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, 2002
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)
(212) 723-5424
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Acts).
Yes No X
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Limited Partnership Units with an aggregate value of $14,033,484 were
outstanding and held by non-affiliates as of the last business day of the
registrants most recently completed second fiscal quarter.
As of February 28, 2003, 9,379.0000 Limited Partnership Units were outstanding.
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 was turned
over to the Partnership and the Partnership commenced trading operations.
The general partner has agreed to make capital contributions, if necessary,
so that its general partnership interest will be equal to the greater of (i) an
amount to entitle it to 1% of each material item of Partnership income, loss,
deduction or credit and (ii) the greater of (a) 1% of the partners'
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contributions to the Partnership or (b) $25,000. The Partnership will be
liquidated upon the first of the following to occur: November 15, 2003; the net
asset value per Unit falls below $400 as of the close of any business day; or
under certain circumstances as defined in the Limited Partnership Agreement of
the Partnership (the "Limited Partnership Agreement").
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner.
The General Partner is wholly owned by Salomon Smith Barney Holdings Inc.
("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of
Citigroup Inc.
The Partnership's trading of futures, forwards and options contracts, if
applicable, on commodities is done on United States of America and foreign
commodity exchanges. It engages in such trading through a commodity brokerage
account maintained with SSB.
Under the Limited Partnership Agreement of the Partnership (the "Limited
Partnership Agreement"), the General Partner administers the business and
affairs of the Partnership. As of December 31, 2002, 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.
3
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 to 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
pays 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
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.
4
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
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, 2002,
2001, 2000, 1999 and 1998 is set forth under "Item 6. Selected Financial Data."
Partnership capital as of December 31, 2002, was $14,773,054.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does not
5
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. ("SSBHI") or its subsidiaries is a party or to which any of
their property is subject. There are no material legal proceedings pending
against the Partnership or the General Partner.
Salomon Smith Barney Inc. ("SSB") is a New York corporation with its
principal place of business at 388 Greenwich St., New York, New York 10013. SSB
is registered as a broker-dealer and futures commission merchant ("FCM"), and
provides futures brokerage and clearing services for institutional and retail
participants in the futures markets. SSB and its affiliates also provide
investment banking and other financial services for clients worldwide.
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against SSB or any of its individual principals within the
past five years that management believes may have a material impact on SSB's
ability to act as an FCM. In the ordinary course of its business, SSB is a party
to various claims and regulatory inquiries. Proceedings deemed to be material
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for purposes of Commodity Futures Trading Commission ("CFTC") disclosure
requirements are:
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California (County
of Orange et al. v. Bear Stearns & Co. Inc. et al.). The complaint alleged,
among other things, that the brokerage firms recommended and sold unsuitable
securities to Orange County. SSB and the remaining brokerage firms settled with
Orange County in mid 1999. SSB paid $1,333,333 to settle this matter.
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. SSB has asked the
court to dismiss the amended complaints. The court denied the motion but stayed
the case. Subsequently, the City withdrew its lawsuit.
In November 1998, a class action complaint was filed in the U.S. District
Court for the Middle District of Florida (Dwight Brock as Clerk for Collier
County v. Merrill Lynch, et al.). The complaint alleged that, pursuant to a
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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. In
November 1999, SSB moved to dismiss the amended complaint. In May 2001, the
parties reached and the court preliminarily approved a tentative settlement. SSB
paid $1,063,457 to settle this matter and in September 2001, the court approved
the settlement.
In connection with the Louisiana and Florida matters, the IRS and SEC
conducted 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. Thereafter,
the plaintiffs filed voluntary discontinuances.
In December 1998, SSB was one of 28 market making firms that reached a
settlement with the SEC in the matter titled In the Matter of Certain Market
Making Activities on NASDAQ. As part of the settlement of that matter, SSB,
without admitting or denying the factual allegations, agreed to an order which
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 SEC
Rules 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000 and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed by a
hedge fund and its investment advisor against SSB in the Supreme Court of the
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State of New York, County of New York (MKP Master Fund, LDC et al. v. Salomon
Smith Barney Inc.). The complaint included allegations that, while acting as
prime broker for the hedge fund, SSB breached its contracts with plaintiffs,
misused their monies and engaged in tortious conduct, including breaching its
fiduciary duties. SSB asked the court to dismiss the complaint in full. In
October 1999, the court dismissed the tort claims, including the breach of
fiduciary duty claims. The court allowed the breach of contract and conversion
claims to stand. In December 1999, SSB filed an answer and asserted
counterclaims against the investment advisor. In response to plaintiff's motion
to strike out 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. In August 2002, SSB
filed a motion for summary judgment.
In April 2002, numerous class action complaints were filed against Solomon
Smith Barney and other investment banks in the U.S. District Court for the
Southern District of New York alleging violations of certain federal securities
laws (including Section 11 of the Securities Act of 1933 and Section 10(b) of
the Securities Exchange Act of 1934) with respect to the allocation of shares
for certain initial public offerings and related aftermarket transactions and
damage to investors caused by allegedly biased research analyst reports. On
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February 19, 2003, the court issued an opinion denying the defendants' motion to
dismiss. Also pending in the Southern District of New York against SSB and other
investment banks are several alleged class actions which have been consolidated
into a single class action alleging violations of certain federal and state
antitrust laws in connection with the allocation of shares in initial public
offerings underwritten by such parties. The defendants in these actions have
moved to dismiss the consolidated amended complaint but the court has not yet
rendered a decision on those motions.
