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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1997
Commission File Number 0-22489
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 13-3862967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 60,000 Units
of Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ]
PART I
Item 1. Business.
(a) General development of business. Smith Barney Principal Plus Futures
Fund L.P. II (the "Partnership") is a limited partnership organized on November
16, 1995 under the Partnership Law 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 interest payments stripped from U.S. Treasury Bonds under the
Treasury's STRIPS program ("Zero Coupons") which payments will be due November
15, 2003. The Partnership uses the Zero Coupons and its other assets to margin
its commodities account.
A total of 60,000 Units of Limited Partnership Interest in the Partnership
(the "Units") were offered to the public. Between April 3, 1996 and August 8,
1996, 19,897 Units were sold to the public at $1,000 per Unit. Proceeds of the
offering along with the General Partners' contribution of $203,000 were held in
escrow until August 9, 1996 at which time an aggregate of $20,100,000 were
turned over to the Partnership and the Partnership commenced trading operations.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership and is a wholly owned subsidiary of Smith
Barney Inc. ("SB"). SB acts as commodity
2
broker for the Partnership. On November 28, 1997, Smith Barney Holdings Inc. was
merged with Salomon Inc to form Salomon Smith Barney Holdings Inc. ("SSBH"), a
wholly owned subsidiary of Travelers Group Inc. SB is a wholly owned subsidiary
of SSBH.
The Partnership's trading of futures contracts on commodities is done on
United States and foreign commodity exchanges. It engages in such trading
through a commodity brokerage account maintained with SB.
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, 1997, all commodity trading
decisions are made for the Partnership by John W. Henry & Company, Inc. ("JWH")
and Willowbridge Associates Inc. ("Willowbridge") (collectively, the
"Advisors"). None of the Advisors is affiliated with the General Partner or SB.
The Advisors are not responsible for the organization or operation of the
Partnership.
Pursuant to the terms of the Management Agreements (the "Management
Agreement"), the Partnership is obligated to pay Willowbridge a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets
allocated to it and pay JWH a monthly management fee equal to 1/3 of 1% (4% per
year) of the month-end Net Assets allocated to it. The Partnership will also pay
Willowbridge an incentive fee payable quarterly equal to 20% of New Trading
Profits earned by it for the Partnership and JWH will receive an incentive fee
of 15% of the New Trading Profits (as defined in the Management Agreements).
3
The Customer Agreement provides that the Partnership will pay SB 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. SB
will pay a portion of its brokerage fees to its financial consultants who have
sold Units and who are registered as associated persons with the Commodity
Futures Trading Commission (the "CFTC"). The Partnership will pay for National
Futures Association ("NFA") fees, exchange and clearing fees, give-up and user
fees and floor brokerage fees. Brokerage fees will be paid for the life of the
Partnership, although the rate at which such fees are paid may be changed. The
Customer Agreement between the Partnership and SB gives the Partnership the
legal right to net unrealized gains and losses.
In addition, SB 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 SB based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from
the date on which such weekly rate is determined.
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, SSBH 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
4
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 SSBH'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 year ended December 31, 1997
and for the period from August 9, 1996 (commencement of trading operations) to
December 31, 1996 is set forth under "Item 6. Select Financial Data."
Partnership capital as of December 31, 1997 was $22,306,204.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Foreign and Domestic
Operations and Export Sales. The Partnership does not
engage in sales of goods or services, and therefore this item is
not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, SB.
5
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Partnership is a party
or to which any of its assets is subject. No material legal proceedings
affecting the Partnership were terminated during the fiscal year.
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, 1997 was
1,281.
(c) Distribution. The Partnership did not declare a distribution in
1997 or 1996.
6
Item 6. Select Financial Data. The Partnership commenced trading operations on
August 9, 1996. Realized and unrealized trading gains, realized and unrealized
gains on Zero Coupons, interest income, net income and increase in net asset
value per Unit for the year ended December 31, 1997 and for the period from
August 9, 1996 (commencement of trading operations) to December 31, 1996 and
total assets at December 31, 1997 and 1996 were as follows:
1997 1996
----------- ---------
Realized and unrealized trading
gains net of brokerage commissions
and clearing fees of $958,141 and
$346,364, respectively $ 372,990 $ 2,812,357
Realized and unrealized gains on
Zero Coupons 429,903 80,764
Interest income 1,212,251 434,374
----------- -----------
$ 2,015,144 $ 3,327,495
=========== ===========
Net Income $ 1,359,429 $ 2,717,561
=========== ===========
Increase in net asset value per unit $ 68.65 $135.20
======= =======
Total assets $23,217,865 $23,276,499
=========== ===========
7
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 and cash equivalents, Zero Coupons, net unrealized
appreciation (depreciation) on open futures contracts and interest receivable.
