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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, 2000
Commission File Number 000-25921
SMITH BARNEY AAA ENERGY FUND L.P. (Exact name
of registrant as specified in its charter)
New York 13-3823300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units
of Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of February 28, 2001, Limited Partnership Units with an aggregate value of
$80,421,165 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
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 years ended December 31, 2000, 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."
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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 close 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 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
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
will make all commodity trading decisions for the Partnership. Mr. A.
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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
U.S. Treasury bill rate determined weekly by SSB based on the non-competitive
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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 years ended December 31, 2000,
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, 2000 was $74,326,664.
(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.
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
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is registered as a broker-dealer and futures commission merchant ("FCM"), and
provides futures brokerage and clearing services for institutional and retail
participants in the futures markets. SSB and its affiliates also provide
investment banking and other financial services for clients worldwide.
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against SSB or any of its individual principals within the
past five years that management believes may have a material impact on SSB's
ability to act as an FCM. In the ordinary course of its business, SSB is a
party to various claims and regulatory inquiries. Proceedings deemed to be
material for purposes of CFTC disclosure requirements are:
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 and Salomon Brothers Realty Corporation 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.
Salomon Brothers Inc had acquired the participations issued by Motels of
America and Best Inns to finance purchases of motel portfolios and sold 95% of
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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. An argument was heard on 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. In June
the Supreme Court reversed the Seventh Circuit and the matter has been remanded
to the Trial Courts.
Both the Department of Labor and the Internal Revenue Service have
advised Salomon Brothers Inc that they were or are reviewing the transactions
in which Ameritech Pension Trust acquired such participations. With respect to
the Internal Revenue Service review, Salomon Smith Barney Holdings, Salomon
Brothers Inc and Salomon Brothers Realty have consented to extensions of time
for the assessment of excise taxes that may be claimed to be due with respect
to the transactions for the years 1987, 1988 and 1989.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
Salomon Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California. (County of Orange et aL v. Bear Stearns & Co. Inc. et al.) The
complaint alleged, among other things, that the brokerage firms
7
recommended and sold unsuitable securities to Orange County. Salomon Smith
Barney 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 Internal Revenue
Service denies tax exempt status to the City's General Obligation Refunding
Bonds Series 1991. The complaints were subsequently amended. Salomon Smith
Barney has asked the court to dismiss the amended complaints. The Court denied
the motion but stayed the case. Subsequently, the city withdrew its lawsuit.
It 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 Salomon
Smith Barney, 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. Salomon Smith Barney has asked the court to dismiss the
amended complaint.
8
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, Salomon Smith Barney 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, Salomon Smith Barney, 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 l5cl -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 Salomon Smith Barney 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, Salomon Smith Barney
breached its contracts with plaintiffs, misused their monies, and engaged in
tortious (wrongful) conduct, including breaching its fiduciary duties. Salomon
Smith Barney asked the court to dismiss the complaint in full. In October 1999,
9
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, Salomon Smith Barney will continue to contest this lawsuit vigorously.
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, 2000 was 708.
(c) Distribution. The Partnership did not declare a distribution in
2000 or 1999.
(d) Use of Proceeds. For the twelve months ended December 31,
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. 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
10
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.
11
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
years ended December 31, 2000, 1999 and the period from March 16, 1998
(commencement of trading operations) to December 31, 1998 and total assets at
December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
----------- ------------- -----------
Realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
of $7,591,291, $12,587,354 and
$5,527,260, respectively $14,488,934 $(4,677,441) $14,675,192
Interest income 2,520,294 3,411,756 1,978,202
------------ ------------- -----------
$17,009,228 $(1,265,685) $16,653,394
============ ============= ===========
Net income (loss) before
Special Allocation to
Special Limited $15,501,056 $(3,236,003) $15,401,913
============ ============= ===========
Allocation to Special
Limited Partner $ 1,831,884 $ - $ 2,699,932
============ ======= ===========
Net income (loss) available
for pro rata distribution
to Partners $13,669,172 $(3,236,003) $12,701,981
============ ============= ===========
Increase (decrease) in
net asset value per Unit $272.65 $(48.76) $184.33
======== ========= =======
Total assets $95,783,289 $86,241,742 $84,035,617
============ ============ ===========
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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 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 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) 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.
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(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 exposure on a daily basis
14
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 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
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 and
15
advisory fees. The level of these expenses is 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, 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. 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 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.
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 year ended December 31, 2000, 17,900.7647 Units were
redeemed totaling $19,960,815. For the year ended December 31, 1999, 2,177.4358
Units were redeemed totaling $2,858,982. For the period 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
16
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.
(c) Results of Operations. For the year ended December 31, 2000, the
net asset value Per Unit increased 24.0% from $1,135.57 to $1,408.22. 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 $22,080,225
before commissions and expenses for the year ended December 31, 2000. Gains were
primarily attributable to the trading of NYMEX Natural Gas, NYMEX Crude Oil,
NYMEX Heating Oil and energy swaps and were partially offset by losses in NYMEX
Unleaded Gas and IPE Gas Oil and Brent Crude.
