UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 2001
Commission File Number 0-24111
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SMITH BARNEY WESTPORT FUTURES FUND L.P.
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(Exact name of registrant as specified in its charter)
New York 13-3939393
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
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(Address and Zip Code of principal executive offices)
(212) 723-5424
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of February 28, 2002, Limited Partnership Units with an aggregate value of
$60,696,444 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
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(a) General development of business. Smith Barney Westport Futures Fund
L.P. ("Partnership") is a limited partnership organized on March 21, 1997 under
the partnership laws of the State of New York. The Partnership commenced trading
operations on August 1, 1997. The Partnership engages in speculative trading of
commodity interests, including futures contracts, options and forward contracts.
A Registration Statement on Form S-1 relating to the public offering became
effective on May 30, 1997. Beginning May 30, 1997, 120,000 Units of Limited
Partnership Interest ("Units") were publicly offered at $1,000 per Unit for a
period of ninety days, subject to increase for up to an additional sixty days at
the sole discretion of the General Partner. Between May 30, 1997 (commencement
of the offering period) and July 31, 1997, 40,035 Units were sold at $1,000 per
Unit. Proceeds of the offering were held in an escrow account and were
transferred, along with the general partner's contribution of $404,000 to the
Partnership's trading account on August 1, 1997 when the Partnership commenced
trading. The public offering of Units terminated on February 1, 1998. Sales of
additional Units and additional general partner contributions of Units for the
periods ended December 31, 2001, 2000 and 1999, and redemptions of Units for the
periods ended December 31, 2001, 2000 and 1999 are reported in the Statement of
Partners' Capital on page F-6 under "Item 8. Financial Statements and
Supplementary Data."
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The general partner has agreed to make capital contributions, if necessary,
so that its general partnership interest will be equal to the greater of (i) an
amount to entitle it to 1% of each material item of Partnership income, loss,
deduction or credit and (ii) the greater of (a) 1% of the partners'
contributions to the Partnership or (b) $25,000. The Partnership will be
liquidated upon the first of the following to occur: December 31, 2017; the net
asset value of a Unit decreases to less than $400 as of the close of any
business day; or under certain circumstances as defined in the Limited
Partnership Agreement of the Partnership (the "Limited Partnership Agreement").
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner.
The General Partner is wholly owned by Salomon Smith Barney Holdings Inc.
("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of
Citigroup Inc. The Partnership's trading of futures, forwards and options
contracts, if applicable, on commodities is done primarily on United States of
America and foreign commodity exchanges. It engages in such trading through a
commodity brokerage account maintained with SSB.
The General Partner has entered into a Management Agreement (the
"Management Agreement") with John W. Henry & Company, Inc. ("JWH"), (the
"Advisor") who will make all commodity trading decisions for the Partnership.
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The Advisor is not affiliated with the General Partner or SSB. The Advisor is
not responsible for the organization or operation of the Partnership.
Pursuant to the terms of the Management Agreement, for the period January
1, 2000 through February 29, 2000, the Partnership was obligated to pay the
Advisor a monthly management fee equal to 1/3 of 1% (4% per year) of month-end
Net Assets (as defined in the Management Agreement) of the Partnership allocated
to the Advisor as of the end of each month and an incentive fee payable
quarterly, equal to 19% of the New Trading Profits (as defined in the Management
Agreement) earned by the Advisor for the Partnership. Effective March 1, 2000
through September 30, 2000, the Partnership was obligated to pay the Advisor a
monthly management fee equal to 1/3 of 1% (4% per year) of month-end Net Assets
allocated to the Advisor and an incentive fee payable quarterly equal to 15% of
New Trading Profits. Effective October 1, 2000, the Partnership pays the Advisor
a monthly management fee equal to 1/6 of 1% (2% per year) of month-end Net
Assets allocated to the Advisor and an incentive fee payable quarterly equal to
20% of the New Trading Profits.
The Partnership had entered into a Customer Agreement with SSB (the
"Customer Agreement") which provided that, effective January 1, 2000 through
February 29, 2000, the Partnership would pay SSB a monthly brokerage fee equal
to 13/24 of 1% of month-end Net Assets allocated to the Advisors (6.5% per year)
in lieu of brokerage commissions on a per trade basis. Effective March 1, 2000,
the monthly brokerage fee was reduced to 11/24 of 1% (5.5% per year) of
month-end Net Assets, in lieu of brokerage commissions on a per trade basis. SSB
4
also pays a portion of its brokerage fees to its financial consultants who have
sold Units and who are registered as associated persons with the Commodity
Futures Trading Commission (the "CFTC"). The Partnership pays for National
Futures Association ("NFA") fees, exchange and clearing fees, give-up and user
fees and floor brokerage fees. The Customer Agreement between the Partnership
and SSB gives the Partnership the legal right to net unrealized gains and
losses.
In addition, SSB pays the Partnership interest on 80% of the average daily
equity maintained in cash in its account during each month at a 30-day U.S.
Treasury bill rate determined weekly by SSB based on the average non-competitive
yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which
such weekly rate is determined.
(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. Treasury Bills, other financial instruments, foreign
currencies, stock indices and physical commodities). The Partnership does not
engage in sales of goods or services. The Partnership's net income (loss) from
operations for the years ended December 31, 2001, 2000, 1999 and the period from
August 1, 1997 (commencement of trading operations) to December 31 1997 is set
forth under "Item 6. Selected Financial Data." The Partnership's capital as of
December 31, 2001 was $65,918,306.
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(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does not
engage in sales of goods or services or own any long lived assets, and
therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which Salomon Smith
Barney Holdings Inc. ("SSBH") or its subsidiaries is a party or to which any of
their property is subject. There are no material legal proceedings pending
against the Partnership or the General Partner. Salomon Smith Barney Inc.
