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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, 2000
Commission File Number 0-22489
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 13-3862967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th 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 28, 2001, Limited Partnership Units with an aggregate value of
$16,717,233 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. II (the "Partnership") is a limited partnership organized on November
16, 1995 under the partnership laws of the State of New York. The Partnership
engages in speculative trading of commodity interests, including contracts on
foreign currencies, commodity options and commodity futures contracts including
futures contracts on United States Treasury and other financial instruments,
foreign currencies and stock indices. The Partnership maintains a portion of its
assets in principal amounts stripped from U.S. Treasury Bonds under the
Treasury's STRIPS program ("Zero Coupons") which payments will be due November
15, 2003. The Partnership uses the Zero Coupons and its other assets to margin
its commodities account.
A total of 60,000 Units of Limited Partnership Interest in the Partnership
(the "Units") were offered to the public. Between April 3, 1996 and August 8,
1996, 19,897 Units were sold to the public at $1,000 per Unit. Proceeds of the
offering along with the General Partners' contribution of $203,000 were held in
escrow until August 9, 1996 at which time an aggregate of $20,100,000 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.
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("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, 2000, all commodity trading
decisions are made for the Partnership by Winton Capital Management ("Winton")
and Willowbridge Associates Inc. ("Willowbridge") (collectively, the
"Advisors"). Neither of the Advisors is affiliated with the General Partner or
SSB. The Advisors are not responsible for the organization or operation of the
Partnership. Effective July 1, 2000, John W. Henry & Company, Inc. was
terminated as an Advisor to the Partnership and Winton was added as an Advisor
on that date.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership is obligated to pay Willowbridge a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets
allocated to it and pay Winton a monthly management fee equal to 1/8 of 1% (1.5%
per year) of the month-end Net Assets allocated to it. The Partnership will also
pay each Advisor an incentive fee payable quarterly equal to 20% of New Trading
3
Profits earned by it for the Partnership (as defined in the Management
Agreements).
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 pays 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 pays 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.
In addition, SSB pays 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
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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 (November 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. The Partnership does not engage in sales of goods or services. The
Partnership's net income from operations for the years ended December 31, 2000,
1999 and 1998 is set forth under "Item 6. Selected Financial Data." Partnership
capital as of December 31, 2000 was $16,573,979.
(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.
5
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.
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 CFTC disclosure requirements are:
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 and Salomon Brothers Realty Corporation 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. Salomon Brothers Inc and Salomon
Brothers Realty Corp.). The complaint alleged that purchases by Ameritech
6
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.
Salomon Brothers Inc 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. An argument was heard on 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. In June
the Supreme Court reversed the Seventh Circuit and the matter has been remanded
to the Trial Courts.
Both the Department of Labor and the Internal Revenue Service have
advised Salomon Brothers Inc that they were or are reviewing the transactions
in which Ameritech Pension Trust acquired such participations. With respect to
the Internal Revenue Service review, Salomon Smith Barney Holdings, Salomon
7
Brothers Inc and Salomon Brothers Realty 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.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
Salomon Smith Barney, 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. Salomon Smith Barney 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 Internal Revenue
Service denies tax exempt status to the City's General Obligation Refunding
Bonds Series 1991. The complaints were subsequently amended. Salomon Smith
Barney has asked the court to dismiss the amended complaints. The Court denied
the motion but stayed the case. Subsequently, the city withdrew its lawsuit.
It 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,
8
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including
Salomon Smith Barney, 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. Salomon Smith Barney 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 April 2000 SSB and
several other broker-dealers entered into a settlement with the IRS and the
SEC.
In December 1998, Salomon Smith Barney 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, Salomon Smith Barney, 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 l5cl -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 Salomon Smith Barney in the
Supreme Court of the State of New York, County of New York (MKP Master Fund,
9
LDC et al. v. Salomon Smith Barney Inc.). The complaint included allegations
that, while acting as prime broker for the hedge fund, Salomon Smith Barney
breached its contracts with plaintiffs, misused their monies, and engaged in
tortious (wrongful) conduct, including breaching its fiduciary duties. Salomon
Smith Barney 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, Salomon Smith Barney will continue to contest this lawsuit vigorously.
