10-K 1 sbplus.txt SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 2001 Commission File Number 0-28350 ------- SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 13-3823300 ----------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) c/o Smith Barney Futures Management LLC 388 Greenwich St. - 7th Fl. New York, New York 10013 ---------------------------------------------------------------------- (Address and Zip Code of principal executive offices) (212) 723-5424 ---------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K [X] As of February 28, 2002, Limited Partnership Units with an aggregate value of $11,687,658 were outstanding and held by non-affiliates. DOCUMENTS INCORPORATED BY REFERENCE NONE PART I Item 1. Business. --------- (a) General development of business. Smith Barney Principal Plus Futures Fund L.P. (the "Partnership") is a limited partnership organized on January 25, 1993 under the partnership laws of the State of New York and was capitalized on April 12, 1995. No activity occurred between January 25, 1993 and April 12, 1995. The Partnership engages in speculative trading of commodity interests, including forward contracts on foreign currencies, commodity options and commodity futures contracts including futures contracts on United States Treasuries and certain other financial instruments, foreign currencies and stock indices. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. The Partnership maintains a portion of its assets in interest payments stripped from U.S. Treasury Bonds under the Treasury's STRIPS program ("Zero Coupons") which payments will be due February 15, 2003. The Partnership uses the Zero Coupons and its other assets to margin its commodities account. A total of 100,000 Units of Limited Partnership Interest in the Partnership (the "Units") were offered to the public. Between July 12, 1995 and November 16, 1995, 37,131 Units were sold to the public at $1,000 per Unit. 2 Proceeds of the offering along with the General Partner's contribution of $376,000 were held in escrow until November 17, 1995 at which time an aggregate of $37,507,000 were turned over to the Partnership and the Partnership commenced trading operations. Smith Barney Futures Management LLC acts as the general partner (the "General Partner") of the Partnership. The Partnership's commodity broker is Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner. The General Partner is wholly owned by Salomon Smith Barney Holdings Inc. ("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of Citigroup Inc. The Partnership's trading of futures, forwards and options contracts, if applicable, on commodities is done on United States of America and foreign commodity exchanges. It engages in such trading through a commodity brokerage account maintained with SSB. Under the Limited Partnership Agreement of the Partnership (the "Limited Partnership Agreement"), the General Partner administers the business and affairs of the Partnership. As of December 31, 2001, all commodity trading decisions are made for the Partnership by Tucson Asset Management (the "Advisor"). The Advisor is not affiliated with the General Partner or SSB. The Advisor is not responsible for the organization or operation of the Partnership. The Partnership is obligated to pay a monthly management fee of 1/6 of 3 1% (2% per year) of month-end Net Assets allocated to the advisor. The Partnership will also pay an incentive fee payable quarterly equal to 20% of New Trading Profits, as defined in the Management Agreement, earned by it for the Partnership of New Trading Profits, as defined in the Management Agreement. Prior to March 1, 2001, the Customer Agreement provided that the Partnership will pay SSB a monthly brokerage fee equal to 7/12 of 1% of month-end Net Assets allocated to the Advisor (7% per year) in lieu of brokerage commissions on a per trade basis. Effective March 1, 2001, the Partnership pays SSB a monthly brokerage fee equal to 5/12 of 1% of month-end Net Assets allocated to the Advisor (5% per year) in lieu of brokerage commissions on a per trade basis. SSB will pay a portion of its brokerage fees to its financial consultants who have sold Units and who are registered as associated persons with the Commodity Futures Trading Commission (the "CFTC"). The Partnership will pay for National Futures Association ("NFA") fees, exchange and clearing fees, give-up and user fees and floor brokerage fees. Brokerage fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. The Customer Agreement between the Partnership and SSB gives the Partnership the legal right to net unrealized gains and losses. Reference should be made to "Item 8. Financial Statements and Supplementary Data." for further 4 information regarding the brokerage commissions included in the notes to the financial statements. In addition, SSB will pay the Partnership interest on 80% of the average daily equity maintained in cash in its account during each month at a 30-day U.S. Treasury bill rate determined weekly by SSB based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. In the unlikely event that the Partnership is required to meet a margin call in excess of the cash balance in its trading accounts, SSBHI will contribute up to an amount equal to the maturity value of the Zero Coupons held by the Partnership at the time of such call to the capital of the Partnership to permit it to meet its margin obligations in excess of its cash balance. The guarantee can only be invoked once. After the guarantee is invoked, trading will cease and the General Partner will either wait until the end of the month in which the Zero Coupons come due (February, 2003), (the "First Payment Date"), or will distribute cash and Zero Coupons to the limited partners. The General Partner will provide a copy of SSBHI's annual report as filed with the SEC to any limited partner requesting it. (b) Financial information about industry segments. The Partnership's business consists of only one segment, speculative trading of commodity interests (including, but not limited to, futures contracts, options and forward 5 contracts on U.S. Treasuries, other financial instruments, foreign currencies, stock indices and physical commodities). The Partnership does not engage in sales of goods or services. The Partnership's net income from operations for the year ended December 31, 2001, 2000, 1999, 1998 and 1997 is set forth under "Item 6. Selected Financial Data." Partnership capital as of December 31, 2001 was $12,288,724. (c) Narrative description of business. See Paragraphs (a) and (b) above. (i) through (x) - Not applicable. (xi) through (xii) - Not applicable. (xiii) - The Partnership has no employees. (d) Financial Information About Geographic Areas. The Partnership does not engage in sales of goods or services or own any long lived assets, and therefore this item is not applicable. Item 2. Properties. The Partnership does not own or lease any properties. The General Partner operates out of facilities provided by its affiliate, SSB. Item 3. Legal Proceedings. This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Salomon Smith Barney Holdings Inc. ("SSBH") or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings 6 pending against the Partnership or the General Partner. Salomon Smith Barney Inc. ("SSB") is a New York corporation with its principal place of business at 388 Greenwich St., New York, New York 10013. SSB is registered as a broker-dealer and futures commission merchant ("FCM"), and provides futures brokerage and clearing services for institutional and retail participants in the futures markets. SSB and its affiliates also provide investment banking and other financial services for clients worldwide. There have been no administrative, civil or criminal actions pending, on appeal or concluded against SSB or any of its individual principals within the past five years that management believes may have a material impact on SSB's ability to act as an FCM. In the ordinary