Because of the low margin deposits normally required in commodity futures
trading, relatively small price movements may result in substantial losses to
the Partnership. Such substantial losses could lead to a material decrease in
liquidity. To minimize this risk, the Partnership follows certain policies
including:
(1) Partnership funds are invested only in commodity contracts which are
traded in sufficient volume to permit, in the opinion of the Advisors, ease of
taking and liquidating positions.
(2) No Advisor will initiate additional positions in any commodity if such
additional positions would result in aggregate positions for all commodities
requiring as margin more than 66-2/3% of the Partnership's assets allocated to
the Advisor.
(3) The Partnership will not employ the trading technique commonly known
as "pyramiding", in which the speculator uses unrealized profits on existing
positions as margin for the purchase or sale of additional positions in the same
or related commodities.
(4) The Partnership will not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
8
(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
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,
9
credit and risk management monitoring systems and, accordingly believes that it
has effective procedures for evaluating and limiting the credit and market risks
to which the Partnership is subject. (See also "Item 8. Financial Statements and
Supplementary Data.", for further information on financial instrument risk
included in the notes to financial statements.)
Other than the risks inherent in commodity futures trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, at its
discretion, cause the Partnership to 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
10
(vi) the occurrence of any event which shall make it unlawful for the existence
of the Partnership to be continued.
(b) Capital resources. (i) The Partnership has made no material
commitments for capital expenditures.
(ii) The Partnership's capital will consist of the capital
contributions of the partners as increased or decreased by gains or losses on
commodity futures trading and Zero Coupon appreciation or depreciation, and by
expenses, interest income, redemptions of Units and distributions of profits, if
any. Gains or losses on commodity futures trading cannot be predicted. Market
moves in commodities are dependent upon fundamental and technical factors which
the Partnership 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 and the
ability of the Advisors to identify and take advantage of price movements in the
commodity markets, in addition to the level of Net Assets maintained.
Furthermore, the Partnership will receive no payment on its Zero Coupons until
their due date. However, the Partnership will accrue interest on the Zero
Coupons and Limited Partners will be required to report as interest income on
their U.S. tax returns in each year their pro-rata share of the accrued interest
on the Zero Coupons even though no interest will be paid prior to their due
date. In addition, the amount of interest income payable by SB is dependent upon
interest rates over which the Partnership has no control.
11
No forecast can be made as to the level of redemptions in any given
period. Beginning with the first full quarter ending at least six months after
trading commences (March 31, 1997), 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, 1997 1,132 Units were redeemed
totaling $1,310,786. During 1997, SB received redemption fees of $19,277.
Redemption Net Asset Value differs from Net Asset Value calculated for financial
reporting purposes in that the accrued liability for reimbursement of offering
and organization expenses will not be included in the calculation of Redemption
Net Asset Value.
Offering and organization expenses of $541,205 relating to the issuance
and marketing of Units offered were initially paid by SB. The accrued liability
for reimbursement of offering and organization expenses will not reduce Net
Asset Value per Unit for any purpose (other than financial reporting), including
calculation of advisory and brokerage fees and the redemption value of Units.
Interest earned by the Partnership will be used to reimburse SB for the offering
and organization expenses of the Partnership plus
12
interest at the prime rate quoted by The Chase Manhattan Bank until such time as
such expenses are fully reimbursed. As of December 31, 1997, the Partnership has
reimbursed SB for $463,936 of offering and organization expenses and $37,315 of
interest.
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, 1997, the Net
Asset Value per Unit increased 6.2% from $1,107.34 to $1,175.99. For the period
from August 9, 1996 (commencement of trading operations) to December 31, 1996,
the net asset value per Unit increased 13.9% from $972.14 to $1,107.34. The net
asset value of $972.14 at commencement of trading operations is reflective of
charging offering and organizational expenses against the initial capital of the
Partnership for financial reporting purposes. The redemption value per unit at
December 31, 1997 and 1996 was $1,180.06 and $1,129.72, respectively. There were
no operations in 1995.