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.
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, 2000 was 886.
(c) Distribution. The Partnership did not declare a
distribution in 2000 or 1999
(d) Use of Proceeds. There were no additional sales in the
years ended December 31, 2000, 1999 and 1998.
10
Item 6. Selected Financial Data. The Partnership commenced trading operations on
August 9, 1996. Realized and unrealized trading gains (losses), realized and
unrealized gains (losses) on Zero Coupons, interest income, net income (loss)
and increase (decrease) in net asset value per Unit for the years ended December
31, 2000, 1999, 1998, 1997 and for the period from August 9, 1996 (commencement
of trading operations) to December 31, 1996 and total assets at December 31,
2000, 1999, 1998, 1997 and 1996 were as follows:
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------ -------------
Realized and unrealized trading
gains(losses) net of brokerage
commissions and clearing fees
of $624,556, $934,444, $914,741,
$958,141, and $346,364,
respectively $ 203,233 $ (1,722,069) $ 2,010,123 $ 372,990 $ 2,812,357
Realized and unrealized
appreciation (depreciation)
on Zero Coupons 471,530 (1,058,378) 644,098 429,903 80,764
Interest income 970,693 1,106,132 1,126,341 1,212,251 434,374
------------ ------------ ------------ ------------ ------------
$ 1,645,456 $ (1,674,315) $ 3,780,562 $ 2,015,144 $ 3,327,495
============ ============ ============ ============ ============
Net income (loss) $ 1,420,294 $ (2,130,054) $ 3,174,331 $ 1,359,429 $ 2,717,561
============ ============ ============ ============ ============
Increase (decrease) in
net asset value per unit $ 119.81 $ (133.74) $ 186.29 $ 68.65 $ 135.20
============ ============ ============ ============ ============
Total assets $ 17,471,747 $ 19,486,036 $ 23,386,690 $ 23,217,865 $ 23,276,499
============ ============ ============ ============ ============
11
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 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.
12
(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
through financial, credit and risk management monitoring systems and accordingly
13
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 (November 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.
14
(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 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 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.
No forecast can be made as to the level of redemptions in any given
15
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 (the
"Redemption Date") 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. Thereafter, no redemption fee will be charged.
For the year ended December 31, 2000, 3,049 Units were redeemed totaling
$3,693,417. For the year ended December 31, 1999, 1,497 Units were redeemed
totaling $1,960,998. For the year ended December 31, 1998, 2,130 Units were
redeemed totaling $2,542,381. During 1998, SSB received redemption fees of
$8,992.
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, 2000, the
Net Asset per Unit increased 9.8% from $1,228.54 to $1,348.35. For the year
ended December 31, 1999, the Net Asset Value per Unit decreased 9.8% from
$1,362.28 to $1,228.54. For the year ended December 31, 1998, the Net Asset
Value per Unit increased 15.8% from $1,175.99 to $1,362.28.
16
The Partnership experienced net trading gains of $827,789 before
commissions and expenses in 2000. Gains were primarily attributable to the
trading in currencies, energy, U.S. and non-U.S. interest rates and were
partially offset by losses recognized in the trading of grains, softs,
livestock, metals and indices. The Partnership experienced unrealized
appreciation of $446,478 on Zero Coupons during 2000 and a gain on the sale of
Zero Coupons of $25,052 during 2000.
The Partnership experienced net trading losses of $787,625 before
commissions and expenses for the period ended December 31, 1999. Losses were
attributable to the trading of commodity futures in non-U.S. interest rates,
softs, indices, metals, grains and currencies offset by gains in U.S interest
rates and energy. The Partnership experienced unrealized depreciation of
$1,084,077 on Zero Coupons during 1999 and a gain on the sale of Zero coupons of
$25,699 during 1999.
The Partnership experienced net trading gains of $2,924,864, before
commissions and expenses in 1998. These gains were attributable to trading in
energy and U.S. and non-U.S. interest rates products offset by losses in
currencies, grains, livestock, metals, softs and indices. The Partnership
experienced unrealized appreciation of $565,392 on Zero Coupons during 1998 and
a gain on the sale of Zero Coupons of $78,706 during 1998.
