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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1999
Commission File Number 0-28350
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.
- -----------------------------------------------------------------------------
(Exact name of registrant asspecified in its charter)
New York 13-3823300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units
of Limited
Partnership
Interest
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of February 29, 2000 Limited Partnership Units with an aggregate value of
$26,840,878 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
Item 1. Business.
(a) General development of business. Smith Barney Principal Plus
Futures Fund L.P. (the "Partnership") is a limited partnership organized on
January 25, 1993 under the Partnership Law of the State of New York and was
capitalized on April 12, 1995. No activity occurred between January 25, 1993 and
April 12, 1995. The Partnership engages in speculative trading of commodity
interests, including forward contracts on foreign currencies, commodity options
and commodity futures contracts including futures contracts on United States
Treasuries and certain other financial instruments, foreign currencies and stock
indices. 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 ("Zero Coupons") which payments will be due February
15, 2003. The Partnership uses the Zero Coupons and its other assets to margin
its commodities account.
A total of 100,000 Units of Limited Partnership Interest in the
Partnership (the "Units") were offered to the public. Between July 12, 1995 and
November 16, 1995, 37,131 Units were sold to the public at $1,000 per Unit.
Proceeds of the offering along with the General Partner's contribution of
$376,000 were held in escrow until November 17, 1995 at which time an aggregate
of $37,507,000 were turned over to the Partnership and the Partnership commenced
trading operations.
2
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form of
organization from a corporation to a limited liability company on October 1,
1999. The Partnership's commodity broker is Salomon Smith Barney Inc. ("SSB").
SSB is an affiliate of the General Partner. The General Partner is wholly owned
by Salomon Smith Barney Holdings Inc. ("SSBHI"), which is the sole owner of SSB.
SSBHI is a wholly owned subsidiary of Citigroup Inc.
The Partnership's trading of futures contracts on commodities is done on
United States and foreign commodity exchanges. It engages in such trading
through a commodity brokerage account maintained with SSB.
Under the Limited Partnership Agreement of the Partnership (the "Limited
Partnership Agreement"), the General Partner administers the business and
affairs of the Partnership. As of December 31, 1999, all commodity trading
decisions are made for the Partnership by John W. Henry & Company, Inc. ("JWH"),
Rabar Market Research, Inc. and Fort Orange Capital Management (collectively,
the "Advisors"). None of the Advisors is affiliated with the General Partner or
SSB. The Advisors are not responsible for the organization or operation of the
Partnership.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership is obligated to pay each Advisor a monthly
3
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
JWH, which will receive a monthly management fee equal to 1/3 of 1% (4% per
year)) of the Partnership allocated to each Advisor. The Partnership will also
pay Fort Orange Capital Management an incentive fee payable quarterly equal to
20% of New Trading Profits earned by it for the Partnership; JWH will receive an
incentive fee payable quarterly of 15% of the New Trading Profits (as defined in
the Management Agreements); and Rabar Market Research Inc. will receive an
annual incentive fee of 22.5% of New Trading Profits of the Partnership.
The Customer Agreement provides that the Partnership will pay SSB a
monthly brokerage fee equal to 7/12 of 1% of month-end Net Assets allocated to
the Advisors (7% per year) in lieu of brokerage commissions on a per trade
basis. SSB will pay a portion of its brokerage fees to its financial consultants
who have sold Units and who are registered as associated persons with the
Commodity Futures Trading Commission (the "CFTC"). The Partnership will pay for
National Futures Association ("NFA") fees, exchange and clearing fees, give-up
and user fees and floor brokerage fees. Brokerage fees will be paid for the life
of the Partnership, although the rate at which such fees are paid may be
changed. The Customer Agreement between the Partnership and SSB gives the
Partnership the legal right to net unrealized gains and losses. Reference should
be made to "Item 8. Financial Statements and Supplementary Data." for further
information regarding the brokerage commissions included in the notes to the
financial statements.
4
In addition, SSB will pay the Partnership interest on 80% of the
average daily equity maintained in cash in its account during each month at a
30-day U.S. Treasury bill rate determined weekly by SSB based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from
the date on which such weekly rate is determined.
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, SSBHI will
contribute up to an amount equal to the maturity value of the Zero Coupons held
by the Partnership at the time of such call to the capital of the Partnership to
permit it to meet its margin obligations in excess of its cash balance. The
guarantee can only be invoked once. After the guarantee is invoked, trading will
cease and the General Partner will either wait until the end of the month in
which the Zero Coupons come due (February, 2003), (the "First Payment Date"), or
will distribute cash and Zero Coupons to the limited partners. The General
Partner will provide a copy of SSBHI's annual report as filed with the SEC to
any limited partner requesting it.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests (including, but not limited to, futures contracts, options and forward
contracts on U.S. Treasuries, other financial instruments, foreign currencies,
stock indices and physical commodities). The Partnership does not engage in
sales of goods or services. The Partnership's net income from operations for the
5
year ended December 31, 1999, 1998, 1997, 1996 and for the period from November
17, 1995 (commencement of trading operations) to December 31, 1995 is set forth
under "Item 6. Selected Financial Data." Partnership capital as of December 31,
1999 was $27,189,905.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does
not engage in sales of goods or services or own any long lived assets, and
therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
There have been no material administrative, civil or criminal actions
within the past five years against SSB or any of its individual principals and
no such actions are currently pending, except as follows.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust), Ameritech Corporation, and an officer of Ameritech
sued Salomon Brothers Inc ("SBI") and Salomon Brothers Realty Corporation
("SBRC") in the U.S. District Court for the Northern District of Illinois
6
(Harris Trust Savings Bank, not individually but solely as trustee for the
Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v. Salomon
Brothers Inc and Salomon Brothers Realty Corp.). The complaint alleged that
purchases by Ameritech Pension Trust from the Salomon entities of approximately
$20.9 million in participations in a portfolio of motels owned by Motels of
America, Inc. and Best Inns, Inc. violated the Employee Retirement Income
Security Act ("ERISA"), the Racketeer Influenced and Corrupt Organization Act
("RICO") and state law. SBI had acquired the participations issued by Motels of
America and Best Inns to finance purchases of motel portfolios and sold 95% of
three such issues and 100% of one such issue to Ameritech Pension Trust.
