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, 2001
Commission File Number 0-28350
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SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.
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(Exact name of registrant as specified in its charter)
New York 13-3823300
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
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(Address and Zip Code of principal executive offices)
(212) 723-5424
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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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
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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 28, 2002, Limited Partnership Units with an aggregate value of
$11,687,658 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
Item 1. Business.
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(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 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 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.
2
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. Smith Barney Futures Management LLC acts as the general
partner (the "General Partner") of the Partnership. 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, forwards and options contracts, if
applicable, on commodities is done on United States of America 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, 2001, all commodity trading
decisions are made for the Partnership by Tucson Asset Management (the
"Advisor"). The Advisor is not affiliated with the General Partner or SSB. The
Advisor is not responsible for the organization or operation of the Partnership.
The Partnership is obligated to pay a monthly management fee of 1/6 of
3
1% (2% per year) of month-end Net Assets allocated to the advisor. The
Partnership will also pay an incentive fee payable quarterly equal to 20% of New
Trading Profits, as defined in the Management Agreement, earned by it for the
Partnership of New Trading Profits, as defined in the Management Agreement.
Prior to March 1, 2001, the Customer Agreement provided that the
Partnership will pay SSB a monthly brokerage fee equal to 7/12 of 1% of
month-end Net Assets allocated to the Advisor (7% per year) in lieu of brokerage
commissions on a per trade basis. Effective March 1, 2001, the Partnership pays
SSB a monthly brokerage fee equal to 5/12 of 1% of month-end Net Assets
allocated to the Advisor (5% 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
4
information regarding the brokerage commissions included in the notes to the
financial statements.
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
5
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
year ended December 31, 2001, 2000, 1999, 1998 and 1997 is set forth under "Item
6. Selected Financial Data." Partnership capital as of December 31, 2001 was
$12,288,724.
(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.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which Salomon Smith
Barney Holdings Inc. ("SSBH") or its subsidiaries is a party or to which any of
their property is subject. There are no material legal proceedings
6
pending against the Partnership or the General Partner.
Salomon Smith Barney Inc. ("SSB") is a New York corporation with its
principal place of business at 388 Greenwich St., New York, New York 10013. SSB
is registered as a broker-dealer and futures commission merchant ("FCM"), and
provides futures brokerage and clearing services for institutional and retail
participants in the futures markets. SSB and its affiliates also provide
investment banking and other financial services for clients worldwide.
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against SSB or any of its individual principals within the
past five years that management believes may have a material impact on SSB's
ability to act as an FCM. In the ordinary course of its business, SSB is a party
to various claims and regulatory inquiries. Proceedings deemed to be material
for purposes of Commodity Futures Trading Commission ("CFTC") disclosure
requirements are:
In September 1992, Harris Trust and Savings Bank (as trustee for Ameritech
Pension Trust ("APT"), Ameritech Corporation, and an officer of Ameritech filed
suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers Realty
Corporation ("SBRC") in the U.S. District Court for the Northern District of
Illinois (Harris Trust Savings Bank, not individually but solely as trustee for
the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
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Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest in a portfolio of motels owned by Best Inns,
Inc. ("Best"), violated the Employee Retirement Income Security Act ("ERISA"),
and that APT's purchase of the participation interests in the third MOA
portfolio and in the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and the Illinois Consumer Fraud and Deceptive
Practices Act ("Consumer Fraud Act"), and constituted fraud, negligent
misrepresentation, breach of contract and unjust enrichment. SBI had acquired
the participation interests when it purchased principal mortgage notes issued by
MOA and Best to finance purchases of motel portfolios; 95% of three of those
interests and 100% of the fourth were sold to APT for a total of approximately
$20.9 million. Plaintiffs' second amended complaint seeks judgment (a) on the
ERISA claims for the approximately $20.9 million purchase price, for rescission
and for disgorgement of profits, as well as other relief, and (b) on the RICO
and state law claims in the amount of $12.3 million, with damages trebled to $37
million on the RICO claims and punitive damages in excess of $37 million on
8
certain of the state law claims as well as other relief. Following motions by
defendants, the court dismissed the RICO, Consumer Fraud Act, fraud, negligent
misrepresentation, breach of contract, and unjust enrichment claims. The court
also found that defendants were not ERISA fiduciaries and dismissed two of the
three claims based on that allegation. Defendants moved for summary judgment on
plaintiffs' only remaining claim, which alleged an ERISA violation. The motion
was denied, and defendants appealed to the U.S. Court of Appeals for the Seventh
Circuit. In July 1999, the U. S. Court of Appeals for the Seventh Circuit
reversed the denial of defendants' motion for summary judgment and dismissed the
sole remaining ERISA claim against the Company. Plaintiffs filed a petition for
certiorari with the U. S. Supreme Court seeking review of the decision of the
Court of Appeals, which was granted in January 2000. After hearing oral
argument, on June 12, 2000, the U.S. Supreme Court reversed the U.S. Court of
Appeals for the Seventh Circuit's judgment, which had overturned the denial of
defendants' motion for summary judgment and dismissed the sole remaining ERISA
claim against the Company, and remanded the matter to the circuit court for
further proceedings. Subsequently, the circuit court remanded the matter to the
U.S. District Court for the Northern District of Illinois for further
proceedings.