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 NYMEX Electricity, NYMEX Natural Gas,
NYMEX Crude Oil and IPE Gas Oil and were partially offset by losses in NYMEX
Unleaded Gas, NYMEX Heating Oil, IPE Brent Crude, CME GSC Index and energy
swaps.
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The Partnership experienced net trading gains of $20,202,452
before commissions and expenses for the period from March 16, 1998 (commencement
of trading operations) to December 31, 1998. Gains were primarily attributable
to the trading of NYMEX Natural Gas, NYMEX Heating Oil, CME GSC Index and energy
swaps and were partially offset by losses in NYMEX Electricity, NYMEX Crude Oil,
NYMEX Unleaded Gas and IPE Gas Oil and Brent Crude
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 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.
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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
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.
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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
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
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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
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).
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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
requirements for the equivalent futures positions have been used as Value at
Risk. In those rare cases in which a futures-equivalent margin is not available,
dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does not
have any optionality component. However, certain of the Advisors trade commodity
options. The Value at Risk associated with options is reflected in the following
table as the margin requirement attributable to the instrument underlying each
option. Where this instrument is a futures contract, the futures margin, and
where this instrument is a physical commodity, the futures-equivalent
22
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.
23
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, 2000. All open position trading risk exposures of the Partnership
have been included in calculating the figures set forth below. As of December
31, 2000, the Partnership's total capitalization was $74,326,664.
December 31, 2000
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ----------------------------------------------------------------------------------------------------------------
Energy $ 4,708,717 6.34% $16,360,644 $3,346,961
Energy Swaps 6,991,928 9.40% 14,203,616 4,461,788
----------- -----
Total $11,700,645 15.74%
=========== ======
24
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% 22,222,908 1,644,887
----------- ----
Total $21,273,897 28.6%
=========== ====
25
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
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
26
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
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, 2000, 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
Partnership. The Partnership has substantial market exposure to gas and oil
27
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
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
28
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,
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, 2000.
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
29
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
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
30
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.
31
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, 2000 and 1999 F-4
Statement of Income and Expenses For the years ended December
31, 2000, 1999 and the period from March 16, 1998 (commencement
of trading operations) to December 31,
1998 F-5
Statement of Partners' Capital for the years ended December 31,
2000, 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
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
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 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, 2000 and 1999 and the results of its operations
for the two years in the period ended December 31, 2000, 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 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
March 9, 2001
F-3
Smith Barney AAA
Energy Fund L.P.
Statement of Financial Condition
December 31, 2000 and 1999
2000 1999
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $ 20,958,126 $ 78,368,723
Net unrealized depreciation on open futures positions (13,615,408) (751,259)
Net unrealized depreciation on open swaps positions (231,661) (623,631)
Commodity options owned, at fair value (cost $21,531,952
and $15,880,430, respectively) 79,038,621 8,992,060
------------ ------------
86,149,678 85,985,893
Due from brokers 9,617,028 --
Interest receivable 16,583 255,849
------------ ------------
$ 95,783,289 $ 86,241,742
------------ ------------
Liabilities and Partners' Capital:
Liabilities:
Commodity options written, at fair value
(premium received $8,255,382 and $11,396,728,
respectively) $ 12,063,964 $ 8,556,476
Accrued expenses:
Commissions 335,187 908,487
Management fees 132,182 128,962
Professional fees 58,534 31,701
Other 14,035 15,059
Due to brokers 4,937,803 808,761
Due to SSB 343,968 --
Redemptions payable (Note 5) 3,570,952 1,485,873
------------ ------------
21,456,625 11,935,319
------------ ------------
Partners' capital (Notes 1, 5 and 7):
General Partner, 704.3292 and 682.3138 Unit equivalents
outstanding in 2000 and 1999, respectively 991,850 774,815
Limited Partners, 50,775.3901 and 64,753.0149 Units of
Limited Partnership Interest outstanding in 2000 and
1999, respectively 71,502,930 73,531,608
Special Limited Partner, 1,300.8510 and 0 Units of Limited
Partnership Interest outstanding in 2000 and 1999,
respectively 1,831,884 --
------------ ------------
74,326,664 74,306,423
------------ ------------
$ 95,783,289 $ 86,241,742
------------ ------------
See notes to financial statements.
F-4
Smith Barney AAA
Energy Fund L.P.