Commodity markets are highly volatile. Broad price fluctuations and
rapid inflation increase the risks involved in commodity trading, but also
17
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
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
18
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, to
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
19
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 results 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
20
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
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
21
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
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
22
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.
23
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, 2000. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 2000, the
Partnership's total capitalization was $16,573,979.
December 31, 2000
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk
- --------------------------------------------------------------------------------------------
Currencies
- Exchange Traded Contracts $ 197,938 1.19% $ 532,135 $ 53,445
Energy 34,000 0.21% 790,700 25,700
Grains 66,789 0.40% 209,900 6,300
Interest rates U.S 119,000 0.72% 272,600 10,090
Interest rates Non-U.S 552,984 3.34% 736,677 170,842
Livestock 28,520 0.17% 56,540 4,500
Metals (Exchange Traded and OTC Contracts) 120,725 0.73% 300,550 18,000
Softs 61,822 0.37% 209,500 21,500
Indices 26,202 0.16% 303,411 12,344
Lumber 2,200 0.01% 170,955 1,100
---------- ------
Total $1,210,180 7.30%
========== ======
24
As of December 31, 1999, the Partnership's total capitalization was $18,847,102.
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- -------------------------------------------------------------------------------------------------------
Currencies
- Exchange Traded $ 257,696 1.37% $ 238,141 $ 175,309
- OTC Contracts 226,009 1.20% 372,478 110,492
Energy 296,300 1.57% 346,300 200,600
Grains 37,750 0.20% 69,300 10,800
Interest rates U.S 196,000 1.04% 301,400 68,000
Interest rates Non-U.S 297,920 1.58% 787,846 115,899
Livestock 18,400 0.10% 46,400 6,400
Metals (Exchange Traded and OTC Contracts) 232,000 1.23% 359,300 30,000
Softs 163,067 0.86% 213,689 69,463
Indices 107,371 0.57% 286,160 34,795
---------- ----------
Total $1,832,513 9.72%
========== ==========
25
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.
26
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
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.
27
The following were the primary trading risk exposures of the
Partnership as of December 31, 2000, 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.
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.
28
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, 2000, 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.)
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 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,
2000.
Energy. The Partnership's primary energy market exposure is to gas
29
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
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership as of December 31, 2000.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, Australian dollar, British pounds and Swiss
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 securitites 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
30
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
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 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.
31
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
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,
2000 and 1999 F-4
Statement of Income and Expenses for
the years ended December 31, 2000, 1999
and 1998 F-5
Statement of Partners' Capital for
the years ended December 31, 2000, 1999
and 1998 F-6
Notes to Financial Statements F-7 - F-11
F-1
To The Limited Partners of
Smith Barney Principal PLUS
Futures Fund L.P. II
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. II
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. II:
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. II at December 31, 2000 and 1999, and the
results of its operations for each of the three years in the period ended
December 31, 2000, 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
March 9, 2001
F-3
Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Financial Condition
December 31, 2000 and 1999
2000 1999
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $ 4,968,714 $ 6,813,826
Net unrealized appreciation on open positions 1,258,784 313,668
Zero coupons, $12,292,000 and $15,341,000 principal
amount in 2000 and 1999, respectively, due
November 15, 2003, at fair value (amortized
cost $10,283,556 and $12,033,954 in 2000 and 1999,
respectively) (Notes 1 and 2) 10,707,930 12,011,850
----------- -----------
16,935,428 19,139,344
Receivable from SSB on sale of zero coupons 514,560 322,229
Interest Income 21,759 24,463
----------- -----------
$17,471,747 $19,486,036
----------- -----------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 45,810 $ 62,619
Management fees 8,607 27,821
Professional fees 34,799 34,761
Other 3,587 7,575
Redemptions payable (Note 5) 804,965 506,158
----------- -----------
897,768 638,934
----------- -----------
Partners' capital (Notes 1, 5 and 6):
General Partner, 203 Unit equivalents outstanding in 2000 and 1999 273,715 249,394
Limited Partners, 12,089 and 15,138 Units of Limited Partnership
Interest outstanding in 2000 and 1999, respectively 16,300,264 18,597,708
----------- -----------
16,573,979 18,847,102
----------- -----------
$17,471,747 $19,486,036
----------- -----------
See notes to financial statements.
