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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
Commission File Number 000-25921
SMITH BARNEY AAA ENERGY FUND L.P.
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(Exact name of registrant as specified in its charter)
New York 13-3823300
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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
390 Greenwich St. - 1st Fl.
New York, New York 10013
(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
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 29, 2000 Limited Partnership Units with an aggregate value
of $71,421,797 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
(a) General development of business. Smith Barney AAA Energy Fund L.P. (the
"Partnership") is a limited partnership organized on January 5, 1998 under the
partnership laws of the State of New York. The objective of the Partnership is
to achieve substantial appreciation of its assets through speculative trading,
directly or indirectly, in commodity interests generally including commodity
options and commodity futures contracts on United States exchanges and certain
foreign exchanges. At present, the Partnership may trade commodity futures and
options contracts of any kind, but initially it traded solely energy and energy
related products. In addition, the Partnership has entered into swap contracts
on energy related products (together with other traded futures and options
contracts, the "Commodity Interests"). During the initial offering period
(February 12, 1998 through March 15, 1998) the Partnership sold 49,538 Units.
The Partnership commenced its Commodity Interest trading activities on March 16,
1998. No securities which represent an equity interest or any other interest in
the Partnership trade on any public market. Sales and redemptions of Units and
general partner contributions and redemptions for the year ending December 31,
1999 and the period from January 5, 1998 (date Partnership was organized) to
December 31, 1998 are reported in the Statement of Partners' Capital on page F-6
under "Item 8. Financial Statements and Supplementary Data."
2
The Partnership will be liquidated upon the first to occur of the
following: December 31, 2018; if the net asset value per Unit falls below $400
as of the end of business on any business day or upon the earlier occurrence of
certain other circumstances set forth 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 General Partner changed its form of
organization from a corporation to a limited liability company on October 1,
1999. 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 contracts on commodities is done
primarily on United States commodity exchanges and foreign commodity exchanges.
It engages in such trading through a commodity brokerage account maintained with
SSB.
Under the Limited Partnership Agreement, the General Partner has sole
responsibility for the administration of the business and affairs of the
Partnership, but may delegate trading discretion to one or more trading
advisors. The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading decisions
for the Partnership.
The General Partner has entered into a management agreement (the
"Management Agreement") with AAA Capital Management, Inc. (the "Advisor") who
3
will make all commodity trading decisions for the Partnership. Mr. A. Anthony
Annunziato is the sole trading principal of the Advisor and is also an employee
of SSB. The Advisor is not responsible for the organization or operation of the
Partnership.
Pursuant to the terms of the Management Agreement, the Partnership is
obligated to pay the Advisor a monthly management fee equal to 1/6 of 1% (2% per
year) of Net Assets allocated to the Advisor as of the end of the month. In
addition, the Advisor will be a Special Limited Partner of the Partnership and
will receive an annual profit share allocation to its capital account in the
Partnership equal to 20% of New Trading Profits (as defined in the Management
Agreement) of the Partnership.
The Customer Agreement between the Partnership and SSB (the "Customer
Agreement") provides that the Partnership pays SSB brokerage commissions at $18
per round turn for futures and swap transactions and $9 per side for options.
SSB pays a portion of its brokerage fees to its financial consultants who have
sold Units. 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. Brokerage fees will be paid for
the life of the Partnership, although the rate at which such fees are paid may
be changed. 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
4
U.S. Treasury bill rate determined weekly by SSB based on the non-competitive
yield on 3 month U.S. Treasury bills maturing in 30 days from the date in which
such weekly rate is determined. The Customer Agreement may be terminated by
either party.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income from operations for the year ended December 31, 1999
and the period from March 16, 1998 (commencement of trading operations) to
December 31, 1998 are set forth under "Item 6. Selected Financial Data." The
Partnership capital as of December 31, 1999 was $74,306,423.
(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.
There have been no material administrative, civil or criminal
actions within the past five years against SSB or any of its individual
principals and no such actions are currently pending, except as follows.