("SSB") is a New York corporation with its principal place of business at
388 Greenwich St., New York, New York 10013. SSB is registered as a
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broker-dealer and futures commission merchant ("FCM"), and provides futures
brokerage and clearing services for institutional and retail participants in the
futures markets. SSB and its affiliates also provide investment banking and
other financial services for clients worldwide.
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against SSB or any of its individual principals within the
past five years that management believes may have a material impact on SSB's
ability to act as an FCM. In the ordinary course of its business, SSB is a party
to various claims and regulatory inquiries. Proceedings deemed to be material
for purposes of Commodity Futures Trading Commission ("CFTC") disclosure
requirements are:
In September 1992, Harris Trust and Savings Bank (as trustee for Ameritech
Pension Trust ("APT"), Ameritech Corporation, and an officer of Ameritech filed
suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers Realty
Corporation ("SBRC") in the U.S. District Court for the Northern District of
Illinois (Harris Trust Savings Bank, not individually but solely as trustee for
the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest in a portfolio of motels owned by Best Inns,
Inc. ("Best"), violated the Employee Retirement Income Security Act ("ERISA"),
and that APT's purchase of the participation interests in the third MOA
portfolio and in the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and the Illinois Consumer Fraud and Deceptive
Practices Act ("Consumer Fraud Act"), and constituted fraud, negligent
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misrepresentation, breach of contract and unjust enrichment. SBI had acquired
the participation interests when it purchased principal mortgage notes issued by
MOA and Best to finance purchases of motel portfolios; 95% of three of those
interests and 100% of the fourth were sold to APT for a total of approximately
$20.9 million. Plaintiffs' second amended complaint seeks judgment (a) on the
ERISA claims for the approximately $20.9 million purchase price, for rescission
and for disgorgement of profits, as well as other relief, and (b) on the RICO
and state law claims in the amount of $12.3 million, with damages trebled to $37
million on the RICO claims and punitive damages in excess of $37 million on
certain of the state law claims as well as other relief. Following motions by
defendants, the court dismissed the RICO, Consumer Fraud Act, fraud, negligent
misrepresentation, breach of contract, and unjust enrichment claims. The court
also found that defendants were not ERISA fiduciaries and dismissed two of the
three claims based on that allegation. Defendants moved for summary judgment on
plaintiffs' only remaining claim, which alleged an ERISA violation. The motion
was denied, and defendants appealed to the U.S. Court of Appeals for the Seventh
Circuit. In July 1999, the U. S. Court of Appeals for the Seventh Circuit
reversed the denial of defendants' motion for summary judgment and dismissed the
sole remaining ERISA claim against the Company. Plaintiffs filed a petition for
certiorari with the U. S. Supreme Court seeking review of the decision of the
Court of Appeals, which was granted in January 2000. After hearing oral
argument, on June 12, 2000, the U.S. Supreme Court reversed the U.S. Court of
8
Appeals for the Seventh Circuit's judgment, which had overturned the denial of
defendants' motion for summary judgment and dismissed the sole remaining ERISA
claim against the Company, and remanded the matter to the circuit court for
further proceedings. Subsequently, the circuit court remanded the matter to the
U.S. District Court for the Northern District of Illinois for further
proceedings.
Both the Department of Labor and the Internal Revenue Service ("IRS") have
advised SBI that they were or are reviewing the underlying transactions. With
respect to the IRS, SSBH, SBI and SBRC have consented to extensions of time for
the assessment of excise taxes that may be claimed with respect to the
transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent
SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to
the transactions and SSBH, SBI and SBRC were given an opportunity to comment on
whether the IRS should issue 30-day letters, which would actually commence the
assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum
setting forth reasons why the IRS should not issue such 30-day letters. Since
that time, the IRS has not issued such 30-day letters to SSBH, SBI or SBRC.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California.
(County of Orange et al v. Bear Stearns & Co. Inc. et al.) The complaint
alleged, among other things, that the brokerage firms recommended and sold
unsuitable securities to Orange Count. SSB and the remaining brokerage firms
9
settled with Orange County in mid 1999.
In June 1998, complaints were filed in the U.S. district Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc, et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the IRS denies tax exempt
status to the City's General Obligation Refunding Bonds Series 1991. The
complaints were subsequently amended. SSB has asked the court to dismiss the
amended complaints. The Court denied the motion but stayed the case.
Subsequently, the city withdrew the lawsuit.
In November 1998, a class action complaint was filed in the United States
District Court for the Middle District of Florida (Dwight Brock as Clerk for
Collier County v. Merrill Lynch, et al.). The Complaint alleged that, pursuant
to a nationwide conspiracy, 17 broker-dealer defendants, including SSB, Charged
excessive mark-ups in connection with advanced refunding transactions. Among
other relief, plaintiffs sought compensatory and punitive damages, restitution
and/or rescission of the transactions and disgorgement of alleged excessive
profits. In October 1999, the plaintiff filed a second amended complaint. SSB
has asked the court to dismiss the amended complaint. In November 1999, SSB
moved to dismiss the amended complaint. In May 2001, the parties reached, and
the court preliminarily approved, a tentative settlement. In September 2001, the
court approved the settlement.
10
In connection with the Louisiana and Florida matters, the IRS and SEC have
been conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions, In April 2000 SSB and several
other broker-dealers entered into a settlement with the IRS and the SEC.