Ameritech Pension Trust's complaint sought (1) approximately $20.9 million on
the ERISA claim, and (2) in excess of $70 million on the RICO and state law
claims as well as other relief. In various decisions between August 1993 and
July 1999, the courts hearing the case have dismissed all of the allegations in
the complaint against the Salomon entities. In October 1999, Ameritech appealed
to the U.S. Supreme Court and in January 2000, the Supreme Court agreed to hear
the case and oral argument will be heard April 17, 2000. The appeal seeks review
of the decision of the U.S. Court of Appeals for the Seventh Circuit that
dismissed the sole remaining ERISA claim against the Salomon entities.
Both the Department of Labor and the Internal Revenue Service ("IRS")
have advised SBI that they were or are reviewing the transactions in which
Ameritech Pension Trust acquired such participations. With respect to the IRS
7
review, SSBHI, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. As of the date of this report,
the IRS has not issued such 30-day letters to SSBHI, SBI or SBRC.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California.
(County of Orange et al. v. Bear Stearns & Co. Inc. et al.) The complaint
alleged, among other things, that the brokerage firms recommended and sold
unsuitable securities to Orange County. SSB and the remaining brokerage firms
settled with Orange County in mid 1999.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the IRS denies tax exempt
status to the City's General Obligation Refunding Bonds Series 1991. The
complaints were subsequently amended. SSB has asked the court to dismiss the
amended complaints. In May 1999, the Court denied SSB's motion to dismiss, but
stayed the litigation because the matter was not ripe. In March 2000, the city
filed a notice of discontinuance dismissing the complaint.
8
In November 1998, a class action complaint was filed in the United
States District Court for the Middle District of Florida (Dwight Brock as Clerk
for Collier County v. Merrill Lynch, et al.). The complaint alleged that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
Among other relief, plaintiffs sought compensatory and punitive damages,
restitution and/or rescission of the transactions and disgorgement of alleged
excessive profits. In October 1999, the plaintiff filed a second amended
complaint. SSB has asked the court to dismiss the amended complaint.
In connection with the Louisiana and Florida matters, the IRS and SEC
have been conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions.
In December 1998, SSB was one of twenty-eight market making firms that
reached a settlement with the SEC in the matter titled In the Matter of Certain
Market Making Activities on NASDAQ. As part of the settlement of that matter,
SSB, without admitting or denying the factual allegations, agreed to an order
that required that it: (i) cease and desist from committing or causing any
violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934
and Rules 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000, and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed
9
by a hedge fund and its investment advisor against SSB in the Supreme Court of
the State of New York, County of New York (MKP Master Fund, LDC et al. v.
Salomon Smith Barney Inc.). The complaint included allegations that, while
acting as prime broker for the hedge fund, SSB breached its contracts with
plaintiffs, misused their monies, and engaged in tortious (wrongful) conduct,
including breaching its fiduciary duties. SSB asked the court to dismiss the
complaint in full. In October 1999, the court dismissed the tort claims,
including the breach of fiduciary duty claims. The court allowed the breach of
contract and misuse of money claims to stand. In December 1999, SSB filed an
answer and asserted counterclaims against the investment advisor. In response to
plaintiff's motion to strike the counterclaims, in January 2000, SSB amended its
counterclaims against the investment advisor to seek indemnification and
contribution. Plaintiffs moved to strike SSB's amended counterclaims in February
2000. SSB will continue to contest this lawsuit vigorously.
In the course of its business, SSB, as a major futures commission
merchant and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings that the general partner believes do not have a
material effect on the business of SSB.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote
during the last fiscal year covered by this report.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information. The Partnership has issued no stock.
There is no public market for the Units of Limited
Partnership Interest.
(b) Holders. The number of holders of Units of Limited
Partnership Interest as of December 31, 1999
was 1,065.
(c) Distribution. The Partnership did not declare a distribution
in 1999 or 1998.
(d) Use of Proceeds. There were no additional sales in the years
ended December 31, 1999, 1998 and 1997.
11
Item 6. Selected Financial Data. The Partnership commenced trading operations on
November 17, 1995. Realized and unrealized trading gains (losses), realized and
unrealized gains (losses) on Zero Coupons, interest income, net income (loss)
and increase in net asset value per Unit for the years ended December 31, 1999,
1998, 1997, 1996 and for the period from November 17, 1995 (commencement of
trading operations) to December 31, 1995 and total assets at December 31, 1999,
1998, 1997, 1996 and 1995 were as follows:
1999 1998 1997 1996 1995
------------ ------------ ------------- ------------ ------------
Realized and unrealized
trading gains(losses) net of
brokerage commissions and
clearing fees of $1,148,676,
$1,357,927, $1,462,372,
$1,459,014 and $167,420,
respectively $ (3,003,382) $ 1,234,224 $ 2,025,344 $ 2,053,372 $ 1,908,271
Realized and unrealized
gains (losses) on
Zero Coupons (1,301,703) 923,712 631,119 (1,226,193) 531,953
Interest income 1,563,022 1,710,639 1,916,217 1,935,048 250,172
------------ ------------ ------------ ------------ ------------
$ (2,742,063) $ 3,868,575 $ 4,572,680 $ 2,762,227 $ 2,690,396
============ ============ ============ ============ ============
Net income (loss) $ (3,247,194) $ 2,968,642 $ 3,546,888 $ 2,043,139 $ 2,227,441
============ ============ ============ ============ ============
Increase (decrease) in
net asset value per unit $ (129.45) $ 109.40 $ 115.33 $ 58.96 $ 59.38
============ ============ ============ ============ ============
Total assets $ 29,079,820 $ 35,208,540 $ 36,883,726 $ 40,218,283 $ 40,226,379
============ ============ ============ ============ ============
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash, Zero Coupons, net unrealized appreciation
(depreciation) on open futures 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. Such
substantial losses could lead to a material decrease in liquidity. To minimize
this risk, the Partnership follows certain policies including:
(1) Partnership funds are invested only in commodity contracts which
are traded in sufficient volume to permit, in the opinion of the Advisors, ease
of taking and liquidating positions.