In April 2002, Citigroup and, in one case, SSB were named as defendants
along with, among others, commercial and/or investment banks, certain current
and former Enron officers and directors, lawyers and accountants in two alleged
consolidated class action complaints that were filed in the U.S. District Court
for the Southern District of Texas seeking unspecified damages. One action,
brought on behalf of individuals who purchased Enron securities (Newby, et al.
v. Enron Corp., et al.), alleges violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and the other action, brought on behalf of current and former Enron
employees (Tittle, et al. v. Enron Corp., et al.), alleges violations of ERISA
and RICO, as well as negligence and civil conspiracy. On May 8, 2002, Citigroup
and SSB filed motions to dismiss the complaints. On December 19, 2002, the
motions to dismiss the Newby complaint were denied. The motion to dismiss the
complaint in Tittle remains pending.
Since April 2002, SSB and several other broker dealers have received
10
subpoenas and/or requests for information from various governmental and
self-regulatory agencies and Congressional committees, including the NASD Inc.
which has raised issues about SSB's internal e-mail retention practices and
research on Winstar Communications, Inc. With respect to Winstar, SSB has
entered into a settlement agreement. SSB agreed to pay a penalty in the amount
of $5 million and did not admit to any wrongdoing. With respect to other such
matters, on December 20, 2002, Citigroup and a number of other broker/dealers
reached a settlement-in-principle with the SEC, the NASD Inc., the New York
Stock Exchange (the "NYSE") and the Attorney General of New York of all issues
raised in their research, initial public offerings allocation and
spinning-related inquiries. In addition, with respect to issues raised by the
NASD, the NYSE and the SEC about SSB's and other firms' e-mail retention
practices, SSB and several other broker/dealers and the NASD, the NYSE and the
SEC entered into a settlement agreement in December 2002. SSB agreed to pay a
penalty in the amount of $1.65 million and did not admit to any allegation of
wrongdoing.
Since May 2002, Citigroup, SSB and certain principals, executive officers
and current and former employees have been named as defendants in a number of
alleged class action complaints filed in the U.S. District Court for the
Southern District of New York by purchasers of various securities alleging they
violated federal securities law, including Sections 10 and 20 of the Securities
Exchange Act of 1934 by issuing research reports without reasonable basis and
failing to disclose conflicts of interest in connection with published
investment research, including Global Crossing, WorldCom, Inc., AT&T, Winstar,
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Rhythm Net Connections, Level 3 Communications, MetroMedia Fiber Network, XO
Communications and Williams Communications Group Inc. Nearly all of these
actions are pending before a single judge in the U.S. District Court for the
Southern District of New York for coordinated proceedings. The court has
consolidated these actions into nine separate categories corresponding to the
companies named above.
Additional actions have been filed against Citigroup and certain of its
affiliates, including SSB, and certain of their current and former directors,
officers and employees, along with other parties, including: (1) three putative
class actions filed in state courts and federal courts on behalf of persons who
maintained accounts with SSB asserting, among other things, common law claims,
claims under state statutes, and claims under the Investment Advisers Act of
1940, for allegedly failing to provide objective and unbiased investment
research and investment management, seeking, among other things, return of fees
and commissions; (2) approximately fifteen actions filed in different state
courts by individuals asserting, among other claims, common law claims and
claims under state securities laws, for allegedly issuing research reports
without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with companies in connection with published investment
research, including Global Crossing and WorldCom, Inc.; (3) approximately five
actions filed in different state courts by pension and other funds asserting
common law claims and statutory claims under, among other things, state and
federal securities laws, for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
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interest with companies in connection with published investment research,
including WorldCom, Inc. and Qwest Communications International Inc.; and (4)
more than two hundred arbitrations asserting common law claims and statutory
claims under, among other things, state and federal securities laws, for
allegedly issuing research reports without a reasonable basis in fact and for
allegedly failing to disclose conflicts of interest with companies in connection
with published investment research.
In July 2002, Citigroup, SSB and various of its affiliates and certain of
their officers and other employees were named as defendants, along with, among
others, commercial and/or investment banks, certain current and former Enron
officers and directors, lawyers and accountants in an alleged class action filed
in the U.S. District Court for the Southern District of New York on behalf of
purchasers of the Yosemite Notes and Enron Credit-Linked Notes, among other
securities (Hudson Soft Co., Ltd v. Credit Suisse First Boston Corporation, et
al.). The complaint alleges violations of RICO and of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and seeks unspecified damages.