F-4
Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Income and Expenses
for the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions $(117,327) $(197,588) $2,741,433
Change in unrealized gains (losses) on open positions 945,116 (590,037) 183,431
------------ ------------ ------------
827,789 (787,625) 2,924,864
Less, Brokerage commissions including clearing fees of
$38,519, $25,058 and $19,687, respectively (Note 3c) (624,556) (934,444) (914,741)
------------ ------------ ------------
Net realized and unrealized gains (losses) 203,233 (1,722,069) 2,010,123
Gains on sale of zero coupons 25,052 25,699 78,706
Unrealized appreciation (depreciation) on zero coupons 446,478 (1,084,077) 565,392
Interest income (Notes 2c and 3c) 970,693 1,106,132 1,126,341
------------ ------------ ------------
1,645,456 (1,674,315) 3,780,562
------------ ------------ ------------
Expenses:
Management fees (Note 3b) 178,204 387,055 384,863
Incentive fees (Note 3b) -- 20,500 167,031
Professional fees 41,096 38,693 41,032
Other expenses 5,862 9,491 13,305
------------ ------------ ------------
225,162 455,739 606,231
------------ ------------ ------------
Net income (loss) $1,420,294 $(2,130,054) $3,174,331
------------ ------------ -------------
Net income (loss) per Unit of Limited Partnership Interest
and General Partner Unit equivalent (Notes 1 and 6) $119.81 $(133.74) $186.29
------------ ------------ -------------
See notes to financial statements.
F-5
Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Partners' Capital
for the years ended December 31, 2000, 1999 and 1998
Limited General
Partners Partner Total
Partners' capital at December 31, 1997 $ 22,067,478 $ 238,726 $ 22,306,204
Net income 3,136,514 37,817 3,174,331
Redemption of 2,130 Units of Limited Partnership Interest (2,542,381) -- (2,542,381)
------------ ------------ ------------
Partners' capital at December 31, 1998 22,661,611 276,543 22,938,154
Net loss (2,102,905) (27,149) (2,130,054)
Redemption of 1,497 Units of Limited Partnership Interest (1,960,998) -- (1,960,998)
------------ ------------ ------------
Partners' capital at December 31, 1999 18,597,708 249,394 18,847,102
Net income 1,395,973 24,321 1,420,294
Redemption of 3,049 Units of Limited Partnership Interest (3,693,417) -- (3,693,417)
------------ ------------ ------------
Partners' capital at December 31, 2000 $ 16,300,264 $ 273,715 $ 16,573,979
------------ ------------ ------------
See notes to financial statements.
F-6
Smith Barney Principal PLUS
Futures Fund L.P. II
Notes to Financial Statements
1. Partnership Organization:
Smith Barney Principal PLUS Futures Fund L.P. II (the "Partnership") is a
limited partnership which was organized on November 16, 1995 under the
partnership laws of the State of New York. 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 60,000 Units during its initial offering period. 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 (November, 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. 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.
c. The original issue discount on the Zero Coupons is being amortized over
their life using the interest method and is included in interest income.
d. 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-7
e. 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 Winton Capital Management and Willowbridge
Associates Inc. ("Willowbridge") (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
Willowbridge a monthly management fee of 1/6 of 1% (2% per year) of
month-end Net Assets allocated to it and pay Winton a monthly management
fee of 1/8 of 1% (1.5% per year) of month-end Net Assets allocated to it.