5
In September 1992, Harris Trust and Savings Bank (as trustee for Ameritech
Pension Trust), Ameritech Corporation, and an officer of Ameritech sued 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 complaint alleged that purchases by Ameritech
Pension Trust from the Salomon entities of approximately $20.9 million in
participations in a portfolio of motels owned by Motels of America, Inc. and
Best Inns, Inc. violated the Employee Retirement Income Security Act ("ERISA"),
the Racketeer Influenced and Corrupt Organization Act ("RICO") and state law.
SBI had acquired the participations issued by Motels of America and Best Inns to
finance purchases of motel portfolios and sold 95% of three such issues and 100%
of one such issue to Ameritech Pension Trust. Ameritech Pension Trust's
complaint sought (1) approximately $20.9 million on the ERISA claim, and (2) in
excess of $70 million on the RICO and state law claims as well as other relief.
In various decisions between August 1993 and July 1999, the courts hearing the
case have dismissed all of the allegations in the complaint against the Salomon
entities. In October 1999, Ameritech appealed to the U.S. Supreme Court and in
January 2000, the Supreme Court agreed to hear the case and oral argument will
be heard April 17, 2000. The appeal seeks review of the decision of the U.S.
Court of Appeals for the Seventh Circuit that dismissed the sole remaining ERISA
claim against the Salomon entities.
6
Both the Department of Labor and the Internal Revenue Service ("IRS")
have advised SBI that they were or are reviewing the transactions in which
Ameritech Pension Trust acquired such participations. With respect to the IRS
review, SSBHI, 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. As of the date of this report,
the IRS has not issued such 30-day letters to SSBHI, 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 County. SSB and the remaining brokerage firms
settled with Orange County in mid 1999.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
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
7
complaints were subsequently amended. SSB has asked the court to dismiss the
amended complaints. In May 1999, the Court denied SSB's motion to dismiss, but
stayed the litigation because the matter was not ripe. In March, 2000 the city
filed a notice of discontinuance dismissing the complaint.
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 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 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 allegations, 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 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
8
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.). The complaint included allegations that, while
acting as prime broker for the hedge fund, SSB breached its contracts with
plaintiffs, misused their monies, and engaged in tortious (wrongful) conduct,
including breaching its fiduciary duties. SSB asked the court to dismiss the
complaint in full. In October 1999, the court dismissed the tort claims,
including the breach of fiduciary duty claims. The court allowed the breach of
contract and misuse of money claims to stand. In December 1999, SSB filed an
answer and asserted counterclaims against the investment advisor. In response to
plaintiff's motion to strike the counterclaims, in January 2000, SSB amended its
counterclaims against the investment advisor to seek indemnification and
contribution. Plaintiffs moved to strike SSB's amended counterclaims in February
2000. SSB will continue to contest this lawsuit vigorously.
In the course of its business, SSB, as a major futures commission
merchant and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings that the general partner believes do not have a
material effect on the business of SSB.
9
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 Partnership
Interest as of December 31, 1999 was 800. (c)
Distribution. The Partnership did not declare a
distribution in 1999 or 1998.
(d) Use of Proceeds. For the twelve months ended December
31, 1999, there were additional sales of 2,558.8989
Units totaling $3,354,000 and contributions by the
General Partner representing 15.2588 Unit equivalents
totaling $20,000. For the period ended December 31,
1998, there were additional sales of 16,475.2559 Units
totaling $15,973,000 and contributions by the General
Partner representing 166.0550 Unit equivalents totaling
$161,000. Proceeds from the sale of additional Units
are used in the trading of commodity interests
including futures contracts, options and forward
contracts.
10
Item 6. Selected Financial Data. The Partnership commenced trading operations on
March 16, 1998. Realized and unrealized trading gains (losses), interest income,
net income (loss) and increase (decrease) in net asset value per Unit for the
year ended December 31, 1999 and the period from March 16, 1998 (commencement of
trading operations) to December 31, 1998 and total assets at December 31, 1999
and 1998 were as follows:
1999 1998
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Realized and unrealized
trading gains (losses)
net of brokerage
commissions and clearing
fees of $12,587,354 and
$5,527,260, respectively $ (4,677,441) $ 14,675,192
Interest income 3,411,756 1,978,202
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$ (1,265,685) $ 16,653,394
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Net income (loss) before
Special Allocation to
Special Limited Partner $ (3,236,003) $ 15,401,913
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Allocation to Special
Limited Partner $ -- $ 2,699,932
============ ============
Net income (loss) available
for pro rata distribution
to Partners $ (3,236,003) $ 12,701,981
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Increase (decrease) in
net asset value per Unit $ (48.76) $ 184.33
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Total assets $ 85,432,981 $ 84,035,617
============ ============
11
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 commodity futures trading account,
consisting of cash, net unrealized appreciation (depreciation) on open futures
and forward contracts, commodity options, if applicable, 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 futures contracts
which are traded in sufficient volume to permit, in the opinion of the Advisor,
ease of taking and liquidating positions.
