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, 1998
Commission File Number 0-28350
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.
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(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 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: 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, 1999 Limited Partnership Units with an aggregate value
of $1,278.34 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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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,
1993under the Partnership Law 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.
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.
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Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. On September 1, 1998, the Partnership's
commodity broker, Smith Barney Inc., merged with Salomon Brothers Inc and
changed its name to 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. ("SSBH"), which is the sole owner of SSB. On October 8, 1998,
Travelers Group Inc. merged with Citicorp Inc. and changed its name to Citigroup
Inc. SSBH is a wholly owned subsidiary of Citigroup Inc.
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 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, 1998, all commodity trading
decisions are made for the Partnership by John W. Henry & Company, Inc. ("JWH"),
Rabar Market Research, Inc. and Abraham Trading Co. (collectively, the
"Advisors"). None of the Advisors is affiliated with the General Partner or SSB.
The Advisors are not responsible for the organization or operation of the
Partnership.
Pursuant to the terms of the Management Agreements (the "Management
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Agreements"), the Partnership is obligated to pay each Advisor a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
JWH, which will receive a monthly management fee equal to 1/3 of 1% (4% per
year)) of the Partnership allocated to each Advisor. The Partnership will also
pay Abraham Trading Co. an incentive fee payable quarterly equal to 20% of New
Trading Profits earned by it for the Partnership; JWH will receive an incentive
fee payable quarterly of 15% of the New Trading Profits (as defined in the
Management Agreements); and Rabar Market Research Inc. will receive an annual
incentive fee of 22.5% of New Trading Profits of the Partnership.
The Customer Agreement provides that the Partnership will pay SSB a
monthly brokerage fee equal to 7/12 of 1% of month-end Net Assets allocated to
the Advisors (7% per year) in lieu of brokerage commissions on a per trade
basis. SSB 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
information regarding the brokerage commissions included in the notes to the
financial statements.
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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, 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 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 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 (including, but not limited to, futures contracts, options and forward
contracts on U.S. Treasuries, other financial instruments, foreign currencies,
stock indices and physical commodities). The Partnership does not engage in
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sales of goods or services. The Partnership's net income from operations for the
year ended December 31, 1998, 1997, 1996 and for the period from November 17,
1995 (commencement of trading operations) to December 31, 1995 is set forth
under "Item 6. Selected Financial Data." Partnership capital as of December 31,
1998 was $34,274,406.
(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, SSB.
Item 3. Legal Proceedings.
Thereare no material legal proceedings pending against the Partnership
or the General Partner.
This section describes the major legal proceedings, other than ordinary
routine litigation incidental to the business, to which SSBH, the parent company
of this General Partner or its subsidiaries is a party or to which any of their
property is subject.
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In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of
Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers
Realty Corporation ("SBRC") in the U.S. District Court for the Northern District
of Illinois (Harris Trust Savings Bank, not individually but solely as trustee
for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
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 with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
MOA portfolio and for the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and state law. SBI had acquired the
participation interests in transactions in which it purchased as principal
mortgage notes issued by MOA and Best to finance purchases of motel portfolios;
95% of three such interests and 100% of one such interest were sold to APT for
purchase prices aggregating approximately $20.9 million. Plaintiffs' second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of the four participation interests (approximately $20.9 million), for
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rescission and for disgorgement of profits, as well as other relief, and (b)
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
damages in excess of $37 million on certain of the state law claims as well as
other relief. The court dismissed the RICO, breach of contract, and unjust
enrichment claims. The court also found that defendants did not qualify as an
ERISA fiduciary and dismissed the claims based on that allegation. Defendants
moved for summary judgment on the sole remaining claim. The motion was denied,
and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit.
Defendants are awaiting a decision.
Both the Department of Labor and the Internal Revenue Service have
advised SBI that they were or are reviewing the transactions in which APT
acquired such participation interests. With respect to the Internal Revenue
Service review, SSBH, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. In 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 30-day letters with respect
to the transactions.
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In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California (County of Orange et al. v. Bear Stearns & Co. Inc. et al.).
Plaintiff alleges, among other things, that defendants recommended and sold to
plaintiff unsuitable securities and that such transactions were outside the
scope of plaintiff's statutory and constitutional authority (ultra vires).
Defendants' motion for summary judgment was granted with respect to the ultra
vires claims in February 1999. The court allowed the filing of an amended
complaint asserting claims based on alleged breaches of fiduciary duty.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
declaratory judgment that Smith Barney Inc. and another underwriter are
responsible for any damages that the City may incur in the event the Internal
Revenue Service denies tax exempt status to the City's General Obligation
Refunding Bonds Series 1991. The Company filed a motion to dismiss the
complaints in September 1998, and the complaints were subsequently amended. The
Company has filed a motion to dismiss the amended complaints.
In November 1998, a purported class action complaint was filed in the
United States District Court for the Middle District of Florida (Dwight Brock as
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Clerk for Collier County v. Merrill Lynch, et al.). The complaint alleges that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
The Company intends to contest this complaint vigorously.
Environmental Matters
In July 1996, the City and County of Denver ("Denver") enacted an
ordinance imposing a substantial fee on any radioactive waste or
radium-contaminated material disposed of in the City of Denver. Under this
ordinance, Denver assessed a subsidiary of Salomon, the S.W. Shattuck Chemical
Company, Inc. ("Shattuck"), $9.35 million for certain disposal already carried
out. Shattuck sued to enjoin imposition of the fee on constitutional grounds.
The United States also sued, seeking to enjoin imposition of the fee on
constitutional grounds. Denver counterclaimed and moved to add SSBH as a
defendant for past costs. These cases have been consolidated before the U.S.
District Court in Colorado, which granted Shattuck's motion for a preliminary
injunction enjoining Denver from enforcing the ordinance during the pendency of
the litigation. The parties have reached a settlement.
The Company 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 the Company's broker-dealer subsidiaries have been named,
arising in the normal course of business out of activities as a broker and
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dealer in securities, as an underwriter of securities, as an investment banker
or otherwise. In the opinion of the Company's management, none of these actions
is expected to have a material adverse effect on the consolidated financial
condition of the Company and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote
during the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information. The Partnership has issued no stock.
There is no public market for the Units of Limited
Partnership Interest.
(b) Holders. The number of holders of Units of Limited
Partnership Interest as of December 31, 1998 was 1,448.
(c) Distribution. The Partnership did not declare a
distribution in 1998 or 1997.
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Item 6. Selected Financial Data. The Partnership commenced trading operations on
November 17, 1995. Realized and unrealized trading gains, realized and
unrealized gains (losses) on Zero Coupons, interest income, net income and
increase in net asset value per Unit for the years ended December 31, 1998,
1997, 1996 and for the period from November 17, 1995 (commencement of trading
operations) to December 31, 1995 and total assets at December 31, 1998, 1997,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995
----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Realized and unrealized
trading gains net of
brokerage commissions and
clearing fees of $1,357,927,
$1,462,372, $1,459,014 and
$167,420, respectively $ 1,234,224 $ 2,025,344 $ 2,053,372 $ 1,908,271
Realized and unrealized gains
(losses) on Zero Coupons 923,712 631,119 (1,226,193) 531,953
Interest income 1,710,639 1,916,217 1,935,048 250,172
------------ ------------ ------------ ------------
$ 3,868,575 $ 4,572,680 $ 2,762,227 $ 2,690,396
============ ============ ============ ============
Net income $ 2,968,642 $ 3,546,888 $ 2,043,139 $ 2,227,441
============ ============ ============ ============
Increase in net asset value
per unit $ 109.40 $ 115.33 $ 58.96 $ 59.38
============ ============ ============ ============
Total assets $ 35,208,540 $ 36,883,726 $ 40,218,283 $ 40,226,379
============ ============ ============ ============
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash 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.
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(5) The Advisors may, from time to time, employ trading strategies such
as spreads or straddles on behalf of the Partnership. The term "spread"
or"straddle" describes a commodity futures trading strategy involving the
simultaneous buying and selling of contracts on the same commodity but involving
different delivery dates or markets and in which the trader expects to earn a
profit from a widening or narrowing of the difference between the prices of the
two contracts.