The Partnership will also pay each Advisor an incentive fee payable
quarterly equal to 20% of New Trading Profits, as defined in the
Management Agreements. For the period January 1, 2000 through June 30,
2000, the Partnership was obligated to pay John W. Henry & Company, Inc.
a monthly management fee of 1/3 of 1% (4% per year) of month-end Net
Assets, and an incentive fee of 15% of the New Trading Profits, as
defined in the Management Agreement. Effective July 1, 2000 John W. Henry
& Company, Inc. was terminated as an Advisor to the Partnership and
Winton Capital Management was added as an Advisor on that date.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which 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. 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, 2000 and 1999, the amount of cash held for
margin requirements was $1,408,303 and $2,228,172, 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-8
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, 2000 and 1999,
based on a monthly calculation, was $575,395 and $855,578, respectively. The
fair value of these commodity interests, including options thereon, if
applicable, at December 31, 2000 and 1999 was $1,258,784 and $313,668,
respectively, as detailed below.
Fair Value
December 31, December 31,
2000 1999
Currencies:
-Exchange Traded Contracts $ 636,230 $ 83,435
-OTC -- (72,633)
Energy 20,337 41,632
Grains 36,478 (3,896)
Interest Rates U.S. 233,656 163,531
Interest Rates Non-U.S 263,893 (42,138)
Livestock 42,715 (4,260)
Metals (Exchange Traded and OTC Contracts) 9,240 53,025
Softs 15,484 74,572
Indices (3,198) 20,400
Lumber 3,949 --
----------- -----------
Total $ 1,258,784 $ 313,668
----------- -----------
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner. Beginning with the end of the first full quarter ending at
least six months after trading commenced (March 31, 1997), 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 date, and 1% on the fourth
and fifth possible redemption dates. Thereafter, no redemption fee will be
charged. During 1998, SSB received redemption fees of $8,992. There were no
redemption fees charged during 2000 and 1999.
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, 2000, 1999 and 1998 were as follows:
2000 1999 1998
Net realized and unrealized gains (losses) $ 31.16 $ (109.18) $ 120.90
Realized and unrealized appreciation (depreciation)
on Zero Coupons 35.19 (64.64) 36.63
Interest income 69.15 68.06 63.05
Expenses (15.69) (27.98) (34.29)
--------- --------- ---------
Increase (decrease) for period 119.81 (133.74) 186.29
Net asset value per Unit, beginning of year 1,228.54 1,362.28 1,175.99
--------- --------- ---------
Net asset value per Unit, end of year $ 1,348.35 $ 1,228.54 $ 1,362.28
--------- --------- ---------
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.
F-10
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 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, 2000. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity.
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 $624,556 were earned
for the year ended December 31, 2000. Management fees of $178,204 were earned by
the Advisors for the year ended December 31, 2000. There were no incentive fees
earned by the Advisors for the year ended December 31, 2000.
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.
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(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 203 (1.6%) Units of Limited Partnership Interest as of December
31, 2000.
(c). Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management LL
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, 2000
and 1999.
Statement of Income and Expenses for the years ended
December 31, 2000, 1999 and 1998. Statement of
Partners' Capital for the years ended December 31,
2000, 1999 and 1998.
(2) Financial Statement Schedules: Financial Data Schedule for
the year ended December 31, 2000.
(3) Exhibits:
33
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 33-80723) and
incorporated herein by reference).
3.2 - Certificate of Limited Partnership of the Partnership as 1
(File No. 33-80723) 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. 33-80723) 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. 33-80723) 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. 33-80723) and
incorporated herein by reference).
10.6 - Management Agreement among the Partnership, the General Partner
and Willowbridge Associates Inc. (filed as Exhibit 10.6 to the
Registration Statement on Form S-1 (File No. 33-80723) and
incorporated herein by reference).
34
10.7 - Letters extending Management Agreements with John W. Henry &
Company, Inc. and Willowbridge Associates Inc. (previously
filed).
10.8 - Letter from the General Partner terminating Management
Agreement with John W. Henry & Company Inc. (filed herein).
10.9 - Management Agreement among the Partnership, the General Partner
and Winton Capital Management (filed herein).
10.10- Letter extending the Management Agreement with Willowbridge
Inc. (filed herein)
(b) Reports on 8-K: None Filed.
35
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
36
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 2001.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
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
37