(2) The Partnership diversifies its positions among various
commodities. The Advisor does not initiate additional positions in any commodity
for the Partnership if such additional positions would result in aggregate
positions for all commodities requiring a margin of more than 66-2/3% of net
assets of the Partnership managed by the Advisor.
(3) The Partnership may occasionally accept delivery of a
commodity. Unless such delivery is disposed of promptly by retendering the
warehouse receipt representing the delivery to the appropriate clearing house,
the physical commodity position is fully hedged.
12
(4) The Partnership does not employ the trading technique
commonly known as "pyramiding", in which the speculator uses unrealized profits
on existing positions as margin for the purchases or sale of additional
positions in the same or related commodities.
(5) The Partnership does not utilize borrowings except
short-term borrowings if the Partnership takes delivery of any cash commodities.
(6) The Advisor 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 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 contracts.
The Partnership is party to financial instruments with
off-balance sheet risk, including derivative financial instruments and
derivative commodity instruments, in the normal course of its business. These
financial instruments may include forwards, futures and options, whose value is
based upon an underlying asset, index, or reference rate, and generally
represent future commitments to exchange currencies or cash flows, or to
purchase or sell other financial instruments at specified terms at specified
future dates. Each of these instruments is subject to various risks similar to
those relating to the underlying financial instruments including market and
credit risk. The General Partner monitors and controls the Partnership risk
13
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 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 Partnership will cease trading
operations and liquidate all open positions under certain circumstances
including a decrease in net asset value per Unit to less than $400 as of the
close of business on any business day.
(b) Capital resources. (i) The Partnership has made no material
commitments for capital expenditures.
(ii) The Partnership's capital consists of the capital
contributions of the partners as increased or decreased by gains or losses on
commodity futures trading and by expenses, interest income, redemptions of Units
and distributions of profits, if any. Gains or losses on commodity futures
trading cannot be predicted. Market moves in commodities are dependent upon
fundamental and technical factors which the Partnership may or may not be able
to identify. Partnership expenses will consist of, among other things,
commissions, management fees, and incentive fees. The level of these expenses is
14
dependent upon the level of trading gains or losses and the ability of the
Advisor 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.
For the year ended December 31, 1999, there were additional sales of
2,558.8989 Units totaling $3,354,000 and contributions by the General Partner
representing 15.2588 Unit equivalents totaling $20,000. For the year ended
December 31, 1998, there were additional sales of 16,475.2559 Units totaling
$15,973,000 and contributions by the General Partner representing 166.0550 Unit
equivalents totaling $161,000.
No forecast can be made as to the level of redemptions in any given period.
For the year ended December 31, 1999, 2,177.4358 Units were redeemed totaling
$2,858,982. For the year ended December 31, 1998, 1,642.7041 Units were redeemed
totaling $1,848,573.
Units of Limited Partnership Interest were sold to persons and entities who
are accredited investors as that term is defined in rule 501(a) of Regulation D
as well as to those persons who are not accredited investors but who have either
a net worth (exclusive of home, furnishings and automobile) either individually
or jointly with the investor's spouse of at least three times his investment in
the Partnership (the minimum investment for which was $25,000) or gross income
for the two previous years and projected gross income for the current fiscal
year of not less than three times his investment in the Partnership for each
year.
15
(c) Results of Operations. For the year ended December 31, 1999 the Net
Asset Value Per Unit decreased 4.1% from $1,184.33 to $1,135.57. For the period
from March 16, 1998 (commencement of trading operations) to December 31, 1998
the Net Asset Value Per Unit increased 18.4% from $1,000.00 to $1,184.33.