The Partnership experienced net trading gains of $1,331,131 before
commissions and expenses for the year ended December 31, 1997. Gains were
attributable to the trading of commodity futures in foreign currencies, grains,
non U.S. interest rates, metals,
13
softs and indices and were partially offset by losses experienced in the trading
of energy products, U.S. interest rates and livestock. The Partnership
experienced unrealized appreciation of $415,817 on Zero Coupons during 1997 and
a gain an sale of Zero Coupons of $14,086 during 1997.
The Partnership experienced net trading gains of $3,158,721 before
commissions and expenses for the period ended December 31, 1996. Gains were
attributable to the trading of commodity futures in interest rates, metals,
energy and foreign currencies. These gains were partially offset by losses
experienced in the trading of indices and agricultural products. The Partnership
experienced unrealized appreciation of $80,764 on Zero Coupons during 1996. The
Partnership included in interest income the amortization of original issue
discount on Zero Coupons based on the interest method.
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify those price trends correctly. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
14
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Accountants. F-2
Financial Statements:
Statement of Financial Condition at
December 31, 1997 and 1996. F-3
Statement of Income and Expenses for
the year ended December 31, 1997 and
for the period from August 9, 1996
(commencement of trading operations)
to December 31, 1996. F-4
Statement of Partners' Capital for
the years ended December 31, 1997 and
1996 and for the period from November 16,
1995 (date the Partnership was organized)
to December 31, 1995. F-5
Notes to Financial Statements. F-6 - F-11
F-1
Report of Independent Accountants
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 (a New York Limited Partnership) as
of December 31, 1997 and 1996, and the related statements of income and expenses
for the year ended December 31, 1997 and for the period from August 9, 1996
(commencement of trading operations) to December 31, 1996, and of partners'
capital for the years ended December 31, 1997 and 1996 and for the period from
November 16, 1995 (date Partnership was organized) to December 31, 1995. 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 in accordance with generally accepted auditing
standards. 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 the
management of the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audits provide 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, 1997 and 1996 and the results of its
operations for the years ended December 31, 1997 and 1996 and for the period
from November 16, 1995 (date Partnership was organized) to December 31, 1995, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 6, 1998
F-2
Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Financial Condition
December 31, 1997 and 1996
Assets: 1997 1996
Equity in commodity futures
trading account:
Cash and cash equivalents
(Note 3c) $ 8,500,216 $ 9,941,903
Net unrealized appreciation
on open futures contracts 720,274 241,456
Zero Coupons, $18,968,000
and $20,100,000 principal
amount in 1997 and 1996,
respectively, due November
15, 2003, at market value
(amortized cost $13,081,092 and
$13,012,376 in 1997 and
1996, respectively) (Notes
1 and 2) 13,577,673 13,093,140
----------- -----------
22,798,163 23,276,499
Receivable from SB on sale
of Zero Coupons 419,702 --
----------- -----------
$23,217,865 $23,276,499
----------- -----------
Liabilities and Partners'
Capital:
Liabilities:
Accrued expenses:
Commissions $ 74,685 $ 74,500
Management fees 34,365 33,970
Incentive fees 1,244 421,541
Due to SB (Note 6) 77,269 449,877
Other 30,223 39,050
Redemptions payable 693,875 --
----------- -----------
911,661 1,018,938
Partners' capital (Notes 1, 5, and 7):
General Partner, 203 Unit
equivalents outstanding in
1997 and 1996 238,726 224,790
Limited Partners, 18,765
and 19,897 Units of
Limited Partnership
Interest outstanding in
1997 and 1996, respectively 22,067,478 22,032,771
----------- -----------
22,306,204 22,257,561
----------- -----------
$23,217,865 $23,276,499
----------- -----------
See notes to financial statements.