Both the Department of Labor and the Internal Revenue
Service ("IRS") have advised SBI that they were or are reviewing the underlying
9
transactions. With respect to the IRS, SSBH, SBI and SBRC have consented to
extensions of time for the assessment of excise taxes that may be claimed with
respect to the transactions for the years 1987, 1988 and 1989. In August 1996,
the IRS sent SSBH, SBI and SBRC what appeared to be draft "30-day letters" with
respect to the transactions and SSBH, SBI and SBRC were given an opportunity to
comment on whether the IRS should issue 30-day letters, which would actually
commence the assessment process. In October 1996, SSBH, SBI and SBRC submitted a
memorandum setting forth reasons why the IRS should not issue such 30-day
letters. Since that time, the IRS has not issued such 30-day letters to SSBH,
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 Count. 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
10
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. The Court denied the motion but stayed the case.
Subsequently, the city withdrew the lawsuit.
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 November 1999, SSB
moved to dismiss the amended complaint. In May 2001, the parties reached, and
the court preliminarily approved, a tentative settlement. In September 2001, the
court approved the settlement.
In connection with the Louisiana and Florida matters, the IRS and SEC have
11
been conducting and industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions, In April 2000 SSB and several
other broker-dealers entered into a settlement with the IRS and the SEC.
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 allegation, 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 15cl -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 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.). Plaintiffs allege that while acting as their prime broker
SSB breached its contracts with plaintiffs, converted plaintiffs' monies and
engaged in tortious conduct, including breaching its fiduciary duties. In
October 1999, the court dismissed plaintiffs' tort claims, including the breach
12
of fiduciary duty claims, but allowed the breach of contract and conversion
claims to stand. In December 1999, SSB filed an answer and asserted
counterclaims against the investment advisor. In response to plaintiffs' 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. In
September 2000, the court denied plaintiffs' motion to dismiss SSB's
counterclaims based on indemnification and contribution. Discovery is ongoing.
SSBH and various subsidiaries have also been named as defendants in various
matters incident to and typical of the businesses in which they are engaged.
These include numerous civil actions, arbitration proceedings and other matters
in which SSBH's broker-dealer subsidiaries have been named, arising in the
normal course of business out of activities as a broker and dealer in
securities, as an underwriter of securities, as an investment banker or
otherwise. In the opinion of SSBH's management, none of these actions is
expected to have a material adverse effect on the results of operations,
consolidated financial condition or liquidity of SSBH and its subsidiaries.
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.
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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, 2001 was 637.
(c) Distribution. The Partnership did not declare a distribution in
2001 or 2000.
(d) Use of Proceeds. There were no additional sales in the years
ended December 31, 2001, 2000 and 1999.
