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, 2005
Commission File Number 000-51282
CITIGROUP FAIRFIELD FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York | 56-2421596 | |||||
(State or other jurisdiction of | (I.R.S. Employer | |||||
incorporation or organization) | Identification No.) | |||||
c/o Citigroup Managed Futures LLC
731 Lexington Ave. — 25th Floor
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
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes No X
CITIGROUP FAIRFIELD FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page Number | ||||||||||
PART I - Financial Information: | ||||||||||
Item 1. | Financial Statements: | |||||||||
Statements of Financial Condition at September 30, 2005 and December 31, 2004 (unaudited). | 3 | |||||||||
Condensed Schedules of Investments at September 30, 2005 and December 31, 2004 (unaudited). | 4 – 5 | |||||||||
Statements of Income and Expenses and Partners' Capital for the three and nine months ended September 30, 2005, the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004 (unaudited). | 6 | |||||||||
Statements of Cash Flows for the three and nine months ended September 30, 2005, the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004 (unaudited). | 7 | |||||||||
Notes to Financial Statements (unaudited). | 8 – 12 | |||||||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 13 – 15 | ||||||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 16 | ||||||||
Item 4. | Controls and Procedures. | 17 | ||||||||
PART II - Other Information | 18 | |||||||||
2
PART I
Item 1. Financial Statements
Citigroup Fairfield Futures Fund L.P. II
Statements of Financial Condition
(Unaudited)
September 30, 2005 | December 31, 2004 | |||||||||
Assets: | ||||||||||
Equity in commodity futures trading account: | ||||||||||
Cash (restricted $3,934,672 and $10,590,831 in 2005 and 2004, respectively) | $ | 81,873,837 | $ | 81,389,833 | ||||||
Net unrealized appreciation on open futures positions | 596,207 | 1,408,251 | ||||||||
Unrealized appreciation on open forward contracts | 1,788,578 | 3,660,825 | ||||||||
84,258,622 | 86,458,909 | |||||||||
Interest receivable | 57,972 | 13,979 | ||||||||
$ | 84,316,594 | $ | 86,472,888 | |||||||
Liabilities and Partners' Capital: | ||||||||||
Liabilities: | ||||||||||
Unrealized depreciation on open forward contracts | $ | 1,136,377 | $ | 2,493,982 | ||||||
Accrued expenses: | ||||||||||
Commissions | 307,640 | 320,073 | ||||||||
Management fees | 136,165 | 141,481 | ||||||||
Administrative fees | 34,041 | 35,370 | ||||||||
Due to CGM for offering costs | 20,551 | 48,573 | ||||||||
Other | 35,577 | 136,545 | ||||||||
Redemptions payable | 3,955,589 | 1,587,812 | ||||||||
5,625,940 | 4,763,836 | |||||||||
Partners' Capital: | ||||||||||
General Partner, 724.0407 Unit equivalents outstanding in 2005 and 2004 | 582,918 | 657,168 | ||||||||
Special Limited Partner, 100.0000 Redeemable Units of Limited Partnership Interest Outstanding in 2005 and 2004 | 80,509 | 90,764 | ||||||||
Limited Partners, 96,917.6511 and 89,198.8286 Redeemable Units of Limited Partnership Interest outstanding in 2005 and 2004, respectively | 78,027,227 | 80,961,120 | ||||||||
78,690,654 | 81,709,052 | |||||||||
$ | 84,316,594 | $ | 86,472,888 | |||||||
See Accompanying Notes to Financial Statements.