(6) The Partnership will not permit the churning of its commodity
trading accounts.
(7) The Partnership may cease trading and liquidate all open positions
prior to its dissolution if its Net Assets (excluding assets maintained in Zero
Coupons) decrease to 10% of those assets on the day trading commenced (adjusted
for redemptions).
The Partnership is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
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
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through financial, credit and risk management monitoring systems and,
accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject. (See
also "Item 8. Financial Statements and Supplementary Data.", for further
information on financial instrument risk included in the notes to financial
statements.)
Other than the risks inherent in commodity 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 (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
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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.
(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's Advisors may or may not be able to identify. Partnership
expenses will consist of, among other things, commissions, management fees and
incentive fees. The level of these expenses is dependent upon the level of
trading gains or losses and the ability of the Advisors to identify and take
advantage of price movements in the commodity markets, in addition to the level
of Net Assets maintained. Furthermore, the Partnership will receive no payment
on its Zero Coupons until their due date. However, the Partnership will accrue
interest on the Zero Coupons and Limited Partners will be required to report as
interest income on their U.S. tax returns in each year their pro-rata share of
the accrued interest on the Zero Coupons even though no interest will be paid
prior to their due date. In addition, the amount of interest income payable by
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SSB is dependent upon interest rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. Beginning with the first full quarter ending at least six months after
trading commences (June 30, 1996), a Limited Partner may cause all of his Units
to be redeemed by the Partnership at the Redemption Net Asset Value thereof as
of the last day of a quarter 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. The last date on which a redemption fee was
charged was June 30, 1997. During 1997 and 1996, SSB received redemption fees of
$33,328 and $59,478, respectively. For the year ended December 31, 1998, 3,400
Units were redeemed totaling $4,290,639. For the year ended December 31, 1997,
5,459 Units were redeemed totaling $6,204,189. For the year ended December 31,
1996, 2,847 Units were redeemed totaling $2,973,876.
Offering and organization expenses relating to the issuance and
marketing of Units offered were initially paid by SSB. Such expenses were
initially estimated to be $550,000 and were charged against the initial capital
of the Partnership. During 1996, the Partnership's total offering and
organization expense were determined to be $612,847. The Partnership has charged
the excess of $62,847 to expense. As of December 31, 1997, the Partnership had
reimbursed SSB for the offering and organization expense plus interest at the
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prime rate quoted by the Chase Manhattan Bank totaling $34,494 from interest
paid to the Partnership.
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, 1998 the net
asset value per Unit increased 9.0% from $1,219.01 to $1,328.41. For the year
ended December 31, 1997 the net asset value per Unit increased 10.4% from
$1,103.68 to $1,219.01. For the year ended December 31, 1996, the net asset
value per Unit increased 5.6% from $1,044.72 to $1,103.68.
The Partnership experienced net trading gains of $2,592,151 before
commissions and expenses for the year ended December 31, 1998. Gains were
primarily attributable to the trading of commodity futures in U.S. and non-U.S.
interest rates, livestock and energy products and were partially offset by
losses recognized in grains, currencies, indices, metals and softs products. The
Partnership experienced a realized gain of $82,242 on Zero Coupons liquidated in
conjuction with the redemption of Units during 1998 and unrealized appreciation
of $841,470 on Zero Coupons during 1998.
The Partnership experienced net trading gains of $3,487,716 before
commissions and expenses for the year ended December 31, 1997. Gains were
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primarily attributable to the trading of commodity futures in currencies, softs,
grains, indices, metals and interest rates and were partially offset by losses
recognized in livestock and energy products. The Partnership experienced a
realized loss of $93,506 on Zero Coupons liquidated in conjunction with the
redemption of Units during 1997 and unrealized appreciation of $724,625 on Zero
Coupons during 1997.
The Partnership experienced net trading gains of $3,512,386 before
commissions and expenses for the year ended December 31, 1996. Gains were
primarily attributable to the trading of commodity futures in currencies, energy
products, metals and interest rates and were partially offset by losses
recognized in indices and agricultural products. The Partnership experienced a
realized loss of $75,906 on Zero Coupons liquidated in conjunction with the
redemption of Units during 1996 and unrealized depreciation of $1,150,287 on
Zero Coupons during 1996.
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
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the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
(d) Operational Risk
The Company is directly exposed to market risk and credit risk, which
arisein 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 Company 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.
Technological Risk - the risk of loss attributable to technological limitations
or hardware failure that constrain the Company's ability to gather, process, and
communicate information efficiently and securely, without interruption, with
customers, among units within the Company, and in the markets where the Company
participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
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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 Company's
stockholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
The Year 2000 issue is the result of existing computers in
many businesses using only two digits to identify a year in the date field.
These computers and programs, often referred to as "information technology,"
were designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could fail
or create erroneous results at the Year 2000. Such systems and processes are
dependent on correctly identifying dates in the next century.
The General Partner administers the business of the
Partnership through various systems and processes maintained by SSBH and SSB. In
addition, the operation of the Partnership is dependent on the capability of the
Partnership's Advisors, the brokers and exchanges through which the Advisors
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trade, and other third parties to prepare adequately for the Year 2000 impact on
their systems and processes. The Partnership itself has no systems or
information technology applications relevant to its operations.
The General Partner, SSB, SSBH and their parent organization
Citigroup Inc. have undertaken a comprehensive, firm-wide evaluation of both
internal and external systems (systems related to third parties) to determine
the specific modifications needed to prepare for the year 2000. The combined
Year 2000 program in SSB is expected to cost approximately $140 million over the
four years from 1996 through 1999, and involve over 450 people at the peak
staffing level. SSB expects to complete all compliance and certification work by
June 1999. At this time, over 95% of SSBH systems have completed the correction
process and are Year 2000 compliant. Over 73% of the systems have completed
certification testing. The Year 2000 project at SSBH remains on schedule.
The systems and components supporting the General Partner's
business that require remediation have been identified and modifications have
been made to bring them into Year 2000 compliance. Testing of these systems was
completed in the fourth quarter of 1998. Final testing and certification are
expected to be completed by the end of the first quarter of 1999.
This expenditure and the General Partner's resources dedicated
to the preparation for Year 2000 do not and will not have a material impact
on the operation or results of the Partnership.
The General Partner has requested and received statements from
the Advisors that each has undertaken its own evaluation and remediation plans
22
<PAGE>
to identify any of its computer systems that are Year 2000 vulnerable. Each
Advisor has confirmed it is taking immediate actions to remedy those systems as
necessary. The General Partner will continue to inquire into and to confirm each
Advisor's readiness for Year 2000.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
organizations, including the commodities exchanges, clearing organizations, or
regulators with which the Partnership interacts to resolve their Year 2000
issues in a timely manner. This risk could involve the inability to determine
the value of the Partnership at some point in time and would make effecting
purchases or redemptions of Units in the Partnership infeasible until such
valuation was determinable.
SSB has successfully participated in industry-wide testing
including: The Streetwide Beta Testing organized by the Securities Industry
Association (SIA), a government securities clearing test with the Federal
Reserve Bank of New York, The Depository Trust Company, and The Bank of new
York, and Futures Industry Association participants test. The firm is also
participating in the streetwide testing which commenced in March 1999.
It is possible that problems may occur that would require some
time to repair. Moreover, it is possible that problems will occur outside SSBH
for which SSBH could experience a secondary effect. Consequently, SSBH is
preparing comprehensive, written contingency plans so that alternative
23
<PAGE>
procedures and a framework for critical decisions are defined before any
potential crisis occurs.
The goal of Year 2000 contingency planning is a set of
alternate procedures to be used in the event of a critical system failure or a
failure by a supplier or counterparty. Planning work was completed in December
1998, and testing of alternative procedures will be conducted in the first half
of 1999.
European Economic and Monetary Union
European Economic and Monetary Union ("EMU") is an historic event in Europe
involving the unification of currency in eleven major countries. The new unified
currency, called the Euro, is expected to compete on a global scale with the
U.S. Dollar and the Japanese Yen.
Introduction of the Euro began on January 1, 1999, when the European
Central Bank assumed control of the monetary policy for participating nations.