Additional actions have been filed against Citigroup and certain of its
affiliates, including SSB, along with other parties, including (i) three actions
brought in state courts by state pension plans for alleged violations of state
securities law and common law fraud and unjust enrichment; (ii) an action by
banks that participated in two Enron revolving credit facilities, alleging
fraud, gross negligence and breach of implied duties in connection with
defendants' administration of a credit facility with Enron; (iii) an action
13
brought by several funds in connection with secondary market purchases of Enron
Corp. debt securities alleging violations of federal securities law, including
Section 11 of the Securities Act of 1933, and claims for fraud and
misrepresentation; (iv) a series of alleged class actions by purchasers of
NewPower Holdings common stock alleging violations of federal securities law,
including Section 11 of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934; (v) an action brought by two investment funds
in connection with purchases of Enron-related securities for alleged violations
of state securities and unfair competition statutes; (vi) an action brought by
several investment funds and fund owners in connection with purchases of notes
of the Osprey I and Osprey II Trusts for alleged violation of state and federal
securities laws and claims for common law fraud, misrepresentation and
conspiracy; (vii) an action brought by several investment funds and fund owners
in connection with purchases of notes of the Osprey I and Osprey II Trusts for
alleged violation of state and federal securities laws and state unfair
competition laws and claims for common law fraud and misrepresentation; (viii)
an action brought by the Attorney General of Connecticut in connection with
various commercial and investment banking services provided to Enron; (ix) a
putative class action brought by clients of SSB in connection with research
reports concerning Enron, alleging breach of contract; (x) actions brought by
several investment funds in connection with the purchase of notes and/or
certificates of the Osprey Trusts, the Marlin Trust, and the Marlin Water trust,
14
as well as the purchase of other Enron or Enron-related securities, alleging
violation of state and federal securities laws, and common law civil conspiracy
and fraud; (xi) an action brought by a retirement and health benefits plan in
connection with the purchase of certain Enron notes, alleging violation of
federal securities law, including Section 11 of the Securities Act of 1933, as
amended, violations of state securities and unfair competition law, and common
law fraud and breach of fiduciary duty; and (xii) an action brought by two
broker/dealers in connection with the purchase of certain notes, alleging
violation of federal and state securities laws. Several of these cases have been
consolidated with the Newby action and stayed pending the Court's decision on
the pending motions of certain defendants to dismiss Newby.
Additionally, Citigroup and certain of its affiliates, including SSB, have
provided substantial information to, and have entered into substantive
discussions with, the Securities and Exchange Commission regarding certain of
their transactions with Enron and a transaction with Dynegy Inc. Citigroup and
certain of its affiliates, including SSB, also have received subpoenas and
requests for information from various other regulatory and governmental agencies
and Congressional committees, as well as from the Special Examiner in the Enron
bankruptcy, regarding certain transactions and business relationships with Enron
and its affiliates. Citigroup and such affiliates, including SSB, are
cooperating fully with all such requests.
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Citigroup and SSB are involved in a number of lawsuits arising out of the
underwriting of debt securities of WorldCom, Inc. These lawsuits include
putative class actions filed in July 2002 by alleged purchasers of WorldCom debt
securities in the United States District Court for the Southern District of New
York (Above Paradise Investments Ltd. V. Worldcom, Inc., et al.; Municipal
Police Employees Retirement System Of Louisiana V. Worldcom, Inc., et al.), and
in the United States District Court for the Southern District of Mississippi
(Longacre Master Fund V. Worldcom, Inc., et al.). These putative class action
complaints assert violations of federal securities law, including Sections 11
and 12 of the Securities Act of 1933, as amended, and seek unspecified damages
from the underwriters.
On October 11, 2002, the Above Paradise and Municipal Police Employees
lawsuits filed in the United States District Court for the Southern District of
New York were superseded by the filing of a consolidated putative class action
complaint in the United States District Court for the Southern District of New
York (In Re Worldcom, Inc. Securities Litigation). In the consolidated
complaint, in addition to the claims of violations by the underwriters of the
federal securities law, including Sections 11 and 12 of the Securities Act of
1933, as amended, the plaintiffs allege violations of Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, by SSB arising out of alleged conflicts of interest of SSB and Jack
Grubman. The plaintiffs continue to seek unspecified compensatory damages. In
addition to the consolidated class action complaint, the Southern District of
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Mississippi class action has been transferred by the Judicial Panel on
MultiDistrict Litigation to the Southern District of New York for centralized
pre-trial proceedings with other WorldCom-related actions.
In addition to the several putative class actions that have been commenced,
certain individual actions have been filed in various federal and state courts
against Citigroup and SSB, along with other parties, concerning WorldCom debt
securities including individual state court actions brought by approximately 18
pension funds and other institutional investors in connection with the
underwriting of debt securities of WorldCom alleging violations of Section 11 of
the Securities Act of 1933, as amended, and, in one case, violations of various
state securities laws and common law fraud. Most of these actions have been
removed to federal court and have been transferred to the Southern District of
New York for centralized pre-trial proceedings with other WorldCom-related
actions.
A putative class action on behalf of participants in WorldCom's 401(k)
salary savings plan and those WorldCom benefit plans covered by ERISA alleging
violations of ERISA and common law fraud (Emanuele V. Worldcom, Inc., Et Al.),
which was commenced in the United States District Court for the District of
Columbia, also has been transferred by the Judicial Panel on MultiDistrict
Litigation to the Southern District of New York for centralized pre-trial
proceedings with other WorldCom-related actions. In December 2002, the claims
against SSB and the other underwriters were dismissed without prejudice.
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On or about January 27, 2003, lead plaintiff in a consolidated putative
class action in the United States District Court for the District of New Jersey
(In Re AT&T Corporation Securities Litgation) sought leave to amend its
complaint on behalf of purchasers of AT&T common stock asserting claims against,
among others, AT&T Corporation, to add as named defendants Citigroup, SSB and
certain executive officers and current and former employees, asserting claims
under federal securities laws for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with AT&T in connection with published investment research.