3
Citigroup Fairfield Futures Fund L.P. II
Condensed Schedule of Investments
September 30, 2005
(Unaudited)
Sector | Contract | Fair Value | ||||||||
Currencies | ||||||||||
Futures contracts purchased (0.00)%* | $ | (875 | ) | |||||||
Unrealized depreciation on forward contracts (0.51)% | (398,693 | ) | ||||||||
Unrealized appreciation on forward contracts 1.00% | 786,330 | |||||||||
Total forward contracts 0.49% | 387,637 | |||||||||
Total Currencies 0.49% | 386,762 | |||||||||
Energy 0.09% | Futures contracts purchased 0.09% | 73,851 | ||||||||
Grains | ||||||||||
Futures contracts sold 0.04% | 30,454 | |||||||||
Futures contracts purchased 0.02% | 13,550 | |||||||||
Total Grains 0.06% | 44,004 | |||||||||
Interest Rates Non-U.S. | ||||||||||
Futures contracts sold 0.01% | 8,057 | |||||||||
Futures contracts purchased (0.10)% | (80,547 | ) | ||||||||
Total Interest Rates Non-U.S. (0.09)% | (72,490 | ) | ||||||||
Interest Rates | ||||||||||
Futures contracts sold 0.02% | 18,094 | |||||||||
Futures contracts purchased (0.01)% | (7,617 | ) | ||||||||
Total Interest Rates 0.01% | 10,477 | |||||||||
Metals | ||||||||||
Unrealized depreciation on forward contracts (0.93)% | (737,684 | ) | ||||||||
Unrealized appreciation on forward contracts 1.27% | 1,002,248 | |||||||||
Total Metals 0.34% | 264,564 | |||||||||
Softs | ||||||||||
Futures contracts sold 0.01% | 8,097 | |||||||||
Futures contracts purchased 0.13% | 101,864 | |||||||||
Total Softs 0.14% | 109,961 | |||||||||
Indices | ||||||||||
Futures contracts sold (0.00)%* | (4,087 | ) | ||||||||
Futures contracts purchased 0.55% | 435,366 | |||||||||
Total Indices 0.55% | 431,279 | |||||||||
Total Fair Value 1.59% | $ | 1,248,408 | ||||||||
Country Composition | Investments at Fair Value | % of Investments at Fair Value | ||||||||
France | $ | 73,288 | 5.87 | % | ||||||
Germany | (41,895 | ) | (3.35 | ) | ||||||
Hong Kong | 20,328 | 1.63 | ||||||||
Japan | 182,169 | 14.59 | ||||||||
Spain | 91,439 | 7.32 | ||||||||
United Kingdom | 215,950 | 17.30 | ||||||||
United States | 707,129 | 56.64 | % | |||||||
$ | 1,248,408 | 100.00 | % | |||||||
Percentages are based on Partners' capital unless otherwise indicated.
* Due to rounding
See Accompanying Notes to Financial Statements.
4
Citigroup Fairfield Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2004
(Unaudited)
Sector | Contract | Fair Value | ||||||||
Currencies | ||||||||||
Unrealized depreciation on forward contracts (1.50)% | $ | (1,228,227 | ) | |||||||
Unrealized appreciation on forward contracts 3.39% | 2,770,355 | |||||||||
Total Currencies 1.89% | 1,542,128 | |||||||||
Energy 0.22% | Futures contracts sold 0.22% | 177,928 | ||||||||
Grains (0.03)% | Futures contracts sold (0.03)% | (23,961 | ) | |||||||
Interest Rates Non-U.S. 0.18% | Futures contracts purchased 0.18% | 146,737 | ||||||||
Interest Rates U.S. | ||||||||||
Futures contracts sold 0.03% | 23,093 | |||||||||
Futures contracts purchased 0.31% | 251,442 | |||||||||
Total Interest Rates U.S. 0.34% | 274,535 | |||||||||
Livestock (0.01)% | Futures contracts purchased (0.01)% | (5,160 | ) | |||||||
Metals | ||||||||||
Futures contracts purchased (0.11)% | (87,350 | ) | ||||||||
Unrealized depreciation on forward contracts (1.55)% | (1,265,755 | ) | ||||||||
Unrealized appreciation on forward contracts 1.09% | 890,470 | |||||||||
Total forward contracts (0.46)% | (375,285 | ) | ||||||||
Total Metals (0.57)% | (462,635 | ) | ||||||||
Softs (0.03)% | Futures contracts purchased (0.03)% | (20,422 | ) | |||||||
Indices | ||||||||||
Futures contracts sold 0.01% | 5,880 | |||||||||
Futures contracts purchased 1.15% | 940,064 | |||||||||
Total Indices 1.16% | 945,944 | |||||||||
Total Fair Value 3.15% | $ | 2,575,094 | ||||||||
Country Composition | Investments at Fair Value | % of Investments at Fair Value | ||||||||
Australia | $ | (3,365 | ) | (0.13 | )% | |||||
France | (2,885 | ) | (0.11 | ) | ||||||
Germany | 126,129 | 4.90 | ||||||||
Hong Kong | (515 | ) | (0.02 | ) | ||||||
Japan | 130,426 | 5.06 | ||||||||
Spain | 139,237 | 5.41 | ||||||||
United Kingdom | (140,006 | ) | (5.44 | ) | ||||||
United States | 2,326,073 | 90.33 | ||||||||
$ | 2,575,094 | 100.00 | % | |||||||
Percentages are based on Partners' capital unless otherwise indicated.