The Partnership experienced net trading gains of $7,909,913 before
commissions and expenses for the year ended December 31, 1999. Gains were
primarily attributable to the trading of indices and energy contracts.
The Partnership experienced net trading gains of $20,202,452 before
commissions and expenses for the period from March 16, 1999 (commencement of
trading operations) to December 31, 1998. Gains were primarily attributable to
the trading of energy contracts.
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 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.
16
(d) Operational Risk
The Partnership is directly exposed to market risk and
credit risk, which arise in the normal course of its
business activities. Slightly less direct, but of critical importance, are risks
pertaining to operational and back office support. This is particularly the case
in a rapidly changing and increasingly global environment with increasing
transaction volumes and an expansion in the number and complexity of products in
the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss
and legal liability attributable to operational problems, such as inaccurate
pricing of transactions, untimely trade execution, clearance and/or settlement,
or the inability to process large volumes of transactions. The Partnership is
subject to increased risks with respect to its trading activities in emerging
market securities, where clearance, settlement,and custodial risks are often
greater than in more established markets.
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
17
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to
limitations in financial systems and controls. Strong financial systems and
controls ensure that assets are safeguarded, that transactions are executed in
accordance with management's authorization, and that financial information
utilized by management and communicated to external parties, including the
Partnership's unitholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
SSBHI's computer systems and business processes successfully handled
the date change from December 31, 1999 to January 1, 2000. SSBHI is not aware of
any significant year 2000 problems encountered internally or with the third
parties with which it interfaces, including customers and counterparties, the
global financial market infrastructure, and the utility infrastructure on which
all corporations rely.
Based on operations since January 1, 2000, SSBHI does not expect any
significant impact to its ongoing business as a result of the year 2000 issue.
However, it is possible that the full impact of year 2000 issues has not been
fully recognized and no assurances can be given that year 2000 problems will not
emerge.
The pretax costs associated with required system modifications and
conversions totaled approximately $130 million. These costs were funded through
operating cash flow and expensed in the period in which they were incurred.
18
The expenditures and the General Partner's resources dedicated to the
preparation for Year 2000 did not have a material impact on the operation or
results of the Partnership.
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.
(e) New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting For Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize all
derivative instruments in the statement of financial condition and measure those
financial instruments at fair value. SFAS 133 has no impact on Partners' Capital
and operating results as all derivative instruments 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
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
19
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
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
20
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
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
21
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.
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.
22
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, 1999. All open position trading risk
exposures of the Partnership have been included in calculating the figures set
forth below. As of December 31, 1999, the Partnership's total capitalization was
$74,306,423.
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- --------------------------------------------------------------------------------
Energy $14,343,463 19.3% $26,883,321 $9,243,752
Energy Swaps 6,930,434 9.3%
--------- ----
Total $21,273,897 28.6%
=========== =====
23
As of December 31, 1998, the Partnership's total capitalization was
approximately $79,727,340.
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Energy $11,939,250 14.98%
Energy Swaps 1,644,887 2.06%
Indices 214,500 0.27%
----------- -----
Total $13,798,637 17.31%
=========== =====
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."
Non-Trading Risk
24
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 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
strategies 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
25
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, 1999, by market sector.
Energy. Energy related products, such as crude oil, heating oil, gasoline,
natural gas and electricity, constitute the principal market exposure of the
Fund. The Partnership has substantial market exposure to gas and oil price
movements, often resulting from political developments in the Middle East.
Political developments in other countries or regions can also materially impact
upon the prices of energy products, as could changing supply and demand
relationships, weather, governmental, commercial and trade programs and
policies, and other significant economic events. Energy prices can be volatile
and substantial profits and losses have been and are expected to continue to be
experienced in these markets.
The Partnership engages in swap transactions in crude oil and other
energy related products. In this connection, the Partnership contracts with its
counterparty to exchange a stream of payments computed by reference to a
notional amount and the price of the energy product that is the subject of the
swap. Swap contracts are not guaranteed by an exchange or clearing house. SSB
does not engage in swap transactions as a principal. The Advisor has never
suffered a loss from counterparty defaults in the swap market.