Exchange rates between the participating countries were fixed and the Euro is
available for electronic payments. Also on January 1, 1999, various issuers
re-denominated their securities and harmonized bond payment conventions. A
three-year transition period began on January 1, 1999, after which Euro notes
and coins will be issued by the European Central Bank and national currencies
will be phased out.
The Company completed a successful conversion to the Euro and has
commenced trading and settlement in the new currency with no major exceptions.
As the preceding risks are largely interrelated, so are the Company's
actions to mitigate and manage them. The Company's Chief Administrative Officer
24
<PAGE>
is responsible for, among other things, oversight of global operations and
technology. An essential element in mitigating the risks noted above is the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data.
(e) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. SFAS 133 is
effective for fiscal year beginning after June 15, 1999 SFAS 133 is expected to
have no material impact on the financial statements of the Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses.
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
25
<PAGE>
instruments is integral, not incidental, to the Partnership's main line of
business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification 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
26
<PAGE>
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be 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
27
<PAGE>
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, certain of the Advisors trade
commodity options. The Value at Risk associated with options is reflected in the
following table as the margin requirement attributable to the instrument
underlying each option. Where this instrument is a futures contract, the futures
margin, and where this instrument is a physical commodity, the
futures-equivalent maintenance margin has been used. This calculation is
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
28
<PAGE>
fact, the fair values of the options traded by the Partnership in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
Value at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected.
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, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was $34,274,406.
29
<PAGE>
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Currencies
- -OTC Contracts $ 133,688 0.39%
- -Exchange Traded Contracts 169,675 0.50%
Energy 127,800 0.37%
Grains 92,458 0.27%
Interest rates U.S. 154,200 0.45%
Interest rates Non-U.S 918,655 2.68%
Livestock 35,975 0.10%
Metals 250,000 0.73%
Softs 71,362 0.21%
Indices 31,284 0.09%
---------- --------
Total $1,985,097 5.79%
========== ========
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 margin requirement (margin requirements
generally range between 2% and 15% of contract face value) as well as 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."
30
<PAGE>
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.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased regulation and
31
<PAGE>
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.
The following were the primary trading risk exposures of the
Partnership as of December 31, 1998, by market sector.
Interest Rates. Interest rate risk is the principal market
exposure of the Partnership. Interest rate movements directly affect the price
of the futures positions held by the Partnership and indirectly the value of its
stock index and currency positions. Interest rate movements in one country as
well as relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
Consequently, even a material change in short-term rates would have little
32
<PAGE>
effect on the Partnership were the medium- to long-term rates to remain steady.
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, although it is difficult at this point to predict the effect of the
introduction of the Euro on the Advisors' currency trading strategies. 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. As of
December 31, 1998, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
33
<PAGE>
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's primary metal market exposure is
to fluctuations in the price of gold and silver. Although certain of the
Advisors will from time to time trade base metals such as aluminum and copper,
the principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver. The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Partnership.
Commodities. The Partnership's primary commodities exposure
is to agricultural price movements which are often directly affected by severe
or unexpected weather conditions. Coffee, cocoa, cotton and sugar accounted for
the substantial bulk of the Partnership's commodity exposure as of December 31,
1998.
Energy. The Partnership's primary energy market exposure is
to gas and oil price movements, often resulting from political developments
in the Middle East. Oil prices are currently depressed, but they can be volatile
34
<PAGE>
and substantial profits and losses have been and are expected to continue to
be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of
the Partnership as of December 31, 1998.
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in Japanese yen, German marks, British pounds and French
francs. The Advisor regularly converts foreign currency balances to dollars in
an attempt to control the Partnership's non-trading risk.
Securities Positions. The Partnership's only market exposure
in instruments held other than for trading is in its securitites portfolio. The
Partnership maintains a portion of its assets in principal amounts stripped from
U.S. Treasury Bonds under the Treasury's STRIPS program. Violent fluctuations in
prevailing interest rates could cause immaterial mark-to-market losses on the
Partnership's securities.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter programs traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
35
<PAGE>
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
Each Advisor applies its own risk management policies to its trading.
The Advisors often follow diversification guidelines, margin limits and stop
loss points to exit a position. The Advisors' research of risk management often
suggests ongoing modifications to their trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to
look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.
In the unlikely event that the Partnership is required to meet a margin
call in excess of the cash balance in its trading accounts, 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.
36
<PAGE>
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, 1998 and 1997. F-4
Statement of Income and Expenses for
the years ended December 31, 1998, 1997
and 1996. F-5
Statement of Partners' Capital for the
years ended December 31, 1998, 1997 and
1996. F-6
Notes to Financial Statements. F-7 - F-11
F-1
Continued
<PAGE>
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 A. Dantuono, Chief Financial Officer
Smith Barney Futures Management Inc.
General Partner, Smith Barney Principal PLUS
Futures Fund L.P.
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
<PAGE>
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 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, 1998 and 1997, and the results
of its operations for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
F-3
<PAGE>
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Equity in commodity futures
trading account:
Cash (Note 3c) $12,186,981 $13,346,392
Net unrealized appreciation
on open futures contracts 1,350,548 1,079,612
Zero Coupons, $25,801,000 and
$29,201,000 principal amount in
1998 and 1997, respectively, due
February 15, 2003 at fair value
(amortized cost $20,356,124 and
$21,727,880 in 1998 and 1997,
respectively) (Notes 1 and 2) 21,303,885 21,834,171
----------- -----------
34,841,414 36,260,175
Receivable from SSB on sale of Zero Coupons 330,440 575,066
Interest receivable 36,686 48,485
----------- -----------
$35,208,540 $36,883,726
=========== ===========
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Management fees $ 47,621 $ 50,926
Commissions 109,341 114,693
Incentive fees 203,874 154,823
Other 40,606 27,024
Redemptions payable 532,692 939,857
----------- -----------
934,134 1,287,323
----------- -----------
Partners' Capital (Notes 1, 5, and 7):
General Partner, 376 Unit
equivalents outstanding in
1998 and 1997 499,482 458,348
Limited Partners, 25,425 and
28,825 Units of Limited Partnership
Interest outstanding in
1998 and 1997, respectively 33,774,924 35,138,055
----------- -----------
34,274,406 35,596,403
----------- -----------
$35,208,540 $36,883,726
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Income and Expenses
for the Years Ended December 31, 1998,
1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income:
Net gains on trading of
commodity interests:
Realized gains on closed positions $ 2,321,215 $ 2,851,564 $ 4,345,757
Change in unrealized gains/ losses
on open positions 270,936 636,152 (833,371)
----------- ----------- -----------
2,592,151 3,487,716 3,512,386
Less, Brokerage commissions including
clearing fees of $39,374, $37,258 and
$42,740, respectively (Note 3c) (1,357,927) (1,462,372) (1,459,014)
----------- ----------- -----------
Net realized and unrealized gains 1,234,224 2,025,344 2,053,372
Gain (Loss) on sale of Zero Coupons 82,242 (93,506) (75,906)
Unrealized appreciation (depreciation)
on Zero Coupons 841,470 724,625 (1,150,287)
Interest income (Notes 3c) 1,710,639 1,916,217 1,935,048
----------- ----------- -----------
3,868,575 4,572,680 2,762,227
----------- ----------- -----------
Expenses:
Management fees (Note 3b) 535,282 586,615 560,948
Incentive fees (Note 3b) 300,523 319,273 67,801
Other expenses 64,128 119,904 90,339
----------- ----------- -----------
899,933 1,025,792 719,088
----------- ----------- -----------
Net income $ 2,968,642 $ 3,546,888 $ 2,043,139
=========== =========== ===========
Net income per Unit of Limited
Partnership Interest and General Partner
Unit equivalent (Notes 1 and 6) $ 109.40 $ 115.33 $ 58.96
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
Smith Barney Principal PLUS
Futures Fund L.P.