(2) No Advisor will initiate additional positions in any commodity if
such additional positions would result in aggregate positions for all
commodities requiring as margin more than 66-2/3% of the Partnership's assets
allocated to the Advisor.
(3) The Partnership will not employ the trading technique commonly
known as "pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchase or sale of additional positions in
the same or related commodities.
(4) The Partnership will not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
13
(5) The Advisors may, from time to time, employ trading strategies
such as spreads or straddles on behalf of the Partnership. The term "spread" or
"straddle" describes a commodity futures trading strategy involving the
simultaneous buying and selling of contracts on the same commodity but involving
different delivery dates or markets and in which the trader expects to earn a
profit from a widening or narrowing of the difference between the prices of the
two contracts.
(6) The Partnership will not permit the churning of its commodity
trading accounts.
(7) The Partnership may cease trading and liquidate all open positions
prior to its dissolution if its Net Assets (excluding assets maintained in Zero
Coupons) decrease to 10% of those assets on the day trading commenced (adjusted
for redemptions).
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
may 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, or to purchase or sell other
financial instruments at specified terms at specified future dates. Each of
these instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
Partner monitors and controls the Partnership's risk exposure on a daily basis
14
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. (See also "Item 8.
Financial Statements and Supplementary Data." for further information on
financial instrument risk included in the notes to financial statements.)
Other than the risks inherent in commodity futures trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the Partnership will cease trading
operations and liquidate all open positions upon the first to occur of the
following: (i) December 31, 2015; (ii) at the end of the month in which the Zero
Coupons purchased by the Partnership come due (February 15, 2003), unless the
General Partner elects otherwise; (iii) the vote to dissolve the Partnership by
limited partners owning more than 50% of the Units; (iv) assignment by the
General Partner of all of its interest in the Partnership or withdrawal,
removal, bankruptcy or any other event that causes the General Partner to cease
to be a general partner under the Partnership Act unless the Partnership is
continued as described in the Limited Partnership Agreement; (v) the Partnership
is required to register under the Investment Company Act of 1940 and the General
Partner determines that dissolution is therefore in the Partnership's best
15
interest; or (vi) the occurrence of any event which shall make it unlawful for
the existence of the Partnership to be continued.
(b) Capital resources. (i) The Partnership has made no material commitments for
capital expenditures.
(ii) The Partnership's capital will consist of the capital
contributions of the partners as increased or decreased by gains or losses on
commodity futures trading and Zero Coupon appreciation or depreciation, and by
expenses, interest income, redemptions of Units and distributions of profits, if
any. Gains or losses on commodity futures trading cannot be predicted. Market
moves in commodities are dependent upon fundamental and technical factors which
the Partnership's Advisors may or may not be able to identify. Partnership
expenses will consist of, among other things, commissions, management fees and
incentive fees. The level of these expenses is dependent upon the level of
trading gains or losses and the ability of the Advisors to identify and take
advantage of price movements in the commodity markets, in addition to the level
of Net Assets maintained. Furthermore, the Partnership will receive no payment
on its Zero Coupons until their due date. However, the Partnership will accrue
interest on the Zero Coupons and Limited Partners will be required to report as
interest income on their U.S. tax returns in each year their pro-rata share of
the accrued interest on the Zero Coupons even though no interest will be paid
prior to their due date. In addition, the amount of interest income payable by
SSB is dependent upon interest rates over which the Partnership has no control.
16
No forecast can be made as to the level of redemptions in any given
period. Beginning with the first full quarter ending at least six months after
trading commences (June 30, 1996), a Limited Partner may cause all of his Units
to be redeemed by the Partnership at the Redemption Net Asset Value thereof as
of the last day of a quarter on ten days' written notice to the General Partner.
Redemption fees equal to 2% of Redemption Net Asset Value per Unit redeemed will
be charged to any Limited Partner who redeems his Units on the first, second or
third possible redemption dates and 1% on the fourth and fifth possible
redemption dates, respectively. The last date on which a redemption fee was
charged was June 30, 1997. During 1997 and 1996, SSB received redemption fees of
$33,328 and $59,478, respectively. For the year ended December 31, 1999, 3,123
Units were redeemed totaling $3,837,307. For the year ended December 31, 1998,
3,400 Units were redeemed totaling $4,290,639. For the year ended December 31,
1997, 5,459 Units were redeemed totaling $6,204,189.
