 1997. These financial statements present the
results of an interim period 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, 1997.
Due to the nature of commodity trading, the results of operations for the
interim period presented should not be considered indicative of the results that
may be expected for the entire year.
5
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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 months ended March 31,
1998 and 1997 were as follows:
THREE-MONTHS ENDED
MARCH 31,
1998 1997
Net realized and unrealized gains
(losses) $ (10.22) $ 57.75
Realized and unrealized gains
(losses) on Zero Coupons 1.38 (21.79)
Interest income 15.82 14.81
Expenses (6.16) (15.32)
Other - (0.11)
--------- ---------
Increase for period 0.82 35.34
Net Asset Value per Unit,
beginning of period 1,175.99 1,107.34
--------- ---------
Net Asset Value per Unit,
end of period $1,176.81 $1,142.68
========= =========
Redemption Net Asset
Value per Unit* $1,176.81 $1,160.54
========= =========
* 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 $541,205 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 of advisory and brokerage fees and the redemption value of Units. As
of March 31, 1998, the Partnership has reimbursed SB for all such expenses
incurred during the initial offering (in addition to interest at the prime rate
quoted by the Chase Manhattan Bank totaling $38,261) from interest earned on
funds held in its account.
6
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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 March 31, 1998 and 1997 was $566,020 and $604,190, respectively, and
the average fair value during the three months then ended based on monthly
calculation, was $669,500 and $906,844 respectively.
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 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
7
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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 March 31, 1998, the notional or contractual
amounts of the Partnership's commitment to purchase and sell these instruments
was $95,270,895 and $69,897,068, respectively, as detailed below. All of these
instruments mature within one year of March 31, 1998. However, due to the nature
of the Partnership's business, these instruments may not be held to maturity. At
March 31, 1998, the fair value of the Partnership's derivatives, including
options thereon, was $566,020, as detailed below.
MARCH 31, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies
- - Exchange Traded Contracts $ 3,949,150 $ 5,848,663 $151,150
- - OTC Contracts 4,457,492 8,706,333 104,573
Energy 927,200 1,594,080 64,760
Interest Rates U.S. 4,308,844 19,574,481 (85,713)
Interest Rates Non-U.S. 79,371,755 31,189,292 90,886
Grains 997,854 911,200 57,950
Softs 205,430 764,707 34,216
Metals 1,053,170 1,308,312 148,198
------------ ------------ --------
Total $95,270,895 $69,897,068 $566,020
============ ============ ========
8
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At March 31, 1997, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $14,910,976
and $60,524,581, respectively, and, the fair value of the Partnership's
derivatives, including options thereon, was $604,190, as detailed below.
MARCH 31, 1997
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies
- - Exchange Traded Contracts $ 1,471,000 $ 3,470,375 $ (59,950)
- - OTC Contracts 2,545,125 7,020,107 (41,842)
Energy - 373,900 6,420
Interest Rates U.S. - 17,886,675 174,150
Interest Rates Non-U.S. 4,051,776 29,797,072 81,382
Grains 3,087,894 - 364,080
Livestock 512,400 - 8,200
Softs 1,719,131 947,089 73,657
Metals 1,375,000 842,440 5,008
Indices 148,650 186,923 (6,915)
------------ ------------ ----------
Total $14,910,976 $60,524,581 $ 604,190
============ ============ =========
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 first
quarter of 1998.
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 three months ended March 31, 1998, Partnership capital decreased
4.0% from $22,306,204 to $21,422,659. This decrease was attributable to the
redemption of 764 Units totaling $899,803 which was partially offset by net
income from operations of $15,538 for the three months ended March 31, 1998.
Future redemptions can impact the amount of funds available for investments in
commodity contract positions in subsequent periods.
Results of Operations
During the three months ended March 31, 1998, the Partnership's net asset
value per Unit increased 0.1% from $1,175.99 to $1,176.81. The Partnership
experienced a net trading gain before commissions and expenses in the first
quarter of 1998 of $40,945. Gains were recognized in the trading of energy
products and non U.S. interest rates and were partially offset by losses in
currencies, U.S. interest rates, grains, metals, indices and softs. The
Partnership experienced a net trading gain before commissions and expenses in
the first quarter of 1997 of $1,403,119. Gains were recognized in the trading of
commodity futures in currencies, softs, grains, interest rates, indices and
metals and were partially offset by losses recognized in energy products and
livestock.