14
<
Item 6. Selected Financial Data. 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, 2001, 2000, 1999, 1998 and 1997 and total assets at December 31,
2001, 2000, 1999, 1998 and 1997 were as follows:
2001 2000 1990 1998 1997
------------ ----------- ------------- ------------ ------------
Realized and unrealized
trading gains(losses) net of
brokerage commissions and
clearing fees of $247,193,
$588,695, $1,148,676,
$1,357,927 and $1,462,372,
respectively $ 241,570 $ (2,076,683) $ (3,003,382) $ 1,234,224 $ 2,025,344
Realized and unrealized
appreciation (depreciation)
on Zero Coupons 220,306 367,890 (1,301,703) 923,712 631,119
Interest income 650,762 1,071,638 1,563,022 1,710,639 1,916,217
------------ ------------ ------------ ------------ ------------
$ 1,112,638 $ (637,155) $ (2,742,063) $ 3,868,575 $ 4,572,680
============ ============ ============ ============ ============
Net income (loss) $ 912,086 $ (857,383) $ (3,247,194) $ 2,968,642 $ 3,546,888
============ ============ ============ ============ ============
Increase (decrease) in
Net Asset Value per Unit $ 87.28 $ (10.68) $ (129.45) $ 109.40 $ 115.33
============ ============ ============ ============ ============
Total assets $ 13,020,582 $ 14,239,485 $ 29,079,820 $ 35,208,540 $ 36,883,726
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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 positions and interest receivable. Because of the low
margin deposits normally required in commodity 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 interests 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.
(5) The Advisor may, from time to time, employ trading strategies such as
spreads or straddles on
16
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
through financial, credit and risk management monitoring systems and accordingly
17
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 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 interest; or (vi) the
occurrence of any event which shall make it unlawful for the existence of the
Partnership to be continued.
18
(b) Capital resources. (i) The Partnership has made no material commitments
for capital expenditures.
(ii) The Partnership's capital consists 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 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 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.
19
No forecast can be made as to the level of redemptions in any given period.
A limited partner may cause all of his Units to be redeemed by the Partnership
at the Net Asset Value thereof as of the last day of a quarter on ten days'
written notice to the General Partner. No fee will be charged for redemptions.
For the year ended December 31, 2001, 1,429 Units were redeemed totaling
$1,769,289. For the year ended December 31, 2000, 11,615 Units was redeemed
totaling $13,186,595. For the year ended December 31, 1999, 3,123 Units were
redeemed totaling $3,837,307.
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, 2001, the Net
Asset Value per Unit increased 7.4% from $1,188.28 to $1,275.56. For the year
ended December 31, 2000, the Net Asset Value per Unit decreased 0.9% from
$1,198.96 to $1,188.28. For the year ended December 31, 1999, the Net Asset
Value per Unit decreased 9.7% from $1,328.41 to $1,198.96.
The Partnership experienced net trading gains of $488,763 before
commissions and expenses for the year ended December 31, 2001. Gains were
primarily attributable to the trading in U.S. and non-U.S. interest rates,
metals and indices and were partially offset by losses recognized in grains,
20
currencies, energy, livestock and softs products. The Partnership experienced a
realized gain of $40,999 on Zero Coupons liquidated in conjuction with the
redemption of Units during 2001 and unrealized appreciation of $179,307 on Zero
Coupons during 2001.
The Partnership experienced net trading losses of $1,487,988 before
commissions and expenses for the year ended December 31, 2000. Losses were
primarily attributable to the trading in softs, grains, indices, metals,
livestock, U.S. and non-U.S. interest rates and were partially offset by gains
recognized in currencies and energy products. The Partnership experienced a
realized loss of $114,437 on Zero Coupons liquidated in conjunction with the
redemption of Units during 2000 and unrealized appreciation of $482,327 on Zero
Coupons during 2000.
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 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.
Commodity 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
21
existence of major price trends and the ability of the Advisor 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
the extent that market trends exist and the Advisor 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.
22
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 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.
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.
23
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
24
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 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
25
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, the Advisor may trade commodity
options. The Value at Risk associated with options is reflected in the 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.
26
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.
27
<
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, 2001. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 2001, the
Partnership's total capitalization was $12,288,724.
December 31, 2001
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ----------------------------------------------------------------------------------------------
Currencies
- -Exchange Traded Contracts $ 90,000 0.73% $227,700 $ 30,000
Energy 139,500 1.14% 235,500 5,000
Grains 9,600 0.08% 51,050 1,200
Interest rates U.S. 23,640 0.19% 164,200 18,200
Interest rates Non-U.S. 51,226 0.42% 228,640 8,747
Metals:
- - OTC Contracts 26,250 0.21% 61,800 13,000
Indices 37,404 0.30% 307,309 7,758
-------- -----
Total $377,620 3.07%
======== =====
28
As of December 31, 2000, the Partnership's total capitalization was $13,145,927.