In December 1998, SSB was one of twenty-eight market making firms that
reached a settlement with the SEC in the matter titled In the Matter of Certain
Market Making Activities on NASDAQ. As part of the settlement of that matter,
SSB, without admitting or denying the factual allegation, agreed to an order
that required that it: (i) cease and desist from committing or causing any
violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934
and Rules 15cl -2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000, and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed by a
hedge fund and its investment advisor against SSB in the Supreme Court of the
State of New York, County of New York (MKP Master Fund, LDC et al. v. Salomon
Smith Barney Inc.). Plaintiffs allege that while acting as their prime broker
SSB breached its contracts with plaintiffs, converted plaintiffs' monies and
engaged in tortious conduct, including breaching its fiduciary duties. In
October 1999, the court dismissed plaintiffs' tort claims, including the breach
of fiduciary duty claims, but allowed the breach of contract and conversion
claims to stand. In December 1999, SSB filed an answer and asserted
counterclaims against the investment advisor. In response to plaintiffs' motion
to strike the counterclaims, in January 2000, SSB amended its counterclaims
11
against the investment advisor to seek indemnification and contribution.
Plaintiffs moved to strike SSB's amended counterclaims in February 2000. In
September 2000, the court denied plaintiffs' motion to dismiss SSB's
counterclaims based on indemnification and contribution. Discovery is ongoing.
SSBH and various subsidiaries have also been named as defendants in various
matters incident to and typical of the businesses in which they are engaged.
These include numerous civil actions, arbitration proceedings and other matters
in which SSBH's broker-dealer subsidiaries have been named, arising in the
normal course of business out of activities as a broker and dealer in
securities, as an underwriter of securities, as an investment banker or
otherwise. In the opinion of SSBH's management, none of these actions is
expected to have a material adverse effect on the results of operations,
consolidated financial condition or liquidity of SSBH and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote during
the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a)Market Information. The Partnership has issued no stock. There is no
public market for the Units of Limited Partnership Interest.
(b)Holders. The number of holders of Units of Limited Partnership Interest
as of December 31, 2001 was 2,549.
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(c) Distribution. The Partnership did not declare a distribution in 2001 or
2000.
(d) Use of Proceeds. For the twelve months ended December 31, 2001, there
were additional sales of 3,123.5530 Units totaling $3,431,000. For the twelve
months ended December 31, 2000, there were additional sales of 87.4301 Units
totaling $74,000. There were no additional sales in the year ended December 31,
1999. Proceeds from the sale of additional Units are used in the trading of
commodity interests including futures contracts, options and forward contracts.
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Item 6. Selected Financial Data. The Partnership commenced trading
operations on August 1, 1997. Realized and unrealized trading gains (losses),
interest income, net income (loss) and increase (decrease) in Net Asset Value
per Unit for the years ended December 31, 2001, 2000, 1999, 1998 and the period
from August 1, 1997 (commencement of trading operations) to December 31, 1997
and total assets at December 31, 2001, 2000, 1999, 1998 and 1997 were as
follows:
2001 2000 1999 1998 1997
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Realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees of
$4,017,979, $4,767,560, $8,105,686,
$8,058,297 and $2,127,374,
respectively $ (1,344,785) $ 7,654,176 $ (12,482,163) $ 11,456,921 $ 5,051,247
Interest income 1,903,410 3,451,534 4,092,286 4,191,852 1,161,609
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$ 558,625 $ 11,105,710 $ (8,389,877) $ 15,648,773 $ 6,212,856
============= ============= ============= ============= =============
Net income (loss) $ (1,381,965) $ 8,154,747 $ (14,122,938) $ 9,558,956 $ 4,152,296
============= ============= ============= ============= =============
Increase(decrease) in Net
Asset Value per Unit $ (24.66) $ 156.96 $ (130.10) $ 83.01 $ 29.05
============= ============= ============= ============= =============
Total assets $ 67,409,207 $ 74,616,075 $ 103,585,998 $ 125,412,315 $ 103,029,348
============= ============= ============= ============= =============
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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, net unrealized appreciation (depreciation) on open
positions and receivables. Because of the low margin deposits normally required
in commodity trading, relatively small price movements may result in substantial
losses to the Partnership. Such substantial losses could lead to a material
decrease in liquidity. To minimize this risk, the Partnership follows certain
policies, including:
(1) Partnership funds are invested only in commodity interests which are
traded in sufficient volume to permit, in the opinion of the Advisor, ease of
taking and liquidating positions.
(2) No Advisor initiates 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. For the purpose of this limitation, forward contracts in currencies
will be deemed to have the same margin requirements as the same or similar
futures contracts traded on the Chicago Mercantile Exchange.
(3) The Partnership will not employ the trading technique commonly known as
"pyramiding", in which the speculator uses unrealized profits on existing
15
positions as margin for the purchase or sale of additional positions in the same
or related commodities.
(4) The Partnership will not utilize borrowing except short-term borrowing
if the Partnership takes delivery of any cash commodities, provided that neither
the deposit of margin with a commodity broker nor obtaining and drawing on a
line of credit with respect to forward contracts shall constitute borrowing.
(5) The Advisor may, from time to time, employ trading strategies such as
spread 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 futures 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.
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
may include forwards, futures and options, whose value is based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, or to purchase or sell other
financial instruments at specified terms at specified future dates. Each of
these instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
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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. (See also Item 8.
Financial Statements and Supplementary Data for further information on financial
instrument risk included in the notes to financial statements.)
Other than the risks inherent in commodity trading, the Partnership knows
of no trends, demands, commitments, events or uncertainties which will result in
or which are reasonably likely to result in the Partnership's liquidity
increasing or decreasing in any material way. The Limited Partnership Agreement
provides that the Partnership will cease trading operations and liquidate all
open positions upon the first to occur of the following: (i) December 31, 2017;
(ii) the vote dissolve the Partnership by limited partners owning more than 50%
of the Units; (iii) 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 New York
Revised Limited Partnership Act unless the Partnership is continued as described
in the Limited Partnership Agreement; (iv) net asset value per Unit falls to
less than $400 as of the end of any trading day; or (v) the occurrence of any
event which shall make it unlawful for the existence of the Partnership to be
continued.