course of its business, SSB is a party to various claims and regulatory inquiries. Proceedings deemed to be material for purposes of Commodity Futures Trading Commission ("CFTC") disclosure requirements are: In September 1992, Harris Trust and Savings Bank (as trustee for Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers Realty Corporation ("SBRC") in the U.S. District Court for the Northern District of Illinois (Harris Trust Savings Bank, not individually but solely as trustee for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v. 7 Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended complaint alleges that three purchases by APT from defendants of participation interests in net cash flow or resale proceeds of three portfolios of motels owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of a similar participation interest in a portfolio of motels owned by Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act ("ERISA"), and that APT's purchase of the participation interests in the third MOA portfolio and in the Best portfolio violated the Racketeer Influenced and Corrupt Organization Act ("RICO") and the Illinois Consumer Fraud and Deceptive Practices Act ("Consumer Fraud Act"), and constituted fraud, negligent misrepresentation, breach of contract and unjust enrichment. SBI had acquired the participation interests when it purchased principal mortgage notes issued by MOA and Best to finance purchases of motel portfolios; 95% of three of those interests and 100% of the fourth were sold to APT for a total of approximately $20.9 million. Plaintiffs' second amended complaint seeks judgment (a) on the ERISA claims for the approximately $20.9 million purchase price, for rescission and for disgorgement of profits, as well as other relief, and (b) on the RICO and state law claims in the amount of $12.3 million, with damages trebled to $37 million on the RICO claims and punitive damages in excess of $37 million on 8 certain of the state law claims as well as other relief. Following motions by defendants, the court dismissed the RICO, Consumer Fraud Act, fraud, negligent misrepresentation, breach of contract, and unjust enrichment claims. The court also found that defendants were not ERISA fiduciaries and dismissed two of the three claims based on that allegation. Defendants moved for summary judgment on plaintiffs' only remaining claim, which alleged an ERISA violation. The motion was denied, and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit. In July 1999, the U. S. Court of Appeals for the Seventh Circuit reversed the denial of defendants' motion for summary judgment and dismissed the sole remaining ERISA claim against the Company. Plaintiffs filed a petition for certiorari with the U. S. Supreme Court seeking review of the decision of the Court of Appeals, which was granted in January 2000. After hearing oral argument, on June 12, 2000, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Seventh Circuit's judgment, which had overturned the denial of defendants' motion for summary judgment and dismissed the sole remaining ERISA claim against the Company, and remanded the matter to the circuit court for further proceedings. Subsequently, the circuit court remanded the matter to the U.S. District Court for the Northern District of Illinois for further proceedings. Both the Department of Labor and the Internal Revenue Service ("IRS") have advised SBI that they were or are reviewing the underlying 9 transactions. With respect to the IRS, SSBH, SBI and SBRC have consented to extensions of time for the assessment of excise taxes that may be claimed with respect to the transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to the transactions and SSBH, SBI and SBRC were given an opportunity to comment on whether the IRS should issue 30-day letters, which would actually commence the assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum setting forth reasons why the IRS should not issue such 30-day letters. Since that time, the IRS has not issued such 30-day letters to SSBH, SBI or SBRC. In December 1996, a complaint seeking unspecified monetary damages was filed by Orange County, California against numerous brokerage firms, including SSB, in the U.S. Bankruptcy Court for the Central District of California. (County of Orange et al v. Bear Stearns & Co. Inc. et al.) The complaint alleged, among other things, that the brokerage firms recommended and sold unsuitable securities to Orange Count. SSB and the remaining brokerage firms settled with Orange County in mid 1999. In June 1998, complaints were filed in the U.S. district Court for the Eastern District of Louisiana in two actions (Board of Liquidations, City Debt of the City of New Orleans v. Smith Barney Inc, et ano. and The City of New 10 Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a determination that Smith Barney Inc. and another underwriter will be responsible for any damages that the City may incur in the event the IRS denies tax exempt status to the City's General Obligation Refunding Bonds Series 1991. The complaints were subsequently amended. SSB has asked the court to dismiss the amended complaints. The Court denied the motion but stayed the case. Subsequently, the city withdrew the lawsuit. In November 1998, a class action complaint was filed in the United States District Court for the Middle District of Florida (Dwight Brock as Clerk for Collier County v. Merrill Lynch, et al.). The Complaint alleged that, pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB, Charged excessive mark-ups in connection with advanced refunding transactions. Among other relief, plaintiffs sought compensatory and punitive damages, restitution and/or rescission of the transactions and disgorgement of alleged excessive profits. In October 1999, the plaintiff filed a second amended complaint. SSB has asked the court to dismiss the amended complaint. In November 1999, SSB moved to dismiss the amended complaint. In May 2001, the parties reached, and the court preliminarily approved, a tentative settlement. In September 2001, the court approved the settlement. In connection with the Louisiana and Florida matters, the IRS and SEC have 11 been conducting and industry-wide investigation into the pricing of Treasury securities in advanced refunding transactions, In April 2000 SSB and several other broker-dealers entered into a settlement with the IRS and the SEC. In December 1998, SSB was one of twenty-eight market making firms that reached a settlement with the SEC in the matter titled In the Matter of Certain Market Making Activities on NASDAQ. As part of the settlement of that matter, SSB, without admitting or denying the factual allegation, agreed to an order that required that it: (i) cease and desist from committing or causing any violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934 and Rules 15cl -2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling approximately $760,000, and (iii) submit certain policies and procedures to an independent consultant for review. In March 1999, a complaint seeking in excess of $250 million was filed by a hedge fund and its investment advisor against SSB in the Supreme Court of the State of New York, County of New York (MKP Master Fund, LDC et al. v. Salomon Smith Barney Inc.). Plaintiffs allege that while acting as their prime broker SSB breached its contracts with plaintiffs, converted plaintiffs' monies and engaged in tortious conduct, including breaching its fiduciary duties. In October 1999, the court dismissed plaintiffs' tort claims, including the breach 12 of fiduciary duty claims, but allowed the breach of contract and conversion claims to stand. In December 1999, SSB filed an answer and asserted counterclaims against the investment advisor. In response to plaintiffs' motion to strike the counterclaims, in January 2000, SSB amended its counterclaims against the investment advisor to seek indemnification and contribution. Plaintiffs moved to strike SSB's amended counterclaims in February 2000. In September 2000, the court denied plaintiffs' motion to dismiss SSB's counterclaims based on indemnification and contribution. Discovery is ongoing. SSBH and various subsidiaries have also been named as defendants in various matters incident to and typical of the businesses in which they are engaged. These include numerous civil actions, arbitration proceedings and other matters in which SSBH's broker-dealer subsidiaries have been named, arising in the normal course of business out of activities as a broker and dealer in securities, as an underwriter of securities, as an investment banker or otherwise. In the opinion of SSBH's management, none of these actions is expected to have a material adverse effect on the results of operations, consolidated financial condition or liquidity of SSBH and its subsidiaries. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to the security holders for a vote during the last fiscal year covered by this report. 13 PART II Item 5. Market for Registrant's Common Equity and Related Security Holder Matters. (a) Market Information. The Partnership has issued no stock. There is no public market for the Units of Limited Partnership Interest. (b) Holders. The number of holders of Units of Limited Partnership Interest as of December 31, 2001 was 637. (c) Distribution. The Partnership did not declare a distribution in 2001 or 2000. (d) Use of Proceeds. There were no additional sales in the years ended December 31, 2001, 2000 and 1999. 14 < Item 6. Selected Financial Data. Realized and unrealized trading gains (losses), realized and unrealized gains (losses) on Zero Coupons, interest income, net income (loss) and increase in Net Asset Value per Unit for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 and total assets at December 31, 2001, 2000, 1999, 1998 and 1997 were as follows:
2001 2000 1990 1998 1997 ------------ ----------- ------------- ------------ ------------ Realized and unrealized trading gains(losses) net of brokerage commissions and clearing fees of $247,193, $588,695, $1,148,676, $1,357,927 and $1,462,372, respectively $ 241,570 $ (2,076,683) $ (3,003,382) $ 1,234,224 $ 2,025,344 Realized and unrealized appreciation (depreciation) on Zero Coupons 220,306 367,890 (1,301,703) 923,712 631,119 Interest income 650,762 1,071,638 1,563,022 1,710,639 1,916,217 ------------ ------------ ------------ ------------ ------------ $ 1,112,638 $ (637,155) $ (2,742,063) $ 3,868,575 $ 4,572,680 ============ ============ ============ ============ ============ Net income (loss) $ 912,086 $ (857,383) $ (3,247,194) $ 2,968,642 $ 3,546,888 ============ ============ ============ ============ ============ Increase (decrease) in Net Asset Value per Unit $ 87.28 $ (10.68) $ (129.45) $ 109.40 $ 115.33 ============ ============ ============ ============ ============ Total assets $ 13,020,582 $ 14,239,485 $ 29,079,820 $ 35,208,540 $ 36,883,726 ============ ============ ============ ============ ============
15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (a) Liquidity. The Partnership does not engage in sales of goods or services. Its only assets are its equity in its commodity futures trading account, consisting of cash, Zero Coupons, net unrealized appreciation (depreciation) on open positions and interest receivable. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership. Such substantial losses could lead to a material decrease in liquidity. To minimize this risk, the Partnership follows certain policies including: (1) Partnership funds are invested only in commodity interests which are traded in sufficient volume to permit, in the opinion of the Advisors, ease of taking and liquidating positions. (2) No Advisor will initiate additional positions in any commodity if such additional positions would result in aggregate positions for all commodities requiring as margin more than 66-2/3% of the Partnership's assets allocated to the Advisor. (3) The Partnership will not employ the trading technique commonly known as "pyramiding", in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or related commodities. (4) The Partnership will not utilize borrowings except short-term borrowings if the Partnership takes delivery of any cash commodities. (5) The Advisor may, from time to time, employ trading strategies such as spreads or straddles on 16 behalf of the Partnership. The term "spread" or "straddle" describes a commodity futures trading strategy involving the simultaneous buying and selling of contracts on the same commodity but involving different delivery dates or markets and in which the trader expects to earn a profit from a widening or narrowing of the difference between the prices of the two contracts. (6) The Partnership will not permit the churning of its commodity trading accounts. (7) The Partnership may cease trading and liquidate all open positions prior to its dissolution if its Net Assets (excluding assets maintained in Zero Coupons) decrease to 10% of those assets on the day trading commenced (adjusted for redemptions). The Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments, in the normal course of its business. These financial instruments may include forwards, futures and options, whose value is based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, or to purchase or sell other financial instruments at specified terms at specified future dates. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments including market and credit risk. The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems and accordingly 17 believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. (See also "Item 8. Financial Statements and Supplementary Data." for further information on financial instrument risk included in the notes to financial statements.) Other than the risks inherent in commodity trading, the Partnership knows of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership's liquidity increasing or decreasing in any material way. The Limited Partnership Agreement provides that the Partnership will cease trading operations and liquidate all open positions upon the first to occur of the following: (i) December 31, 2015; (ii) at the end of the month in which the Zero Coupons purchased by the Partnership come due (February 15, 2003), unless the General Partner elects otherwise; (iii) the vote to dissolve the Partnership by limited partners owning more than 50% of the Units; (iv) assignment by the General Partner of all of its interest in the Partnership or withdrawal, removal, bankruptcy or any other event that causes the General Partner to cease to be a general partner under the Partnership Act unless the Partnership is continued as described in the Limited Partnership Agreement; (v) the Partnership is required to register under the Investment Company Act of 1940 and the General Partner determines that dissolution is therefore in the Partnership's best interest; or (vi) the occurrence of any event which shall make it unlawful for the existence of the Partnership to be continued. 18 (b) Capital resources. (i) The Partnership has made no material commitments for capital expenditures. (ii) The Partnership's capital consists of the capital contributions of the partners as increased or decreased by gains or losses on commodity futures trading and Zero Coupon appreciation or depreciation, and by expenses, interest income, redemptions of Units and distributions of profits, if any. Gains or losses on commodity trading cannot be predicted. Market moves in commodities are dependent upon fundamental and technical factors which the Partnership's Advisors may or may not be able to identify. Partnership expenses consist of, among other things, commissions, management fees and incentive fees. The level of these expenses is dependent upon the level of trading gains or losses and the ability of the Advisors to identify and take advantage of price movements in the commodity markets, in addition to the level of Net Assets maintained. Furthermore, the Partnership will receive no payment on its Zero Coupons until their due date. However, the Partnership will accrue interest on the Zero Coupons and Limited Partners will be required to report as interest income on their U.S. tax returns in each year their pro-rata share of the accrued interest on the Zero Coupons even though no interest will be paid prior to their due date. In addition, the amount of interest income payable by SSB is dependent upon interest rates over which the Partnership has no control. 