The Partnership will usually enter into swaps on a net basis, i.e., the
26
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the agreement, with the Partnership receiving or paying, as
the case may be, only the net amount of the two payments. Swaps do not involve
the delivery of underlying assets or principal. Accordingly, the risk of loss
with respect to swaps is limited to the net amount of payments that the
Partnership is contractually obligated to make. If the counterparty to a swap
defaults, the Partnership's risk of loss consists of the net amount of payments
that the Partnership is contractually entitled to receive.
The Partnership may also enter into spot transactions to purchase or
sell commodities with SSB, or one of its affiliates, as principal. Such spot
transactions provide for two day settlement and are not margined. Such
transactions may be entered into in connection with exchange for physical
transactions. Like the swap contract market, the spot market is a principals'
market so there is no clearinghouse guarantee of performance. Instead, the
Partnership is subject to the risk of inability of, or refusal by, a
counterparty to perform with respect to the underlying contract.
Other Commodity Interests. The Fund primarily emphasizes the trading of
energy products, but may also trade some portion of its assets in other
commodity interests, including, but not limited to, commodity interest contracts
on the Goldman Sachs Commodity Index (an index future comprised primarily of
energy products). Commodity interest prices can be affected by numerous factors,
27
including political developments, weather conditions, seasonal effects and other
factors which affect supply and demand for the underlying commodity.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership as of December 31, 1999.
Non-Segregated Account. Since 10% or more of the Units are owned by
employees of SSB, the General Partner and their principals and employees
(including the principals of the Advisor), the Partnership's commodity futures
account with SSB will be carried as a "proprietary account". Such accounts do
not receive the protections afforded by Section 4d(2) of the Commodity Exchange
Act relating to the segregation of customer funds. This means that in the event
of a bankruptcy of the futures commission merchant carrying the account, the
balance in the account would be classified in the liquidation as that of a
general creditor. As such, the Partnership's account would not be a
first-priority distribution of the firm's assets. By contrast, segregated
accounts are a first priority distribution.
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 programs traded on behalf of the Partnership.
However, any such intervention would be a highly unusual event. The General
28
Partner primarily relies on the Advisor's own risk control policies while
maintaining a general supervisory overview of the Partnership's market risk
exposures.
The Advisor applies its own risk management policies to its trading.
The Advisor often follows diversification guidelines, margin limits and stop
loss points to exit a position. The Advisor's research of risk management often
suggests ongoing modifications to 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.
29
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY AAA ENERGY 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, 1999 and 1998. F-4
Statement of Income and Expenses for
the year ended December 31, 1999 and
the period from March 16, 1998 (commencement
of trading operations) to December 31, 1998. F-5
Statement of Partners' Capital for
the year ended December 31, 1999 and the
period from January 5, 1998 (date Partnership
was organized) to December 31, 1998. F-6
Notes to Financial Statements. F-7 - F-11
F-1
Continued
Smith Barney AAA
Energy Fund L.P.
Annual Report
December 31, 1999
SMITH BARNEY FUTURES MANAGEMENT LLc
To The Limited Partners of
Smith Barney AAA Energy 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 LLC
General Partner, Smith Barney AAA
Energy Fund L.P.
Smith Barney Futures Management LLC
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Accountants
To the Partners of
Smith Barney AAA Energy 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 AAA
Energy Fund L.P. at December 31, 1999 and 1998 and the results of its operations
for the year ended December 31, 1999 and the period from January 15, 1998 (date
Partnership was organized) to December 31, 1998, in conformity with accounting
principles generally accepted in the United States. 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, 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 25, 2000
F-3
Smith Barney AAA
Energy Fund L.P.