See Accompanying Notes to Financial Statements.
5
Citigroup Fairfield Futures Fund L.P. II
Statements of Income and Expenses and Partners' Capital
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Period From March 15, 2004 (Commencement of Trading Operations) To September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Income: | ||||||||||||||||||
Net gains (losses) on trading of commodity interests: | ||||||||||||||||||
Realized gains (losses) on closed positions | $ | 2,930,058 | $ | (5,267,414 | ) | $ | (5,405,049 | ) | $ | (10,137,774 | ) | |||||||
Change in unrealized gains (losses) on open positions | 39,084 | 4,001,522 | (1,326,686 | ) | 2,745,122 | |||||||||||||
2,969,142 | (1,265,892 | ) | (6,731,735 | ) | (7,392,652 | ) | ||||||||||||
Interest income | 573,336 | 144,974 | 1,405,442 | 227,213 | ||||||||||||||
3,542,478 | (1,120,918 | ) | (5,326,293 | ) | (7,165,439 | ) | ||||||||||||
Expenses: | ||||||||||||||||||
Brokerage commissions including clearing fees of $18,592, $13,777, $43,136 and $23,078, respectively | 982,651 | 701,297 | 2,936,298 | 1,282,189 | ||||||||||||||
Management fees | 412,381 | 293,245 | 1,205,903 | 538,855 | ||||||||||||||
Administrative fees | 103,094 | 73,312 | 301,474 | 134,712 | ||||||||||||||
Other | 25,833 | 54,407 | 95,690 | 83,399 | ||||||||||||||
1,523,959 | 1,122,261 | 4,539,365 | 2,039,155 | |||||||||||||||
Net income (loss) | 2,018,519 | (2,243,179 | ) | (9,865,658 | ) | (9,204,594 | ) | |||||||||||
Additions – Limited Partners | 5,440,000 | 16,500,000 | 20,461,000 | 45,808,000 | ||||||||||||||
– General Partner | — | 100,000 | — | 395,000 | ||||||||||||||
Redemptions | (8,017,264 | ) | (4,894,671 | ) | (13,613,740 | ) | (5,076,999 | ) | ||||||||||
Net increase (decrease) in Partners' capital | (558,745 | ) | 9,462,150 | (3,018,398 | ) | 31,921,407 | ||||||||||||
Proceeds from Offering – Limited Partners | — | — | — | 28,502,000 | ||||||||||||||
– Special Limited | ||||||||||||||||||
Partner | — | — | — | 100,000 | ||||||||||||||
– General Partner | — | — | — | 286,000 | ||||||||||||||
Offering costs | — | — | — | (75,000 | ) | |||||||||||||
Partners' capital, beginning of period | 79,249,399 | 51,272,257 | 81,709,052 | — | ||||||||||||||
Partners' capital, end of period | $ | 78,690,654 | $ | 60,734,407 | $ | 78,690,654 | $ | 60,734,407 | ||||||||||
Net asset value per Redeemable Unit (97,741.6918 and 74,635.6143 Redeemable Units outstanding at September 30, 2005 and 2004, respectively) | $ | 805.09 | $ | 813.75 | $ | 805.09 | $ | 813.75 | ||||||||||
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent | $ | 19.64 | $ | (33.11 | ) | $ | (102.55 | ) | $ | (186.25 | ) | |||||||
Redemption Net asset value per Unit | $ | 805.26 | $ | 814.48 | $ | 805.26 | $ | 814.48 | ||||||||||
See Accompanying Notes to Financial Statements.
