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 0-22489
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SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
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(Exact name of registrant as specified in its charter)
New York 13-3862967
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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)
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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
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(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
$13,995,103 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. 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, 2001, 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.
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
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
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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
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
4
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, 2001,
2000 1999, 1998 and 1997 is set forth under "Item 6. Selected Financial Data."
Partnership capital as of December 31, 2001, was $15,415,522.
(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.
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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.
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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 pending
5
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.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
6
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
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
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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 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.
8
In June 1998, complaints were filed in the U.S. district Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc, et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the IRS denies tax exempt
status to the City's General Obligation Refunding Bonds Series 1991. The
complaints were subsequently amended. SSB has asked the court to dismiss the
amended complaints. 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
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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
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
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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
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,
11
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.
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 809.
(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.
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Item 6. Selected Financial Data. Net 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, 2001, 2000, 1999, 1998 and 1997 and total
assets at December 31, 2001, 2000, 1999, 1998 and 1997 were as follows:
2001 2000 1999 1998 1997
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Realized and unrealized trading
gains(losses)net of brokerage
commissions and clearing fees
of $649,493, $624,556, $934,444,
$914,741, and $958,141,
respectively $ (164,612) $ 203,233 $ (1,722,069) $ 2,010,123 $ 372,990
Realized and unrealized
appreciation (depreciation)
on Zero Coupons 279,052 471,530 (1,058,378) 644,098 429,903
Interest income 814,370 970,693 1,106,132 1,126,341 1,212,251
------------ ------------ ------------ ------------ ------------
$ 928,810 $ 1,645,456 $ (1,674,315) $ 3,780,562 $ 2,015,144
============ ============ ============ ============ ============
Net income (loss) $ 698,088 $ 1,420,294 $ (2,130,054) $ 3,174,331 $ 1,359,429
============ ============ ============ ============ ============
Increase (decrease) in
Net Asset Value per Unit $ 58.43 $ 119.81 $ (133.74) $ 186.29 $ 68.65
============ ============ ============ ============ ============
Total assets $ 15,909,719 $ 17,471,747 $ 19,486,036 $ 23,386,690 $ 23,217,865
============ ============ ============ ============ ============
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash, Zero Coupons, net unrealized appreciation
(depreciation) on open futures contracts and interest receivable. Because of the
low margin deposits normally required in commodity 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.
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(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
15
through financial, credit and risk management monitoring systems and accordingly
believes that it has effective procedures for evaluating and limiting the credit
and market risks to which the Partnership is subject. (See also "Item 8.
Financial Statements and Supplementary Data." for further information on
financial instrument risk included in the notes to financial statements.)
Other than the risks inherent in commodity 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
16
occurrence of any event which shall make it unlawful for the existence of the
Partnership to be continued.
(b) Capital resources. (i) The Partnership has made no material commitments
for capital expenditures.
(ii) The Partnership's capital will consist of the capital contributions of
the partners as increased or decreased by gains or losses on commodity 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 period.
17
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, 2001, 1,334 Units were redeemed totaling $1,856,545. 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 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 4.3% from $1,348.35 to $1,406.78. For the year
ended December 31, 2000, the Net Asset Value 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.
18
The Partnership experienced net trading gains of $484,881, before
commissions and expenses in 2001. Gains were attributable to trading in energy,
grains, softs and U.S. and non-U.S. interest rates products offset by losses in
currencies, livestock, metals and indices. The Partnership experienced
unrealized appreciation of $215,895 on Zero Coupons during 2001 and a gain on
the sale of Zero Coupons of $63,157 during 2001.
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.
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
19
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 than in more established markets.
20
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
21
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
intrinsic to all future projections, the inclusion of the quantification
22
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 to be
23
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
24
maintenance margin has been used. This calculation is conservative in that it
assumes that the fair value of an option will decline by the same amount as the
fair value of the underlying instrument, whereas, in fact, the fair values of
the options traded by the Partnership in almost all cases fluctuate to a lesser
extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive correlation
in the different positions held in each market risk category has been assumed.
Consequently, the margin requirements applicable to the open contracts have
simply been added to determine each trading category's aggregate Value at Risk.
The diversification effects resulting from the fact that the Partnership's
positions are rarely, if ever, 100% positively correlated have not been
reflected.
25
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 $15,415,522.
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 $ 152,825 0.99% $ 214,971 $ 117,565
Energy 147,600 0.96% 284,100 28,220
Grains 108,893 0.71% 138,012 27,097
Interest rates U.S 23,425 0.15% 213,500 6,300
Interest rates Non-U.S 197,971 1.28% 860,350 181,465
Livestock 19,680 0.13% 82,640 6,237
Metals
Exchange Traded Contracts 84,800 0.55% 122,400 38,900
OTC Contracts 25,100 0.16% 86,200 10,350
Softs 60,978 0.40% 131,867 47,686
Indices 204,231 1.32% 280,568 975
Lumber 1,300 0.01% 7,900 950
---------- ----------
Total $1,026,803 6.66%
========== ==========
26
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 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%
========== ==========
27
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.
28
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.