On or about January 28, 2003, lead plaintiff in a consolidated putative
class action in the United States District Court for the Southern District of
New York (In Re Global Crossing, Ltd. Securities Litigation) filed a
consolidated complaint on behalf of purchasers of the securities of Global
Crossing and its subsidiaries, which names as defendants, among others,
Citigroup, SSB and certain executive officers and current and former employees,
asserting claims under federal securities laws for allegedly issuing research
reports without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with Global Crossing in connection with published
investment research.
SSBHI 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 SSBHI's broker-dealer subsidiaries have been named, arising in
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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 SSBHI's management, none of these actions is
expected to have a material adverse effect on the results of operations,
consolidated financial condition or liquidity of SSBHI 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, 2002 was 724.
(c)Distribution. The Partnership did not declare a distribution in
2002 or 2001.
(d)Use of Proceeds. There were no additional sales in the years ended
December 31, 2002, 2001 and 2000.
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Item 6. Selected Financial Data. Net realized and unrealized trading gains
(losses), interest income, net income (loss) and increase (decrease) in Net
Asset Value per Unit for the years ended December 31, 2002, 2001, 2000, 1999 and
1998 and total assets at December 31, 2002, 2001, 2000, 1999 and 1998 were as
follows:
2002 2001 2000 1999 1998
Net realized and unrealized
trading gains (losses) net
of brokerage commissions
and clearing fees of $507,847,
$649,493, $624,556, $934,444, and
$914,741, respectively $ 1,110,854 $ (164,612) $ 203,233 $ (1,722,069) $ 2,010,123
Realized and unrealized
appreciation (depreciation)
on Zero Coupons (204,198) 279,052 471,530 (1,058,378) 644,098
Interest income 672,978 814,370 970,693 1,106,132 1,126,341
------------ ------------ ------------ ------------ ------------
$ 1,579,634 $ 928,810 $ 1,645,456 $ (1,674,315) $ 3,780,562
============ ============ ============ ============ ============
Net income (loss) $ 1,345,768 $ 698,088 $ 1,420,294 $ (2,130,054) $ 3,174,331
============ ============ ============ ============ ============
Increase(decrease) in Net
Asset Value per Unit $ 134.97 $ 58.43 $ 119.81 $ (133.74) $ 186.29
============ ============ ============ ============ ============
Total assets $ 15,276,846 $ 15,909,719 $ 17,471,747 $ 19,486,036 $ 23,386,690
============ ============ ============ ============ ============
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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
through financial, credit and risk management monitoring systems and accordingly
22
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
23
Partnership to be continued.
(b) Capital resources. (i) The Partnership has made no material commitments
for capital expenditures as of the end of the fiscal period.
(ii) The Partnership's capital will consist of the capital contributions of
the partners as increased or decreased by gains or losses on commodity futures
trading and Zero Coupon appreciation or depreciation, and by expenses, interest
income, redemptions of Units and distributions of profits, if any. Gains or
losses on commodity 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. The amount of interest income payable by SSB is dependent upon interest
rates over which the Partnership has no control.
24
No forecast can be made as to the level of redemptions in any given period.
A limited partner may cause all of his Units to be redeemed by the Partnership
at the net asset value thereof as of the last day of a quarter (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, 2002, 1,376 Units were redeemed totaling $1,988,236. 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 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, 2002, the Net
Asset Value per Unit increased 9.6% from $1,406.78 to $1,541.75. 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
25
Value per Unit increased 9.8% from $1,228.54 to $1,348.35.
The Partnership experienced net trading gains of $1,618,701 before
commissions and expenses in 2002. Gains were attributable to the trading of
commodity futures in currencies, grains, U.S. and non-U.S. interest rates and
livestock and offset by losses in energy, metals, softs and indices. The
Partnership experienced unrealized depreciation of $277,765 on Zero Coupons
during 2002 and a gain on the sale of Zero coupons of $73,567 during 2002.
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.
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
26
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.
27
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.
(e) Critical Accounting Policies
The General Partner believes that the accounting policies that will be most
critical to the Partnership's financial condition and results of operations
relate to the valuation of the Partnership's positions. The majority of the
Partnership's positions will be exchange-traded futures contracts, which will be
valued daily at settlement prices published by the exchanges. If applicable, the
28
Partnership's spot and forward foreign currency contracts will also be valued at
published daily settlement prices or at dealers' quotes. The General Partner
expects that under normal circumstances substantially all of the Partnership's
assets will be valued by objective measures and without difficulty.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk Introduction
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification 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
29
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification in this
section should not be considered to constitute any assurance or representation
that the Partnership's losses in any market sector will be limited to Value at
Risk or by the Partnership's attempts to manage its market risk.
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
30
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by the
Advisors is quantified below in terms of Value at Risk. Due to the Partnership's
mark-to-market accounting, any loss in the fair value of the Partnership's open
positions is directly reflected in the Partnership's earnings (realized or
unrealized).
Exchange maintenance margin requirements have been used by the Partnership
as the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges 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,
31
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 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.
32
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, 2002 and the
highest and lowest value at any point during the year. All open position trading
risk exposures of the Partnership have been included in calculating the figures
set forth below. As of December 31, 2002, the Partnership's total capitalization
was $14,773,054.