Statement of Financial Condition
December 31, 1999 and 1998
>
Assets: 1999 1998
Equity in commodity futures
trading account:
Cash (Note 3c) $ 78,368,723 $ 70,049,894
Net unrealized appreciation
(depreciation) on open futures
contracts (751,259) 6,718,299
Net unrealized appreciation
(depreciation) on open swaps
contracts (623,631) 606,945
Commodity options owned, at
fair value (cost $15,880,430
and $8,098,837, respectively) 8,992,060 6,443,285
------------ ------------
85,985,893 83,818,423
Interest receivable 255,849 217,194
------------ ------------
$ 86,241,742 $ 84,035,617
------------ ------------
------------ ------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 908,487 $ 488,115
Management fees 128,962 135,859
Professional fees 31,701 21,574
Other 15,059 7,962
Due SSB -- 951
Due to broker 808,761 --
Redemptions payable 1,485,873 118,433
Commodity options written,
at fair value (premium $11,396,728
and $4,970,916, respectively) 8,556,476 3,535,383
------------ ------------
11,935,319 4,308,277
------------ ------------
Partners' capital (Notes 1 and 7):
General Partner, 682.3138 and
667.0550 Unit equivalents outstanding
in 1999 and 1998, respectively 774,815 790,013
Limited Partners, 64,753.0149 and
64,371.5518 Units of Limited
Partnership Interest outstanding
in 1999 and 1998, respectively 73,531,608 76,237,395
Special Limited Partner, 0 and
2,279.7128 Units of Limited Partnership
Interest outstanding in 1999 and 1998,
respectively -- 2,699,932
------------ -- ---------
74,306,423 79,727,340
---------- ----------
$ 86,241,742 $ 84,035,617
------------ ------------
------------ ------------
See notes to financial statements.
F-4
Smith Barney AAA
Energy Fund L.P.
Statement of Income and Expenses
for the year ended December 31 1999 and
for the period from March 16, 1998
(commencement of trading operations)
to December 31, 1998
1999 1998
Income:
Net gains (losses) on
trading of commodity interests:
Realized gains on closed positions $ 20,438,146 $ 13,097,227
Change in unrealized gains
(losses) on open positions (12,528,233) 7,105,225
--------------- ---------------
7,909,913 20,202,452
Less, Brokerage commissions
including clearing fees of
$1,574,467 and $686,659,
respectively (Note 3c) (12,587,354) (5,527,260)
--------------- ---------------
Net realized and
unrealized gains (losses) (4,677,441) 14,675,192
Interest income (Notes 3c and 6) 3,411,756 1,978,202
--------------- ---------------
(1,265,685) 16,653,394
Expenses:
Management fees (Note 3b) 1,820,154 1,125,531
Organization expense (Note 6) -- 75,951
Professional fees 111,375 37,000
Other expenses 38,789 12,999
--------------- ---------------
1,970,318 1,251,481
--------------- ---------------
Net income (loss) before
allocation to the Special
Limited Partner (3,236,003) 15,401,913
--------------- ---------------
Allocation to the Special
Limited Partner -- 2,699,932
--------------- ---------------
Net income (loss) available
for pro rata distribution $ (3,236,003) $ 12,701,981
--------------- ---------------
--------------- ---------------
Net income (loss) per Unit of
Limited Partnership Interest
and General Partner Unit equivalent
(Notes 1 and 7) $ (48.76) $ 184.33
--------------- ---------------
See notes to financial statements.
F-5
Smith Barney AAA
Energy Fund L.P.
Statement of Partners' Capital
for the year ended Decemer 31, 1999
and for the period from January 5, 1998
(date Partnership was organized)
to December 31, 1998
Special
Limited Limited General
Partners Partner Partner Total
Initial capital contributions $ 1,000 $ -- $ 1,000 $ 2,000
Proceeds from offering of 49,538
Units of Limited Partnership
Interest and General Partner's
contribution representing 500 Unit
equivalents
(Note 1) 49,538,000 -- 500,000 50,038,000
------------ ------------ ------------ ------------
Opening Partnership capital for
operations 49,539,000 -- 501,000 50,040,000
Sale of 16,475.2559 Units of
Limited Partnership Interest and
General Partner's contribution
representing 166.0550 Unit equivalents 15,973,000 -- 161,000 16,134,000
Redemption of 1,642.7041 Units of
Limited Partnership Interest (1,848,573) -- -- (1,848,573)
Allocation of net income for the
year ended December 31, 1998:
Allocation of 2,279.7128 Units of
Limited Partnership Interest to
the Special Limited Partner (Note 3b) -- 2,699,932 -- 2,699,932
Net income available for pro
rata distribution 12,573,968 -- 128,013 12,701,981
------------ ------------ ------------ ------------
Partners' capital at December 31, 1998 76,237,395 2,699,932 790,013 79,727,340
Sale of 2,558.8989 Units of
Limited Partnership Interest
and General Partner's contribution
representing 15.2588 Unit
equivalents 3,354,000 -- 20,000 3,374,000
Redemption 2,177.4358 Units of Limited
Partnership Interest (2,858,982) -- -- (2,858,982)
Redemption 2,279.7128 Units of
Special Limited Partnership Interest -- (2,699,932) -- (2,699,932)
Net loss available for pro
rata distribution (3,200,805) -- (35,198) (3,236,003)
------------ ------------ ------------ ------------
Partners' capital at December 31, 1999 $ 73,531,608 $ -- $ 774,815 $ 74,306,423
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to financial statements.