Statement of Income and Expenses
for the years ended December 31, 2000 and 1999
and for the period from March 16, 1998
(commencement of trading operations)
to December 31, 1998
2000 1999 1998
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions $(23,193,801) $20,438,146 $13,097,227
Change in unrealized gains (losses) on open positions 45,274,026 (12,528,233) 7,105,225
-------------- -------------- --------------
22,080,225 7,909,913 20,202,452
Less, Brokerage commissions including clearing fees
of $1,024,792, 1,574,467 and $686,659, respectively
(Note 3c) (7,591,291) (12,587,354) (5,527,260)
-------------- -------------- --------------
Net realized and unrealized gains (losses) 14,488,934 (4,677,441) 14,675,192
Interest income (Notes 3c and 6) 2,520,294 3,411,756 1,978,202
-------------- -------------- --------------
17,009,228 (1,265,685) 16,653,394
-------------- -------------- --------------
Expenses:
Management fees (Note 3b) 1,365,960 1,820,154 1,125,531
Organization expense (Note 6) -- -- 75,951
Professional fees 111,791 111,375 37,000
Other expenses 30,421 38,789 12,999
-------------- -------------- --------------
1,508,172 1,970,318 1,251,481
-------------- -------------- --------------
Net income (loss) before allocation to the Special
Limited Partner 15,501,056 (3,236,003) 15,401,913
Allocation to the Special Limited Partner 1,831,884 -- 2,699,932
-------------- -------------- --------------
Net income (loss) available for pro rata distribution $13,669,172 $(3,236,003) $12,701,981
-------------- -------------- --------------
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent (Notes 1
and 7 $272.65 $(48.76) $184.33
-------------- -------------- --------------
See notes to financial statements.
F-5
Smith Barney AAA
Energy Fund L.P.
Statement of Partners' Capital
for the years ended Decemer 31, 2000 and 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 period
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 loss 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
Sale of 3,923.1399 Units of Limited
Partnership Interest and General
Partner's contribution representing
22.0154 Unit equivalents 4,455,000 -- 25,000 4,480,000
Redemption 17,900.7647 Units of Limited
Partnership Interest (19,960,815) -- -- (19,960,815)
Allocation of net income for the year
ended December 31, 2000:
Allocation of 1,300.8510 Units of Limited
Partnership Interest to the Special
Limited Partner (Note 3b) -- 1,831,884 -- 1,831,884
Net income available for pro rata
distribution 13,477,137 -- 192,035 13,669,172
------------ ------------ ------------ ------------
Partners' capital at December 31, 2000 $ 71,502,930 $ 1,831,884 $ 991,850 $ 74,326,664
------------ ------------ ------------ ------------
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. The Partnership was authorized to sell an
unlimited number of Units during its initial offering period.
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, 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 and foreign currencies 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 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.
F-7
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. One half of the management fee will be paid to the Advisor, and
the other half will be paid to SSB for services it provides in
connection with 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,
F-8
exchange, clearing, user and give-up 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, 2000 and 1999, the
amount of cash held for margin requirements was $6,991,928 and
$17,146,683, 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, 2000 and 1999, based on a monthly calculation, was $9,388,872 and
$(6,771,852), respectively. The fair value of these commodity interests,
including options and swaps thereon, if applicable, at December 31, 2000
and 1999, was $53,127,588 and $(939,306), respectively, as detailed below.
Fair Value
December 31, December 31,
2000 1999
Energy $ 53,359,249 $ (315,675)
Energy Swaps (231,661) (623,631)
------------ ------------
Total $ 53,127,588 $ (939,306)
------------ ------------
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.
F-9
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,
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
years ended December 31, 2000 and 1999 and the period from March 16, 1998
(commencement of trading operations) to December 31, 1998 were as follows:
2000 1999 1998
Net realized and unrealized gains (losses) $ 290.47 $ (70.95) $ 214.27
Interest income 41.32 51.81 30.39
Expenses (59.14) (29.62) (60.33)
--------- --------- ---------
Increase (decrease) for period 272.65 (48.76) 184.33
Net asset value per Unit, beginning of period 1,135.57 1,184.33 1,000.00
--------- --------- ---------
Net asset value per Unit, end of period $ 1,408.22 $ 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
F-10
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
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. As of December 31, 2000,
the counterparties to the Partnership's swap contracts were Citibank, N.A.,
which is affiliated with the Partnership, Morgan Stanley Capital Group
Inc., J. Aron & Company, Enron North America Corp. and Hess Energy Trading
Company, LLC. As of December 31, 2000, the Partnership owed Citibank N.A.
$1,757,620, which is included in Due to brokers and represents cash due to
Citibank N.A. for realized swap transactions.
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, 2000. However, due
to the nature of the Partnership's business, these instruments may not be
held to maturity.
9. Subsequent Events:
On January 31, 2001, there were additional redemptions of 128.9565 Units
totaling $197,450.
F-11
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
During the last two fiscal years and any subsequent interim period,
no independent accountant who was engaged as the principal accountant to audit
the Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs
are managed by its General Partner, Smith Barney Futures Management 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, 2000, SSB earned
$7,591,291 in brokerage commissions and clearing fees. The Advisor earned
$1,365,960 in management fees during 2000.
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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 704.3292 (1.3%) Units of Limited Partnership Interest as of
December 31, 2000.
(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, 2000 and 1999.
Statement of Income and Expenses for the years ended
December 31, 2000, 1999 and for the period from March
16, 1998 (commencement of
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trading operations) to December 31, 1998.
Statement of Partners' Capital for the years ended
December 31, 2000, 1999 and for 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, 2000.
(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 (previously filed).
10.5-Letter from the General Partner to AAA Capital
Management, Inc. extending the Management Agreement for
2000 (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
35
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 2001.
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
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