6
Citigroup Fairfield Futures Fund L.P. II
Statements of Cash Flows
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Period from March 15, 2004 (Commencement of Trading Operations) to September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||
Net income (loss) | $ | 2,018,519 | $ | (2,243,179 | ) | $ | (9,865,658 | ) | $ | (9,204,594 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||
(Increase) decrease in restricted cash | 5,748,654 | (5,210,265 | ) | 6,656,159 | (9,335,080 | ) | ||||||||||||
(Increase) decrease in net unrealized appreciation on open futures positions | 500,557 | (2,790,820 | ) | 812,044 | (2,790,820 | ) | ||||||||||||
(Increase) decrease in unrealized appreciation on open forward contracts | 444,960 | (194,863 | ) | 1,872,247 | (447,098 | ) | ||||||||||||
(Increase) decrease in interest receivable | (9,216 | ) | (8,715 | ) | (43,993 | ) | (20,408 | ) | ||||||||||
Increase (decrease) in unrealized depreciation on open futures contracts | — | (888,949 | ) | — | — | |||||||||||||
Increase (decrease) in unrealized depreciation on open forward contracts | (984,601 | ) | (126,890 | ) | (1,357,605 | ) | 492,797 | |||||||||||
Accrued expenses: | ||||||||||||||||||
Increase (decrease) in commissions | 8,813 | 38,691 | (12,433 | ) | 229,450 | |||||||||||||
Increase (decrease) in management fees | 4,093 | 17,044 | (5,316 | ) | 101,467 | |||||||||||||
Increase (decrease) in administrative fees | 1,023 | 4,262 | (1,329 | ) | 25,367 | |||||||||||||
Increase (decrease) in due to CGM for offering costs | (9,891 | ) | (8,791 | ) | (28,022 | ) | 57,405 | |||||||||||
Increase (decrease) in other | (116,159 | ) | 53,777 | (100,968 | ) | 82,160 | ||||||||||||
Net cash provided by (used in) operating activities | 7,606,752 | (11,358,698 | ) | (2,074,874 | ) | (20,809,354 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||
Proceeds from additions – Limited Partners | 5,440,000 | 16,500,000 | 20,461,000 | 45,808,000 | ||||||||||||||
Proceeds from additions – General Partner | — | 100,000 | — | 395,000 | ||||||||||||||
Payments for redemptions – Limited Partners | (4,963,545 | ) | (3,972,026 | ) | (11,245,963 | ) | (4,097,544 | ) | ||||||||||
Net cash provided by (used in) Financing activities | 476,455 | 12,627,974 | 9,215,037 | 42,105,456 | ||||||||||||||
Net change in Cash | 8,083,207 | 1,269,276 | 7,140,163 | 21,296,102 | ||||||||||||||
Unrestricted cash, at beginning of period | 69,855,958 | 48,839,826 | 70,799,002 | 28,813,000 | ||||||||||||||
Unrestricted cash, at end of period | $ | 77,939,165 | $ | 50,109,102 | $ | 77,939,165 | $ | 50,109,102 | ||||||||||
See Accompanying Notes to Financial Statements.
7
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
September 30, 2005
(Unaudited)
1. General:
Citigroup Fairfield Futures Fund L.P. II (the "Partnership") is a limited partnership which was organized on December 18, 2003 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.
During the initial offering period (January 12, 2004 through March 12, 2004), the Partnership sold 28,601 redeemable units of Limited Partnership Interest ("Redeemable Units") and 285 Units of General Partnership Interest. The Partnership commenced trading on March 15, 2004.
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"), CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. ("CGMHI"), which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. As of September 30, 2005, all trading decisions for the Partnership are made by Graham Capital Management, L.P. (the "Advisor").
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, 2005 and December 31, 2004 and the results of its operations and cash flows for the three and nine months ended September 30, 2005, the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004. 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 for the year ended December 31, 2004.