19 No forecast can be made as to the level of redemptions in any given period. A limited partner may cause all of his Units to be redeemed by the Partnership at the Net Asset Value thereof as of the last day of a quarter on ten days' written notice to the General Partner. No fee will be charged for redemptions. For the year ended December 31, 2001, 1,429 Units were redeemed totaling $1,769,289. For the year ended December 31, 2000, 11,615 Units was redeemed totaling $13,186,595. For the year ended December 31, 1999, 3,123 Units were redeemed totaling $3,837,307. For each Unit redeemed the Partnership liquidates $1,000 (principal amount) of Zero Coupons and will continue to liquidate $1,000 (principal amount) of Zero Coupons per Unit redeemed. These liquidations will be at market value which will be less than the amount payable on their due date. Moreover, it is possible that the market value of the Zero Coupon could be less than its purchase price plus the original issue discount amortized to date. (c) Results of operations. For the year ended December 31, 2001, the Net Asset Value per Unit increased 7.4% from $1,188.28 to $1,275.56. For the year ended December 31, 2000, the Net Asset Value per Unit decreased 0.9% from $1,198.96 to $1,188.28. For the year ended December 31, 1999, the Net Asset Value per Unit decreased 9.7% from $1,328.41 to $1,198.96. The Partnership experienced net trading gains of $488,763 before commissions and expenses for the year ended December 31, 2001. Gains were primarily attributable to the trading in U.S. and non-U.S. interest rates, metals and indices and were partially offset by losses recognized in grains, 20 currencies, energy, livestock and softs products. The Partnership experienced a realized gain of $40,999 on Zero Coupons liquidated in conjuction with the redemption of Units during 2001 and unrealized appreciation of $179,307 on Zero Coupons during 2001. The Partnership experienced net trading losses of $1,487,988 before commissions and expenses for the year ended December 31, 2000. Losses were primarily attributable to the trading in softs, grains, indices, metals, livestock, U.S. and non-U.S. interest rates and were partially offset by gains recognized in currencies and energy products. The Partnership experienced a realized loss of $114,437 on Zero Coupons liquidated in conjunction with the redemption of Units during 2000 and unrealized appreciation of $482,327 on Zero Coupons during 2000. The Partnership experienced net trading losses of $1,854,706 before commissions and expenses for the year ended December 31, 1999. Losses were primarily attributable to the trading in livestock, softs, metals, U.S. and non- U.S. interest rates and were partially offset by gains recognized in indices, currencies and energy products. The Partnership experienced a realized loss of $11,715 on Zero Coupons liquidated in conjunction with the redemption of Units during 1999 and unrealized depreciation of $1,289,988 on Zero Coupons during 1999. Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility of profit. The profitability of the Partnership depends on the 21 existence of major price trends and the ability of the Advisor to identify those price trends correctly. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor are able to identify them, the Partnership expects to increase capital through operations. (d) Operational Risk The Partnership is directly exposed to market risk and credit risk, which arise in the normal course of its business activities. Slightly less direct, but of critical importance, are risks pertaining to operational and back office support. This is particularly the case in a rapidly changing and increasingly global environment with increasing transaction volumes and an expansion in the number and complexity of products in the marketplace. Such risks include: Operational/Settlement Risk - the risk of financial and opportunity loss and legal liability attributable to operational problems, such as inaccurate pricing of transactions, untimely trade execution, clearance and/or settlement, or the inability to process large volumes of transactions. The Partnership is subject to increased risks with respect to its trading activities in emerging market securities, where clearance, settlement, and custodial risks are often greater than in more established markets. 22 Technological Risk - the risk of loss attributable to technological limitations or hardware failure that constrain the Partnership's ability to gather, process, and communicate information efficiently and securely, without interruption, with customers, among units within the Partnership, and in the markets where the Partnership participates. Legal/Documentation Risk - the risk of loss attributable to deficiencies in the documentation of transactions (such as trade confirmations) and customer relationships (such as master netting agreements) or errors that result in noncompliance with applicable legal and regulatory requirements. Financial Control Risk - the risk of loss attributable to limitations in financial systems and controls. Strong financial systems and controls ensure that assets are safeguarded, that transactions are executed in accordance with management's authorization, and that financial information utilized by management and communicated to external parties, including the Partnership's unitholder, creditors, and regulators, is free of material errors. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Introduction The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business. 23 Market movements result in frequent changes in the fair market value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership's open positions and the liquidity of the markets in which it trades. The Partnership rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results. Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or 24 representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk. Quantifying the Partnership's Trading Value at Risk The following quantitative disclosures regarding the Partnership's market risk exposures contain "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor except for statements of historical fact (such as the terms of particular contracts and the number of market risk sensitive instruments held during or at the end of the reporting period). The Partnership's risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Partnership's mark-to-market accounting, any loss in the fair value of the Partnership's open positions is directly reflected in the Partnership's earnings (realized or unrealized). Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day intervals. The maintenance margin levels are established by dealers and exchanges 25 using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component which is not relevant to Value at Risk. In the case of market sensitive instruments which are not exchange traded (almost exclusively currencies in the case of the Partnership), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers' margins have been used. The fair value of the Partnership's futures and forward positions does not have any optionality component. However, the Advisor may trade commodity options. The Value at Risk associated with options is reflected in the following table as the margin requirement attributable to the instrument underlying each option. Where this instrument is a futures contract, the futures margin, and where this instrument is a physical commodity, the futures-equivalent maintenance margin has been used. This calculation is conservative in that it assumes that the fair value of an option will decline by the same amount as the fair value of the underlying instrument, whereas, in fact, the fair values of the options traded by the Partnership in almost all cases fluctuate to a lesser extent than those of the underlying instruments. 26 In quantifying the Partnership's Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been added to determine each trading category's aggregate Value at Risk. The diversification effects resulting from the fact that the Partnership's positions are rarely, if ever, 100% positively correlated have not been reflected. 27 < The Partnership's Trading Value at Risk in Different Market Sectors The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of December 31, 2001. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of December 31, 2001, the Partnership's total capitalization was $12,288,724. December 31, 2001