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(b) Capital resources. (i) The Partnership has made no material commitments
for capital expenditures.
(ii) The Partnership's capital consists of the capital contributions of the
partners, as increased or decreased by gains or losses on commodity trading, and
by expenses, interest income, redemptions of Units and distributions of profits,
if any. Gains or losses on commodity trading cannot be predicted. Market moves
in commodities are dependent upon fundamental and technical factors which the
Partnership may or may not be able to identify. Partnership expenses will
consist of, among other things, commissions, management fees and incentive fees.
The level of these expenses is dependent upon the level of trading gains or
losses and the ability of the Advisors to identify and take advantage of price
movements in the commodity markets, in addition to the level of net assets
maintained. In addition, the amount of interest income payable by SSB is
dependent upon interest rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given period.
A limited partner may require the Partnership to redeem his Units at their Net
Asset Value as of the last day of a month on 10 days' notice to the General
Partner. For the purpose of a redemption, any accrued liability for
reimbursement of offering and organization expenses for the Initial Offering
Period will not reduce Net Asset Value per Unit. There is no fee charged to
limited partners in connection with redemptions. For the year ended December 31,
2001, 7,510.2400 Units were redeemed totaling $8,450,801. For the year ended
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December 31, 2000, 38,747.9674 Units were redeemed totaling $35,390,012. For the
year ended December 31, 1999, 9,719.2218 Units were redeemed totaling
$9,934,685.
For the year ended December 31, 2001, there were additional sales of
3,123.5530 Units totaling $3,431,000. For the year ended December 31, 2000,
there were additional sales of 87.4301 Units totaling $74,000, in a private
offering pursuant to SEC Regulation D. There were no additional sales in the
year ended December 31, 1999. The Partnership ceased its public offering of
Units effective March 1, 1998.
(c) Results of Operations.
For the year ended December 31, 2001, the Net Asset Value per Unit
decreased 2.2% from $1,121.36 to $1,096.70. For the year ended December 31,
2000, the Net Asset Value per Unit increased 16.3% from $964.40 to $1,121.36.
For the year ended December 31, 1999, the Net Asset Value per Unit decreased
11.9% from $1,094.50 to $964.40.
The Partnership experienced net trading gains of $2,673,194 before
commissions and expenses in 2001. Gains were primarily attributable to the
trading of currencies, U.S. and non-U.S. interest rates, indices, softs and
livestock and were partially offset by losses recognized in the trading of
energy, grains and metals.
The Partnership experienced net trading gains of $12,421,736 before
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commissions and expenses in 2000. Gains were primarily attributable to the
trading in currencies, energy products, grains, U.S. interest rates, livestock
and indices and were partially offset by losses recognized in the trading of
non-U.S. interest rates, metals and softs.
The Partnership experienced net trading losses of $4,376,477 before
commissions and expenses in 1999. Losses were primarily attributable to the
trading in grains, non-U.S. interest rates, livestock, metals, softs and indices
and were partially offset by gains recognized in the trading of currencies,
energy products and U.S. interest rates.
Commodity markets are highly volatile. Broad price fluctuations and rapid
inflation increase the risks involved in commodity trading, but also increase
the possibility of profit. The profitability of the Partnership depends on the
existence of major price trends and the ability of the Advisor to identify those
price trends correctly. Price trends are influenced by, among other things,
changing supply and demand relationships, weather, governmental, agricultural,
commercial and trade programs and policies, national and international political
and economic events and changes in interest rates. To the extent that market
trends exist and the Advisor is able to identify them, the Partnership expects
to increase capital through operations.
(d) Operational Risk
The Partnership is directly exposed to market risk and credit risk, which
arise in the normal course of its business activities. Slightly less direct, but
of critical importance, are risks pertaining to operational and back office
20
support. This is particularly the case in a rapidly changing and increasingly
global environment with increasing transaction volumes and an expansion in the
number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss
and legal liability attributable to operational problems, such as inaccurate
pricing of transactions, untimely trade execution, clearance and/or settlement,
or the inability to process large volumes of transactions. The Partnership is
subject to increased risks with respect to its trading activities in emerging
market securities, where clearance, settlement, and custodial risks are often
greater than in more established markets.
Technological Risk - the risk of loss attributable to technological
limitations or hardware failure that constrain the Partnership's ability to
gather, process, and communicate information efficiently and securely, without
interruption, to customers, among units within the Partnership, and in the
markets where the Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in
the documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
21
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Partnership's
unitholder, creditors, and regulators, is free of material errors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification results among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
22
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
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
23
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
Advisor is quantified below in terms of Value at Risk. Due to the Partnership's
mark-to-market accounting, any loss in the fair value of the Partnership's open
positions is directly reflected in the Partnership's earnings (realized or
unrealized).
Exchange maintenance margin requirements have been used by the Partnership
as the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange traded
(almost exclusively currencies in the case of the Partnership), the margin
24
requirements for the equivalent futures positions have been used as Value at
Risk. In those rare cases in which a futures-equivalent margin is not available,
dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does not
have any optionality component. However, the Advisor may trade commodity
options. The Value at Risk associated with options is reflected in the following
table as the margin requirement attributable to the instrument underlying each
option. Where this instrument is a futures contract, the futures margin, and
where this instrument is a physical commodity, the futures-equivalent
maintenance margin has been used. This calculation is conservative in that it
assumes that the fair value of an option will decline by the same amount as the
fair value of the underlying instrument, whereas, in fact, the fair values of
the options traded by the Partnership in almost all cases fluctuate to a lesser
extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive correlation
in the different positions held in each market risk category has been assumed.