December 31, 2002
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- --------------------------------------------------------------------------------------------
Currencies
- Exchange Traded Contracts $ 147,337 1.00% $ 224,158 $ 92,299
Energy 283,200 1.92% 402,800 19,500
Grains 42,198 0.29% 131,903 21,133
Interest rates U.S 135,000 0.91% 153,200 7,200
Interest rates Non-U.S 458,263 3.09% 464,720 114,068
Livestock 12,100 0.08% 30,150 5,569
Metals
- Exchange Traded Contracts 51,000 0.35% 137,600 14,200
- OTC Contracts 14,325 0.10% 84,825 14,325
Softs 40,175 0.27% 115,357 24,481
Indices 91,175 0.62% 336,090 (9,146)
Lumber 5,000 0.03% 10,000 1,100
---------- ----------
Total $1,279,773 8.66%
========== ==========
33
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%
========== ==========
34
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.
35
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.
36
The following were the primary trading risk exposures of the Partnership as
of December 31, 2002, 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
37
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
limited to futures on broadly based indices. As of December 31, 2002, 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,
2002.
38
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, 2002.
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
39
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
40
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.
41
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
Reports of Independent Accountants. F-3 - F-4
Financial Statements:
Statements of Financial Condition at
December 31, 2002 and 2001. F-5
Condensed Schedules of Investments at
December 31, 2002 and 2001. F-6 - F-7
Statements of Income and Expenses for
the years ended December 31, 2002, 2001
and 2000. F-8
Statements of Partners' Capital for
the years ended December 31, 2002, 2001
and 2000. F-9
Notes to Financial Statements. F-10-F-13
Selected unaudited quarterly financial
data. F-14
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 Auditors
To the Partners of
Smith Barney Principal PLUS Futures Fund L.P. II:
We have audited the accompanying statement of financial condition of Smith
Barney Principal PLUS Futures Fund L.P. II (the Partnership), including the
condensed schedule of investments, as of December 31, 2002, and the related
statements of income and expenses, and partners' capital for the year then
ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
the Partnership as of December 31, 2001 and for the years ended December
31, 2001 and 2000 were audited by other auditors whose report dated
February 28, 2002 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Smith Barney Principal
PLUS Futures Fund L.P. II as of December 31, 2002, and the results of its
operations and changes in its partners' capital for the year then ended, in
conformity with accounting principles generally accepted in the United
States of America.
KPMG
New York, New York
March 7, 2003
F-3
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 the results of its
operations for each of the two 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-4
Smith Barney Principal PLUS
Futures Fund L.P. II
Statements of Financial Condition
December 31, 2002 and 2001
2002 2001
Assets:
Equity in commodity futures trading account:
Cash (restricted $1,511,921 and $1,243,463 in 2002 and 2001,
respectively) (Note 3c) $ 4,723,318 $ 4,793,430
Net unrealized appreciation on open positions * 791,065 421,121
U.S. Treasury zero coupon bonds, $9,582,000 and $10,958,000
principal amount in 2002 and 2001, respectively, due
November 15, 2003, at market value (amortized cost $9,129,904
and $9,777,282 in 2002 and 2001, respectively) 9,492,408 10,417,551
----------- -----------
15,006,791 15,632,102
Receivable from SSB on sale of U.S. Treasury zero coupon bonds 265,993 271,528
Interest receivable 4,062 6,089
----------- -----------
$15,276,846 $15,909,719
----------- -----------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions (Note 3c) $ 41,725 $ 41,148
Management fees (Note 3b) 7,696 7,190
Professional fees 35,632 38,545
Other 4,008 4,975
Redemptions payable (Note 5) 414,731 402,339
----------- -----------
503,792 494,197
----------- -----------
Partners' capital (Notes 1 and 5):
General Partner, 203 Unit equivalents outstanding in 2002 and 2001 312,975 285,576
Limited Partners, 9,379 and 10,755 Units of Limited Partnership
Interest outstanding in 2002 and 2001, respectively 14,460,079 15,129,946
----------- -----------
14,773,054 15,415,522
----------- -----------
$15,276,846 $15,909,719
----------- -----------
* Forward contracts included in this balance are presented gross in the
accompanying Condensed Schedule of Investments.
See accompanying notes to financial statements.
F-5
Smith Barney Principal PLUS
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2002
Sector Contract Fair Value
============= ====================== ===========
Currencies Futures contracts purchased 0.93% $137,773
Futures contracts sold (0.02)% (3,989)
----------
Total Currencies 0.91% 133,784
----------
Total Energy 0.88% Futures contracts purchased 0.88% 129,580
----------
Grains Futures contracts purchased (0.04)% (6,827)
Futures contracts sold 0.19% 28,729
----------
Total Grains 0.15% 21,902
----------
Interest Rates Non-U.S. Futures contracts purchased 2.37% 350,884
Futures contracts sold (0.00)% * (105)
----------
Total Interest Rates Non-U.S. 2.37% 350,779
----------
Total Interest Rates U.S 0.73% Futures contracts purchased 0.73% 108,163
----------
Total Livestock 0.01% Futures contracts purchased 0.01% 1,915
----------
Metals Futures contracts purchased 0.40% 60,155
Futures contracts sold (0.00)% * (13)
----------
Total Futures contracts 0. 40% 60,142
Unrealized appreciation on forward contracts 0.15% 22,508
Unrealized depreciation on forward contracts (0.33)% (49,713)
----------
Total forward contracts (0.18)% (27,205)
----------
Total Metals 0.22% 32,937
----------
Total Lumber (0.00)% * Futures contracts sold (0.00)% * (77)
----------
Softs Futures contracts purchased 0.06% 9,244
Futures contracts sold 0.07% 10,511
----------
Total Softs 0.13% 19,755
----------
Indices Futures contracts purchased (0.05)% (7,659)
Futures contracts sold (0.00)% * (14)
----------
Total Indices (0.05)% (7,673)
----------
Total Fair Value of Futures
and Forwards positions 5.35% 791,065
Total U.S. Treasury zero coupon U.S. Treasury zero coupon bonds, $9,582,000
bonds 64.25% principal amount 11/15/2003 (amortized cost $9,129,904) 9,492,408
----------
Total Investments 69.60% $10,283,473
===========
Investments % of Investments
Country Composition at Value at Value
---------------------------------- -------------------------- ----------------
Australia $51,831 0.50%
Canada 32,019 0.31
Germany 99,406 0.97
Japan 12,906 0.13
Spain 2,320 0.02
United Kingdom 153,079 1.49
United States 9,931,912 96.58
-------------------- -------------------
$10,283,473 100.00%
==================== ===================
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding.