29
The following were the primary trading risk exposures of the Partnership as
of December 31, 2001, 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
30
Value at Risk in a functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity price
risk in the G-7 countries. The stock index futures traded by the Partnership are
by law limited to futures on broadly based indices. As of December 31, 2001, the
Partnership's primary exposures were in the S&P 500, Financial Times (England),
and CAC40 (France) 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, zinc 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,
2001.
31
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the
Middle East. Oil prices can be volatile and substantial profits and losses have
been and are expected to continue to be experienced in this market.
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, Australian dollar, British pounds and Euro 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 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
32
and limiting the credit and market risks to which the Partnership is subject.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
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.
33
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, 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. II
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. 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,
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. II 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. II
Statement of Financial Condition
December 31, 2001 and 2000
2001 2000
----------- -----------
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $ 4,793,430 $ 4,968,714
Net unrealized appreciation on open positions 421,121 1,258,784
Zero coupons, $10,958,000 and $12,292,000 principal amount in 2001
and 2000, respectively, due November 15, 2003, at fair value
(amortized cost $9,777,282 and $10,283,556 in 2001 and 2000,
respectively) (Notes 1 and 2) 10,417,551 10,707,930
----------- -----------
15,632,102 16,935,428
Receivable from SSB on sale of zero coupons 271,528 514,560
Interest receivable 6,089 21,759
----------- -----------
$15,909,719 $17,471,747
----------- -----------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 41,148 $ 45,810
Management fees 7,190 8,607
Professional fees 38,545 34,799
Other 4,975 3,587
Redemptions payable (Note 5) 402,339 804,965
----------- -----------
494,197 897,768
----------- -----------
Partners' capital (Notes 1, 5 and 6):
General Partner, 203 Unit equivalents outstanding in 2001 and 2000 285,576 273,715
Limited Partners, 10,755 and 12,089 Units of Limited Partnership
Interest outstanding in 2001 and 2000, respectively 15,129,946 16,300,264
----------- -----------
15,415,522 16,573,979
----------- -----------
$15,909,719 $17,471,747
----------- -----------
See notes to financial statements.
F-4
Smith Barney Principal PLUS
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2001
Sector Contract Fair Value
- ---------- ---------- -----------
Currencies Futures contract purchased - 0.40% $ 62,698
Futures contracts sold - 1.16% 178,335
------------
Total Currencies - 1.56% 241,033
------------
Energy Futures contract purchased - (0.07)% (10,025)
Futures contracts sold - 0.07% 10,410
------------
Total Energy - 0.00% 385
------------
Grains Futures contract purchased - 0.00% * (1,000)
Futures contracts sold - 0.61% 94,757
------------
Total Grains - 0.61% 93,757
------------
Interest Rates Non-U.S Futures contract - purchased (0.11)% (17,938)
Futures contracts sold - 0.34% 52,742
------------
Total Interest Rates Non-U.S. - 0.23% 34,804
------------
Interest Rates Futures contract purchased - 0.03% 5,790
Futures contracts sold - (0.01)% (2,613)
------------
Total Interest Rates U.S. - 0.02% 3,177
------------
Livestock Futures contract purchased - 0.08% 12,920
Futures contracts sold - (0.04)% (6,880)
------------
Total Livestock - 0.04% 6,040
------------
Metals Futures contract purchased - 0.03% 5,560
Futures contracts sold - (0.19)% (29,501)
------------
Total Metals - (0.16)% (23,941)
------------
Total Lumber - (0.01)% Futures contract sold (0.01)% (1,661)
------------
Softs Futures contract purchased - 0.13% 20,397
Futures contracts sold - 0.03% 4,593
------------
Total Softs - 0.16% 24,990
------------
Total Indices - 0.28% Futures contract purchased - 0.28% 42,537
------------
Total Fair Value - 2.73% 421,121
Total Zero Coupons - 67.58% Zero Coupon Bond, 11/15/2003
(amortized cost $9,777,282) 10,417,551
------------
Total Investments - 70.31% $ 10,838,672
------------
Country Composition Investments % of Investments
at Value at Value
------------------- ------------------ --------------------
Australia $7,645 0.07%
Canada 8,263 0.08%
France 6,113 0.05%
Germany 33,361 0.31%
Hong Kong 910 0.01%
Japan (1,881) (0.02)%
Singapore (11,076) (0.10)%
United Kingdom (53,418) (0.49)%
United States 10,848,756 100.09%
------------------ ----------------
$10,838,672 100.00%
================== ================
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding.
See notes to financial statements.