Consequently, the margin requirements applicable to the open contracts have
simply been added to determine each trading category's aggregate Value at Risk.
The diversification effects resulting from the fact that the Partnership's
positions are rarely, if ever, 100% positively correlated have not been
reflected.
25
The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of December 31, 2001. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 2001, the
Partnership's total capitalization was $65,918,306
December 31, 2001
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- --------------------------------------------------------------------------------------------
Currencies
- - OTC Contracts $3,550,245 5.39% $3,954,547 $1,144,067
Energy 1,334,000 2.02% 1,662,000 360,500
Grains 180,800 0.27% 308,200 88,750
Interest Rates U.S. 723,700 1.10% 1,118,900 291,980
Interest Rates Non-U.S 1,708,918 2.59% 3,149,641 735,704
Livestock 10,200 0.02% 10,200 4,550
Metals
- - Exchange 279,000 0.42% 354,000 85,500
- - OTC Contracts 54,000 0.08% 216,300 24,000
Softs 224,310 0.34% 333,973 97,225
Indices 759,946 1.15% 1,350,419 667,760
---------- ----------
Total $8,825,119 13.39%
========== ==========
26
As of December 31, 2000, the Partnership's total capitalization was
$72,320,072.
December 31, 2000
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- --------------------------------------------------------------------------------------------
Currencies
- -Exchange Traded Contracts $ 168,840 0.23% $1,041,100 $ 75,981
- -OTC Contracts 2,089,562 2.89% 5,242,009 2,089,562
Energy 1,544,400 2.14% 3,197,800 379,000
Grains 160,550 0.22% 1,580,350 107,325
Interest Rates U.S. 824,650 1.14% 1,709,300 142,250
Interest Rates Non-U.S 3,213,403 4.44% 6,009,489 1,417,003
Livestock 4,550 0.01% 18,525 4,550
Metals (Exchange Traded and
OTC Contracts) 358,500 0.50% 1,793,000 243,300
Softs 241,912 0.33% 1,131,034 108,730
Indices 1,200,586 1.66% 1,917,760 661,068
---------- ----------
Total $9,806,953 13.56%
========== ==========
27
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership is
typically many times the applicable maintenance margin requirement (margin
requirements generally range between 2% and 15% of contract face value) as well
as many times the capitalization of the Partnership. The magnitude of the
Partnership's open positions creates a "risk of ruin" not typically found in
most other investment vehicles. Because of the size of its positions, certain
market conditions -- unusual, but historically recurring from time to time --
could cause the Partnership to incur severe losses over a short period of time.
The foregoing Value at Risk table -- as well as the past performance of the
Partnership -- give no indication of this "risk of ruin."
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances
not needed for margin. However, these balances (as well as any market risk they
represent) are immaterial.
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Partnership's
market sensitive instruments.
28
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's market
risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisor for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased regulation and
many other factors could result in material losses as well as in material
changes to the risk exposures and the management strategies of the Partnership.
There can be no assurance that the Partnership's current market exposure and/or
risk management strategies will not change materially or that any such
strategies will be effective in either the short- or long- term. Investors must
be prepared to lose all or substantially all of their investment in the
Partnership.
29
The following were the primary trading risk exposures of the Partnership as
of December 31, 2001, by market sector.
Interest Rates. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
30
Stock Indices. The Partnership's primary equity exposure is to equity price
risk in the G-7 countries. The stock index futures traded by the Partnership are
by law limited to futures on broadly based indices. As of December 31, 2001, the
Partnership's primary exposures were in the NASDAQ and EUREX (Germany) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's primary metal market exposure is to fluctuations
in the price of gold and silver. Although the Advisor will from time to time
trade base metals such as copper, the principal market exposures of the
Partnership have consistently been in the precious metals, gold and silver. The
General Partner anticipates that gold and silver will remain the primary metals
market exposure for the Partnership.
Softs. The Partnership's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Cocoa, cotton and sugar accounted for the substantial bulk
of the Partnership's commodity exposure as of December 31, 2001.
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle East.
Oil prices can be volatile and substantial profits and losses have been and are
31
expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership
as of December 31, 2001.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, Euro dollar and Swiss francs. The Advisor
regularly converts foreign currency balances to dollars in an attempt to control
the Partnership's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems and accordingly believes that it has effective procedures for evaluating
and limiting the credit and market risks to which the Partnership is subject.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisor concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require the Advisor to close out individual
positions as well as enter certain positions traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisor's own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
32
The Advisor applies its own risk management policies to its trading. The
Advisor often follows diversification guidelines, margin limits and stop loss
points to exit a position. The Advisor's research of risk management often
suggests ongoing modifications to its trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisor to discuss its risk management and to look
for any material changes to the Advisor's portfolio balance and trading
techniques. The Advisor is required to notify the General Partner of any
material changes to its programs.
33
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
SMITH BARNEY WESTPORT FUTURES FUND L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation F-2
Report of Independent Accountants. F-3
Financial Statements:
Statement of Financial Condition at
December 31, 2001 and 2000 F-4
Condensed Schedule of Investments at
December 31, 2001. F-5
Statement of Income and Expenses for
the years ended December 31, 2001, 2000
and 1999. F-6
Statement of Partners' Capital for
the years ended December 31, 2001, 2000
and 1999. F-7
Notes to Financial Statements. F-8 - F-12
F-1
To The Limited Partners of
Smith Barney Westport Futures Fund L.P.