See accompanying notes to financial statements.
F-6
Smith Barney Principal PLUS
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2001
Sector Contract Fair Value
============= ============ ===========
Currencies Futures contracts purchased 0.40% $62,698
Futures contracts sold 1.16% 178,335
----------
Total Currencies 1.56% 241,033
----------
Energy Futures contracts purchased (0.07)% (10,025)
Futures contracts sold 0.07% 10,410
----------
Total Energy 0.00% 385
----------
Grains Futures contracts purchased 0.00% * (1,000)
Futures contracts sold 0.61% 94,757
----------
Total Grains 0.61% 93,757
----------
Interest Rates Non-U.S. Futures contracts 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 contracts purchased 0.03% 5,790
Futures contracts sold (0.01)% (2,613)
----------
Total Interest Rates U.S. 0.02% 3,177
----------
Livestock Futures contracts purchased 0.08% 12,920
Futures contracts sold (0.04)% (6,880)
----------
Total Livestock 0.04% 6,040
----------
Metals Futures contracts purchased 0.03% 5,560
Futures contracts sold (0.19)% (29,501)
----------
Total Metals (0.16)% (23,941)
----------
Total Lumber (0.01)% Futures contracts sold (0.01)% (1,661)
----------
Softs Futures contracts purchased 0.13% 20,397
Futures contracts sold 0.03% 4,593
----------
Total Softs 0.16% 24,990
----------
Total Indices 0.28% Futures contracts purchased 0.28% 42,537
----------
Total Fair Value 2.73% 421,121
----------
Total U.S. Treasury zero U.S. Treasury zero coupon bonds, $10,958,000
coupon bonds 67.58% principal amount 11/15/2003 (amortized cost $9,777,282) 10,417,551
----------
Total Investments 70.31% $10,838,672
===========
Investments % of Investments
Country Composition 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 accompanying notes to financial statements.
F-7
Smith Barney Principal PLUS
Futures Fund L.P. II
Statements of Income and Expenses
for the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
Income:
Net gains on trading of commodity interests:
Realized gains (losses) on closed positions and foreign
exchange $ 1,248,757 $ 1,322,544 $ (117,327)
Change in unrealized gains (losses) on open positions 369,944 (837,663) 945,116
----------- ----------- -----------
1,618,701 484,881 827,789
Gains on sale of U.S. Treasury zero coupon bonds 73,567 63,157 25,052
Unrealized appreciation (depreciation) on U.S. Treasury
zero coupon bonds (277,765) 215,895 446,478
Interest income (Notes 2c and 3c) 672,978 814,370 970,693
----------- ----------- -----------
2,087,481 1,578,303 2,270,012
----------- ----------- -----------
Expenses:
Brokerage commissions including clearing fees of $29,068,
$43,765 and $38,519, respectively (Note 3c) 507,847 649,493 624,556
Management fees (Note 3b) 79,497 96,142 178,204
Incentive fees (Note 3b) 111,632 80,345 --
Professional fees 37,126 44,052 41,096
Other expenses 5,611 10,183 5,862
----------- ----------- -----------
741,713 880,215 849,718
----------- ----------- -----------
Net income (loss) $ 1,345,768 $ 698,088 $ 1,420,294
----------- ----------- -----------
Net income (loss) per Unit of Limited Partnership Interest
and General Partner Unit equivalent (Notes 1 and 6) $ 134.97 $ 58.43 $ 119.81
----------- ----------- -----------
See accompanying notes to financial statements.
F-8
Smith Barney Principal PLUS
Futures Fund L.P. II
Statements of Partners' Capital
for the years ended December 31, 2002, 2001 and 2000
Limited General
Partners Partner Total
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
Net income 1,318,369 27,399 1,345,768
Redemption of 1,376 Units of Limited Partnership Interest (1,988,236) -- (1,988,236)
------------ ------------ ------------
Partners' capital at December 31, 2002 $ 14,460,079 $ 312,975 $ 14,773,054
------------ ------------ ------------
See accompanying notes to financial statements.
F-9
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 the initial offering period of the
Partnership.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker
is Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General
Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings Inc. ("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly
owned subsidiary of Citigroup Inc.