F-6
Smith Barney AAA
Energy Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Smith Barney AAA Energy Fund L.P. (the "Partnership") is a limited
partnership which was organized on January 5, 1998 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests, including commodity options
and commodity futures contracts on United States exchanges and certain
foreign exchanges. The Partnership may trade commodity futures and options
contracts of any kind but intends initially to trade solely energy and
energy related products. In addition, the Partnership may enter into swap
contracts on energy related products. The commodity interests that are
traded by the Partnership are volatile and involve a high degree of market
risk.
Between February 12, 1998 (commencement of the offering period) and March
14, 1998, 49,538 Units of Limited Partnership Interest ("Units") were sold
at $1,000 per Unit. The proceeds of the initial offering were held in an
escrow account until March 15, 1998, at which time they were turned over to
the Partnership for trading.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form
of organization from a corporation to a limited liability company on
October 1, 1999. 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, after the allocation to the Special Limited
Partner, 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, 2018; 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 or
other measures of fair value deemed appropriate by management of the
General Partner for those commodity interests for which market
quotations are not readily available, including dealer quotes for swaps
and certain option contracts. Investments in commodity interests
denominated in foreign currencies are translated into U.S. dollars at
F-7
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. The Partnership may purchase and write (sell) options. An option is a
contract allowing, but not requiring, its holder to buy (call) or sell
(put) a specific or standard commodity or financial instrument at a
specified price during a specified time period. The option premium is
the total price paid or received for the option contract. When the
Partnership writes an option, the premium received is recorded as a
liability in the statement of financial condition and marked to market
daily. When the Partnership purchases an option, the premium paid is
recorded as an asset in the statement of financial condition and marked
to market daily.
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
d. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from these estimates.
3. Agreements:
a.Limited Partnership Agreement:
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading
decisions for the Partnership.
b.Management Agreement:
The General Partner, on behalf of the Partnership, has entered into a
Management Agreement with AAA Capital Management, Inc. (the "Advisor"),
registered commodity trading advisor. Mr. A. Anthony Annunziato is the
sole trading principal of the Advisor and is also an employee of SSB.
The Partnership will pay the Advisor a monthly management fee equal to
1/6 of 1% (2% per year) of month-end Net Assets allocated to the
Advisor. In addition, the Advisor will be a Special Limited Partner of
the Partnership and will receive an annual profit share allocation to
its capital account in the Partnership equal to 20% of New Trading
Profits, as defined, earned on behalf of the Partnership during each
calendar year in the form of Units.
c.Customer Agreement:
The Partnership has entered into a Customer Agreement which provides
that the Partnership will pay SSB brokerage commissions at $18 per round
turn for futures and swap transactions and $9 per side for options. The
brokerage fee is inclusive of applicable floor brokerage. In addition,
the Partnership will pay SSB National Futures Association ("NFA") fees,
exchange, clearing, user and give-up fees. SSB will pay a portion of
F-8
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, 1999 and 1998, the
amount of cash held for margin requirements was $17,146,683 and
$12,153,750, 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.
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 periods ended December
31, 1999 and 1998, based on a monthly calculation, was $(6,771,852) and
$22,308, respectively. The fair value of these commodity interests,
including options and swaps thereon, if applicable, at December 31, 1999
and 1998, was $(1,748,067) and $10,233,146, respectively, as detailed
below.
Fair Value
December 31,
1999 1998
Energy $ (315,675) $ 9,604,751
Energy Swaps (623,631) 606,945
Indices -- 21,450
-- ------
Total $ (939,306) $10,233,146
----------- -----------
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.