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
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
September 30, 2005
(Unaudited)
2. Financial Highlights:
Changes in Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and nine months ended September 30, 2005, the three months ended September 30, 2004 and the period from March 15, 2004 (commencement of trading operations) to September 30, 2004 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | For the Period March 15, 2004 (commencement of trading operations) to September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Net realized and unrealized gains (losses)* | $ | 19.34 | $ | (29.12 | ) | $ | (100.50 | ) | $ | (176.75 | ) | |||||||
Interest income | 5.58 | 2.07 | 13.99 | 3.83 | ||||||||||||||
Expenses ** | (5.28 | ) | (6.06 | ) | (16.04 | ) | (13.33 | ) | ||||||||||
Increase (decrease) for the period | 19.64 | (33.11 | ) | (102.55 | ) | (186.25 | ) | |||||||||||
Net Asset Value per Redeemable Unit, beginning of period | 785.45 | 846.86 | 907.64 | 1,000.00 | ||||||||||||||
Net Asset Value per Redeemable Unit, end of period | $ | 805.09 | $ | 813.75 | $ | 805.09 | $ | 813.75 | ||||||||||
Redemption/subscription value per Redeemable Unit versus Net Asset value per Redeemable Unit | 0.17 | 0.73 | 0.17 | 0.73 | ||||||||||||||
Redemption/subscription value per Redeemable Unit, end of period*** | $ | 805.26 | $ | 814.48 | $ | 805.26 | $ | 814.48 | ||||||||||
* | Includes brokerage commissions. |
** | Excludes brokerage commissions. |
*** | For the purpose of a redemption/subscription, any remaining accrued liability for reimbursement of offering costs will not reduce redemption/subscription net asset value. |
9
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
September 30, 2005
(Unaudited)
2. Financial Highlights (continued):
Three Months Ended September 30, | Nine Months Ended September 30, | For the Period March 15, 2004 (commencement of trading operations) to September 30, | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Ratio to average net assets: **** | ||||||||||||||||||
Net investment loss before incentive fees ***** | (4.8 | )% | (7.1 | )% | (5.3 | )% | (8.4 | )% | ||||||||||
Operating expenses | 7.6 | % | 8.2 | % | 7.7 | % | 8.0 | % | ||||||||||
Incentive fees | — | % | — | % | — | % | — | % | ||||||||||
Total expenses | 7.6 | % | 8.2 | % | 7.7 | % | 8.0 | % | ||||||||||
Total return: | ||||||||||||||||||
Total return before incentive fees | 2.5 | % | (3.9 | )% | (11.3 | )% | (18.6 | )% | ||||||||||
Incentive fees | — | % | — | % | — | % | — | % | ||||||||||
Total return after incentive fees | 2.5 | % | (3.9) | % | (11.3 | )% | (18.6 | )% | ||||||||||
**** | 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.
10
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
September 30, 2005
(Unaudited)
3. Offering Costs:
Offering and organization costs of $75,000 relating to the issuance and marketing of the partnership's Redeemable Units offered were initially paid by CGM. These costs have been recorded as due to CGM in the statement of financial condition. These costs are being reimbursed to CGM by the Partnership in 24 equal monthly installments (together with interest at the prime rate quoted by the JP Morgan Chase & Co.).
As of September 30, 2005, $54,449 of these costs have been reimbursed to CGM by the Partnership.
In addition, the Partnership has recorded interest expense of $2,947 through September 30, 2005, which is included in other expenses.
The remaining deferred liability for these costs due to CGM of $20,551 (exclusive of interest charges) will not reduce Net Asset Value per Redeemable Unit for any purpose (other than financial reporting), including calculation of advisory and brokerage fees and the redemption/subscription value of Redeemable Units.
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 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 of these interests during the nine months ended September 30, 2005 and the period from March 15, 2004 (commencement of trading operations) to December 31, 2004, based on a monthly calculation, were $(79,982) and $972,065, respectively. The fair values of these commodity interests, including options thereon, if applicable, at September 30, 2005 and December 31, 2004, were $1,248,408 and $2,575,094, 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.
5. Financial Instrument Risks:
In the normal course of its business, the Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures and options, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, 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.
11
Citigroup Fairfield Futures Fund L.P. II
Notes to Financial Statements
September 30, 2005
(Unaudited)
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, forward and option positions by sector, margin requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of September 30, 2005. However, due to the nature of the Partnership's business, these instruments may not be held to maturity.
12
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, net unrealized appreciation (depreciation) on open futures and forward contracts and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a substantial decrease in liquidity, no such losses occurred in the third quarter of 2005.
The Partnership's capital consists of capital contributions, as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading and expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.
For the nine months ended September 30, 2005, Partnership capital decreased 3.7% from $81,709,052 to $78,690,654. This decrease was attributable to a net loss from operations of $9,865,658, coupled with the redemption of 17,005.2003 Redeemable Units of Limited Partnership Interest totaling $13,613,740, which was partially offset by the addition of 24,724.0228 Redeemable Units totalling $20,461,000, 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 dates of entry into the contracts and the forward rates at the reporting date, is included in the statements of financial condition. Realized gains (losses) and changes in unrealized values on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the statements of income and expenses and partners' capital.