December 31, 2000
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ------------------------------------------------------------------------------------------
Currencies
- -Exchange Traded Contracts $ 53,848 0.41% $263,939 $ 29,018
- -OTC Contracts 8,250 0.06% 347,886 8,250
Energy 22,100 0.17% 212,500 20,000
Grains 49,050 0.37% 141,400 9,600
Interest rates U.S. 74,150 0.56% 258,745 11,300
Interest rates Non-U.S. 221,947 1.69% 629,165 36,963
Livestock 29,070 0.22% 40,175 1,600
Metals (Exchange Traded and
OTC Contracts) 28,300 0.22% 342,750 26,300
Softs 38,600 0.29% 136,800 9,500
Indices 59,282 0.45% 606,091 27,980
Lumber 2,200 0.02% 8,800 1,800
---------- -----
Total $586,797 4.46%
======== =====
29
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."
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.
30
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 Advisor 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
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.
31
The following were the primary trading risk exposures of the Partnership as
of December 31, 2001, by market sector.
Interest Rates. 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.
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. The Partnership is primarily
32
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.)
Metals. The Partnership's primary metal market exposure is to fluctuations
in the price of aluminum.
Softs. The Partnership's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Wheat accounted for the substantial bulk of the
Partnership's commodity exposure as of December 31, 2001.
Energy. The Partnership's primary energy market exposure is to gas price
movements, often resulting from political developments in the Middle East.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership
as of December 31, 2001.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, Euro dollar and Hong Kong dollar. 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.
33
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 Advisor concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require the Advisor to close out individual
positions as well as enter certain positions traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisor's own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
The Advisor applies its own risk management policies to its trading. The
Advisor often follows diversification guidelines, margin limits and stop loss
points to exit a position. The Advisor's 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 Advisor to discuss its risk
34
management and to look for any material changes to the Advisor's portfolio
balance and trading techniques. The Advisor is 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.
35
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, 2001 and 2000. F-4
Condensed Schedule of Investments at
December 31, 2001 F-5
Statement of Income and Expenses for
the years ended December 31, 2001, 2000
and 1999. F-6
Statement of Partners' Capital for the
years ended December 31, 2001, 2000 and
1999. F-7
Notes to Financial Statements. F-8 - F-12
F-1
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 R. McAuliffe, Jr.
Chief Financial Officer and Director
Smith Barney Futures Management LLC
General Partner, Smith Barney Principal PLUS
Futures Fund L.P.
Smith Barney Futures Management LLC
388 Greenwich Street
7th 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, including the
condensed schedule of investments, 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, 2001 and 2000, and the results of its operations for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. 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 of America,
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 our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-3
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Financial Condition
December 31, 2001 and 2000
2001 2000
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $2,820,810 $3,023,608
Net unrealized appreciation on open positions 327,998 478,851
Zero coupons, $9,634,000 and $11,063,000 principal amount in 2001 and
2000, respectively, due February 15, 2003 at fair value (amortized cost
$9,061,122 and $9,813,170 in 2001 and 2000, respectively)
(Notes 1 and 2) 9,380,529 9,953,270
------------ ------------
12,529,337 13,455,729
Receivable from SSB on sale of zero coupons 487,523 770,500
Interest receivable 3,722 13,256
------------ ------------
$13,020,582 $14,239,485
============ ============
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $17,634 $5,844
Management fees 6,959 27,362
Incentive fees 30,209 --
Professional fees 33,019 33,242
Other 4,981 5,189
Redemptions payable (Note 5) 639,056 1,021,921
------------ ------------
731,858 1,093,558
------------ ------------
Partners' Capital (Notes 1, 5 and 6):
General Partner, 376 Unit equivalents outstanding in 2001 and 2000 479,611 446,793
Limited Partners, 9,258 and 10,687 Units of Limited Partnership Interest
outstanding in 2001 and 2000, respectively 11,809,113 12,699,134
------------ ------------
12,288,724 13,145,927
------------ ------------
$13,020,582 $14,239,485
============ ============
See notes to financial statements.