The General Partner and each limited partner share in the profits and
losses of the Partnership in proportion to the amount of partnership
interest owned by each except that no limited partner shall be liable for
obligations of the Partnership in excess of their initial capital
contribution and profits, if any, net of distributions.
The Partnership will be liquidated (see Note 9) 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 their 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 gains (losses)
on open positions are recognized in the period in which the contract is
closed or the changes occur and are included in net gains (losses) on
trading of commodity interests.
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on their 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.
e. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent 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.
f. Certain prior period amounts have been reclassified to conform to
current year presentation.
F-10
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 provides 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. Month-end Net Assets, for the purpose of
calculating management fees are Net Assets, as defined in the Limited
Partnership Agreement (excluding the fair value of the U.S. Treasury zero
coupon bonds), prior to the reduction of redemptions and incentive fees.
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 135% of month-end Net Assets allocated
to the Advisors (7% per year) in lieu of brokerage commissions on a per
trade basis. Month-end Net Assets, for the purpose of calculating
commissions are Net Assets, as defined in the Limited Partnership
Agreement, (excluding the fair value of the U.S. Treasury zero coupon
bonds), prior to the reduction of all liabilities of the Partnership. 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 National Futures Association 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, 2002 and
2001, the amount of cash held for margin requirements was $1,511,921 and
$1,243,463, respectively. SSB will pay the Partnership interest on 80% of
the average daily equity maintained in cash in its account during each
month at a 30-day U.S. Treasury bill rate determined weekly by SSB based on
the average noncompetitive yield on 3-month U.S. Treasury bills maturing in
30 days from the date on which such weekly rate is determined. The Customer
Agreement between the Partnership and SSB gives the Partnership the legal
right to net unrealized gains and losses. The Customer Agreement may be
terminated by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments
and derivative commodity instruments. The results of the Partnership's
trading activities 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, 2002
and 2001, based on a monthly calculation, was $529,374 and $568,840,
respectively.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of
the General Partner. On 10 days' notice to the General Partner, a limited
partner may require the Partnership to redeem their 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 their Units on the first, second or
F-11
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 2002, 2001 and 2000.
6. Financial Highlights:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
Net realized and unrealized gains (losses) * $ 112.32 $ (15.04)$ 31.16
Realized and unrealized appreciation (depreciation)
on Zero Coupons (19.66) 23.63 35.19
Interest income 65.12 69.18 69.15
Expenses ** (22.81) (19.34) (15.69)
--------- --------- ---------
Increase for year 134.97 58.43 119.81
Net asset value per Unit, beginning of year 1,406.78 1,348.35 1,228.54
--------- --------- ---------
Net asset value per Unit, end of year $ 1,541.75 $ 1,406.78 $ 1,348.35
--------- --------- ---------
* Includes brokerage commissions
** Excludes brokerage commissions
Ratios to average net assets:
Net investment income before incentive fee *** 0.3% 0.1%
Incentive fees (0.8)% (0.5)%
---- ---
Net investment loss after incentive fees (0.5)% (0.4)%
---- ---
Net income before incentive fees **** 10.0% 4.8%
Incentive fees **** (0.8)% (0.5)%
---- ---
Net income after incentive fees **** 9.2% 4.3%
---- ---
Operating expenses 4.3% 4.9%
Incentive fees 0.8% 0.5%
---- ---
Total expenses 5.1% 5.4%
---- ---
Total return:
Total return before incentive fees 10.4% 4.8%
Incentive fees (0.8)% (0.5)%
---- ---
Total return after incentive fees 9.6% 4.3%
---- ---
*** Interest income less total expenses (exclusive of incentive fees)
**** Supplemental information not required
The above ratios may vary for individual investors based on the timing of
capital transactions during the year.
7. Guarantee:
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, SSBHI will
contribute up to an amount equal to the maturity value of the Zero Coupons
held by the Partnership at the time of such call to the capital of the
Partnership to permit it to meet its margin obligations in excess of its
cash balance. The guarantee can only be invoked once. After the guarantee
is invoked, trading will cease and the General Partner will either wait
until the First Payment Date or will distribute cash and Zero Coupons to
the limited partners.
F-12
8. Financial Instrument Risks:
In the normal course of its business the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial
instruments may include forwards, futures and options, whose values are
based upon an underlying asset, index, or reference rate, and generally
represent future commitments to exchange currencies or cash flows, to
purchase or sell other financial instruments at specific terms at specified
future dates, or, in the case of derivative commodity instruments, to have
a reasonable possibility to be settled in cash, through physical delivery
or with another financial instrument. These instruments may be traded on an
exchange or over-the-counter ("OTC"). Exchange traded instruments are
standardized and include futures and certain option contracts. OTC
contracts are negotiated between contracting parties and include forwards
and certain options. Each of these instruments is subject to various risks
similar to those related to the underlying financial instruments including
market and credit risk. In general, the risks associated with OTC contracts
are greater than those associated with exchange traded instruments because
of the greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that
an exchange or clearing organization acts as a counterparty to the
transactions. The Partnership's risk of loss in the event of counterparty
default is typically limited to the amounts recognized in the statement of
financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has credit risk and concentration risk
because the sole counterparty or broker with respect to the Partnership's
assets is SSB.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the
Partnership is subject. These monitoring systems allow the General Partner
to statistically analyze actual trading results with risk adjusted
performance indicators and correlation statistics. In addition, on-line
monitoring systems provide account analysis of futures, forwards and
options positions by sector, margin requirements, gain and loss
transactions and collateral positions.