Offering and organization expenses relating to the issuance and
marketing of Units offered were initially paid by SSB. Such expenses were
initially estimated to be $550,000 and were charged against the initial capital
of the Partnership. During 1996, the Partnership's total offering and
organization expense were determined to be $612,847. The Partnership has charged
the excess of $62,847 to expense. As of December 31, 1997, the Partnership had
reimbursed SSB for the offering and organization expense plus interest at the
prime rate quoted by the Chase Manhattan Bank totaling $34,494 from interest
paid to the Partnership.
17
For each Unit redeemed the Partnership liquidates $1,000 (principal
amount) of Zero Coupons and will continue to liquidate $1,000 (principal amount)
of Zero Coupons per Unit redeemed. These liquidations will be at market value
which will be less than the amount payable on their due date. Moreover, it is
possible that the market value of the Zero Coupon could be less than its
purchase price plus the original issue discount amortized to date.
(c) Results of operations. For the year ended December 31, 1999, the
net asset value per Unit decreased 9.7% from $1,328.41 to $1,198.96. For the
year ended December 31, 1998 the net asset value per Unit increased 9.0% from
$1,219.01 to $1,328.41. For the year ended December 31, 1997 the net asset value
per Unit increased 10.4% from $1,103.68 to $1,219.01.
The Partnership experienced net trading losses of $1,854,706 before
commissions and expenses for the year ended December 31, 1999. Losses were
primarily attributable to the trading of commodity futures in livestock, softs,
metals, U.S. and non- U.S. interest rates and were partially offset by gains
recognized in indices, currencies and energy products. The Partnership
experienced a realized loss of $11,715 on Zero Coupons liquidated in conjunction
with the redemption of Units during 1999 and unrealized depreciation of
$1,289,988 on Zero Coupons during 1999.
The Partnership experienced net trading gains of $2,592,151 before
commissions and expenses for the year ended December 31, 1998. Gains were
18
primarily attributable to the trading of commodity futures in U.S. and non-U.S.
interest rates, livestock and energy products and were partially offset by
losses recognized in grains, currencies, indices, metals and softs products. The
Partnership experienced a realized gain of $82,242 on Zero Coupons liquidated in
conjuction with the redemption of Units during 1998 and unrealized appreciation
of $841,470 on Zero Coupons during 1998.
The Partnership experienced net trading gains of $3,487,716 before
commissions and expenses for the year ended December 31, 1997. Gains were
primarily attributable to the trading of commodity futures in currencies, softs,
grains, indices, metals and interest rates and were partially offset by losses
recognized in livestock and energy products. The Partnership experienced a
realized loss of $93,506 on Zero Coupons liquidated in conjunction with the
redemption of Units during 1997 and unrealized appreciation of $724,625 on Zero
Coupons during 1997.
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 those price trends correctly. 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
19
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
(d) Operational Risk
The Partnership is directly exposed to market risk and credit
risk, which arise in the normal course of its business activities. Slightly less
direct, but of critical importance, are risks pertaining to operational and back
office support. This is particularly the case in a rapidly changing and
increasingly global environment with increasing transaction volumes and an
expansion in the number and complexity of products in the marketplace. Such
risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss and
legal liability attributable to operational problems, such as inaccurate pricing
of transactions, untimely trade execution, clearance and/or settlement, or the
inability to process large volumes of transactions. The Partnership is subject
to increased risks with respect to its trading activities in emerging market
securities, where clearance, settlement, and custodial risks are often greater
than in more established markets.
Technological Risk - the risk of loss attributable to technological limitations
or hardware failure that constrain the Partnership's ability to gather, process,
and communicate information efficiently and securely, without interruption, with
customers, among units within the Partnership, and in the markets where the
Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
20
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Partnership's
unitholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
SSBHI's computer systems and business processes successfully
handled the date change from December 31, 1999 to January 1, 2000. SSBHI is not
aware of any significant year 2000 problems encountered internally or with the
third parties with which it interfaces, including customers and counterparties,
the global financial market infrastructure, and the utility infrastructure on
which all corporations rely.
Based on operations since January 1, 2000, SSBHI does not
expect any significant impact to its ongoing business as a result of the year
2000 issue. However, it is possible that the full impact of year 2000 issues has
not been fully recognized and no assurances can be given that year 2000 problems
will not emerge.
The pretax costs associated with required system modifications
and conversions totaled approximately $130 million. These costs were funded
through operating cash flow and expensed in the period in which they were
incurred.
21
The expenditures and the General Partner's resources dedicated
to the preparation for Year 2000 did not have a material impact on the operation
or results of the Partnership.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
organizations, including the commodities exchanges, clearing organizations, or
regulators with which the Partnership interacts to resolve their Year 2000
issues in a timely manner. This risk could involve the inability to determine
the value of the Partnership at some point in time and would make effecting
purchases or redemptions of Units in the Partnership infeasible until such
valuation was determinable.
(e) New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No.
133 ("SFAS 133"), Accounting For Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize all
derivative instruments in the statement of financial condition and measure those
financial instruments at fair value. SFAS 133 has no impact on the Partners'
Capital and operating results as all derivative instruments are recorded at fair
value, with changes therein reported in the statement of income and expenses.
22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
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
23
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
included 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.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
24
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).
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
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. 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.
In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, certain of the Advisors trade
commodity options. The Value at Risk associated with options is reflected in the
25
following table as the margin requirement attributable to the instrument
underlying each option. Where this instrument is a futures contract, the futures
margin, and where this instrument is a physical commodity, the
futures-equivalent maintenance margin has been used. This calculation is
conservative in that it assumes that the fair value of an option will decline by
the same amount as the fair value of the underlying instrument, whereas, in
fact, the fair values of the options traded by the Partnership in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
Value at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected.
26
The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1999. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1999, the
Partnership's total capitalization was $27,189,905.