Statement of Partners' Capital
for the Years Ended December 31, 1998,
1997 and 1996
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
<S> <C> <C> <C>
Partners' capital at December 31, 1995 $ 38,791,626 $ 392,815 $ 39,184,441
Net income 2,020,970 22,169 2,043,139
Redemption of 2,847 Units of Limited
Partnership Interest (2,973,876) -- (2,973,876)
------------ ------------ ------------
Partners' capital at December 31, 1996 37,838,720 414,984 38,253,704
Net income 3,503,524 43,364 3,546,888
Redemption of 5,459 Units of Limited
Partnership Interest (6,204,189) -- (6,204,189)
------------ ------------ ------------
Partners' capital at December 31, 1997 35,138,055 458,348 35,596,403
Net income 2,927,508 41,134 2,968,642
Redemption of 3,400 Units of Limited
Partnership Interest (4,290,639) -- (4,290,639)
------------ ------------ ------------
Partners' capital at December 31, 1998 $ 33,774,924 $ 499,482 $ 34,274,406
============ ============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
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"). Between July 12, 1995 and November 16, 1995, 37,131 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 November 17,
1995, at which time they were turned over to the Partnership for trading.
The Partnership was authorized to sell 100,000 Units during the offering
period of the Partnership. Smith Barney Futures Management Inc. acts as the
general partner (the "General Partner") of the Partnership. On September 1,
1998, the Partnership's commodity broker, Smith Barney Inc., merged with
Salomon Brothers Inc and changed its name to 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. ("SSBH"), which is the
sole owner of SSB. On October 8, 1998, Travelers Group Inc. merged with
Citicorp Inc. and changed its name to Citigroup Inc. SSBH 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 are recognized in the period in
which the contract is closed or the changes occur and are included in net
gains (losses) on trading of commodity interests.
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
c. The original issue discount on the Zero Coupons is being amortized over
their life using the interest method and is included in interest income.
d. Zero Coupons are recorded in the statement of financial condition at fair
value. Realized gain (loss) on the sale of Zero Coupons is determined on
the amortized cost basis of the Zero Coupons at the time of sale.
e. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
F-7
<PAGE>
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., Abraham Trading
Co. and Rabar Market Research Inc. (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 a monthly management fee of 1/6 of 1% (2% per year) to
Abraham Trading Co. and Rabar Market Research Inc., and 1/3 of 1 % (4%
per year) to John W. Henry & Company, Inc., of month-end Net Assets
allocated to each advisor. The Partnership will also pay Abraham Trading
Co. an incentive fee payable quarterly equal to 20% of New Trading
Profits, as defined, earned by it for the Partnership; John W. Henry &
Company, Inc. will receive a quarterly incentive fee of 15% of New
Trading Profits; and Rabar Market Research Inc. will receive an annual
incentive fee of 22.5% of New Trading Profits of the Partnership.
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 Advisors. The Partnership is 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. 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, 1998 and 1997, the amount
of cash held for margin requirements was $2,250,973 and $2,930,178,
respectively. SSB will pay the Partnership interest on 80% of the average
daily equity maintained in cash in its account during each month at a
30-day U.S. Treasury bill rate determined weekly by SSB based on the
average noncompetitive yield on 3-month U.S. Treasury bills maturing in
30 days from the date on which such weekly rate is determined. The
Customer Agreement between the Partnership and SSB gives the Partnership
the legal right to net unrealized gains and losses. The Customer
Agreement may be terminated by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
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, if
applicable, at December 31, 1998 and 1997 was $1,350,548 and $1,079,612,
respectively and the average fair value during the years then ended, based
on a monthly calculation, was $1,147,510 and $1,182,103, respectively.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner. On 10 days' notice to the General Partner, a limited
partner may require the Partnership to redeem his Units at their Redemption
Net Asset Value as of the last day of a quarter. Redemption fees equal to 2%
F-8
<PAGE>
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 and 1996, SSB
received redemption fees of $33,328 and $59,478, respectively. Redemption
Net Asset Value differs from Net Asset Value calculated for financial
reporting purposes in that any accrued liability for reimbursement of
offering and organization expenses will not be included in the calculation
of Redemption Net Asset Value.
6. Offering and Organization Costs:
Offering and organization expenses relating to the issuance and marketing of
Units during the offering period were initially paid by SSB. Such expenses
were initially estimated to be $550,000 and were charged against the initial
capital of the Partnership. During 1996, the Partnership's total offering
and organization expenses were determined to be $612,847. The Partnership
has charged the excess of $62,847 to expense. As of December 31, 1997 the
Partnership had reimbursed SB for the offering and organization expense plus
interest at the prime rate quoted by the Chase Manhattan Bank totaling
$34,494 from interest paid to the Partnership.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net realized and unrealized gains $ 47.41 $ 66.66 $ 58.66
Realized and unrealized gains
(losses) on Zero Coupons 32.87 21.33 (32.04)
Interest income 61.61 58.85 52.41
Expenses (32.49) (31.51) (20.07)
--------- --------- ---------
Increase for year 109.40 115.33 58.96
Net asset value per Unit,
beginning of year 1,219.01 1,103.68 1,044.72
--------- --------- ---------
Net asset value per Unit, end of year $ 1,328.41 $ 1,219.01 $ 1,103.68
========= ========= =========
</TABLE>
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.
9. 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 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
F-9
<PAGE>
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 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 not recorded
in the financial statements, reflect the extent of the Partnership's
involvement in these instruments.
At December 31, 1998, the Partnership's commitment to purchase and sell
these instruments was $101,948,437 and $95,047,009, respectively. All of
these instruments mature within one year of December 31, 1998. However, due
to the nature of the Partnership's business, these instruments may not be
held to maturity. At December 31, 1998, the fair value of the Partnership's
derivatives, including options thereon, if applicable, was $1,350,548, as
detailed below.
<TABLE>
<CAPTION>
December 31, 1998
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
<S> <C> <C> <C>
Currencies
-Exchange Traded Contracts $ 3,636,075 $ 1,874,375 $ 54,358
-OTC Contracts 5,170,563 1,578,002 53,374
Energy -- 1,298,588 (47,454)
Grains 191,782 2,987,925 58,398
Interest Rate U.S. 9,430,094 12,005,819 (82,237)
Interest Rate Non-U.S 80,293,487 66,487,227 1,290,455
Livestock -- 865,450 25,120
Metals 2,636,819 6,289,250 (97,212)
Softs 297,225 1,540,440 93,013
Indices 292,392 119,933 2,733
------------ ------------ ------------
Total $101,948,437 $ 95,047,009 $ 1,350,548
============ ============ ============
</TABLE>
F-10
<PAGE>
At December 31, 1997, the Partnership's commitment to purchase and sell these
instruments was $103,740,103 and $104,099,896, respectively, and the fair value
of the Partnership's derivatives, including options thereon, if applicable, was
$1,079,612, as detailed below.
<TABLE>
<CAPTION>
December 31, 1997
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
<S> <C> <C> <C>
Currencies
-Exchange Traded Contracts $ 1,852,635 $ 13,543,743 $ 130,111
-OTC Contracts 11,577,189 22,737,095 (43,636)
Energy -- 2,330,053 81,274
Grains -- 3,197,466 76,852
Interest Rate U.S. 16,567,737 -- 99,253
Interest Rate Non-U.S 68,669,047 47,748,762 101,593
Livestock -- 1,949,300 55,800
Metals 3,314,600 9,844,978 485,359
Softs 1,709,720 1,695,191 11,764
Indices 49,175 1,053,308 81,242
------------ ------------ ------------
Total $103,740,103 $104,099,896 $ 1,079,612
============ ============ ============
</TABLE>
10. Subsequent Events:
Abraham Trading Co. was terminated as an Advisor to the Partnership on
January 31, 1999. Fort Orange Capital Management was added as an Advisor on
February 1, 1999.
11. New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 requires that an entity recognize all derivatives in the statement
of financial condition and measure those instruments at fair value. SFAS 133
is effective for fiscal years beginning after June 15, 1999. SFAS 133 is
expected to have no material impact on the financial statements of the
Partnership as all commodity interests are recorded at fair value, with
changes therein reported in the statement of income and expenses.
F-11
<PAGE>
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. 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 $1,357,927 were paid
for the year ended December 31, 1998. Management fees and incentive fees of
$535,282 and $300,523, respectively, were paid to the Advisors for the year
ended December 31, 1998.