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
10
<PAGE>
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 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. Interest income increased by $2,475 for the three months
ended March 31, 1998 as compared to the corresponding period in 1997. The
increase in interest income is primarily due to an increase in interest rates
during the three months ended March 31, 1998 as compared to 1997.
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. Brokerage commissions and clearing fees for the three months ended
March 31, 1998 decreased by $7,538, as compared to the corresponding period in
1997.
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 decreased by $5,439 as compared to the
corresponding period in 1997.
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, 1998 and 1997 resulted in incentive fees of $0 and $190,380,
respectively.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Between May 1994 and the present, Salomon Brothers Inc. ("SBI"), SB and
The Robinson Humphrey Company, Inc. ("R- H"), all currently subsidiaries
of Salomon Smith Barney Holdings Inc. ("SSBHI"), along with a number of
other broker-dealers, were named as defendants in approximately 25
federal court lawsuits and two state court lawsuits, principally
alleging that companies that make markets in securities traded on NASDAQ
violated the federal antitrust laws by conspiring to maintain a minimum
spread of $.25 between the bid and asked price for certain securities.
The federal lawsuits and one state court case were consolidated for
pre-trial purposes in the Southern District of New York in the fall of
1994 under the caption In re NASDAQ Market-Makers Antitrust Litigation,
United States District Court, Southern District of New York No.
94-CIV-3996 (RWS); M.D.L. No. 1023. The other state court suit, Lawrence
A. Abel v. Merrill Lynch & Co., Inc. et al.; Superior Court of San
Diego, Case No. 677313, has been dismissed without prejudice in
conjunction with a tolling agreement.
In consolidated action, the plaintiffs purport to represent a class of
persons who bought one or more of what they currently estimate to be
approximately 1,650 securities on NASDAQ between May 1, 1989 and May 27,
1994. They seek unspecified monetary damages, which would be trebled
under the antitrust laws. The plaintiffs also seek injunctive relief, as
well as attorney's fees and the costs of the action. (The state cases
seek similar relief.) Plaintiffs in the consolidated action filed an
amended consolidated complaint that defendants answered in December
1995. On November 26, 1996, the Court certified a class composed of
retail purchasers. A motion to include institutional investors in the
class and to add class representatives was granted. In December 1997,
SBI, SB and R-H, along with several other broker-dealer defendants,
executed a settlement agreement with the plaintiffs. This agreement has
been preliminarily approved by the U.S. District Court for the Southern
District of New York but is subject to final approval.
On July 17, 1996, the Antitrust Division of the Department of Justice
filed a complaint against a number of firms that act as market makers in
NASDAQ stocks. The complaint basically alleged that a common
understanding arose among NASDAQ market makers which worked to keep
quote spreads in NASDAQ stocks artificially wide. Contemporaneous with
the
12
<PAGE>
filing of the complaint, SBI, SB and other defendants entered into a
stipulated settlement agreement, pursuant to which the defendants would
agree not to engage in certain practices relating to the quoting of
NASDAQ securities and would further agree to implement a program to
ensure compliance with federal antitrust laws and with the terms of the
settlement. In entering into the stipulated settlement, SBI and SB did
not admit any liability. There are no fines, penalties, or other
payments of monies in connection with the settlement. In April 1997, the
U.S. District Court for the Southern District of New York approved the
settlement. In May 1997, plaintiffs in the related civil action (who
were permitted to intervene for limited purposes) appealed the district
court's approval of the settlement. The appeal is pending.
The Securities and Exchange Commission ("SEC") is also conducting a
review of the NASDAQ marketplace, during which it has subpoenaed
documents and taken the testimony of various individuals including SBI
and SB personnel. In July 1996, the SEC reached a settlement with the
National Association of Securities Dealers and issued a report detailing
certain conclusions with respect to the NASD and the NASDAQ market.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms,
including SB, in the U.S. Bankruptcy Court for the Central District of
California. Plaintiff alleged, among other things, that the defendants
recommended and sold to plaintiff unsuitable securities. The case
(County of Orange et al. v. Bear Sterns & Co. Inc. et al.) Has been
stayed by agreement of the parties.
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
13
<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: 5/15/98
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: 5/15/98
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 5/15/98
14
<PAGE>
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