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Smith Barney Futures Management LLC
General Partner, Smith Barney Westport
Futures Fund L.P.
Smith Barney Futures Management LLC
388 Greenwich Street
7th Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Accountants
To the Partners of Smith Barney Westport Futures Fund L.P.: In our opinion,
the accompanying statement of financial condition, including the condensed
schedule of investments, and the related statements of income and expenses and
of partners' capital present fairly, in all material respects, the financial
position of Smith Barney Westport Futures Fund L.P. at December 31, 2001 and
2000, and the results of its operations for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the management of the General Partner; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the management of the General Partner,
and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-3
Smith Barney Westport
Futures Fund L.P.
Statement of Financial Condition
December 31, 2001 and 2000
2001 2000
---------- ---------
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $63,559,232 $62,073,585
Net unrealized appreciation on open positions 3,772,859 12,276,429
----------- -----------
67,332,091 74,350,014
Interest receivable 77,116 266,061
----------- -----------
$67,409,207 $74,616,075
----------- -----------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 314,884 $ 347,597
Management fees 111,671 123,688
Professional fees 72,060 46,400
Other 19,681 9,111
Redemptions payable (Note 5) 972,605 1,769,207
----------- -----------
1,490,901 2,296,003
----------- -----------
Partners' capital (Notes 1, 5 and 6):
General Partner, 1,212.9836 Unit equivalents
outstanding in 2001 and 2000 1,330,275 1,360,191
Limited Partners, 58,893.2695 and 63,279.9565
Units of Limited Partnership Interest
outstanding in 2001 and 2000, respectively 64,588,031 70,959,881
----------- -----------
65,918,306 72,320,072
----------- -----------
$67,409,207 $74,616,075
----------- -----------
See notes to financial statements.
F-4
Smith Barney Westport
Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2001
Number
Sector of Contracts Contract Fair Value
- ---------- -------- ---------- --------
Total Energy - (0.37)% Futures contracts sold - (0.37)% $(242,843)
---------
Total Grains - 0.28% Futures contracts sold - 0.29% 193,543
---------
Total Interest Rates U.S. - (0.03)% Futures contracts sold - (0.03)% (20,832)
--------
Interest Rates Non-U.S.
Futures contracts sold 1.03% 681,997
Futures contracts purchased - (0.20)% (134,404)
---------
Total Interest Rates Non-U.S.-0.83% 547,593
---------
Total Livestock - (0.01)% Futures contracts sold - (0.01)% (12,550)
---------
Metals
Futures contracts sold - (0.76)% (504,426)
Futures contracts purchased - (0.37)% (246,518)
---------
Total Metals - (1.13)% (750,944)
---------
Currencies Over the counter contracts sold - 5.9%
JPY (11,920,547,800) JPY/USD - 6.0%, March 20, 2002 3,953,503
Other - (0.10)% (61,329)
Over the counter contracts purchased-0.11% 72,598
---------
Total Currencies - 6.01% 3,964,772
---------
Total Softs - 0.02% Futures contracts purchased - 0.02% 15,674
---------
Total Indices - 0.11% Futures contracts purchased - 0.11% 78,446
---------
Total Fair Value - 5.71% $3,772,859
==========
Investments % of Investments
COUNTRY COMPOSITION at Fair Value at Fair Value
------------------- --------------- --------------
Australia $ 106,784 2.83%
Canada 36,090 0.96%
Germany 774,461 20.53%
Japan (252,100) (6.68)%
United Kingdom (513,892) (13.62)%
United States 3,621,516 95.98%
--------------- --------------
$3,772,859 100.00%
=============== ==============
Percentages are based on Partners' capital unless otherwise indicated.
See notes to financial statements.
F-5
Smith Barney Westport
Futures Fund L.P.
Statement of Income and Expenses
for the years ended
December 31, 2001, 2000, and 1999
2001 2000 1999
----------- ------------ ------------
Income:
Net gains (losses) on trading of commodity interests:
Realized gains on closed positions $ 11,176,764 $ 3,534,366 $ 6,241,090
Change in unrealized gains (losses) on open positions (8,503,570) 8,887,370 (10,617,567)
------------ ------------ ------------
2,673,194 12,421,736 (4,376,477)
Less, Brokerage commissions including clearing fees of
$77,835, 106,719 and $140,646, respectively (Note 3c) (4,017,979) (4,767,560) (8,105,686)
------------ ------------ ------------
Net realized and unrealized gains (losses) (1,344,785) 7,654,176 (12,482,163)
Interest income (Note 3c) 1,903,410 3,451,534 4,092,286
------------ ------------ ------------
558,625 11,105,710 (8,389,877)
------------ ------------ ------------
Expenses:
Management fees (Note 3b) 1,387,098 2,791,114 4,698,422
Incentive fees (Note 3b) 376,932 -- 896,039
Professional fees 141,044 116,373 102,470
Other expenses 35,516 43,476 36,130
------------ ------------ ------------
1,940,590 2,950,963 5,733,061
------------ ------------ ------------
Net income (loss) $ (1,381,965) $ 8,154,747 $(14,122,938)
------------ ------------ ------------
Net income (loss) per Unit of Limited Partnership Interest
and General Partner Unit equivalent (Notes 1 and 6) $ (24.66) $ 156.96 $ (130.10)
------------ ------------ ------------
See notes to financial statements.
F-6
Smith Barney Westport
Futures Fund L.P.