37
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. As of
March 1, 1999, two beneficial owners who are neither a director nor executive
officer own more than five percent (5%) of the outstanding Units issued by the
Registrant as follows:
Title Name and Address of Amount and Nature of Percent of
of Class Beneficial Owner Beneficial Ownership Class
Units of CITIC Industrial Bank 5,000 Units 19.4%
Limited No. 6 Xinyuan Nan Lu
Partnership Chaoyang District Beijing
Interest
Units of Naomi R. Wilden 1,500 Units 5.8%
Limited 11727 Pendelton
Partnership Ycaipa, CA 92399
Interest
(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 376 (1.5%) 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
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
38
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1998
and 1997.
Statement of Income and Expenses for the years ended
December 31, 1998, 1997 and 1996. Statement of
Partners' Capital for the years ended December 31,
1998, 1997 and 1996.
(2) Financial Statement Schedules:Financial data schedule
for the year ended December 31, 1998.
(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).
39
<PAGE>
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). 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).
40
<PAGE>
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 (filed herein).
10.10- Letter from General Partner terminating Management
Agreement with Abraham Trading Co. (filed herein).
10.11- Management Agreement among the Partnership, the
General Partner and Fort Orange Capital Management
(filed herein).
(b) Reports on 8-K: None Filed.
41
<PAGE>
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
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, 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 1999.
SMITH BARNEY PRINCIPAL PLUS FUTURES FUND L.P.
By: Smith Barney Futures Management Inc.
(General Partner)
By
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel, Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
By
43
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000944697
<NAME> Smith Barney Principal PLUS Futures Fund L.P.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,186,981
<SECURITIES> 22,654,433
<RECEIVABLES> 367,126
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,208,540
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,208,540
<CURRENT-LIABILITIES> 934,134
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 34,274,406
<TOTAL-LIABILITY-AND-EQUITY> 35,208,540
<SALES> 0
<TOTAL-REVENUES> 3,868,575
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 899,933
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,968,642
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,968,642
<EPS-PRIMARY> 109.40
<EPS-DILUTED> 0
</TABLE>
June 22, 1998
Rabar Market Research
10 Bank St. - Suite 830
White Plain, N.Y. 10606
Attention: Mr. John Dreyer & Mr. Paul Rabar
Re: Management Agreement Renewal
Smith Barney Principal Plus Futures Fund L.P.
Dear Mr. Dreyer & Mr. Rabar:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1999
and make the attached modification on Rider 1. The incentive fee will now be
paid annually instead of quarterly. All other provisions of the Management
Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
RABAR MARKET RESEARCH
By:
Print Name:
DAD/sr
June 22, 1998
John W. Henry & Company
One Glendinning Place
Westport, Ct. 06880
Attn: Ms. Beth Kenton
Re: Management Agreement Renewal
Smith Barney Principal Plus Futures Fund L.P.
Dear Ms. Kenton:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1999
and make the attached modification on Rider 1. All other provisions of the
Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
JOHN W. HENRY & COMPANY
By:
Print Name:
DAD/sr
January 27, 1999
Salem Abraham
Abraham Trading Company
Moody Building
Second & Main
Canadian, TX 79014
Re: Smith Barney Principal Plus Futures Fund L.P.
Dear Salem:
Please liquidate all of your positions in the above references
fund(s) in an orderly fashion by Friday, January 29, 1999.
If you have any questions, I can be reached at 212- 723-54160
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
Daniel A. Dantuono
Chief Financial Officer & Director
DAD/sr
MANAGEMENT AGREEMENT
AGREEMENT made as of the 1st day of February, 1999 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
PRINCIPAL PLUS FUTURES FUND L.P., a New York limited partnership (the
"Partnership") and FORT ORANGE CAPITAL MANAGEMENT INC., a New York corporation
(the "Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of SMITH BARNEY PRINCIPAL
PLUS FUTURES FUND L.P., a limited partnership organized with the objective to
achieve substantial capital appreciation by engaging in speculative trading of a
diversified portfolio of commodity interests which may include futures
contracts, options, forward contracts and physicals; and
WHEREAS, the Limited Partnership Agreement establishing the
Partnership (the "Limited Partnership Agreement") permits SBFM to delegate to
one or more commodity trading advisors SBFM's authority to make trading
decisions for the Partnership; and
WHEREAS, the Advisor is registered as a commodity trading
advisor with the Commodity Futures Trading Commission ("CFTC") and is a member
of the National Futures Association ("NFA"); and
WHEREAS, SBFM is registered as a commodity pool operator with
the CFTC and is a member of the NFA; and
WHEREAS, SBFM and the Advisor wish to enter into this
Agreement in order to set forth the terms and conditions upon which the Advisor
will render and implement advisory services in connection with the conduct by
the Partnership of its commodity trading activities during the term of this
Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DUTIES OF THE ADVISOR. (a) For the period and on the terms
and conditions of this Agreement, the Advisor shall have sole authority and
responsibility, as one of the Partnership's agents and attorneys-in-fact, for
directing the investment and reinvestment of the assets and funds of the
Partnership allocated to it by SBFM in commodity interests, including commodity
futures contracts, options and forward contracts and physicals. All such trading
on behalf of the Partnership shall be in accordance with the trading policies
set forth in the Partnership's Prospectus dated as of July 12, 1995 (as
supplemented, the "Prospectus"), and as such trading policies may be changed
from time to time upon receipt by the Advisor of prior written notice of such
change and pursuant to the trading strategy selected by SBFM to be utilized by
the Advisor in managing the Partnership's assets. SBFM has initially selected
the Advisor's _____________ Program to manage the Partnership's assets allocated
to it. Any open positions or other investments at the time of receipt of such
notice of a change in trading policy shall not be deemed to violate the changed
policy and shall be closed or sold in the ordinary course of trading. The
Advisor may not deviate from the trading policies set forth in the Prospectus
without the prior written consent of the Partnership given by SBFM. The Advisor
makes no representation or warranty that the trading to be directed by it for
the Partnership will be profitable or will not incur losses. The Advisor will
have no responsibility for the management of the Partnership's assets invested
in Zero Coupon U.S. Treasury obligations.
(b) SBFM acknowledges receipt of the Advisor's Disclosure
Document dated October 1, 1998 (the "Disclosure Document"). All trades made by
the Advisor for the account of the Partnership shall be made through such
commodity broker or brokers as SBFM shall direct, and the Advisor shall have no
authority or responsibility for selecting or supervising any such broker in
connection with the clearance or confirmation of transactions for the
Partnership or for the negotiation of brokerage rates charged therefor. However,
the Advisor, with the prior written permission (by either original or fax copy)
of SBFM, may direct all trades in commodity futures and options to a futures
commission merchant or independent floor broker it chooses for execution with
instructions to give-up the trades to the broker designated by SBFM, provided
that the futures commission merchant or independent floor broker and any give-up
or floor brokerage fees are approved in advance by SBFM. All give-up or similar
fees relating to the foregoing shall be paid by the Partnership after all
parties have executed the relevant give-up agreement (by either original or fax
copy).
(c) The initial allocation of the Partnership's assets to the
Advisor will be made to the Advisor's Global Strategic Program (the "Program").
In the event the Advisor wishes to use a trading system or methodology other
than or in addition to the system or methodology outlined in the Disclosure
Document in connection with its trading for the Partnership, either in whole or
in part, it may not do so unless the Advisor gives SBFM prior written notice of
its intention to utilize such different trading system or methodology and SBFM
consents thereto in writing. In addition, the Advisor will provide five days'
prior written notice to SBFM of any change in the trading system or methodology
to be utilized for the Partnership which the Advisor deems material. If the
Advisor deems such change in system or methodology or in markets traded to be
material, the changed system or methodology or markets traded will not be
utilized for the Partnership without the prior written consent of SBFM. In
addition, the Advisor will notify SBFM of any changes to the trading system or
methodology that would require a change in the description of the trading
strategy or methods described in the Advisor's Disclosure Document. Further, the
Advisor will provide the Partnership with a current list of all commodity
interests to be traded for the Partnership's account and will not trade any
additional commodity interests for such account without providing notice thereof
to SBFM and receiving SBFM's written approval. The Advisor also agrees to
provide SBFM, on a monthly basis, with a written report of the assets under the
Advisor's management together with all other matters deemed by the Advisor to be
material changes to its business not previously reported to SBFM. The Advisor
further agrees that it will convert foreign currency balances (not required to
margin positions denominated in a foreign currency) to U.S. dollars no less
frequently than monthly.