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ----------------------------------------------------------------------------------------
Currencies
- -OTC Contracts $ 249,863 0.92% $ 321,852 $ 223,737
- -Exchange Traded Contracts 182,954 0.67% 323,143 77,774
Energy 54,000 0.20% 207,127 72,040
Grains 32,540 0.12% 106,083 25,175
Interest rates U.S. 94,220 0.35% 287,200 98,951
Interest rates Non-U.S 234,971 0.86% 981,372 393,328
Livestock 12,450 0.05% 19,020 6,414
Metals 342,750 1.26% 351,000 203,240
Softs 44,200 0.16% 81,500 36,200
Indices 412,109 1.52% 827,809 198,257
Lumber 2,200 0.01% 9,600 3,200
---------- -----
Total $1,662,257 6.12%
========== =====
27
As of December 31, 1998, the Partnership's total capitalization was
$34,274,406.
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Currencies
- -OTC Contracts $ 133,688 0.39%
- -Exchange Traded Contracts 169,675 0.50%
Energy 127,800 0.37%
Grains 92,458 0.27%
Interest rates U.S. 154,200 0.45%
Interest rates Non-U.S 918,655 2.68%
Livestock 35,975 0.10%
Metals 250,000 0.73%
Softs 71,362 0.21%
Indices 31,284 0.09%
---------- ----
Total $1,985,097 5.79%
========== ====
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership
is typically many times the applicable maintenance margin requirement (margin
requirements generally range between 2% and 15% of contract face value) as well
as many times the capitalization of the Partnership. The magnitude of the
Partnership's open positions creates a "risk of ruin" not typically found in
most other investment vehicles. Because of the size of its positions, certain
market conditions -- unusual, but historically recurring from time to time --
could cause the Partnership to incur severe losses over a short period of time.
The foregoing Value at Risk table -- as well as the past performance of the
Partnership -- give no indication of this "risk of ruin."
28
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, these balances (as well as any market
risk they represent) are immaterial.
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Partnership's
market sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased regulation and
29
many other factors could result in material losses as well as in material
changes to the risk exposures and the management strategies of the Partnership.
There can be no assurance that the Partnership's current market exposure and/or
risk management strategies will not change materially or that any such
strategies will be effective in either the short- or long- term. Investors must
be prepared to lose all or substantially all of their investment in the
Partnership
The following were the primary trading risk exposures of the
Partnership as of December 31, 1999, by market sector.
Interest Rates. Interest rate risk is the principal market
exposure of the Partnership. Interest rate movements directly affect the price
of the futures positions held by the Partnership and indirectly the value of its
stock index and currency positions. Interest rate movements in one country as
well as relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
30
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium- to long-term rates to remain steady.
Currencies. The Partnership's currency exposure is to
exchange rate fluctuations, primarily fluctuations which disrupt the historical
pricing relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1999, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
31
Metals. The Partnership's primary metal market exposure is
to fluctuations in the price of gold and silver. Although certain of the
Advisors will from time to time trade base metals such as aluminum and copper,
the principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver. The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Partnership.
Softs. The Partnership's primary commodities exposure is to
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
1999.
Energy. The Partnership's primary energy market exposure is
to gas and oil price movements, often resulting from political developments in
the Middle East. Oil prices can be volatile and substantial profits and losses
have been and are expected to continue to be experienced in this market.
32
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of
the Partnership as of December 31, 1999.
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in Japanese yen, German marks, British pounds and French
francs. The Advisor regularly converts foreign currency balances to dollars in
an attempt to control the Partnership's non-trading risk.
Securities Positions. The Partnership's only market exposure
in instruments held other than for trading is in its securities portfolio. The
Partnership maintains a portion of its assets in principal amounts stripped from
U.S. Treasury Bonds under the Treasury's STRIPS program. Violent fluctuations in
prevailing interest rates could cause immaterial mark-to-market losses on the
Partnership's securities.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
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.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
33
individual positions as well as enter programs traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
Each Advisor applies its own risk management policies to its trading.
The Advisors often follow diversification guidelines, margin limits and stop
loss points to exit a position. The Advisors' research of risk management often
suggests ongoing modifications to their trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to
look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, SSBHI will
contribute up to an amount equal to the maturity value of the Zero Coupons held
by the Partnership at the time of such call to the capital of the Partnership to
permit it to meet its margin obligations in excess of its cash balance.
34
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation F-2
Report of Independent Accountants. F-3
Financial Statements:
Statement of Financial Condition at
December 31, 1999 and 1998. F-4
Statement of Income and Expenses for
the years ended December 31, 1999, 1998
and 1997. F-5
Statement of Partners' Capital for the
years ended December 31, 1999, 1998 and
1997. F-6
Notes to Financial Statements. F-7 - F-11
F-1
Continued
To The Limited Partners of
Smith Barney Principal PLUS
Futures Fund L.P.
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management LLC
General Partner, Smith Barney Principal PLUS
Futures Fund L.P.
