Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 on open futures and option 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 second quarter of 2007.
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 six months ended June 30, 2007, Partnership capital decreased 10.3% from $297,319,407 to $266,563,555. This decrease was attributable to a net loss from operations of $5,399,543, coupled with the redemption of 43,832.1813 Redeemable Units of Limited Partnership Interest totaling $47,040,776 and 693.5451 Redeemable Units of Special Limited Partnership Interest totaling $785,163, which was partially offset by additional sales of 20,050.1832 Redeemable Units of Limited Partnership Interest totaling $22,469,630. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.
In July 2006, the Financial Accounting Standards Board (the ‘‘FASB’’) released FASB Interpretation No. 48 ‘‘Accounting for Uncertainty in Income Taxes’’ (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are ‘‘more-likely-than-not’’ of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Partnership adopted FIN 48 as of January 1, 2007, and the application of this standard did not impact the financial statements.
Table of ContentsIn September 2006, the FASB issued Statement of Financial Accounting Standards (‘‘SFAS’’) No. 157, Fair Value Measurements. This accounting standard establishes a single authoritative definition of fair value sets out a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and the interim periods within those fiscal years. As of June 30, 2007, the Partnership is still evaluating the impact the adoption of SFAS No. 157 will have on the financial statement amounts; however, additional disclosures will be required about the inputs used to develop the measurements and the effect of certain measurements on changes in Partners’ Capital for the period.
Results of Operations
During the Partnership’s second quarter of 2007 the Net Asset Value per Redeemable Unit increased 3.2% from $1,069.81 to $1,103.68 as compared to an increase of 3.5% in the second quarter of 2006. The Partnership experienced a net trading gain (comprised of realized gains on closed positions and changes in unrealized losses on open positions) before brokerage commissions and related fees in the second quarter of 2007 of $10,378,599. Gains were primarily attributable to the trading of commodity futures in S&P 500 Index, and were partially offset by losses in S&P Calls and S&P Puts. The Partnership experienced a net trading gain before brokerage commissions and related fees in the second quarter of 2006 of $10,345,945. Gains were primarily attributable to the trading of commodity futures in S&P 500 Index, S&P Calls and S&P Puts.
The global economy remained stable in the quarter as relatively low interest rates and high levels of liquidity in the capital markets were the backdrop to the highest corporate activities in recent history. Favorable trading conditions in equity index options during the second quarter provided gains for the Partnership. Profits earned in May and June as volatility slowly trended higher were sufficient to offset losses realized in April.
Small losses were accumulated in April as equity volatility, as measured by CBOE Volatility Index (VIX), dropped sharply. The theoretical value of an option is an increasing function of the underlying security’s volatility; therefore, losses were partially taken as the volatility risk premium dissipated. Profits were generated by the strategy to offset April losses as the VIX index slowly rebounded in the second half of the quarter due to several notable declines and price reversals in May and June, rendering profits for the Partnership.
During the six months ended June 30, 2007, the Net Asset Value per Redeemable Unit decreased 1.3% from $1,117.78 to $1,103.68 as compared to an increase of 5.7% in the period from February 21, 2006 to June 30, 2006. The Partnership experienced a net trading loss (comprised of realized losses on closed positions and change in unrealized gains on open positions) before brokerage commissions and related fees in the six months ended June 30, 2007 of $700,951. Losses were primarily attributable to the trading of commodity futures in S&P Puts, and were partially offset by gains in S&P 500 Index, and S&P Calls. The Partnership experienced a net trading gain before brokerage commissions and related fees in the period from February 21, 2006 to June 30, 2006 of $14,410,382. Gains were primarily attributable to the trading of commodity futures in S&P 500 Index, S&P Calls and S&P Puts.
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
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Table of Contentson Treasury bills. Interest income for the three and six months ended June 30, 2007 increased by $717,890 and $3,234,908, respectively, as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006. The increase is due to higher average net assets during the three and six months ended June 30, 2007 as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006.
Brokerage commissions are calculated on 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 six months ended June 30, 2007 increased by $576,806 and $3,663,589, respectively, as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006. The increase in brokerage commissions and fees is due to higher average net assets during the three and six months ended June 30, 2007 as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006.
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 six months ended June 30, 2007 increased by $354,108 and $1,613,443, respectively, as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006. The increase in management fees is due to higher average net assets during the three and six months ended June 30, 2007 as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006.
Administrative 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 six months ended June 30, 2007 increased by $88,526 and $403,359, respectively, as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006. The increase in administrative fees is due to an increase in net assets during the three and six months ended June 30, 2007 as compared to the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006.