(d) The Advisor agrees to make all material disclosures to the
Partnership regarding itself and its principals as defined in Part 4 of the
CFTC's regulations ("principals"), shareholders, directors, officers and
employees, their trading performance and general trading methods, its customer
accounts (but not the identities of or identifying information with respect to
its customers) and otherwise as are required in the reasonable judgment of SBFM
to be made in any filings required by Federal or state law or NFA rule or order.
Notwithstanding Sections 1(d) and 4(d) of this Agreement, the Advisor is not
required to disclose the actual trading results of proprietary accounts of the
Advisor or its principals unless SBFM reasonably determines that such disclosure
is required in order to fulfill its fiduciary obligations to the Partnership or
the reporting, filing or other obligations imposed on it by Federal or state law
or NFA rule or order. The Partnership and SBFM acknowledge that the trading
advice to be provided by the Advisor is a property right belonging to the
Advisor and that they will keep all such advice confidential. Further, SBFM
agrees to treat as confidential any results of proprietary accounts and/or
proprietary information with respect to trading systems obtained from the
Advisor.
(e) The Advisor understands and agrees that SBFM may designate
other trading advisors for the Partnership and apportion or reapportion to such
other trading advisors the management of an amount of Net Assets (as defined in
Section 3(b) hereof) as it shall determine in its absolute discretion. The
designation of other trading advisors and the apportionment or reapportionment
of Net Assets to any such trading advisors pursuant to this Section 1 shall
neither terminate this Agreement nor modify in any regard the respective rights
and obligations of the parties hereunder.
(f) SBFM may, from time to time, in its absolute discretion,
select additional trading advisors and reapportion funds among the trading
advisors for the Partnership as it deems appropriate. SBFM shall use its best
efforts to make reapportionments, if any, as of the first day of a month. The
Advisor agrees that it may be called upon at any time promptly to liquidate
positions in SBFM's sole discretion so that SBFM may reallocate the
Partnership's assets, meet margin calls on the Partnership's account, fund
redemptions, or for any other reason, except that SBFM will not require the
liquidation of specific positions by the Advisor. SBFM will use its best efforts
to give two days' prior notice to the Advisor of any reallocations or
liquidations.
(g) The Advisor will not be liable for trading losses in the
Partnership's account including losses caused by errors; provided, however, that
(i) the Advisor will be liable to the Partnership with respect to losses
incurred due to errors committed or caused by it or any of its principals or
employees in communicating improper trading instructions or orders to any broker
on behalf of the Partnership and (ii) the Advisor will be liable to the
Partnership with respect to losses incurred due to errors committed or caused by
any executing broker (other than any SBFM affiliate) selected by the Advisor,
(it also being understood that SBFM, with the assistance of the Advisor, will
first attempt to recover such losses from the executing broker).
2. INDEPENDENCE OF THE ADVISOR. For all purposes herein, the
Advisor shall be deemed to be an independent contractor and, unless otherwise
expressly provided or authorized, shall have no authority to act for or
represent the Partnership in any way and shall not be deemed an agent, promoter
or sponsor of the Partnership, SBFM, or any other trading advisor. The Advisor
shall not be responsible to the Partnership, the General Partner, any trading
advisor or any limited partners for any acts or omissions of any other trading
advisor no longer acting as an advisor to the Partnership.
3. COMPENSATION. (a) In consideration of and as compensation
for all of the services to be rendered by the Advisor to the Partnership under
this Agreement, the Partnership shall pay the Advisor (i) an incentive fee
payable quarterly equal to 20% of New Trading Profits (as such term is defined
below) earned by the Advisor for the Partnership and (ii) a monthly fee for
professional management services equal to 1/6 of 1% (2% per year) of the
month-end Net Assets of the Partnership allocated to the Advisor.
(b) "Net Assets" shall have the meaning set forth in Paragraph
7(d)(1) of the Limited Partnership Agreement dated as of June 22, 1995 and
without regard to amendments thereto, provided that in determining the Net
Assets of the Partnership on any date, no adjustment shall be made to reflect
any distributions, redemptions or incentive fees payable as of the date of such
determination.
(c) "New Trading Profits" shall mean the excess, if any, of
Net Assets managed by the Advisor at the end of the fiscal period over Net
Assets managed by the Advisor at the end of the highest previous fiscal period
or Net Assets allocated to the Advisor at the date trading commences, whichever
is higher, and as further adjusted to eliminate the effect on Net Assets
resulting from new capital contributions, redemptions, reallocations or capital
distributions, if any, made during the fiscal period decreased by interest or
other income, not directly related to trading activity, earned on the
Partnership's assets during the fiscal period, whether the assets are held
separately or in margin accounts. Ongoing expenses will be attributed to the
Advisor based pro rata on the Advisor's proportionate share of Net Assets and
shall not include management fees of the Partnership's other advisors. Ongoing
expenses above will not include expenses of litigation not involving the
activities of the Advisor on behalf of the Partnership. Ongoing expenses include
offering and organizational expenses of the Partnership. No incentive fee shall
be paid until the end of the first full calendar quarter of trading, which fee
shall be based on New Trading Profits earned from the commencement of trading
operations by the Partnership through the end of the first full calendar
quarter. Interest income earned, if any, will not be taken into account in
computing New Trading Profits earned by the Advisor. If Net Assets allocated to
the Advisor are reduced due to redemptions, distributions or reallocations (net
of additions), there will be a corresponding proportional reduction in the
related loss carryforward amount that must be recouped before the Advisor is
eligible to receive another incentive fee.
(d) Quarterly incentive fees and monthly management fees shall
be paid within twenty (20) business days following the end of the period, as the
case may be, for which such fee is payable. In the event of the termination of
this Agreement as of any date which shall not be the end of a calendar quarter
or a calendar month, as the case may be, the quarterly incentive fee shall be
computed as if the effective date of termination were the last day of the then
current quarter and the monthly management fee shall be prorated to the
effective date of termination. If, during any month, the Partnership does not
conduct business operations or the Advisor is unable to provide the services
contemplated herein for more than two successive business days, the monthly
management fee shall be prorated by the ratio which the number of business days
during which SBFM conducted the Partnership's business operations or utilized
the Advisor's services bears in the month to the total number of business days
in such month.
(e) The provisions of this Paragraph 3 shall survive the
termination of this Agreement.
4. RIGHT TO ENGAGE IN OTHER ACTIVITIES. (a) The services
provided by the Advisor hereunder are not to be deemed exclusive. SBFM on its
own behalf and on behalf of the Partnership acknowledges that, subject to the
terms of this Agreement, the Advisor and its officers, directors, employees and
shareholder(s), may render advisory, consulting and management services to other
clients and accounts. The Advisor and its officers, directors, employees and
shareholder(s) shall be free to trade for their own accounts and to advise other
investors and manage other commodity accounts during the term of this Agreement
and to use the same or different information, computer programs and trading
strategies, programs or formulas which they obtain, produce or utilize in the
performance of services to SBFM for the Partnership. However, the Advisor
represents, warrants and agrees that it believes that the rendering of such
consulting, advisory and management services to other accounts and entities will
not require any material change in the Advisor's basic trading strategies and
will not affect the capacity of the Advisor to continue to render services to
SBFM for the Partnership of the quality and nature contemplated by this
Agreement.
(b) If, at any time during the term of this Agreement, the
Advisor is required to aggregate the Partnership's commodity positions with the
positions of any other person for purposes of applying CFTC- or exchange-imposed
speculative position limits, the Advisor agrees that it will promptly notify
SBFM if the Partnership's positions are included in an aggregate amount which
exceeds the applicable speculative position limit. The Advisor agrees that, if
its trading recommendations are altered because of the application of any
speculative position limits, it will not modify the trading instructions with
respect to the Partnership's account in such manner as to affect the Partnership
substantially disproportionately as compared with the Advisor's other accounts.