Statement of Partners' Capital
for the years ended
December 31, 2001, 2000 and 1999
Limited General
Partners Partner Total
---------- -------- ----------
Partners' capital at December 31, 1998 $ 122,211,349 $ 1,327,611 $ 123,538,960
Net loss (13,965,128) (157,810) (14,122,938)
Redemption of 9,719.2218
Units of Limited Partnership
Interest (9,934,685) -- (9,934,685)
------------- ------------- -------------
Partners' capital at December 31, 1999 98,311,536 1,169,801 99,481,337
Net income 7,964,357 190,390 8,154,747
Sale of 87.4301 Units of Limited Partnership Interest 74,000 -- 74,000
Redemption of 38,747.9674 Units of Limited
Partnership Interest (35,390,012) -- (35,390,012)
------------- ------------- -------------
Partners' capital at December 31, 2000 70,959,881 1,360,191 72,320,072
Net loss (1,352,049) (29,916) (1,381,965)
Sale of 3,123.5530 Units of Limited
Partnership Interest 3,431,000 -- 3,431,000
Redemption of 7,510.2400 Units of Limited
Partnership Interest (8,450,801) -- (8,450,801)
------------- ------------- -------------
Partners' capital at December 31, 2001 $ 64,588,031 $ 1,330,275 $ 65,918,306
------------- ------------- -------------
See notes to financial statements.
F-7
Smith Barney Westport
Futures Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Smith Barney Westport Futures Fund L.P. (the "Partnership") is a limited
partnership which was organized on March 21, 1997 under the partnership laws of
the State of New York to engage 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 was
authorized to sell 120,000 Units during the initial offering period of the
Partnership. The Partnership continues to offer Units.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner.
The General Partner is wholly owned by Salomon Smith Barney Holdings Inc.
("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of
Citigroup Inc.
The General Partner and each limited partner share in the profits and
losses of the Partnership in proportion to the amount of partnership interest
owned by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits, if
any, net of distributions.
The Partnership will be liquidated upon the first to occur of the
following: December 31, 2017; the net asset value of a Unit decreases to less
than $400 as of a close of any business day; or under certain other
circumstances as defined in the Limited Partnership Agreement.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The commodity
interests are recorded on trade date and open contracts are recorded in the
statement of financial condition at fair value on the last business day of the
year, which represents market value for those commodity interests for which
market quotations are readily available. Investments in commodity interests
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates prevailing on the last business day of the year. Realized gains
(losses) and changes in unrealized values on commodity interests and foreign
currencies are recognized in the period in which the contract is closed or the
changes occur and are included in net gains (losses) on trading of commodity
interests.
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income and
expenses.
c. The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
F-8
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 Agreement:
The General Partner, on behalf of the Partnership, has entered into a
Management Agreement with John W. Henry & Company, Inc. ("JWH") (the "Advisor"),
a registered commodity trading advisor. The Advisor is not affiliated with the
General Partner or SSB and is not responsible for the organization or operation
of the Partnership. For the period January 1, 2000 through February 29, 2000,
the Partnership was obligated to pay the Advisor a monthly management fee equal
to 1/3 of 1% (4% per year) of month-end Net Assets allocated to the Advisor and
an incentive fee payable quarterly equal to 19% of the New Trading Profits, as
defined in the Management Agreement. Effective March 1, 2000 through September
30, 2000, the Partnership was obligated to pay the Advisor a monthly management
fee equal to 1/3 of 1% (4% per year) of month-end Net Assets allocated to the
Advisor and an incentive fee payable quarterly equal to 15% of the New Trading
Profits, as defined in the Management Agreement. Effective October 1, 2000 the
Partnership pays the Advisor a monthly management fee equal to 1/6 of 1% (2% per
year) of month-end Net Assets allocated to the Advisor and an incentive fee
payable quarterly equal to 20% of the New Trading Profits, as defined in the
Management Agreement, earned by the Advisor for the Partnership.
c. Customer Agreement:
For the period January 1, 2000 through February 29, 2000, the Partnership
had entered into a Customer Agreement which provided that the Partnership pay
SSB a monthly brokerage fee equal to 13/24 of 1% (6.5% per year) of month-end
Net Assets, in lieu of brokerage commissions on a per trade basis. Effective
March 1, 2000, the Partnership has entered into a Customer Agreement which
provides that the Partnership will pay SSB a monthly brokerage fee equal to
11/24 of 1% (5.5% per year) of month-end Net Assets, as defined, in lieu of
brokerage commissions on a per trade basis. The Partnership will pay for
National Futures Association ("NFA") fees, exchange, clearing, user, give-up and
floor brokerage fees. SSB will pay a portion of brokerage fees to its financial
consultants who have sold Units in this Partnership. All of the Partnership's
assets are deposited in the Partnership's account at SSB. The Partnership's cash
is deposited by SSB in segregated bank accounts to the extent required by
Commodity Futures Trading Commission regulations. At December 31, 2001 and 2000,
the amount of cash held for margin requirements was $9,716,407 and $10,889,825,
respectively. SSB has agreed to 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 upon notice by either
party.
F-9
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity interests. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair value during the years ended December 31,
2001 and 2000, based on a monthly calculation, was $4,144,787 and $3,441,292,
respectively. The fair value of these commodity interests, including options
thereon, if applicable, at December 31, 2001 and 2000 was $3,772,859 and
$12,276,429, respectively.
Fair Value
December 31,
2000
----------------
Currencies:
-Exchange Traded Contracts $ 346,363
-OTC Contracts 4,232,727
Energy 2,025,066
Grains 217,502
Interest Rates U.S. 2,606,063
Interest Rates Non-U.S. 2,133,383
Livestock 14,560
Metals:
-Exchange Traded Contracts (14,402)
-OTC Contracts (99,968)
Softs (220,566)
Indices 1,035,701
-------------
Total $12,276,429
-------------
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of
the General Partner and at such times as the General Partner may decide. A
limited partner may require the Partnership to redeem his Units at their Net
Asset Value as of the last day of each month on 10 days' notice to the General
Partner. No fee will be charged for redemptions.