F-4
Smith Barney Principal PLUS
Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2001
Sector Contract Fair Value
Total Currencies - 1.47% Exchange contracts sold - 1.47% $ 180,750
-------
Total Energy - 0.45% Exchange contracts sold - 0.45% 55,400
------
Total Grains - 0.02% Futures contracts sold - 0.02% 1,800
-----
Interest Rates U.S. Futures contracts sold - 0.11% 13,562
Futures contracts purchased - 0.02% 2,625
-----
Total Interest Rates U.S. - 0.13% 16,187
------
Total Interest Rates Non-U.S - 0.28% Futures contracts sold - 0.28% 34,196
-------
Metals Futures contracts sold - (0.68)% (83,509)
Futures contracts purchased - 0.94% 115,614
-------
Total Metals - 0.26% 32,105
-------
Total Indices - 0.06% Futures contracts purchased - 0.06% 7,560
-------
Total Fair Value - 2.67% 327,998
-------
Total Zero Coupons - 76.33% Zero Coupon Bond, 2/15/2003 9,380,529
(amortized cost $9,061,122) - 76.33% ---------
---------
Total Investments - 79.00% $9,708,527
=========
Investments % of Investments
Country Composition at Value at Value
------------------- ----------------------------------
Canada $7,560 0.08%
Germany 34,195 0.35%
United Kingdom 32,105 0.33%
United States 9,634,667 99.24%
----------------------------------
$9,708,527 100.00%
==================================
Percentages are based on Partners' capital unless otherwise indicated
See notes to financial statements
F-5
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Income and Expenses
for the years ended December 31, 2001,
2000 and 1999
2001 2000 1999
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions $639,616 $(1,502,461) $(968,536)
Change in unrealized gains (losses) on open positions (150,853) 14,473 (886,170)
------------ ----------- ------------
488,763 (1,487,988) (1,854,706)
Less, Brokerage commissions including clearing fees of
$19,702, $23,109 and $33,604, respectively (Note 3c) (247,193) (588,695) (1,148,676)
------------ ----------- ------------
Net realized and unrealized gains (losses) 241,570 (2,076,683) (3,003,382)
Gains (losses) on sale of zero coupons 40,999 (114,437) (11,715)
Unrealized appreciation (depreciation) on zero coupons 179,307 482,327 (1,289,988)
Interest income (Notes 3c) 650,762 1,071,638 1,563,022
----------- ----------- ------------
1,112,638 (637,155) (2,742,063)
----------- ----------- ------------
Expenses:
Management fees (Note 3b) 75,292 177,828 434,157
Incentive fees (Note 3b) 69,802 -- --
Professional fees 46,026 37,074 60,814
Other expenses 9,432 5,326 10,160
----------- ----------- ------------
200,552 220,228 505,131
----------- ----------- ------------
Net income (loss) $912,086 $(857,383) $(3,247,194)
=========== ============= ==========
Net income (loss) per Unit of Limited Partnership Interest
and General Partner Unit equivalent (Notes 1 and 6) $87.28 $(10.68) $(129.45)
=========== ============= ==========
See notes to financial statements.
F-6
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Partners' Capital
for the years ended December 31, 2001,
2000 and 1999
Limited General
Partners Partner Total
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
Net loss (853,367) (4,016) (857,383)
Redemption of 11,615 Units of Limited
Partnership Interest (13,186,595) -- (13,186,595)
------------ ----------- ----------
Partners' capital at December 31, 2000 12,699,134 446,793 13,145,927
Net Income 879,268 32,818 912,086
Redemption of 1,429 Units of Limited
Partnership Interest (1,769,289) -- (1,769,289)
------------ ------------ ----------
Partners' capital at December 31, 2001 $11,809,113 $479,611 $12,288,724
============ ============ ==========
See notes to financial statements.
F-7
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"). The Partnership was authorized to sell 100,000 Units
during the initial offering period of the Partnership.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. 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 and foreign currencies 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 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.
F-8
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 in the United States of America 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 a
Management Agreement with Tucson Asset Management (the "Advisor"), which
provides that the Advisor have sole discretion in determining the
investment of the assets of the Partnership allocated to the 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) of month-end Net
Assets allocated to each advisor. The Partnership will also pay an
incentive fee payable quarterly equal to 20% of New Trading Profits, as
defined in the Management Agreement. Fort Orange Capital Management and
Rabar Market Research Inc. were terminated as Advisors to the Partnership
on March 1, 2001. Tucson Asset Management was added as an Advisor on that
date.