The Advisor further represents, warrants and agrees that under no circumstances
will it knowingly or deliberately use trading strategies or methods for the
Partnership that are inferior to strategies or methods employed for any other
client or account and that it will not knowingly or deliberately favor any
client or account managed by it over any other client or account in any manner,
it being acknowledged, however, that different trading strategies or methods may
be utilized for differing sizes of accounts, accounts with different trading
policies, accounts experiencing differing inflows or outflows of equity,
accounts which commence trading at different times, accounts which have
different portfolios or different fiscal years, accounts utilizing different
executing brokers and accounts with other differences, and that such differences
may cause divergent trading results.
(c) It is acknowledged that the Advisor and/or its officers,
employees, directors and shareholder(s) presently act, and it is agreed that
they may continue to act, as advisor for other accounts managed by them, and may
continue to receive compensation with respect to services for such accounts in
amounts which may be more or less than the amounts received from the
Partnership.
(d) The Advisor agrees that it shall make such information
available to SBFM respecting the performance of the Partnership's account as
compared to the performance of other accounts managed by the Advisor or its
principals as shall be reasonably requested by SBFM. The Advisor presently
believes and represents that existing speculative position limits will not
materially adversely affect its ability to manage the Partnership's account
given the potential size of the Partnership's account and the Advisor's and its
principals' current accounts and all proposed accounts for which they have
contracted to act as trading manager.
5. TERM. (a) This Agreement shall continue in effect until
June 30, 1999. SBFM may, in its sole discretion, renew this Agreement for
additional one-year periods upon notice to the Advisor not less than 30 days
prior to the expiration of the previous period. At any time during the term of
this Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to immediately terminate this Agreement if (i) the Net Asset Value per
Unit shall decline as of the close of business on any day to $400 or less; (ii)
the Net Assets allocated to the Advisor (adjusted for redemptions,
distributions, withdrawals or reallocations, if any) decline by 50% or more as
of the end of a trading day from such Net Assets' previous highest value; (iii)
limited partners owning at least 50% of the outstanding Units shall vote to
require SBFM to terminate this Agreement; (iv) the Advisor fails to comply with
the terms of this Agreement; (v) SBFM, in good faith, reasonably determines that
the performance of the Advisor has been such that SBFM's fiduciary duties to the
Partnership require SBFM to terminate this Agreement; or (vi) SBFM reasonably
believes that the application of speculative position limits will substantially
affect the performance of the Partnership. At any time during the term of this
Agreement, SBFM may elect immediately to terminate this Agreement if (i) the
Advisor merges, consolidates with another entity, sells a substantial portion of
its assets, or becomes bankrupt or insolvent, (ii) Daniel M. Byrnes dies,
becomes incapacitated, leaves the employ of the Advisor, ceases to control the
Advisor or is otherwise not managing the trading programs or systems of the
Advisor, or (iii) the Advisor's registration as a commodity trading advisor with
the CFTC or its membership in the NFA or any other regulatory authority, is
terminated or suspended. This Agreement will immediately terminate upon
dissolution of the Partnership or upon cessation of trading prior to
dissolution.
(b) The Advisor may terminate this Agreement by giving not
less than 30 days' notice to SBFM (i) in the event that the trading policies of
the Partnership as set forth in the Prospectus are changed in such manner that
the Advisor reasonably believes will adversely affect the performance of its
trading strategies; (ii) after June 30, 1999; or (iii) in the event that the
General Partner or Partnership fails to comply with the terms of this Agreement.
(c) Except as otherwise provided in this Agreement, any
termination of this Agreement in accordance with this Paragraph 5 or Paragraph
1(e) shall be without penalty or liability to any party, except for any fees due
to the Advisor pursuant to Section 3 hereof.
6. INDEMNIFICATION. (a)(i) In any threatened, pending or
completed action, suit, or proceeding to which the Advisor was or is a party or
is threatened to be made a party arising out of or in connection with this
Agreement or the management of the Partnership's assets by the Advisor or the
offering and sale of units in the Partnership, SBFM shall, subject to
subparagraph (a)(iii) of this Paragraph 6, indemnify and hold harmless the
Advisor against any loss, liability, damage, cost, expense (including, without
limitation, attorneys' and accountants' fees), judgments and amounts paid in
settlement actually and reasonably incurred by it in connection with such
action, suit, or proceeding if the Advisor acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership, and provided that its conduct did not constitute negligence,
intentional misconduct, or a breach of its fiduciary obligations to the
Partnership as a commodity trading advisor, unless and only to the extent that
the court or administrative forum in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the Advisor is fairly and reasonably
entitled to indemnity for such expenses which such court or administrative forum
shall deem proper; and further provided that no indemnification shall be
available from the Partnership if such indemnification is prohibited by Section
16 of the Partnership Agreement. The termination of any action, suit or
proceeding by judgment, order or settlement shall not, of itself, create a
presumption that the Advisor did not act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership.
(ii) To the extent that the Advisor has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
subparagraph (i) above, or in defense of any claim, issue or matter therein,
SBFM shall indemnify it against the expenses (including, without limitation,
attorneys' and accountants' fees) actually and reasonably incurred by it in
connection therewith.
(iii) Any indemnification under subparagraph (i) above, unless
ordered by a court or administrative forum, shall be made by SBFM only as
authorized in the specific case and only upon a determination by independent
legal counsel in a written opinion that such indemnification is proper in the
circumstances because the Advisor has met the applicable standard of conduct set
forth in subparagraph (i) above. Such independent legal counsel shall be
selected by SBFM in a timely manner, subject to the Advisor's approval, which
approval shall not be unreasonably withheld. The Advisor will be deemed to have
approved SBFM's selection unless the Advisor notifies SBFM in writing, received
by SBFM within five days of SBFM's telecopying to the Advisor of the notice of
SBFM's selection, that the Advisor does not approve the selection.
(iv) In the event the Advisor is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a result of, or
in connection with, the Partnership's or SBFM's activities or claimed activities
unrelated to the Advisor, SBFM shall indemnify, defend and hold harmless the
Advisor against any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees) incurred in connection therewith.
(v) As used in this Paragraph 6(a), the terms "Advisor" shall
include the Advisor, its principals, officers, directors, stockholders and
employees and the term "SBFM" shall include the Partnership.
(b)(i) The Advisor agrees to indemnify, defend and hold
harmless SBFM, the Partnership and their affiliates against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees), judgments and amounts paid in settlement actually and
reasonably incurred by them (A) as a result of the material breach of any
material representations and warranties made by the Advisor in this Agreement,
or (B) as a result of any act or omission of the Advisor relating to the
Partnership if there has been a final judicial or regulatory determination or,
in the event of a settlement of any action or proceeding with the prior written
consent of the Advisor, a written opinion of an arbitrator pursuant to Paragraph
14 hereof, to the effect that such acts or omissions violated the terms of this
Agreement in any material respect or involved negligence, bad faith,
recklessness or intentional misconduct on the part of the Advisor (except as
otherwise provided in Section 1(g)).
(ii) In the event SBFM, the Partnership or any of their
affiliates is made a party to any claim, dispute or litigation or otherwise
incurs any loss or expense as a result of, or in connection with, the activities
or claimed activities of the Advisor or its principals, officers, directors,
shareholder(s) or employees unrelated to SBFM's or the Partnership's business,
the Advisor shall indemnify, defend and hold harmless SBFM, the Partnership or
any of their affiliates against any loss, liability, damage, cost or expense
(including, without limitation, attorneys' and accountants' fees) incurred in
connection therewith.
(c) In the event that a person entitled to indemnification
under this Paragraph 6 is made a party to an action, suit or proceeding alleging
both matters for which indemnification can be made hereunder and matters for
which indemnification may not be made hereunder, such person shall be
indemnified only for that portion of the loss, liability, damage, cost or
expense incurred in such action, suit or proceeding which relates to the matters
for which indemnification can be made.
(d) None of the indemnifications contained in this Paragraph 6
shall be applicable with respect to default judgments, confessions of judgment
or settlements entered into by the party claiming indemnification without the
prior written consent, which shall not be unreasonably withheld, of the party
obligated to indemnify such party.