The majority of these instruments mature within one year of December 31,
2002. However, due to the nature of the Partnership's business, these
instruments may not be held to maturity.
9. Liquidation of Partnership:
In accordance with the Limited Partnership Agreement, the Partnership will
terminate operations on November 15, 2003, the month in which the U.S.
Treasury zero coupon bonds mature.
F-13
Selected unaudited quarterly financial data for the years ended December 31,
2002 and December 31, 2001 is summarized below:
For the period For the period For the period For the period
from October 1, 2002 from July 1, 2002 April 1, 2002 to January 1, 2002
to December 31, 2002 to September 30, 2002 June 30, 2002 to March 31, 2002
Net realized and unrealized
trading gains (losses) net of
brokerage commissions and clearing
fees including interest income $1,740 $1,392,731 $648,989 $(463,826)
Net Income (loss) $(27,274) $1,268,874 $597,426 $(493,258)
Increase (decrease) in Net Asset $(2.77) $125.71 $57.04 $(45.01)
Value per Unit
For the period For the period For the period For the period
from October 1, 2001 from July 1, 2001 April 1, 2001 to January 1, 2001
to December 31, 2001 to September 30, 2001 June 30, 2001 to March 31, 2001
Net realized and unrealized
trading gains (losses) net of
brokerage commissions and clearing
fees including interest income $(166,918) $763,482 $(731,826) $1,064,072
Net Income (loss) $(203,794) $727,077 $(769,309) $944,114
Increase (decrease) in Net Asset $(18.13) $63.57 $(63.82) $76.81
Value per Unit
F-14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the principal accountant for
Partnership. On July 9, 2002, that firm was dismissed as principal accountant
and KPMG LLP was engaged as principal accountant. The decision to change
accountants was approved by the general partner of the Partnership.
In connection with the audits of the two fiscal years ended December 31,
2001, and through July 9, 2002, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference thereto in their reports on the financial statements for such
years.
The audit reports of PricewaterhouseCoopers LLP on the financial statements
of the Partnership as of and for the years ended December 31, 2001 and 2000 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principle.
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.
42
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 $507,847 were earned for the year
ended December 31, 2002. Management fees and incentive fees of $79,497 and
$111,632, respectively were earned by the Advisors for the year ended December
31, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
(a). Security ownership of certain beneficial owners. The Partnership knows
of no person who beneficially owns more than 5% of the Units
outstanding.
(b). Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership
interest equivalent to 203 (2.1%) Units of Limited Partnership
Interest as of December 31, 2002.
(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
43
are set forth under "Item 1. Business.", "Item 8. Financial Statements and
Supplementary Data." and "Item 11. Executive Compensation."
Item 14. Control and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of a date within 90 days of the filing of this report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statements of Financial Condition at December 31, 2002 and 2001.
Statements of Income and Expenses for the years ended December
31, 2002, 2001 and 2000.
Statements of Partners' Capital for the years ended December 31,
2002, 2001 and 2000.
(2) Financial Statement Schedules: Financial Data Schedule for the
year ended December 31, 2002.
(3) Exhibits:
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).
44
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).
45
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 (previously
filed).
10.12- Letters extending Management Agreements with Winton Capital
Management and Willowbridge Associates Inc. for 2002 (filed
herein)
99.1 Certificate of Chief Executive Officer.
99.2 Certificate of Chief Financial Officer.
(b) Reports on 8-K: None Filed.
46
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
No proxy material has been sent to Limited Partners.
47
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 27th day of March 2003.
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
48
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this annual report on Form 10-K of Smith Barney
Principal Plus Futures Fund L.P. II;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition and results of operations of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
49
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ David J. Vogel
-----------------------
David J. Vogel
Chief Executive Officer
50
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Smith Barney
Principal Plus Futures Fund L.P. II;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition and results of operations of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
51
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Daaniel R. McAuliffe, Jr
-----------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer
52
CIK> 0001005335
NAME> Smith Barney Principal PLUS Futures Fund L.P. II
PERIOD-TYPE> 12-MONTHS
FISCAL-YEAR-END> DEC-31-2002
PERIOD-START> JAN-01-2002
PERIOD-END> DEC-31-2002
CASH> 4,723,318
SECURITIES> 10,283,473
RECEIVABLES> 270,055
ALLOWANCES> 0
INVENTORY> 0
CURRENT-ASSETS> 15,276,846
PP&E> 0
DEPRECIATION> 0
TOTAL-ASSETS> 15,276,846
CURRENT-LIABILITIES> 503,792
BONDS> 0
PREFERRED-MANDATORY> 0
PREFERRED> 0
COMMON> 0
OTHER-SE> 14,773,054
TOTAL-LIABILITY-AND-EQUITY> 15,276,846
SALES> 0
TOTAL-REVENUES> 2,087,481
CGS> 0
TOTAL-COSTS> 0
OTHER-EXPENSES> 741,713
LOSS-PROVISION> 0
INTEREST-EXPENSE> 0
INCOME-PRETAX> 1,345,768
INCOME-TAX> 0
INCOME-CONTINUING> 0
DISCONTINUED> 0
EXTRAORDINARY> 0
CHANGES> 0
NET-INCOME> 1,345,768
EPS-PRIMARY> 134.97
EPS-DILUTED> 0