Smith Barney Futures Management LLC
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Accountants
To the Partners of
Smith Barney Principal PLUS Futures Fund L.P.:
In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Smith Barney
Principal PLUS Futures Fund L.P. at December 31, 1999 and 1998, and the results
of its operations for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the management of
the General Partner; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the management of
the General Partner, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 2000
F-3
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Financial Condition
December 31, 1999 and 1998
1999 1998
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $ 8,748,980 $12,186,981
Net unrealized appreciation on open
futures contracts 478,762 1,350,548
Zero coupons, $22,678,000 and $25,801,000 principal
amount in 1999 and 1998, respectively, due February 15,
2003 at fair value (amortized cost
$18,971,524 and $20,356,124 in 1999 and 1998,
respectively) (Notes 1 and 2) 18,629,297 21,303,885
Commodity options owned,
at market value (cost $22,793) 8,409 --
----------- -----------
27,865,448 34,841,414
Receivable from SSB on sale of zero coupons 1,184,588 330,440
Interest receivable 29,784 36,686
----------- -----------
$29,079,820 $35,208,540
----------- -----------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Management fees $ 32,020 $ 47,621
Commissions 79,735 109,341
Incentive fees -- 203,874
Professional fees 38,284 31,230
Other 9,777 9,376
Redemptions payable 1,730,099 532,692
----------- -----------
1,889,915 934,134
----------- -----------
Partners' Capital (Notes 1, 5, and 6):
General Partner, 376 Unit equivalents
outstanding in 1999 and 1998 450,809 499,482
Limited Partners, 22,302 and 25,425 Units
of Limited Partnership Interest outstanding
in 1999 and 1998, respectively 26,739,096 33,774,924
----------- -----------
27,189,905 34,274,406
----------- -----------
$29,079,820 $35,208,540
----------- -----------
See notes to financial statements.
F-4
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Income and Expenses
for the years ended December 31, 1999,
1998 and 1997
1999 1998 1997
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions $ (968,536) $ 2,321,215 $ 2,851,564
Change in unrealized gains (losses) on open positions (886,170) 270,936 636,152
----------- ----------- -----------
(1,854,706) 2,592,151 3,487,716
Less, Brokerage commissions including clearing fees of
$33,604, $39,374 and $37,258, respectively (Note 3c) (1,148,676) (1,357,927) (1,462,372)
----------- ----------- -----------
Net realized and unrealized gains (losses) (3,003,382) 1,234,224 2,025,344
Gains (losses) on sale of zero coupons (11,715) 82,242 (93,506)
Unrealized appreciation (depreciation) on zero coupons (1,289,988) 841,470 724,625
Interest income (Notes 3c) 1,563,022 1,710,639 1,916,217
----------- ----------- -----------
(2,742,063) 3,868,575 4,572,680
----------- ----------- -----------
Expenses:
Management fees (Note 3b) 434,157 535,282 586,615
Incentive fees (Note 3b) -- 300,523 319,273
Professional fees 60,814 48,798 39,102
Other expenses 10,160 15,330 80,802
----------- ----------- -----------
505,131 899,933 1,025,792
----------- ----------- -----------
Net income (loss) $(3,247,194) $ 2,968,642 $ 3,546,888
----------- ----------- -----------
Net income (loss) per Unit of Limited Partnership Interest
and General Partner Unit equivalent (Notes 1 and 6) $ (129.45) $ 109.40 $ 115.33
----------- ----------- -----------
See notes to financial statements.
F-5
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Partners' Capital
for the years ended December 31, 1999
1998 and 1997
Limited General
Partners Partner Total
Partners' capital at December 31, 1996 $ 37,838,720 $ 414,984 $ 38,253,704
Net income 3,503,524 43,364 3,546,888
Redemption of 5,459 Units of Limited
Partnership Interest (6,204,189) -- (6,204,189)
------------ ------------ ------------
Partners' capital at December 31, 1997 35,138,055 458,348 35,596,403
Net income 2,927,508 41,134 2,968,642
Redemption of 3,400 Units of Limited
Partnership Interest (4,290,639) -- (4,290,639)
------------ ------------ ------------
Partners' capital at December 31, 1998 33,774,924 499,482 34,274,406
Net loss (3,198,521) (48,673) (3,247,194)
Redemption of 3,123 Units of Limited
Partnership Interest (3,837,307) -- (3,837,307)
------------ ------------ ------------
Partners' capital at December 31, 1999 $ 26,739,096 $ 450,809 $ 27,189,905
------------ ------------ ------------
See notes to financial statements.
F-6
Smith Barney Principal PLUS
Futures Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Smith Barney Principal PLUS Futures Fund L.P. (the "Partnership") is a
limited partnership which was initially organized on January 25, 1993 under
the partnership laws of the State of New York and was capitalized on April
12, 1995. No activity occurred between January 25, 1993 and April 12, 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 will maintain a portion of its assets in principal amounts
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 July 12, 1995 and November 16, 1995, 37,131 Units
of Limited Partnership Interest ("Units") were sold at $1,000 per Unit. The
proceeds of the offering were held in an escrow account until November 17,
1995, at which time they were turned over to the Partnership for trading.
The Partnership was authorized to sell 100,000 Units during the offering
period of the Partnership. Smith Barney Futures Management LLC acts as the
general partner (the "General Partner") of the Partnership. The General
Partner changed its form of organization from a corporation to a limited
liability company on October 1, 1999. The Partnership's commodity broker is
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General
Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings Inc. ("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly
owned subsidiary of Citigroup Inc. The General Partner and each limited
partner share in the profits and losses of the Partnership in proportion to
the amount of partnership interest owned by each except that no limited
partner shall be liable for obligations of the Partnership in excess of his
initial capital contribution and profits, if any, net of distributions. The
Partnership will be liquidated upon the first to occur of the following:
December 31, 2015; at the end of the month in which the Zero Coupons
purchased come due (February, 2003) ("First Payment Date"), unless the
General Partner elects otherwise, or under certain other circumstances as
defined in the Limited Partnership Agreement. The General Partner, in its
sole discretion, may elect not to terminate the Partnership as of the First
Payment Date. In the event that the General Partner elects to continue the
Partnership, each limited partner shall have the opportunity to redeem all
or some of his Units.