(e) The provisions of this Paragraph 6 shall survive the
termination of this Agreement.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Advisor represents and warrants that:
(i) All references to the Advisor and its principals in the
Advisor's Disclosure Document are accurate in all material respects and as to
them the Prospectus does not contain any untrue statement of a material fact or
omit to state a material fact which is necessary to make the statements therein
not misleading, except that with respect to Table B in the Prospectus (if
applicable), this representation and warranty extends only to the underlying
data made available by the Advisor for the preparation thereof and not to any
hypothetical or pro forma adjustments. Subject to such exception, all references
to the Advisor and its principals in the Prospectus will, after review and
approval of such references by the Advisor prior to the use of such Prospectus
in connection with the offering of the Partnership's units, be accurate in all
material respects.
(ii) The information with respect to the Advisor set forth in
the actual performance tables in the Prospectus is based on all of the customer
accounts managed on a discretionary basis by the Advisor's principals and/or the
Advisor during the period covered by such tables and required to be disclosed
therein.
(iii) The Advisor will be acting as a commodity trading
advisor with respect to the Partnership and not as a securities investment
adviser and is duly registered with the CFTC as a commodity trading advisor, is
a member of the NFA, and is in compliance with such other registration and
licensing requirements as shall be necessary to enable it to perform its
obligations hereunder, and agrees to maintain and renew such registrations and
licenses during the term of this Agreement.
(iv) The Advisor is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York and has
full power and authority to enter into this Agreement and to provide the
services required of it hereunder.
(v) The Advisor will not, by acting as a commodity trading
advisor to the Partnership, breach or cause to be breached any undertaking,
agreement, contract, statute, rule or regulation to which it is a party or by
which it is bound.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Advisor and is a valid and binding agreement
enforceable in accordance with its terms.
(vii) At any time during the term of this Agreement that a
prospectus relating to the Units is required to be delivered in connection with
the offer and sale thereof, the Advisor agrees upon the request of SBFM to
provide the Partnership with such information as shall be necessary so that, as
to the Advisor and its principals, such prospectus is accurate.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (as from time to time amended or
supplemented, which amendment or supplement is approved by the Advisor as to
descriptions of itself and its actual performance) does not contain any untrue
statement of a material fact or omit to state a material fact which is necessary
to make the statements therein not misleading, except that the foregoing
representation does not apply to any statement or omission concerning the
Advisor in the Prospectus, made in reliance upon, and in conformity with,
information furnished to SBFM by or on behalf of the Advisor expressly for use
in the Prospectus.
(ii) It is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full corporate
power and authority to perform its obligations under this Agreement.
(iii) SBFM and the Partnership have the capacity and authority
to enter into this Agreement on behalf of the Partnership.
(iv) This Agreement has been duly and validly authorized,
executed and delivered on SBFM's and the Partnership's behalf and is a valid and
binding agreement of SBFM and the Partnership enforceable in accordance with its
terms.
(v) SBFM will not, by acting as General Partner to the
Partnership and the Partnership will not, breach or cause to be breached any
undertaking, agreement, contract, statute, rule or regulation to which it is a
party or by which it is bound which would materially limit or affect the
performance of its duties under this Agreement.
(vi) It is registered as a commodity pool operator and is a
member of the NFA, and it will maintain and renew such registration and
membership during the term of this Agreement.
(vii) The Partnership is a limited partnership duly organized
and validly existing under the laws of the State of New York and has full power
and authority to enter into this Agreement and to perform its obligations under
this Agreement.
8. COVENANTS OF THE ADVISOR, SBFM AND THE PARTNERSHIP. (a) The
Advisor agrees as follows:
(i) In connection with its activities on behalf of the
Partnership, the Advisor will comply with all applicable rules and regulations
of the CFTC and/or the commodity exchange on which any particular transaction is
executed.
(ii) The Advisor will promptly notify SBFM of the commencement
of any material suit, action or proceeding involving it, whether or not any such
suit, action or proceeding also involves SBFM.
(iii) In the placement of orders for the Partnership's account
and for the accounts of any other client, the Advisor will utilize a
pre-determined, systematic, fair and reasonable order entry system, which shall,
on an overall basis, be no less favorable to the Partnership than to any other
account managed by the Advisor. The Advisor acknowledges its obligation to
review the Partnership's positions, prices and equity in the account managed by
the Advisor daily and within two business days to notify, in writing, the broker
and SBFM and the Partnership's brokers of (i) any error committed by the Advisor
or its principals or employees; (ii) any trade which the Advisor believes was
not executed in accordance with its instructions; and (iii) any discrepancy (due
to differences in the positions, prices or equity in the account) between its
records and the information reported on the account's daily and monthly broker
statements.
(iv) The Advisor will demonstrate to SBFM's satisfaction its
ability to bear its responsibilities arising under this Agreement, by
presentation of supporting documentation (such as financial statements together
with a certification of accuracy or, in certain cases, the individual
obligations of the controlling principals of the Advisor for the Advisor's
responsibilities hereunder) as SBFM may reasonably request. In this connection,
Advisor agrees that it shall cause the Promissory Note attached hereto as Rider
A to be executed.
(b) SBFM agrees for itself and the Partnership that:
(i) SBFM and the Partnership will comply with all applicable
rules and regulations of the CFTC and/or the commodity exchange on which any
particular transaction is executed.
(ii) SBFM will promptly notify the Advisor of the commencement
of any material suit, action or proceeding involving it or the Partnership,
whether or not such suit, action or proceeding also involves the Advisor.
9. COMPLETE AGREEMENT. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter hereof.
10. ASSIGNMENT. This Agreement may not be assigned by any
party without the express written consent of the other parties.
11. AMENDMENT. This Agreement may not be amended except by the
written consent of the parties.
12. NOTICES. All notices, demands or requests required to be
made or delivered under this Agreement shall be in writing and delivered
personally or by registered or certified mail or expedited courier, return
receipt requested, postage prepaid, to the addresses below or to such other
addresses as may be designated by the party entitled to receive the same by
notice similarly given:
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street - 1st Floor
New York, New York 10013
Attention: David J. Vogel
If to the Advisor:
Mr. Daniel M. Byrnes
Fort Orange Capital Management Inc.
100 State Street
Albany, New York 12207
<PAGE>
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
14. ARBITRATION. The parties agree that any dispute or
controversy arising out of or relating to this Agreement or the interpretation
thereof, shall be settled by arbitration in accordance with the rules, then in
effect, of the National Futures Association or, if the National Futures
Association shall refuse jurisdiction, then in accordance with the rules, then
in effect, of the American Arbitration Association; provided, however, that the
power of the arbitrator shall be limited to interpreting this Agreement as
written and the arbitrator shall state in writing his reasons for his award.
Judgment upon any award made by the arbitrator may be entered in any court of
competent jurisdiction.
15. NO THIRD PARTY BENEFICIARIES. There are no third party
beneficiaries to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
SMITH BARNEY
FUTURES MANAGEMENT INC.
By
David J. Vogel
President and Director
SMITH BARNEY
PRINCIPAL PLUS FUTURES FUND L.P.
By: Smith Barney
Futures Management Inc.
(General Partner)
By
David J. Vogel
President and Director
FORT ORANGE CAPITAL MANAGEMENT INC.
By
Daniel M. Byrnes
President
<PAGE>
RIDER A
PROMISSORY NOTE
Albany, New York
Date: February 1, 1999
FOR VALUE RECEIVED, the undersigned, Daniel M. Byrnes, each
promise to pay on demand, to the order of SMITH BARNEY PRINCIPAL PLUS FUTURES
FUND L. P. (the "Fund") or Smith Barney Futures Management Inc. ("SBFM") as the
Fund or SBFM shall elect, the sum of One Hundred Thousand Dollars ($100,000).
This note shall be callable by the Fund or SBFM only if and to the extent that
Fort Orange Capital Management Inc. ("Fort Orange"), a New York corporation,
does not have sufficient assets to fulfill Fort Orange's obligations associated
with the Management Agreement dated February 1, 1999 among SBFM, the Fund and
Fort Orange.
- -------------------------
Daniel M. Byrnes
President