F-10
6. Financial Highlights:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999
--------- ---------- ---------
Net realized and unrealized gains (losses) $ (24.04) $ 149.85 $ (115.26)
Interest income 30.58 41.36 37.15
Expenses (31.20) (34.25) (51.99)
------ -------- ------
Increase (decrease) for year (24.66) 156.96 (130.10)
Net asset value per Unit, beginning of year 1,121.36 964.40 1,094.50
-------- -------- ------
Net asset value per Unit, end of year $ 1,096.70 $1,121.36 $ 964.40
-------- --------- --------
Ratios to Average Net Assets :
Net loss before incentive fee (1.5)%
Incentive fee (0.5)%
----------
Net loss after incentive fee (2.0)%
----------
Operating expenses 8.2%
Incentive fee 0.5%
----------
Total expenses and incentive fee 8.7%
----------
Total return:
Total return before incentive fee (1.7)%
Incentive fee (0.5)%
----------
Total return after incentive fee (2.2)%
----------
7. 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, or to purchase or sell other
financial instruments at specific terms at specified future dates, or, in the
case of derivative commodity instruments, to have a reasonable possibility to be
settled in cash, through physical delivery or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts. OTC contracts are negotiated between contracting parties and
include forwards and certain options. Each of these instruments is subject to
various risks similar to those related to the underlying financial instruments
including market and credit risk. In general, the risks associated with OTC
contracts are greater than those associated with exchange traded instruments
because of the greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions.
F-11
The Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has credit risk and concentration risk because the sole counterparty
or broker with respect to the Partnership's assets is SSB.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
The notional or contractual amounts of these instruments, while
appropriately not recorded in the financial statements, reflect the extent of
the Partnership's involvement in these instruments. The majority of these
instruments mature within one year of December 31, 2001. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity.
8. Subsequent Event:
On January 1, 2002, there were additional sales representing 136.7740 Units
of Limited Partnership Interest totaling $150,000 and on January 31, 2002
additional redemptions representing 527.1333 Units of Limited Partnership
Interest totaling $571,792.
F-12
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed by
its General Partner, Smith Barney Futures Management LLC. Investment decisions
are made by John W. Henry & Company, Inc.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by
Smith Barney Futures Management LLC, its General Partner. SSB, an affiliate of
the General Partner, is the commodity broker for the Partnership and receives
brokerage commissions for such services, as described under "Item 1. Business."
Brokerage commissions and clearing fees of $4,017,979 were earned for the year
ended December 31, 2001. Management fees of $1,387,098 were earned by the
Advisor for the year ended December 31, 2001. Trading performance for the year
ended December 31, 2001 resulted in an incentive fees of $376,932.
34
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. As of March 1, 2002,
the Partnership knows of no person who beneficially owns more than 5% of the
Units outstanding.
(b). Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner. The General Partner owns Units of general partnership interest
equivalent to 1,212.9836 Units (2.0%) of Limited Partnership Interest as of
December 31, 2001.
(c). Changes in control. None.
------------------
Item 13. Certain Relationship and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management LLC would be
considered promoters for purposes of item 404 (d) of Regulation S-K. The nature
and the amounts of compensation each promoter will receive, if any, from the
Partnership are set forth under "Item 1. Business" and "Item 11. Executive
Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 2001 and 2000.
35
Statement of Income and Expenses for the years ended December 31, 2001,
2000 and 1999.
Statement of Partners' Capital for the years ended December 31, 2001, 2000
and 1999.
(2) Financial Statement Schedules: Financial Data Schedule for the period ended
December 31, 2001.
(3) Exhibits:
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 333-24923) and incorporated herein
by reference).
3.2 - Certificate of Limited Partnership of the Partnership as filed in the
office of the Secretary of State of the State of New York (filed as Exhibit 3.2
to the Registration Statement on Form S-1 (Filed No. 333-24923) and incorporated
herein by reference).
10.1- Customer Agreement between the Partnership and Smith Barney (filed as
Exhibit 10.1 to the Registration Statement on Form S-1 (File No. 333-24923) and
incorporated herein by reference).
10.2- Subscription Agreement (filed as Exhibit 10.2 to the Registration
Statement on Form S-1 (File No. 333-24923) 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. 333-24923)
and incorporated herein by reference).
10.4- Management Agreement among the Partnership, the General Partner and
John W. Henry & Company Inc. (filed as Exhibit 10.4 to the Registration
Statement on Form S-1 (File No. 333-24923) and incorporated herein by
reference).
36
10.5- Letter extending the Management Agreement between the General Partner
and John W. Henry & Company, Inc. for 1999 (previously filed).
10.6- Letter extending the Management Agreement between the General Partner
and John W. Henry & Company, Inc. for 2000 (previously filed).
10.7- Letter extending the Management Agreement between the General Partner
and John W. Henry & Company, Inc. for 2001 (filed herein).
(b) Reports on 8-K: None Filed.
37
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 29h day of March 2002.
SMITH BARNEY WESTPORT FUTURES FUND L.P.
By: Smith Barney Futures Management LLC
(General Partner)
By /s/ David J. Vogel
-------------------------------------
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10-K has been signed below by the following persons
in the capacities and on the date indicated.
/s/ David J. Vogel /s/ Shelley Ullman
- ----------------------------- ------------------
David J. Vogel Director
Director, Principal Executive
Officer and President
/s/ Maureen O'Toole /s/ Steve J. Keltz
- -------------------------- ------------------
Maureen O'Toole Secretary and Director
Director
/s/ Daniel R. McAuliffe, Jr.
- ------------------------------ -
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
39