Results of Operations
During the Partnership's third quarter of 2005, the net asset value per Redeemable Unit increased 2.5% from $785.45 to $805.09 as compared to a decrease of 3.9% in the third quarter of 2004. The Partnership experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2005 of $2,969,142. Gains were primarily attributable to the trading of commodity futures in energy, metals, softs and indices and were partially offset by losses in currencies, grains, U.S. interest rates, non-U.S. interest rates and livestock. The Partnership experienced a net trading loss before brokerage commissions and related fees in the third quarter of 2004 of $1,265,892. Losses were primarily attributable to the trading of commodity futures in currencies, U.S. interest rates, livestock, metals and indices and were partially offset by gains in energy, grains and non-U.S. interest rates.
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Third Quarter results reflect strong trends and profitable trading in the energy and stock index markets with directionless and volatile prices in interest rates and currencies producing losses. Periodic trading opportunities in metals and softs generated small gains. The overall net result was positive for the quarter.
The quarter started with a reversing trend in U.S. and European fixed income instruments as yields began to rise prompted by U.S. central bank rate increases. This volatility continued through the remainder of the quarter and led to the greatest sector loss for the Partnership. The most profitable trends for the quarter, however, were in the energy markets as crude oil and natural gas prices rose to historic levels. Substantial profits were made in trading these markets which saw recent trends exacerbated by the impact of the two Gulf Coast hurricanes.
Prospects of improving economic conditions in Japan led to strong profits in Nikkei stock index trading and combined with solid second quarter corporate profits led to profits in U.S. stock index trading as well. Offsetting profitable stock index trading were losses in foreign currency trading. The most notable event in this markets was the Chinese government decision to unpeg the yuan from the U.S. dollar and the yuan's subsequent upward revaluation. This led to near continuous adjustments in the relation of the major currencies throughout the quarter and range-bound trading in the U.S. dollar. While other commodity markets produced lackluster price trends, precious metals, particularly gold rose to over $400 an ounce, its highest level in 15 years and produced additional profits for the Partnership's Advisor.
During the Partnership's nine months ended September 30, 2005, the net asset value per Redeemable Unit decreased 11.3% from $907.64 to $805.09 as compared to a decrease of 18.6% for the period from March 15, 2004 to September 30, 2004. The Partnership experienced a net trading loss before brokerage commissions and related fees during the nine months ended September 30, 2005 of $6,371,735. Losses were primarily attributable to the trading of commodity futures in currencies, grains, U.S. interest rates and non-U.S. interest rates, livestock, metals and softs and were partially offset by gains in energy and indices. The Partnership experienced a net trading loss before brokerage commissions and related fees during the period from March 15, 2004 to September 30, 2004 of $7,392,652. Losses were primarily attributable to the trading of commodity futures in currencies, U.S. interest rates and non-U.S. interest rates, livestock, metals, softs and indices and were partially offset by gains in energy and grains.
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 Advisor 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 Advisor is able to identify them, the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership's daily average equity maintained in cash was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. 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 and nine months ended September 30, 2005 increased by $428,362 and $1,178,229, respectively, as compared to the corresponding periods in 2004. The increase in interest income is primarily due to higher interest rates during the three and nine months ended September 30, 2005 as compared to the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004.
Brokerage commissions are calculated as a percentage of the Partnership's adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Commissions and fees for the three and nine months ended September 30, 2005 increased by $281,354 and $1,654,109, respectively, as compared to the corresponding periods in 2004. The increase in brokerage
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commissions is due to higher month-end net assets during the three and nine months ended September 30, 2005 as compared to the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004.
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, additions and redemptions. Management fees for the three and nine months ended September 30, 2005 increased by $119,136 and $667,048, respectively, as compared to the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004. The increase in management fees is due to higher month-end net assets during the three and nine months ended September 30, 2005 as compared to the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004.
Administrative fees are paid to the General Partner for administering the business and affairs of the Partnership. These 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. Administrative fees for the three and nine months ended September 30, 2005 increased by $29,782 and $166,762, respectively, as compared to the corresponding periods in 2004. The increase in administrative fees is due to higher month-end net assets during the three and nine months ended September 30, 2005 as compared to the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004.