F-5
Smith Barney Principal PLUS
Futures Fund L.P. II
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 $ 1,322,544 $ (117,327) $ (197,588)
Change in unrealized gains (losses) on open positions (837,663) 945,116 (590,037)
----------- ----------- -----------
484,881 827,789 (787,625)
Less, Brokerage commissions including clearing fees of
$43,765, $38,519 and $25,058, respectively (Note 3c) (649,493) (624,556) (934,444)
----------- ----------- -----------
Net realized and unrealized gains (losses) (164,612) 203,233 (1,722,069)
Gains on sale of zero coupons 63,157 25,052 25,699
Unrealized appreciation (depreciation) on zero coupons 215,895 446,478 (1,084,077)
Interest income (Notes 2c and 3c) 814,370 970,693 1,106,132
----------- ----------- -----------
928,810 1,645,456 (1,674,315)
----------- ----------- -----------
Expenses:
Management fees (Note 3b) 96,142 178,204 387,055
Incentive fees (Note 3b) 80,345 -- 20,500
Professional fees 44,052 41,096 38,693
Other expenses 10,183 5,862 9,491
----------- ----------- -----------
230,722 225,162 455,739
----------- ----------- -----------
Net income (loss) $ 698,088 $ 1,420,294 $(2,130,054)
----------- ----------- -----------
Net income (loss) per Unit of Limited Partnership Interest
and General Partner Unit equivalent (Notes 1 and 6) $ 58.43 $ 119.81 $ (133.74)
----------- ----------- -----------
See notes to financial statements.
F-6
Smith Barney Principal PLUS
Futures Fund L.P. II
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 $ 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
Net income 686,227 11,861 698,088
Redemption of 1,334 Units of Limited Partnership Interest (1,856,545) -- (1,856,545)
------------ ------------ ------------
Partners' capital at December 31, 2001 $ 15,129,946 $ 285,576 $ 15,415,522
------------ ------------ ------------
See notes to financial statements.
F-7
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.
F-8
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.
e. 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
Management Agreements with Winton Capital Management ("Winton") 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.
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, 2001 and 2000,
the amount of cash held for margin requirements was $1,243,463 and $1,408,303,
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 $568,840 and $575,395, respectively. The fair value of these
commodity interests, including options thereon, if applicable, at December 31,
2001 and 2000 was $421,121 and $1,258,784, respectively.
Fair Value
December 31,
2000
------------
Currencies:
-Exchange Traded Contracts $636,230
Energy 20,337
Grains 36,478
Interest Rates U.S. 233,656
Interest Rates Non-U.S. 263,893
Livestock 42,715
Metals:
-Exchange Traded Contracts 9,240
Softs 15,484
Indices (3,198)
Lumber 3,949
------------
Total $1,258,784
------------
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. There were no
redemption fees charged during 2001, 2000 and 1999.
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) $ (15.04)$ 31.16 $ (109.18)
Realized and unrealized appreciation (depreciation)
on Zero Coupons 23.63 35.19 (64.64)
Interest income 69.18 69.15 68.06
Expenses (19.34) (15.69) (27.98)
--------- --------- ---------
Increase (decrease) for period 58.43 119.81 (133.74)
Net asset value per Unit, beginning of year 1,348.35 1,228.54 1,362.28
--------- --------- ---------
Net asset value per Unit, end of year $ 1,406.78 $ 1,348.35 $ 1,228.54
--------- --------- ---------
Ratios to average net assets:
Net income before incentive fee 4.8%
Incentive fee (0.5)%
-------
Net income after incentive fee 4.3%
-------
Operating expenses 4.9%
Incentive fee 0.5%
-------
Total expenses and incentive fee 5.4%
-------
Total return:
Total return before incentive fee 4.8%
Incentive fee (0.5)%
-------
Total return after incentive fee 4.3%
-------
7. Guarantee:
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, SSBHI will
contribute up to an amount equal to the maturity value of the Zero Coupons held
by the Partnership at the time of such call to the capital of the Partnership to
permit it to meet its margin obligations in excess of its cash balance. The
guarantee can only be invoked once. After the guarantee is invoked, trading will
cease and the General Partner will either wait until the First Payment Date or
will distribute cash and Zero Coupons to the limited partners.
8. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
may include forwards, futures and options, whose value is based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, to purchase or sell other
financial instruments at specific terms at specified future dates, or, in the
case of derivative commodity instruments, to have a reasonable possibility to be
settled in cash, through physical delivery or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts. OTC contracts are negotiated between contracting parties and
include forwards and certain options. Each of these instruments is subject to
various risks similar to those related to the underlying financial instruments
including market and credit risk. In general, the risks associated with OTC
contracts are greater than those associated with exchange traded instruments
because of the greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
F-11
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 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 $649,493 were earned for the year
ended December 31, 2001. Management fees of $96,142 were earned by the Advisors
for the year ended December 31, 2001. Incentive fees of $80,345 were earned by
the Advisors for the year ended December 31, 2001.
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.
34
(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 (1.9%) Units of Limited Partnership Interest as of December
31, 2001.
(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. 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:
35
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 filed in the
office of the Secretary of State of the State of New York (filed as Exhibit
3.2 to the Registration Statement on Form S-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).
36
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. (previously filed).
10.9 - Management Agreement among the Partnership, the General Partner and
Winton Capital Management (previously filed).
10.10- Letter extending the Management Agreement with Willowbridge Inc.
(previously filed).
10.11- Letters extending Management Agreements with Winton Capital Management
and Willowbridge Associates Inc. for 2001 (filed herein).
(b) Reports on 8-K: None Filed.
37
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
38
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 29th day of March 2002.
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/ 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
39