Year to Date % of Total High Low Market Sector Value at Risk Capitalization Value at Risk Value at Risk ---------------------------------------------------------------------------------------------- Currencies -Exchange Traded Contracts $ 90,000 0.73% $227,700 $ 30,000 Energy 139,500 1.14% 235,500 5,000 Grains 9,600 0.08% 51,050 1,200 Interest rates U.S. 23,640 0.19% 164,200 18,200 Interest rates Non-U.S. 51,226 0.42% 228,640 8,747 Metals: - OTC Contracts 26,250 0.21% 61,800 13,000 Indices 37,404 0.30% 307,309 7,758 -------- ----- Total $377,620 3.07% ======== =====
28 As of December 31, 2000, the Partnership's total capitalization was $13,145,927. December 31, 2000
Year to Date % of Total High Low Market Sector Value at Risk Capitalization Value at Risk Value at Risk ------------------------------------------------------------------------------------------ Currencies -Exchange Traded Contracts $ 53,848 0.41% $263,939 $ 29,018 -OTC Contracts 8,250 0.06% 347,886 8,250 Energy 22,100 0.17% 212,500 20,000 Grains 49,050 0.37% 141,400 9,600 Interest rates U.S. 74,150 0.56% 258,745 11,300 Interest rates Non-U.S. 221,947 1.69% 629,165 36,963 Livestock 29,070 0.22% 40,175 1,600 Metals (Exchange Traded and OTC Contracts) 28,300 0.22% 342,750 26,300 Softs 38,600 0.29% 136,800 9,500 Indices 59,282 0.45% 606,091 27,980 Lumber 2,200 0.02% 8,800 1,800 ---------- ----- Total $586,797 4.46% ======== =====
29 Material Limitations on Value at Risk as an Assessment of Market Risk The face value of the market sector instruments held by the Partnership is typically many times the applicable maintenance margin requirement (margin requirements generally range between 2% and 15% of contract face value) as well as many times the capitalization of the Partnership. The magnitude of the Partnership's open positions creates a "risk of ruin" not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions -- unusual, but historically recurring from time to time -- could cause the Partnership to incur severe losses over a short period of time. The foregoing Value at Risk table -- as well as the past performance of the Partnership -- give no indication of this "risk of ruin." Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial. Materiality as used in this section, "Qualitative and Quantitative Disclosures About Market Risk," is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of the Partnership's market sensitive instruments. 30 Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership's market risk exposures - except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership's primary market risk exposures as well as the strategies used and to be used by the General Partner and the Advisor for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership's risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the management strategies of the Partnership. There can be no assurance that the Partnership's current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long- term. Investors must be prepared to lose all or substantially all of their investment in the Partnership. 31 The following were the primary trading risk exposures of the Partnership as of December 31, 2001, by market sector. Interest Rates. Interest rate movements directly affect the price of the futures positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Partnership's profitability. The Partnership's primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. Currencies. The Partnership's currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The General Partner does not anticipate that the risk profile of the Partnership's currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk inherent to the dollar-based Partnership in expressing Value at Risk in a functional currency other than dollars. Stock Indices. The Partnership's primary equity exposure is to equity price risk in the G-7 countries. The stock index futures traded by the Partnership are by law limited to futures on broadly based indices. The Partnership is primarily 32 exposed to the risk of adverse price trends or static markets in the major U.S., European and Japanese indices. (Static markets would not cause major market changes but would make it difficult for the Partnership to avoid being "whipsawed" into numerous small losses.) Metals. The Partnership's primary metal market exposure is to fluctuations in the price of aluminum. Softs. The Partnership's primary commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Wheat accounted for the substantial bulk of the Partnership's commodity exposure as of December 31, 2001. Energy. The Partnership's primary energy market exposure is to gas price movements, often resulting from political developments in the Middle East. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following were the only non-trading risk exposures of the Partnership as of December 31, 2001. Foreign Currency Balances. The Partnership's primary foreign currency balances are in Japanese yen, Euro dollar and Hong Kong dollar. The Advisor regularly converts foreign currency balances to dollars in an attempt to control the Partnership's non-trading risk. Securities Positions. The Partnership's only market exposure in instruments held other than for trading is in its securities portfolio. The Partnership maintains a portion of its assets in principal amounts stripped from U.S. Treasury Bonds under the Treasury's STRIPS program. 33 Violent fluctuations in prevailing interest rates could cause immaterial mark-to-market losses on the Partnership's securities. Qualitative Disclosures Regarding Means of Managing Risk Exposure The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. The General Partner monitors the Partnership's performance and the concentration of its open positions, and consults with the Advisor concerning the Partnership's overall risk profile. If the General Partner felt it necessary to do so, the General Partner could require the Advisor to close out individual positions as well as enter certain positions traded on behalf of the Partnership. However, any such intervention would be a highly unusual event. The General Partner primarily relies on the Advisor's own risk control policies while maintaining a general supervisory overview of the Partnership's market risk exposures. The Advisor applies its own risk management policies to its trading. The Advisor often follows diversification guidelines, margin limits and stop loss points to exit a position. The Advisor's research of risk management often suggests ongoing modifications to their trading programs. As part of the General Partner's risk management, the General Partner periodically meets with the Advisor to discuss its risk 34 management and to look for any material changes to the Advisor's portfolio balance and trading techniques. The Advisor is required to notify the General Partner of any material changes to their programs. In the unlikely event that the Partnership is required to meet a margin call in excess of the cash balance in its trading accounts, SSBHI will contribute up to an amount equal to the maturity value of the Zero Coupons held by the Partnership at the time of such call to the capital of the Partnership to permit it to meet its margin obligations in excess of its cash balance. 