Special Limited Partner profit share allocations (incentive fees) are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. There were no profit share allocations earned for the three or nine months ended September 30, 2005 or the three months ended September 30, 2004 and the period from March 15, 2004 to September 30, 2004.
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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.
Market movements result in frequent changes in the fair market value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership's open positions and the liquidity of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk.
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.
The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of September 30, 2005 and the highest, lowest and average values during the three months ended September 30, 2005. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of September 30, 2005, the Partnership's total capitalization was $78,690,654. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership's Registration Statement on Form 10 filed on July 12, 2005.
September 30, 2005
(Unaudited)
Three months ended September 30, 2005 | ||||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk* | |||||||||||||||||
Currencies | ||||||||||||||||||||||
– Exchange Traded Contracts | $ | 2,800 | 0.00 | %** | $ | 2,800 | $ | — | $ | 933 | ||||||||||||
– OTC | 994,681 | 1.27 | % | 3,122,188 | 252,696 | 1,366,243 | ||||||||||||||||
Energy | 270,500 | 0.34 | % | 1,265,000 | 139,000 | 486,583 | ||||||||||||||||
Grains | 36,262 | 0.05 | % | 134,300 | 13,800 | 47,271 | ||||||||||||||||
Interest Rates U.S. | 57,250 | 0.07 | % | 681,350 | 15,654 | 70,224 | ||||||||||||||||
Interest Rates Non-U.S. | 154,811 | 0.20 | % | 750,461 | 75,501 | 175,744 | ||||||||||||||||
Metals | ||||||||||||||||||||||
– Exchange Traded Contracts | 81,000 | 0.10 | % | 81,000 | 14,000 | 27,000 | ||||||||||||||||
– OTC | 201,180 | 0.26 | % | 396,780 | 59,200 | 290,660 | ||||||||||||||||
Softs | 123,212 | 0.16 | % | 200,241 | 31,350 | 127,614 | ||||||||||||||||
Indices | 1,670,965 | 2.12 | % | 4,314,703 | 1,199,797 | 2,503,329 | ||||||||||||||||
Total | $ | 3,592,661 | 4.57 | % | ||||||||||||||||||
* | Average of month-end Values at Risk |
** | Due to rounding |
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Item 4. Controls and Procedures
The General Partner of the Partnership, with the participation of the General Partner's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) with respect to the Partnership as of the end of the period considered by the report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls during the registrant's last fiscal quarter, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information supplements and amends our discussion set forth under Part II, Item 1, "Legal Proceedings" in the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, and under Item 3 "Legal Proceedings" in the Partnership's Registration Statement on Form 10 filed on July 12, 2005.
Enron Corp.
On August 4, 2005, a breach of contract action was filed in the United States District Court for the Southern District of New York, WESTPAC BANKING CORPORATION v. CITIBANK, N.A. The complaint alleges that Citibank breached a representation and warranty in a Credit Default Swap agreement entered into in December 2000 concerning Enron.
On August 26, 2005, a group of 15 plaintiffs filed an action in the United States District Court for the Southern District of Texas, AVENUE CAPITAL MANAGEMENT II, L.P., ET AL. v. J.P. MORGAN-CHASE & CO., ET AL. The complaint names as defendants Citigroup Inc., Citibank, N.A., Citigroup Global Markets Inc., and several J.P. Morgan entities and alleges fraud, breach of fiduciary duty and breach of contract arising out of Enron bank debt incurred under two syndicated revolving credit facilities and a syndicated letter of credit facility.
WorldCom, Inc.
In STURM, ET AL. v. CITIGROUP, ET AL., an NASD arbitration seeking very significant compensatory and punitive damages, Claimants' common law claims, including fraud, arising out of alleged research analyst conflicts of interest related to SSB research coverage of WorldCom, were heard this quarter.
Citigroup, along with other financial institution defendants, entered into a settlement in NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM v. EBBERS, ET AL., resolving all claims against the Citigroup-related defendants in this WorldCom-related action, which was brought by a plaintiff that opted out of the settlement of the WorldCom class action. The settlement amount is covered by existing litigation reserves.
Citigroup along with other financial institutions and other defendants, entered into a settlement resolving all claims against the Citigroup-related defendants in 32 individual actions filed by a single law firm on behalf of 70 institutional plaintiffs that have opted out of the WorldCom class action settlement. Plaintiffs in these actions asserted various claims under federal and state law, including, among other things, federal and state securities claims, fraud, negligent misrepresentation and breach of fiduciary duty, in connection with the Citigroup-related defendants' research coverage, and underwriting of WorldCom securities. The settlement amount is covered by existing litigation reserves.