Special Limited Partner profit share allocations are based on the new trading profits generated by the Advisor at the end of the quarter as defined in the advisory agreements between the Partnership, the General Partner and the Advisor. There were no profit share allocations for the three and six months ended June 30, 2007. Trading performance for the three months ended June 30, 2006 and the period from February 21, 2006 to June 30, 2006, resulted in profit share allocations of $1,323,959 and $1,937,302, respectively.
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Table of ContentsItem 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 the Partnership 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 June 30, 2007 and the highest, lowest and average values during the three months ended June 30, 2007. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of June 30, 2007, the Partnership’s total capitalization was $266,563,555. There has been no material change in the trading Value at Risk information previously disclosed in the Annual Report on Form 10-12G filed April 30, 2007 with the Securities Exchange Commission for the year ended December 31, 2006.
June 30, 2007
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Three months ended June 30, 2007 |
| Market Sector | | | Value at Risk | | | % of Total
Capitalization | | | High
Value at Risk | | | Low
Value at Risk | | | Average
Value at Risk* |
| Indices | | | | $ | 85,939,626 | | | | | | 32.24 | % | | | | $ | 166,862,394 | | | | | $ | 31,340,077 | | | | | $ | 73,465,079 | |
| Total | | | | $ | 85,939,626 | | | | | | 32.24 | % | | | | | | | | | | | | | | | | | | |
| * | Average of month-end Values at Risk |
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Table of ContentsItem 4. Controls and Procedures
The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
Management is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2007 and, based on that evaluation, the CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.
The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. These controls include policies and procedures that:
| |
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; |
| |
| • | provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and |
| |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended June 30, 2007 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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Table of ContentsPART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information supplements and amends our discussion set forth under Part I, Item 8 ‘‘Legal Proceedings’’ in our Annual Report on Form 10-12G for the period from February 21, 2006 (commencement of trading operations) through December 31, 2006 filed on April 30, 2007.
Research
Customer Class Actions.
On May 3, 2007, the District Court remanded DISHER V. CITIGROUP GLOBAL MARKETS, INC., to Illinois state court. On June 13, 2007, Citigroup moved in state court to dismiss the action.
Mutual Funds
In May 2007, CGMI finalized its settlement agreement with the NYSE and the New Jersey Bureau of Securities on the matter related to its market-timing practices prior to September 2003.
IPO Securities Litigation
On May 18, 2007, the Second Circuit denied plaintiffs’ petition for rehearing en banc of the Second Circuit’s decision reversing the district court’s class certification.
IPO Antitrust Litigation
On June 18, 2007, the United States Supreme Court ruled that the securities law precludes application of the antitrust laws to the claims asserted by plaintiffs, effectively terminating the litigation.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth under Part I, Item 1A. ‘‘Risk Factors’’ in our Annual Report on Form 10-12G for the fiscal year ended December 31, 2006 filed on April 30, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended June 30, 2007, there were additional sales of 132.8095 Redeemable Units totaling $140,000. 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.
The following chart sets forth the purchases of Redeemable Units by the Partnership.
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Table of Contents
| | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | | (a) Total Number
of Shares
(or Redeemable
Units) Purchased* | | | (b) Average
Price Paid per
Share (or
Redeemable Unit)** | | | (c) Total Number
of Shares (or
Redeemable Units)
Purchased as Part
of Publicly Announced
Plans or Programs | | | (d) Maximum Number
(or Approximate
Dollar Value) of Shares
(or Redeemable Units)
that May Yet Be
Purchased Under the
Plans or Programs |
April 1, 2007 -
April 30, 2007 | | | | | 6,870.8689 | | | | | $ | 1,045.63 | | | | | | N/A | | | | | | N/A | |
May 1, 2007 -
May 31, 2007 | | | | | 17,717.8597 | | | | | $ | 1,061.04 | | | | | | N/A | | | | | | N/A | |
June 1, 2007 -
June 30, 2007 | | | | | 13,497.2981 | | | | | $ | 1,103.68 | | | | | | N/A | | | | | | N/A | |
| | | | | | 38,086.0267 | | | | | $ | 1,070.12 | | | | | | | | | | | | | |
| * | 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 Annual Report on Form 10-12G for the period ended December 31, 2006 filed on April 30, 2007.
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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Table of ContentsSIGNATURES
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.
SMITH BARNEY WARRINGTON FUND L.P.
| | | |
| By: | | | Citigroup Managed Futures LLC |
| | | | (General Partner) |
| By: | | | /s/ Jerry Pascucci |
| | | | Jerry Pascucci
President and Director |
| Date: | | | August 14, 2007 |
| By: | | | /s/ Jennifer Magro |
| | | | Jennifer Magro
Chief Financial Officer and Director |
| Date: | | | August 14, 2007 |
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