2. Accounting Policies:
a. 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 statement of financial condition at fair value on the
last business day of the year, which represents market value for those
commodity interests for which market quotations are 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 year. Realized gains (losses) and changes in
unrealized values on commodity interests 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.
b. The partnership may purchase and write (sell) options. An option is a
contract allowing, but not requiring, its holder to buy (call) or sell
(put) a specific or standard commodity or financial instrument at a
specified price during a specified time period. The option premium is the
total price paid or received for the option contract. When the fund
writes an option, the premium received is recorded as a liability in the
statement of financial condition and marked to market daily. When the
F-7
fund purchases an option, the premium paid is recorded as an asset in the
statement of financial condition and marked to market daily.
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
d. The original issue discount on the Zero Coupons is being amortized over
their life using the interest method and is included in interest income.
e. Zero Coupons are recorded in the statement of financial condition at fair
value. Realized gain (loss) on the sale of Zero Coupons is determined on
the amortized cost basis of the Zero Coupons at the time of sale.
f. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading
decisions for the Partnership.
b. Management Agreements:
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with John W. Henry & Company, Inc., Fort Orange
Capital Management and Rabar Market Research Inc. (collectively, the
"Advisors"), which provide that the Advisors have sole discretion in
determining the investment of the assets of the Partnership allocated to
each Advisor by the General Partner. As compensation for services, the
Partnership is obligated to pay a monthly management fee of 1/6 of 1% (2%
per year) to Fort Orange Capital Management and Rabar Market Research
Inc., and 1/3 of 1 % (4% per year) to John W. Henry & Company, Inc., of
month-end Net Assets allocated to each advisor. The Partnership will also
pay Fort Orange Capital Management an incentive fee payable quarterly
equal to 20% of New Trading Profits, as defined in the Management
Agreements, earned by it for the Partnership; John W. Henry & Company,
Inc. will receive a quarterly incentive fee of 15% of New Trading
Profits; and Rabar Market Research Inc. will receive an annual incentive
fee of 22.5% of New Trading Profits of the Partnership. Abraham Trading
Co. was terminated as an Advisor to the Partnership on January 31, 1999.
Fort Orange Capital Management was added as a Advisor on February 1,
1999.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement with SSB whereby
SSB provides services which include, among other things, the execution of
transactions for the Partnership's account in accordance with orders
placed by the Advisors. The Partnership is obligated to pay a monthly
brokerage fee to SSB equal to 7/12 of 1 % of month-end Net Assets (7% per
year) in lieu of brokerage commissions on a per trade basis. A portion of
this fee is paid to employees of SSB who have sold Units of the
Partnership. This fee does not include exchange, clearing, user, give-up,
floor brokerage and NFA fees which will be borne by the Partnership. All
of the Partnership's assets are deposited in the Partnership's account at
SSB. The Partnership maintains a portion of these assets in Zero Coupons
and a portion in cash. The Partnership's cash is deposited by SSB in
F-8
segregated bank accounts, to the extent required by Commodity Futures
Trading Commission regulations. At December 31, 1999 and 1998, the amount
of cash held for margin requirements was $1,909,496 and $2,250,973,
respectively. SSB will pay the Partnership interest on 80% of the average
daily equity maintained in cash in its account during each month at a
30-day U.S. Treasury bill rate determined weekly by SSB based on the
average noncompetitive yield on 3-month U.S. Treasury bills maturing in
30 days from the date on which such weekly rate is determined. The
Customer Agreement between the Partnership and SSB gives the Partnership
the legal right to net unrealized gains and losses.The Customer Agreement
may be terminated by either party.
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. All of the
commodity interests owned by the Partnership are held for trading purposes.
The average fair value during the years ended December 31, 1999 and 1998,
based on a monthly calculation, was $465,450 and $1,147,510, respectively.
The fair value of these commodity interests, including options thereon, if
applicable, at December 31, 1999 and 1998 was $487,171 and $1,350,548,
respectively, as detailed below.
Fair Value
December 31, December 31,
1999 1998
Currencies:
-Exchange Traded Contracts $ 27,204 $ 54,358
-OTC Contracts (85,269) 53,374
Energy (29,936) (47,454)
Grains 18 58,398
Interest Rates U.S. 131,062 (82,237)
Interest Rates Non-U.S 48,053 1,290,455
Livestock 2,885 25,120
Metals 97,976 (97,212)
Softs (10,624) 93,013
Indices 308,607 2,733
Lumber (2,805) --
----------- -----------
Total $ 487,171 $ 1,350,548
----------- -----------
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner. On 10 days notice to the General Partner, a limited partner
may require the Partnership to redeem his Units at their Redemption Net
Asset Value as of the last day of a quarter. Redemption fees equal to 2% of
Redemption Net Asset Value per Unit redeemed will be charged to any limited
partner who redeems his Units on the first, second or third possible
redemption dates, and 1 % on the fourth and fifth possible redemption dates.
Thereafter, no redemption fee will be charged. During 1997, SSB received
redemption fees of $33,328. Redemption Net Asset Value differs from Net
Asset Value calculated for financial reporting purposes in that any accrued
liability for reimbursement of offering and organization expenses will not
be included in the calculation of Redemption Net Asset Value.
F-9
6. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
Net realized and unrealized gains (losses) $ (120.12) $ 47.41 $ 66.66
Realized and unrealized appreciation
(depreciation) on Zero Coupons (51.90) 32.87 21.33
Interest income 62.91 61.61 58.85
Expenses (20.34) (32.49) (31.51)
-------- -------- --------
Increase (decrease) for year (129.45) 109.40 115.33
Net asset value per Unit, beginning of year 1,328.41 1,219.01 1,103.68
-------- -------- --------
Net asset value per Unit, end of year $ 1,198.96 $ 1,328.41 $ 1,219.01
-------- -------- --------
7. Guarantee:
In the unlikely event that the Partnership is required to meet a margin call
in excess of the cash balance in its trading accounts, SSBHI will contribute
up to an amount equal to the maturity value of the Zero Coupons held by the
Partnership at the time of such call to the capital of the Partnership to
permit it to meet its margin obligations in excess of its cash balance. The
guarantee can only be invoked once. After the guarantee is invoked, trading
will cease and the General Partner will either wait until the First Payment
Date or will distribute cash and Zero Coupons to the limited partners.