Global Crossing
On September 12, 2005, Citigroup entered into a settlement with the Global Crossing Estate Representative, resolving all claims pending in United States Bankruptcy Court for the Southern District of New York against the Citigroup-related defendants. The settlement amount is covered by existing litigation reserves.
Research
On September 27, 2005, Citigroup entered into a memorandum of agreement settling all claims against the Citigroup-related defendants in IN RE SALOMON ANALYST AT&T LITIGATION, a putative class action alleging research analyst conflicts of interest. The settlement amount is covered by existing litigation reserves. The settlement is subject to judicial approval.
On September 22, 2005, Citigroup reached an agreement-in-principle to settle all claims against the Citigroup-related defendants in NORMAN v. SALOMON SMITH BARNEY, ET AL., a putative class
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action asserting violations of the Investment Advisers Act of 1940 and various common law claims in connection with certain investors who maintained guided portfolio management accounts at Smith Barney. The settlement amount is covered by existing litigation reserves. The settlement is subject to judicial approval.
On August 17, 2005, in DISHER v. CITIGROUP GLOBAL MARKETS INC., the United States Court of Appeals for the Seventh Circuit reversed the district court's grant of plaintiffs' motion to remand the case to state court, and directed the district court to dismiss the case as preempted under the Securities Litigation Uniform Standards Act ("SLUSA"). The United States Supreme Court has granted review in another case involving SLUSA that may affect the Seventh Circuit's dismissal of the Disher matter.
Adelphia
In May and July of 2005, the United States District Court for the Southern District of New York granted motions to dismiss several claims, based on the running of applicable statute of limitations, asserted in the putative class and individual actions being coordinated under IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION. With the exception of one individual action that was dismissed with prejudice, the court granted the putative class and individual plaintiffs leave to re-plead certain of those claims the court found to be time-barred. Additional motions to dismiss the class complaint and the remaining individual complaints on other grounds remain pending.
IPO Securities Litigation
On June 30, 2005, the United States Court of Appeals for the Second Circuit entered an order in IN RE INITIAL PUBLIC OFFERING SECURITIES LITIGATION agreeing to review the district court's order granting plaintiffs' motion for class certification.
IPO Antitrust Litigation
On September 28, 2005 the United States Court of Appeals for the Second Circuit in IN RE INITIAL PUBLIC OFFERING ANTITRUST LITIGATION vacated the district court's order dismissing these actions and remanded for further proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended September 30, 2005 there were additional sales of 6,920.5086 Redeemable Units of Limited Partnership totaling $5,440,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under section 4(2) of the Securities Act of 1933, as amended and section 506 of Regulation D promulgated thereunder.
Proceeds from the sale of additional Redeemable Units are used in the trading of commodity interests including futures contracts, options and forwards contracts.
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The following chart sets forth the purchases of Redeemable Units by the Partnership.
Period | (a) Total Number of Shares (or Units) Purchased* | (b) Average Price Paid per Share (or Unit)** | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||
July 1, 2005 - July 31, 2005 | 3,302.0135 | $780.61 | N/A | N/A | ||||||||||||||
August 1, 2005 - August 31, 2005 | 1,861.5114 | $797.25 | N/A | N/A | ||||||||||||||
September 1, 2005 - September 30, 2005 | 4,912.1883 | $805.26 | N/A | N/A | ||||||||||||||
Total | 10,075.7132 | $794.37 | 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. |
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
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 Registration Statement on Form 10 filed on July 12, 2005. |
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). |
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SIGNATURES
Pursuant to the requirements 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.
CITIGROUP FAIRFIELD FUTURES FUND L.P. II
By: | Citigroup Managed Futures LLC | |||||||||
(General Partner) | ||||||||||
By: | /s/ David J. Vogel | |||||||||
David J. Vogel, President and Director | ||||||||||
Date: | November 14, 2005 | |||||||||
By: | /s/ Daniel R. McAuliffe, Jr. | |||||||||
Daniel R. McAuliffe, Jr. Chief Financial Officer and Director | ||||||||||
Date: | November 14, 2005 | |||||||||
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