F-3
Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Income and Expenses
for the year ended December 31, 1997 and from August
9, 1996 (commencement of trading operations) to
December 31, 1996
1997 1996
Income:
Net gains on trading of
commodity interests:
Realized gains on
closed positions $ 852,313 $2,917,265
Change in unrealized
gains on open positions 478,818 241,456
---------- ----------
1,331,131 3,158,721
Less, Brokerage
commissions
and clearing fees
($16,092 and $6,901,
respectively) (Note 3c) 958,141 346,364
---------- ----------
Net realized and
unrealized gains 372,990 2,812,357
Gain on sale of Zero 14,086 --
Coupons
Unrealized appreciation
on Zero Coupons 415,817 80,764
Interest income
(Notes 2c, 3c and 6) 1,212,251 434,374
---------- ----------
2,015,144 3,327,495
---------- ----------
Expenses:
Management fees (Note 3b) 404,339 146,507
Incentive fees (Note 3b) 191,624 421,541
Other expenses 59,752 41,886
---------- ----------
655,715 609,934
---------- ----------
Net income $1,359,429 $2,717,561
---------- ----------
Net income per Unit of
Limited Partnership Interest
and General Partner Unit
equivalent (Notes 1 and 7) $ 68.65 $ 135.20
---------- ----------
See notes to financial statements.
F-4
Smith Barney Principal PLUS
Futures Fund L.P. II
Statement of Partners' Capital for the years ended
December 31, 1997 and 1996 and for the period from
November 16, 1995 (date the Partnership was
organized) to December 31, 1995
Limited General
Partners Partner Total
Initial capital
contributions $ 1,000 $ 1,000 $ 2,000
------------ ------------ ------------
Partners' capital at
December 31, 1995 1,000 1,000 2,000
Proceeds from offering
of 19,896 Units of
Limited Partnership Interest
and General Partner's
contribution representing
202 Unit equivalents
(Note 1) 19,896,000 202,000 20,098,000
Offering and
organization
costs (Note 6) (554,400) (5,600) (560,000)
------------ ------------ ------------
Opening Partnership
capital for operations 19,342,600 197,400 19,540,000
Net Income 2,690,171 27,390 2,717,561
------------ ------------ ------------
Partners' capital at
December 31, 1996 22,032,771 224,790 22,257,561
Net Income 1,345,493 13,936 1,359,429
Redemption of 1,132
Units of Limited
Partnership Interest (1,310,786) -- (1,310,786)
------------ ------------ ------------
Partners' capital at
December 31, 1997 $ 22,067,478 $ 238,726 $ 22,306,204
------------ ------------ ------------
See notes to financial statements.
F-5
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 interest payments stripped from U.S. Treasury Bonds under the Treasury's
STRIPS program which payments are due approximately seven years from the date
trading commenced ("Zero Coupons").
Between April 3, 1996 (commencement of offering period) and August 8, 1996,
19,896 Units of Limited Partnership Interest ("Units") were sold at $1,000
per Unit. The proceeds of the offering were held in an escrow account until
August 9, 1996, at which time they were turned over to the Partnership for
trading. The Partnership was authorized to sell 60,000 Units during the
offering period of the Partnership.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership and is a wholly owned subsidiary of
Smith Barney Inc. ("SB"). SB acts as commodity broker for the Partnership
(see Note 3c). On November 28, 1997, Smith Barney Holdings Inc. was merged
with Salomon Inc to form Salomon Smith Barney Holdings Inc. ("SSBH"), a
wholly owned subsidiary of Travelers Group Inc. SB is a wholly owned
subsidiary of SSBH.
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of the
Partnership in excess of his initial capital contribution and profits, if
any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2015; at the end of the month in which the Zero Coupons
purchased come due (November, 2003) ("First Payment Date"), unless the
General Partner elects otherwise, or under certain other circumstances as
defined in the Limited Partnership Agreement. The General Partner, in its
sole discretion, may elect not to terminate the Partnership as of the First
Payment Date. In the event that the General Partner elects to continue the
Partnership, each limited partner shall have the opportunity to redeem all or
some of his Units.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at market value for those
commodity interests for which market quotations are readily available or
at fair value on the last business day of the year. Investments in
commodity interests denominated in foreign currency are translated into
U.S. dollars at the exchange rates prevailing on the last business day of
the year. Realized gain (loss) and changes in unrealized values on
commodity interests are recognized in the period in which the contract is
closed or the changes occur and are included in net gains (losses) on
trading of commodity interests.
F-6
b. Income taxes have not been provided as each partner is individually liable
for the taxes, if any, on his share of the Partnership's income and
expenses.
c. The original issue discount on the Zero Coupons is being amortized over
their life using the interest method and is included in interest income.
d. Zero Coupons are recorded in the statement of financial condition at
market value. Realized gain (loss) on the sale of Zero Coupons is
determined on the amortized cost basis of the Zero Coupons at the time of
sale.
e. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.