35 Item 8. Financial Statements and Supplementary Data. -------------------------------------------- SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. INDEX TO FINANCIAL STATEMENTS Page Number Oath or Affirmation F-2 Report of Independent Accountants. F-3 Financial Statements: Statement of Financial Condition at December 31, 2001 and 2000. F-4 Condensed Schedule of Investments at December 31, 2001 F-5 Statement of Income and Expenses for the years ended December 31, 2001, 2000 and 1999. F-6 Statement of Partners' Capital for the years ended December 31, 2001, 2000 and 1999. F-7 Notes to Financial Statements. F-8 - F-12 F-1 To The Limited Partners of Smith Barney Principal PLUS Futures Fund L.P. To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete. By: Daniel R. McAuliffe, Jr. Chief Financial Officer and Director Smith Barney Futures Management LLC General Partner, Smith Barney Principal PLUS Futures Fund L.P. Smith Barney Futures Management LLC 388 Greenwich Street 7th Floor New York, N.Y. 10013 212-723-5424 F-2 Report of Independent Accountants To the Partners of Smith Barney Principal PLUS Futures Fund L.P.: In our opinion, the accompanying statement of financial condition, including the condensed schedule of investments, and the related statements of income and expenses and of partners' capital present fairly, in all material respects, the financial position of Smith Barney Principal PLUS Futures Fund L.P. at December 31, 2001 and 2000, and the results of its operations for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of the General Partner; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the management of the General Partner, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 28, 2002 F-3 Smith Barney Principal PLUS Futures Fund L.P. Statement of Financial Condition December 31, 2001 and 2000
2001 2000 Assets: Equity in commodity futures trading account: Cash (Note 3c) $2,820,810 $3,023,608 Net unrealized appreciation on open positions 327,998 478,851 Zero coupons, $9,634,000 and $11,063,000 principal amount in 2001 and 2000, respectively, due February 15, 2003 at fair value (amortized cost $9,061,122 and $9,813,170 in 2001 and 2000, respectively) (Notes 1 and 2) 9,380,529 9,953,270 ------------ ------------ 12,529,337 13,455,729 Receivable from SSB on sale of zero coupons 487,523 770,500 Interest receivable 3,722 13,256 ------------ ------------ $13,020,582 $14,239,485 ============ ============ Liabilities and Partners' Capital: Liabilities: Accrued expenses: Commissions $17,634 $5,844 Management fees 6,959 27,362 Incentive fees 30,209 -- Professional fees 33,019 33,242 Other 4,981 5,189 Redemptions payable (Note 5) 639,056 1,021,921 ------------ ------------ 731,858 1,093,558 ------------ ------------ Partners' Capital (Notes 1, 5 and 6): General Partner, 376 Unit equivalents outstanding in 2001 and 2000 479,611 446,793 Limited Partners, 9,258 and 10,687 Units of Limited Partnership Interest outstanding in 2001 and 2000, respectively 11,809,113 12,699,134 ------------ ------------ 12,288,724 13,145,927 ------------ ------------ $13,020,582 $14,239,485 ============ ============
See notes to financial statements. F-4 Smith Barney Principal PLUS Futures Fund L.P. Condensed Schedule of Investments December 31, 2001
Sector Contract Fair Value Total Currencies - 1.47% Exchange contracts sold - 1.47% $ 180,750 ------- Total Energy - 0.45% Exchange contracts sold - 0.45% 55,400 ------ Total Grains - 0.02% Futures contracts sold - 0.02% 1,800 ----- Interest Rates U.S. Futures contracts sold - 0.11% 13,562 Futures contracts purchased - 0.02% 2,625 ----- Total Interest Rates U.S. - 0.13% 16,187 ------ Total Interest Rates Non-U.S - 0.28% Futures contracts sold - 0.28% 34,196 ------- Metals Futures contracts sold - (0.68)% (83,509) Futures contracts purchased - 0.94% 115,614 ------- Total Metals - 0.26% 32,105 ------- Total Indices - 0.06% Futures contracts purchased - 0.06% 7,560 ------- Total Fair Value - 2.67% 327,998 ------- Total Zero Coupons - 76.33% Zero Coupon Bond, 2/15/2003 9,380,529 (amortized cost $9,061,122) - 76.33% --------- --------- Total Investments - 79.00% $9,708,527 =========
Investments % of Investments Country Composition at Value at Value ------------------- ---------------------------------- Canada $7,560 0.08% Germany 34,195 0.35% United Kingdom 32,105 0.33% United States 9,634,667 99.24% ---------------------------------- $9,708,527 100.00% ==================================
Percentages are based on Partners' capital unless otherwise indicated See notes to financial statements F-5 Smith Barney Principal PLUS Futures Fund L.P. Statement of Income and Expenses for the years ended December 31, 2001, 2000 and 1999
2001 2000 1999 Income: Net gains (losses) on trading of commodity interests: Realized gains (losses) on closed positions $639,616 $(1,502,461) $(968,536) Change in unrealized gains (losses) on open positions (150,853) 14,473 (886,170) ------------ ----------- ------------ 488,763 (1,487,988) (1,854,706) Less, Brokerage commissions including clearing fees of $19,702, $23,109 and $33,604, respectively (Note 3c) (247,193) (588,695) (1,148,676) ------------ ----------- ------------ Net realized and unrealized gains (losses) 241,570 (2,076,683) (3,003,382) Gains (losses) on sale of zero coupons 40,999 (114,437) (11,715) Unrealized appreciation (depreciation) on zero coupons 179,307 482,327 (1,289,988) Interest income (Notes 3c) 650,762 1,071,638 1,563,022 ----------- ----------- ------------ 1,112,638 (637,155) (2,742,063) ----------- ----------- ------------ Expenses: Management fees (Note 3b) 75,292 177,828 434,157 Incentive fees (Note 3b) 69,802 -- -- Professional fees 46,026 37,074 60,814 Other expenses 9,432 5,326 10,160 ----------- ----------- ------------ 200,552 220,228 505,131 ----------- ----------- ------------ Net income (loss) $912,086 $(857,383) $(3,247,194) =========== ============= ========== Net income (loss) per Unit of Limited Partnership Interest and General Partner Unit equivalent (Notes 1 and 6) $87.28 $(10.68) $(129.45) =========== ============= ==========
See notes to financial statements. F-6 Smith Barney Principal PLUS Futures Fund L.P. Statement of Partners' Capital for the years ended December 31, 2001, 2000 and 1999
Limited General Partners Partner Total Partners' capital at December 31, 1998 $33,774,924 $499,482 $34,274,406 Net loss (3,198,521) (48,673) (3,247,194) Redemption of 3,123 Units of Limited Partnership Interest (3,837,307) -- (3,837,307) ------------ ----------- ----------- Partners' capital at December 31, 1999 26,739,096 450,809 27,189,905 Net loss (853,367) (4,016) (857,383) Redemption of 11,615 Units of Limited Partnership Interest (13,186,595) -- (13,186,595) ------------ ----------- ---------- Partners' capital at December 31, 2000 12,699,134 446,793 13,145,927 Net Income 879,268 32,818 912,086 Redemption of 1,429 Units of Limited Partnership Interest (1,769,289) -- (1,769,289) ------------ ------------ ---------- Partners' capital at December 31, 2001 $11,809,113 $479,611 $12,288,724 ============ ============ ==========