Beginning with the first full month ending at least three months after the
commencement of trading, 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. There is no fee charged to limited
partners in connection with redemptions.
6. Offering and Organization Costs:
Offering and organization expenses of $75,951 relating to the issuance and
marketing of Units offered were initially paid by SSB. As of December 31,
F-9
1998, the Partnership had reimbursed SSB for $75,951 of offering and
organization expenses from the interest earned on funds held in its
account.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
year ended December 31, 1999 and the period from March 16, 1998
(commencement of trading operations) to December 31, 1998 were as follows:
1999 1998
Net realized and unrealized
gains (losses) $ (70.95)$ 214.27
Interest income 51.81 30.39
Expenses (29.62) (60.33)
--------- ---------
Increase (decrease) for period (48.76) 184.33
Net asset value per Unit,
beginning of period 1,184.33 1,000.00
--------- ---------
Net asset value per Unit, end
of period $ 1,135.57 $ 1,184.33
--------- ---------
--------- ---------
8. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments may include forwards, futures, options and swaps, 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 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. The Partnership's swap
contracts are OTC contracts.
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 (see table in Note 4). The Partnership's risk of loss in the
F-10
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. As of December 31, 1999, the
counterparties to the Partnership's swap contracts were Citibank, N.A.,
which is affiliated with the Partnership, Morgan Stanley Capital Group Inc.
and J. Aron & Company.
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, 1999. However, due
to the nature of the Partnership's business, these instruments may not be
held to maturity.
9. Subsequent Events:
On January 1, 2000 there were additional sales of 3,923.1399 Units totaling
$4,455,000 and contributions by the General Partner representing 22.0154
unit equivalents totaling $25,000. On January 31, 2000 there were
additional redemptions of 372.9565 Units totaling $408,041
10. New Accounting Pronouncements:
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize
all derivative instruments in the statement of financial condition and
measure those financial instruments at fair value. SFAS 133 has no impact
on the Partners' Capital and operating results as all derivative
instruments are recorded at fair value, with changes therein reported in
the statement of income and expenses.
F-11
34
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 AAA Capital Management, Inc. (the "Advisor").
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management LLC, its General Partner, which
receives compensation for its services, as set forth under "Item 1. Business."
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." During the year ended December 31, 1999, SSB earned
$12,587,354 in brokerage commissions and clearing fees. The Advisor earned
$1,820,154 in management fees during 1999.
30
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. The
Partnership knows of no person who beneficially owns more than 5% of the Units
outstanding.
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership interest
equivalent to 682.3138 (1.0%) Units of partnership interest as of December 31,
1999.
(c). Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management
LLC would be considered promoters for purposes of item 404(d) of Regulation S-K.
The nature and the amounts of compensation each promoter will receive from the
Partnership are set forth under "Item 1. Business.", "Item 8. Financial
Statements and Supplementary Data." and "Item 11. Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements: Statement of Financial
Condition at December 31, 1999 and 1998. Statement
of Income and Expenses for the year ended December
31, 1999 and the period from March 16, 1998
31
(commencement of trading operations) to December
31, 1998. Statement of Partners' Capital for the
year ended December 31, 1999 and the period from
January 5, 1998 (date Partnership was organized)
to December 31, 1998.
(2) Financial Statement Schedules: Financial Data
Schedule for year ended December 31, 1999.
(3) Exhibits:
3.1 - Certificate of Limited Partnership (previously filed)
3.2 - Limited Partnership Agreement (previously filed).
10.1 - Management Agreement among the Partnership, the
General Partner and AAA Capital Management, Inc.
(previously filed).
10.2 - Customer Agreement between Registrant and Smith
Barney Inc. (the predecessor to Salomon Smith Barney
Inc.) (previously filed).
10.3 - Form of Subscription Agreement (previously filed).
10.4 - Letter from General Partner to AAA Capital
Management, Inc. extending the Management Agreement
for 1999 (filed herein).
(b) Report on Form 8-K: None Filed
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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
33
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 authorized, in the City of New York and State of New York on the 30th day
of March 2000.
SMITH BARNEY AAA ENERGY 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/ 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
34