3. Agreements:
a. Limited Partnership Agreement: The General Partner administers the
business and affairs of the Partnership including selecting one or more
advisors to make trading decisions for the Partnership.
b. Management Agreements:
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with John W. Henry & Company, Inc. ("JWH") and
Willowbridge Associates Inc. ("Willowbridge") (collectively, the
"Advisors"), which provide that the Advisors have sole discretion in
determining the investment of the assets of the Partnership allocated to
each Advisor by the General Partner. As compensation for services, the
Partnership is obligated to pay Willowbridge a monthly management fee of
1/6 of 1% (2% per year) of month-end Net Assets allocated to it and pay
JWH a monthly management fee of 1/3 of 1% (4% per year) of month-end Net
Assets allocated to it. The Partnership will also pay Willowbridge an
incentive fee payable quarterly equal to 20% of New Trading Profits earned
by it for the Partnership and JWH will receive an incentive fee of 15% of
the New Trading Profits.
F-7
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SB a monthly brokerage fee equal to 7/12 of 1% of
month-end Net Assets allocated to the Advisors (7% per year) in lieu of
brokerage commissions on a per trade basis. A portion of this fee is paid
to employees of SB who have sold Units of the Partnership. This fee does
not include exchange, clearing, user, give-up, floor brokerage and NFA
fees which will be borne by the Partnership. All of the Partnership's
assets are deposited in the Partnership's account at SB. The Partnership
maintains a portion of these assets in Zero Coupons and a portion in cash.
The Partnership's cash is deposited by SB in segregated bank accounts, as
required by Commodity Futures Trading Commission regulations. At December
31, 1997 and 1996, the amount of cash held for margin requirements was
$2,469,749 and $1,487,207. SB 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 SB 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 SB gives the Partnership
the legal right to net unrealized gains and losses. The Customer Agreement
may be terminated by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
All of the commodity interests owned by the Partnership are held for trading
purposes. The fair value of these commodity interests, including options
thereon, at December 31, 1997 and 1996 was $720,274 and $241,456,
respectively, and the average fair value during the period then ended, based
on monthly calculation, was $814,445 and $1,507,237, respectively.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner. Beginning with the end of the first full quarter ending at
least six months after trading commences (March 31, 1997), on 10 days' notice
to the General Partner, a limited partner may require the Partnership to
redeem his Units at their Redemption Net Asset Value as of the last day of a
quarter. Redemption fees equal to 2% of Redemption Net Asset Value per Unit
redeemed will be charged to any limited partner who redeems his Units on the
first, second or third possible redemption date, and 1% on the fourth and
fifth possible redemption dates. Thereafter, no redemption fee will be
charged. During 1997, SB received redemption fees of $19,277. Redemption Net
Asset Value differs from Net Asset Value calculated for financial reporting
purposes in that the accrued liability for reimbursement of offering and
organization expenses will not be included in the calculation of Redemption
Net Asset Value.
F-8
6. Offering and Organization Costs:
Offering and organization expenses of $541,205 relating to the issuance and
marketing of Units offered were initially paid by SB. The accrued liability
for reimbursement of offering and organization expenses will not reduce Net
Asset Value per Unit for any purpose (other than financial reporting),
including calculation of advisory and brokerage fees and the redemption value
of Units. Interest earned by the Partnership will be used to reimburse SB for
the offering and organization expenses of the Partnership plus interest at
the prime rate quoted by the Chase Manhattan Bank until such time as such
expenses are fully reimbursed. As of December 31,1997, the Partnership has
reimbursed SB for $463,936 of offering and organization expenses and $37,315
of interest.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit for the year ended 1997 and for the
period from August 9, 1996 (commencement of trading operations) to December
31,1996 were as follows:
1997 1996
Net realized and
unrealized gains $ 18.91 $ 139.92
Interest income 61.06 21.60
Realized and
unrealized gains on
Zero Coupons 22.05 4.03
Expenses (33.37) (30.35)
--------- ---------
Increase for period 68.65 135.20
Net asset value per
Unit beginning of period 1,107.34 972.14
--------- ---------
Net asset value per
Unit, end of period $1,175.99 $1,107.34
--------- ---------
Redemption value per
Unit, end of period* $1,180.06 $1,129.72
--------- ---------
*For the purpose of a redemption, any accrued liability for reimbursement of
offering and organization expenses will not reduce redemption net asset value
per Unit.