See notes to financial statements. F-7 Smith Barney Principal PLUS Futures Fund L.P. Notes to Financial Statements 1. Partnership Organization: Smith Barney Principal PLUS Futures Fund L.P. (the "Partnership") is a limited partnership which was initially organized on January 25, 1993 under the partnership laws of the State of New York and was capitalized on April 12, 1995. No activity occurred between January 25, 1993 and April 12, 1995. The Partnership engages in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options and forward contracts. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. The Partnership will maintain a portion of its assets in principal amounts stripped from U.S. Treasury Bonds under the Treasury's STRIPS program which payments are due approximately seven years from the date trading commenced ("Zero Coupons"). The Partnership was authorized to sell 100,000 Units during the initial offering period of the Partnership. Smith Barney Futures Management LLC acts as the general partner (the "General Partner") of the Partnership. The Partnership's commodity broker is Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner. The General Partner is wholly owned by Salomon Smith Barney Holdings Inc. ("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of Citigroup Inc. The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of his initial capital contribution and profits, if any, net of distributions. The Partnership will be liquidated upon the first to occur of the following: December 31, 2015; at the end of the month in which the Zero Coupons purchased come due (February, 2003) ("First Payment Date"), unless the General Partner elects otherwise, or under certain other circumstances as defined in the Limited Partnership Agreement. The General Partner, in its sole discretion, may elect not to terminate the Partnership as of the First Payment Date. In the event that the General Partner elects to continue the Partnership, each limited partner shall have the opportunity to redeem all or some of his Units. 2. Accounting Policies: a. All commodity interests (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statement of financial condition at fair value on the last business day of the year, which represents market value for those commodity interests for which market quotations are readily available. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the year. Realized gains (losses) and changes in unrealized values on commodity interests and foreign currencies are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests. b. The partnership may purchase and write (sell) options. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the fund writes an option, the premium received is recorded as a liability in the statement of financial condition and marked to market daily. When the fund purchases an option, the premium paid is recorded as an asset in the statement of financial condition and marked to market daily. c. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on his share of the Partnership's income and expenses. F-8 d. The original issue discount on the Zero Coupons is being amortized over their life using the interest method and is included in interest income. e. Zero Coupons are recorded in the statement of financial condition at fair value. Realized gain (loss) on the sale of Zero Coupons is determined on the amortized cost basis of the Zero Coupons at the time of sale. f. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 3. Agreements: a.Limited Partnership Agreement: The General Partner administers the business and affairs of the Partnership including selecting one or more advisors to make trading decisions for the Partnership. b.Management Agreements: The General Partner, on behalf of the Partnership, has entered into a Management Agreement with Tucson Asset Management (the "Advisor"), which provides that the Advisor have sole discretion in determining the investment of the assets of the Partnership allocated to the Advisor by the General Partner. As compensation for services, the Partnership is obligated to pay a monthly management fee of 1/6 of 1% (2% per year) of month-end Net Assets allocated to each advisor. The Partnership will also pay an incentive fee payable quarterly equal to 20% of New Trading Profits, as defined in the Management Agreement. Fort Orange Capital Management and Rabar Market Research Inc. were terminated as Advisors to the Partnership on March 1, 2001. Tucson Asset Management was added as an Advisor on that date. c.Customer Agreement: The Partnership has entered into a Customer Agreement with SSB whereby SSB provides services which include, among other things, the execution of transactions for the Partnership's account in accordance with orders placed by the Advisor. Prior to March 1, 2001 the Partnership was obligated to pay a monthly brokerage fee to SSB equal to 7/12 of 1 % of month-end Net Assets (7% per year) in lieu of brokerage commissions on a per trade basis. Effective March 1, 2001, the Partnership is obligated to pay a monthly brokerage fee to SSB equal to 5/12 of 1% of month-end Net Assets (5% per year) in lieu of brokerage commissions on a per trade basis. A portion of this fee is paid to employees of SSB who have sold Units of the Partnership. This fee does not include exchange, clearing, user, give-up, floor brokerage and NFA fees which will be borne by the Partnership. All of the Partnership's assets are deposited in the Partnership's account at SSB. The Partnership maintains a portion of these assets in Zero Coupons and a portion in cash. The Partnership's cash is deposited by SSB in segregated bank accounts, to the extent required by Commodity Futures Trading Commission regulations. At December 31, 2001 and 2000, the amount of cash held for margin requirements was $468,622 and $699,434, respectively. SSB will pay the Partnership interest on 80% of the average daily equity maintained in cash in its account during each month at a 30-day U.S. Treasury bill rate determined weekly by SSB based on the average noncompetitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. The Customer Agreement between the Partnership and SSB gives the Partnership the legal right to net unrealized gains and losses. The Customer Agreement may be terminated by either party. F-9 4. Trading Activities: The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership's trading activity are shown in the statement of income and expenses. All of the commodity interests owned by the Partnership are held for trading purposes. The average fair value during the years ended December 31, 2001 and 2000, based on a monthly calculation, was $255,048 and $269,193, respectively. The fair value of these commodity interests, including options thereon, if applicable, at December 31, 2001 and 2000 was $327,998 and $478,851, respectively. Fair Value December 31, 2000 ------------ Currencies: -Exchange Traded Contracts $65,505 -OTC Contracts (5,049) Energy 3,487 Grains 31,857 Interest Rates U.S. 176,358 Interest Rates Non-U.S. 169,076 Livestock 7,940 Metals: -Exchange Traded Contracts (2,290) -OTC Contracts (6,203) Softs 10,194 Indices 28,350 Lumber (374) ---------- Total $478,851 ========== 5. Distributions and Redemptions: Distributions of profits, if any, will be made at the sole discretion of the General Partner. On 10 days notice to the General Partner, a limited partner may require the Partnership to redeem his Units at their Redemption Net Asset Value as of the last day of a quarter. F-10 6. Financial Highlights: Changes in the net asset value per Unit of Partnership interest for the years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999 Net realized and unrealized gains (losses) $24.69 $(89.55) $(120.12) Realized and unrealized appreciation (depreciation) on Zero Coupons 20.35 26.93 (51.90) Interest income 61.28 63.80 62.91 Expenses (19.04) (11.86) (20.34) ----------- ---------- ---------- Increase (decrease) for year 87.28 (10.68) (129.45) Net asset value per Unit, beginning of year 1,188.28 1,198.96 1,328.41 --------- --------- --------- Net asset value per Unit, end of year $1,275.56 $1,188.28 $1,198.96 ========= ========= ======== Ratios to average net assets: Net income before incentive fee 7.6% Incentive fee (0.5)% ---------- Net income after incentive fee 7.1% ========= Operating expenses 3.0% Incentive fee 0.5% ---------- Total expenses and incentive fee 3.5% ========= Total return: Total return before incentive fee 7.9% Incentive fee (0.5)% ----------- Total return after incentive fee 7.4% ==========