8. Financial Instrument Risks:
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 may 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, 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. 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 (see table in Note
4). 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 SSB. 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
F-10
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
appropriately not recorded in the financial statements, reflect the extent
of the Partnership's involvement in these instruments. The majority of
these instruments mature within one year of December 31, 1999. However, due
to the nature of the Partnership's business, these instruments may not be
held to maturity.
9. New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize
all derivative instruments in the statement of financial condition and
measure those financial instruments at fair value. SFAS 133 has no impact on
Partners' Capital and operating results as all derivative instruments are
recorded at fair value, with changes therein reported in the statement of
income and expenses.
F-11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim period,
no independent accountant who was engaged as the principal accountant to audit
the Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs
are managed by its General Partner, Smith Barney Futures Management LLC
Investment decisions are made by the Advisors.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management LLC, its General Partner. SSB, an
affiliate of the General Partner, is the commodity broker for the Partnership
and receives brokerage commissions for such services, as described under "Item
1. Business." Brokerage commissions and clearing fees of $1,148,676 were paid
for the year ended December 31, 1999. Management fees of $434,157 were paid to
the Advisors for the year ended December 31, 1999. There were no incentive fees
paid during the year ended December 31, 1999.
35
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners.
As of March 1, 2000, two beneficial owners who are neither a director nor
executive officer own more than five percent (5%) of the outstanding Units
issued by the Registrant as follows:
Title Name and Address of Amount and Nature of Percent of
of Class Beneficial Owner Beneficial Ownership Class
- -------- ------------------- -------------------- ----------
Units of CITIC Industrial Bank 5,000 Units 22.0%
Limited No. 6 Xinyuan Nan Lu
Partnership Chaoyang District Beijing
Interest
Units of Marilyn Duke Co. Ttee 1,500 Units 6.6%
Limited Evelyn Freed Co. Ttee
Partnership FBO: Naomi R Wilden Trust
Interest P. O. BOX 430
Rogue River, OR 97537-0430
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of partnership interest
equivalent to 376 (1.6%) Units of Limited Partnership Interest.
(c). Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management
LLC would be considered promoters for purposes of Item 404(d) of Regulation S-K.
The nature and the amounts of compensation each promoter will receive from the
Partnership are set forth under "Item 1. Business.", "Item 8. Financial
Statements and Supplementary Data." and "Item 11. Executive Compensation."
36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1999
and 1998.
Statement of Income and Expenses for the years ended
December 31, 1999, 1998 and 1997. Statement of
Partners' Capital for the years ended December 31,
1999, 1998 and 1997.
(2) Financial Statement Schedules:Financial data schedule
for the year ended December 31, 1998.
(3) Exhibits:
3.1 Limited Partnership Agreement (dated April 3, 1995
and amended as of June 22, 1995), (filed as Exhibit
3.1 to the Registration Statement on Form S-1 (File
No. 33-01742) and incorporated herein by reference).
3.2 Certificate of Limited Partnership of the
Partnership as filed in the office of the Secretary
of State of New York (filed as Exhibit 3.2 to the
Registration Statement on Form S-1 (File No.
33-91742) and incorporated herein by reference).
37
10.1 - Customer Agreement between the Partnership and Smith
Barney Shearson Inc. (filed as Exhibit 10.1 to the
Registration Statement on Form S-1 (File No. 33-91742)
and incorporated herein by reference).
10.3 - Escrow Instructions relating to escrow of
subscription funds (filed as Exhibit 10.3 to the
Registration Statement on Form S-1 (File No. 33-91742)
and incorporated herein by reference).
10.5 - Management Agreement among the Partnership, the
General Partner and John W. Henry & Company, Inc. (JWH)
(filed as Exhibit 10.5 to the Registration Statement on
Form S-1 (File No. 33-91742) and incorporated herein by
reference).
10.6 - Management Agreement among the Partnership, the
General Partner and Rabar Market Research, Inc. (filed
as Exhibit 10.6 to the Registration Statement on Form
S-1 (File No. 33-91742) and incorporated herein by
reference).
10.7 - Management Agreement among the Partnership, the
General Partner and Abraham Trading Co. (filed as
Exhibit 10.7 to the Registration Statement on Form S-1
(File No. 33-91742) and incorporated herein by
reference).
38
10.8 - Letters extending Management Agreements with Rabar
Market Research, Inc., Abraham Trading Co. and John W.
Henry & Company, Inc. for 1997 and 1996 (previously
filed).
10.9 - Letters extending Management Agreements with Rabar
Market Research, Inc. and John W. Henry & Company,
Inc.for 1998 (previously filed).
10.10- Letter from General Partner terminating Management
Agreement with Abraham Trading Co. (previously filed).
10.11- Management Agreement among the Partnership, the
General Partner and Fort Orange Capital Management for
1999 (filed herein)
10.12- Letters extending Management Agreements with Rabar
Market Research, Inc. and John W. Henry & Company,
Inc.for 1999 (filed herein)
(b) Reports on 8-K: None Filed.
39
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 30th day of March 2000.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.
By: Smith Barney Futures Management LLC
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10-K has been signed below by the following persons
in the capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
41