8. 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, SSBH 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-9
9. Financial Instrument Risk:
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 include forwards, futures and options, whose value is based upon
an underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, to purchase or sell other
financial instruments at specific terms at specified future dates, or, in the
case of derivative commodity instruments, to have a reasonable possibility to
be settled in cash 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 concentration risk because the sole
counterparty or broker with respect to the Partnership's assets is SB.
The General Partner monitors and controls the Partnership's risk exposure on
a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership
is subject. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.
The notional or contractual amounts of these instruments, while not recorded
in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At December 31, 1997, the Partnership's
commitment to purchase and sell these instruments was $103,162,990 and
$65,919,874, respectively, as detailed below. All of these instruments mature
within one year of December 31, 1997. However, due to the nature of the
Partnership's business, these instruments may not be held to maturity. At
December 31, 1997, the fair value of the Partnership's derivatives, including
options thereon, was $720,274, as detailed below.
F-10
December 31, 1997
-----------------------------------------------
Notional or Contractual
Amount of Commitments
-----------------------------------------------
To Purchase To Sell Fair Value
Currencies
-Exchange
Traded Contracts -- $ 4,026,713 $ 62,013
-OTC Contracts $ 7,813,559 14,869,435 (37,009)
Energy -- 2,381,490 165,550
Interest Rates
U.S 27,054,925 -- 163,819
Interest
Rates Non-U.S 58,496,762 38,054,369 189,136
Grains 2,958,744 679,250 (102,587)
Softs 3,987,204 842,675 (129,803)
Metals 2,851,796 4,180,877 336,934
Indices -- 885,065 72,221
------------ ------------ ------------
Total $103,162,990 $ 65,919,874 $ 720,274
------------ ------------ ------------
At December 31, 1996, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was
$62,598,929 and $26,015,417, respectively, and the fair value of the
Partnership's derivatives, including options thereon, was $241,456 as
detailed below.
December 31, 1996
--------------------------------------------
Notional or Contractual
Amount of Commitments
--------------------------------------------
To Purchase To Sell Fair Value
Currencies
-Exchange
Traded $ 1,334,520 $ 5,148,813 $ 12,153
Contracts
-OTC 7,465,989 7,184,196 56,748
Contracts
Energy 2,918,918 -- 118,296
Interest Rates 11,395,169 -- (83,819)
U.S
Interest 37,500,497 7,525,109 (14,353)
Rates
Non-U.S
Grains 356,850 614,676 (274)
Livestock 412,460 -- 15,310
Softs 532,888 966,751 (13,390)
Metals 681,638 3,643,675 115,283
Indices -- 932,197 35,502
----------- ----------- -----------
Total $62,598,929 $26,015,417 $ 241,456
----------- ----------- -----------
F-11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
During the last two fiscal years and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed by
its General Partner, Smith Barney Futures Management Inc. Investment decisions
are made by the Advisors.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management Inc., its General Partner, which
receives compensation for its services, as set forth under "Item 1. Business."
SB, 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 $958,141
were paid for the year ended December 31, 1997. Management fees of $404,339 were
paid or payable to the Advisors for the year ended December 31, 1997. In
addition, incentive fees of $191,624 were paid to the Advisors for the year
ended December 31, 1997.
15
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 partnership interest
equivalent to 203 (1.1%) Units of Limited Partnership Interest.
(c). Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Smith Barney Inc. and Smith Barney Futures Management Inc. would be
considered promoters for purposes of Item 404(d) of Regulation S-K. The nature
and the amounts of compensation each promoter will receive from the Partnership
are set forth under "Item 1. Business." and "Item 11. Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1997 and
1996. Statement of Income and Expenses for the year ended
December 31, 1997 and for period from August 9, 1996
(commencement of trading operations) to December 31, 1996.
16
Statement of Partners' Capital for the years ended December
31, 1997 and 1996 and for the period from November 16, 1995
(date the Partnership was organized) to December 31, 1995.
(2) Financial Statement Schedules: Financial Data
Schedule for the year ended December 31, 1997.
(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).
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).
17
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).
10.7- Letters extending Management Agreements with John W. Henry &
Company and Willowbridge Associates Inc. (filed herein).
(b) Reports on 8-K: None Filed.
18
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
19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement 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 24th day of March 1998.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. II
By: Smith Barney Futures Management Inc.
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel, Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael Schaefer /s/ Daniel A. Dantuono
Michael Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
20