7. Guarantee: In the unlikely event that the Partnership is required to meet a margin call in excess of the cash balance in its trading accounts, SSBHI will contribute up to an amount equal to the maturity value of the Zero Coupons held by the Partnership at the time of such call to the capital of the Partnership to permit it to meet its margin obligations in excess of its cash balance. The guarantee can only be invoked once. After the guarantee is invoked, trading will cease and the General Partner will either wait until the First Payment Date or will distribute cash and Zero Coupons to the limited partners. F-11 8. Financial Instrument Risks: The Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments, in the normal course of its business. These financial instruments may include forwards, futures and options, whose value is based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract. Market risk is the potential for changes in the value of the financial instruments traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's risk of loss in the event of counterparty default is typically limited to the amounts recognized in the statement of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership has credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership's assets is SSB. The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions. The notional or contractual amounts of these instruments, while appropriately not recorded in the financial statements, reflect the extent of the Partnership's involvement in these instruments. The majority of these instruments mature within one year of December 31, 2001. However, due to the nature of the Partnership's business, these instruments may not be held to maturity. F-12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. During the last two fiscal years and any subsequent interim period, no independent accountant who was engaged as the principal accountant to audit the Partnership's financial statements has resigned or was dismissed. PART III Item 10. Directors and Executive Officers of the Registrant. The Partnership has no officers or directors and its affairs are managed by its General Partner, Smith Barney Futures Management LLC. Investment decisions are made by the Advisor. Item 11. Executive Compensation. The Partnership has no directors or officers. Its affairs are managed by Smith Barney Futures Management LLC, its General Partner. SSB, an affiliate of the General Partner, is the commodity broker for the Partnership and receives brokerage commissions for such services, as described under "Item 1. Business." Brokerage commissions and clearing fees of $247,193 were earned for the year ended December 31, 2001. Management fees and incentive fees of $75,292 and $68,802, respectively were paid or payable to the Advisor for the year ended December 31, 2001. 36 Item 12. Security Ownership of Certain Beneficial Owners and Management. (a). Security ownership of certain beneficial owners. The Partnership knows of no person who beneficially owns more than 5% of the Units outstanding. (b). Security ownership of management. Under the terms of the Limited Partnership Agreement, the Partnership's affairs are managed by the General Partner. The General Partner owns Units of general partnership interest equivalent to 376 (3.9%) Units of Limited Partnership Interest. (c). Changes in control. None. Item 13. Certain Relationships and Related Transactions. Salomon Smith Barney Inc. and Smith Barney Futures Management LLC would be considered promoters for purposes of Item 404(d) of Regulation S-K. The nature and the amounts of compensation each promoter will receive from the Partnership are set forth under "Item 1. Business.", "Item 8. Financial Statements and Supplementary Data." and "Item 11. Executive Compensation." PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements: Statement of Financial Condition at December 31, 2001 and 2000. 37 Statement of Income and Expenses for the years ended December 31, 2001, 2000 and 1999. Statement of Partners' Capital for the years ended December 31, 2001, 2000 and 1999. (2) Financial Statement Schedules: Financial data schedule for the year ended December 31, 2001. (3) Exhibits: 3.1 - Limited Partnership Agreement (dated April 3, 1995 and amended as of June 22, 1995), (filed as Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 33-01742) and incorporated herein by reference). 3.2 - Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of New York (filed as Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 33-91742) and incorporated herein by reference). 10.1 - Customer Agreement between the Partnership and Smith Barney Shearson Inc. (filed as Exhibit 10.1 to the Registration Statement on Form S-1 (File No. 33-91742) and incorporated herein by reference). 10.3 - Escrow Instructions relating to escrow of subscription funds (filed as Exhibit 10.3 to the Registration Statement on Form S-1 (File No. 33-91742) and incorporated herein by reference). 38 10.5 - Management Agreement among the Partnership, the General Partner and John W. Henry & Company, Inc. (JWH) (filed as Exhibit 10.5 to the Registration Statement on Form S-1 (File No. 33-91742) and incorporated herein by reference). 10.6 - Management Agreement among the Partnership, the General Partner and Rabar Market Research, Inc. (filed as Exhibit 10.6 to the Registration Statement on Form S-1 (File No. 33-91742) and incorporated herein by reference). 10.7 - Management Agreement among the Partnership, the General Partner and Abraham Trading Co. (filed as Exhibit 10.7 to the Registration Statement on Form S-1 (File No. 33-91742) and incorporated herein by reference). 10.8 - Letters extending Management Agreements with Rabar Market Research, Inc., Abraham Trading Co. and John W. Henry & Company, Inc. for 1997 and 1996 (previously filed). 10.9 - Letters extending Management Agreements with Rabar Market Research, Inc. and John W. Henry & Company, Inc. for 1998 (previously filed). 10.10- Letter from General Partner terminating Management Agreement with Abraham Trading Co. (previously filed). 39 10.11- Management Agreement among the Partnership, the General Partner and Fort Orange Capital Management for 1999 (previously filed). 10.12- Letters extending Management Agreements with Rabar Market Research, Inc. and John W. Henry & Company, Inc. for 1999 (previously filed). 10.13- Letter from the General Partner terminating Management Agreement with John W. Henry & Company Inc. (previously filed). 10.14- Letters extending Management Agreements with Rabar Market Research, Inc. and Fort Orange Capital Management for 2000 (previously filed). 10.15- Letters from General Partner terminating Management Agreements with Rabar Market Research, Inc. and Fort Orange Capital Management (filed herein). 10.16- Management Agreement among the Partnership, the General Partner and Tucson Asset Management (filed herein). (b) Reports on 8-K: None Filed. 40 Supplemental Information To Be Furnished With Reports Filed Pursuant To Section 15(d) Of The Act by Registrants Which Have Not Registered Securities Pursuant To Section 12 Of the Act. Annual Report to Limited Partners 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 29h day of March 2002. SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P. By: Smith Barney Futures Management LLC (General Partner) By /s/ David J. Vogel ------------------------------------ David J. Vogel, President & Director Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons in the capacities and on the date indicated. /s/ David J. Vogel /s/ Shelley Ullman ------------------------------ ------------------- David J. Vogel Director Director, Principal Executive Officer and President /s/ Maureen O'Toole /s/ Steve J. Keltz -------------------------- ------------------ Maureen O'Toole Secretary and Director Director /s/ Daniel R. McAuliffe, Jr. ------------------------------ Daniel R. McAuliffe, Jr. Chief Financial Officer and Director 42