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 Advisor. Prior to March 1, 2001 the Partnership was 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.
Effective March 1, 2001, the Partnership is obligated to pay a monthly
brokerage fee to SSB equal to 5/12 of 1% of month-end Net Assets (5% 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 segregated
bank accounts, to the extent required by Commodity Futures Trading
Commission regulations. At December 31, 2001 and 2000, the amount of cash
held for margin requirements was $468,622 and $699,434, 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.
F-9
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, 2001 and 2000, based on a monthly calculation, was $255,048 and
$269,193, respectively. The fair value of these commodity interests,
including options thereon, if applicable, at December 31, 2001 and 2000 was
$327,998 and $478,851, respectively.
Fair Value
December 31,
2000
------------
Currencies:
-Exchange Traded Contracts $65,505
-OTC Contracts (5,049)
Energy 3,487
Grains 31,857
Interest Rates U.S. 176,358
Interest Rates Non-U.S. 169,076
Livestock 7,940
Metals:
-Exchange Traded Contracts (2,290)
-OTC Contracts (6,203)
Softs 10,194
Indices 28,350
Lumber (374)
----------
Total $478,851
==========
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.
F-10
6. Financial Highlights:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
Net realized and unrealized gains (losses) $24.69 $(89.55) $(120.12)
Realized and unrealized appreciation (depreciation) on Zero
Coupons 20.35 26.93 (51.90)
Interest income 61.28 63.80 62.91
Expenses (19.04) (11.86) (20.34)
----------- ---------- ----------
Increase (decrease) for year 87.28 (10.68) (129.45)
Net asset value per Unit, beginning of year 1,188.28 1,198.96 1,328.41
--------- --------- ---------
Net asset value per Unit, end of year $1,275.56 $1,188.28 $1,198.96
========= ========= ========
Ratios to average net assets:
Net income before incentive fee 7.6%
Incentive fee (0.5)%
----------
Net income after incentive fee 7.1%
=========
Operating expenses 3.0%
Incentive fee 0.5%
----------
Total expenses and incentive fee 3.5%
=========
Total return:
Total return before incentive fee 7.9%
Incentive fee (0.5)%
-----------
Total return after incentive fee 7.4%
==========
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.
F-11
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. 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 credit risk and 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 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, 2001. However, due
to the nature of the Partnership's business, these instruments may not be
held to maturity.
F-12
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 Advisor.
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 $247,193 were earned for the year
ended December 31, 2001. Management fees and incentive fees of $75,292 and
$68,802, respectively were paid or payable to the Advisor for the year ended
December 31, 2001.
36
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. The Partnership knows
of no person who beneficially owns more than 5% of the Units outstanding.
(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 general partnership interest
equivalent to 376 (3.9%) 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."
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, 2001 and 2000.
37
Statement of Income and Expenses for the years ended
December 31, 2001, 2000 and 1999.
Statement of Partners' Capital for the years ended December
31, 2001, 2000 and 1999.
(2) Financial Statement Schedules: Financial data schedule for
the year ended December 31, 2001.
(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).
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).
38
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).
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).
39
10.11- Management Agreement among the Partnership, the General
Partner and Fort Orange Capital Management for 1999
(previously filed).
10.12- Letters extending Management Agreements with Rabar Market
Research, Inc. and John W. Henry & Company, Inc. for 1999
(previously filed).
10.13- Letter from the General Partner terminating Management
Agreement with John W. Henry & Company Inc. (previously
filed).
10.14- Letters extending Management Agreements with Rabar Market
Research, Inc. and Fort Orange Capital Management for 2000
(previously filed).
10.15- Letters from General Partner terminating Management
Agreements with Rabar Market Research, Inc. and Fort Orange
Capital Management (filed herein).
10.16- Management Agreement among the Partnership, the General
Partner and Tucson Asset Management (filed herein).
(b) Reports on 8-K: None Filed.
40
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
41
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 29h day of March 2002.
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/ Shelley Ullman
- ------------------------------ -------------------
David J. Vogel Director
Director, Principal Executive
Officer and President
/s/ Maureen O'Toole /s/ Steve J. Keltz
- -------------------------- ------------------
Maureen O'Toole Secretary and Director
Director
/s/ Daniel R. McAuliffe, Jr.
- ------------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
42