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, 2003
Commission File Number 0-50271
SALOMON SMITH BARNEY ORION FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
New York 22-3644546
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Citigroup Managed Futures LLC
399 Park Avenue - 7th Fl.
New York, New York 10022
(Address and Zip Code of principal executive offices)
(212) 559-2011
(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: Redeemable 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
---
Limited Partnership Redeemable Units with an aggregate value of $78,017,925 were
outstanding and held by non-affiliates as of the last business day of the
registrant's most recently completed second fiscal quarter.
As of February 29, 2004, 81,996.6937 Limited Partnership Redeemable Units were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
(a) General development of business. Salomon Smith Barney Orion Futures
Fund L.P. (the "Partnership") is a limited partnership organized on March 22,
1999 under the partnership laws of the State of New York. The objective of the
Partnership is to achieve substantial capital appreciation through speculative
trading in U.S. and international markets for currencies, interest rates, stock
indices, agricultural, energy products, precious and base metals. The
Partnership may employ futures, options on futures, and forward contracts in
those markets. In addition, the Partnership may also enter into swap contracts
on energy related products (together with other traded futures and options
contracts, the "Commodity Interests"). During the initial offering period (March
31, 1999 through June 10, 1999) the Partnership sold 10,499 redeemable units of
Limited Partnership Interest ("Redeemable Units") at $1,000 per Redeemable Unit.
The Partnership commenced its Commodity Interest trading activities on June 10,
1999. No securities which represent an equity interest or any other interest in
the Partnership trade on any public market. The Partnership privately and
continuously offers up to 150,000 Redeemable Units to qualified investors. Sales
and redemptions of Redeemable Units and general partner contributions and
redemptions for the years ended December 31, 2003, 2002 and 2001 are reported in
the Statement of Partners' Capital on page F-9 under "Item 8. Financial
Statements and Supplementary Data."
Citigroup Managed Futures LLC, formerly known as Smith Barney Futures
Management LLC, a Delaware limited liability company, is the Partnership's
general partner and commodity pool operator (the "General Partner"). At the
commencement of trading the Partnership's General Partner was SFG Global
Investments, Inc. ("SFG") and Citigroup Managed Futures LLC was the
Partnership's trading manager. Effective April 1, 2001, the limited partners of
the Partnership elected Citigroup Managed Futures LLC as the General Partner of
the Partnership and consented to the withdrawal of SFG as General Partner.
Concurrent with this election as General Partner, Citigroup Managed Futures LLC
withdrew as the Partnership's trading manager.
Effective September 1, 2001, the Partnership allocated the portion of the
Partnership's capital that were allocated to AAA Capital Management, Inc.
("AAA") for trading to the SB AAA Master Fund LLC, a New York Limited Liability
Company (the "Master"). With this cash, the Partnership purchased 5,173.4381
Units of the Master at a fair value of $5,173,438. The Master was formed in
order to permit accounts managed now or in the future by AAA using the Energy
with Swaps Program, to invest together in one trading vehicle. The General
Partner is the Managing Member of the Master. Individual and pool accounts
currently managed by AAA, including the Partnership (collectively, the "Feeder
Funds") are permitted to be non-managing members of the Master. The General
Partner and AAA believe that trading through this master/feeder structure should
promote efficiency and economy in the trading process. Expenses to investors as
a result of the investment in the Master are approximately the same and
redemption rights are not affected.
The Partnership's and the Master's commodity broker is Citigroup Global
Markets Inc. ("CGM"), formerly Salomon Smith Barney Inc. CGM is an affiliate of
the General Partner. The General Partner is wholly owned by Citigroup Global
Markets Holdings Inc. ("CGMHI"), formerly Salomon Smith Barney Holdings Inc.,
which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup
Inc. ("Citigroup").
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At December 31, 2003 and 2002, the Partnership owns 13.1% and 7.3%,
respectively, of the Master. It is AAA's intention to continue to invest the
assets allocated to it by the Partnership in the Master. The performance of the
Partnership is directly affected by the performance of the Master.
The Partnership's/Master'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 CGM.
The Partnership will be liquidated upon the first to occur of the
following: December 31, 2019; the net asset value of a Redeemable Unit decreases
to less than $400 as of a close of any business day; a decline in net assets
after trading commences to less than $1,000,000 or under certain other
circumstances as defined in the Limited Partnership Agreement of the Partnership
(the "Limited Partnership Agreement").
Under the amended and restated limited partnership agreement of the
Partnership (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 Partnership pays the General Partner a monthly administrative fee
equal to 1/24 of 1% (0.5% per year) of month-end net assets. Month-end Net
Assets, for the purpose of calculating administrative fees are Net Assets, as
defined in the Limited Partnership Agreement, prior to the reduction of
redemptions and incentive fees. Prior to April 1, 2001, the Partnership paid SFG
Global Investments, Inc. a monthly fee of $2,000.
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with Winton Capital Management, Willowbridge Associates
Inc., and AAA (collectively, the "Advisors"), each of which are registered
commodity trading Advisors. Beacon Management Corporation was terminated as an
Advisor to the Partnership on April 30, 2003 and Winton Capital Management was
added on the same date. The Advisors are not affiliated with one another, are
not affiliated with the General Partner or CGM except AAA, and are not
responsible for the organization or operation of the Partnership. Mr. A. Anthony
Annunziato is the sole trading principal of AAA and is also an employee of CGM.
The Partnership will pay each Advisor a monthly management fee equal to 1/6 of
1% (2% a year) of month-end Net Assets allocated to each Advisor. Month-end Net
Assets, for the purpose of calculating management fees are Net Assets, as
defined in the Limited Partnership Agreement, prior to the reduction of
redemptions and incentive fees. In addition, the Partnership is obligated to pay
each Advisor an incentive fee payable quarterly equal to 20% of the New Trading
Profits, as defined in the Management Agreements, earned by each Advisor for the
Partnership.
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay CGM brokerage commissions at $18 per round turn for
futures and forward transactions and $9 per side for options. The brokerage fee
was inclusive of floor brokerage. The Partnership will also be allocated
brokerage commissions through its investment in the Master. CGM pays a portion
of its brokerage fees to its financial consultants who have sold Redeemable
Units in the Partnership. In addition, the Partnership paid for National Futures
3
Association ("NFA") fees, exchange and clearing fees, give-up and user fees.
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, CGM pays the
Partnership interest on 100% 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 CGM 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 between the Partnership and CGM gives the Partnership the
legal right to net unrealized gains and losses. The Customer Agreement may be
terminated upon notice 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 (loss) from operations for the years ended December 31,
2003, 2001, 2000 and the period from June 10, 1999 (commencement of trading
operations) to December 31, 1999 are set forth under "Item 6. Selected Financial
Data." The Partnership's capital as of December 31, 2003, was $87,468,980.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) 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.
(e) Available Information. The Partnership does not have an Internet
address. The Partnership will provide paper copies of its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to these reports free of charge upon request.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, CGM.
Item 3. Legal Proceedings
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which Citigroup
Global Markets Holdings Inc. ("CGMHI") or its subsidiaries is a party or to
which any of their property is subject. There are no material legal proceedings
pending against the Partnership or the General Partner.
Citigroup Managed Futures LLC. ("CGM") is a New York corporation with its
principal place of business at 388 Greenwich Street, New York, New York 10013.
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CGM 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. CGM and its affiliates also provide
investment banking and other financial services for clients worldwide.
There have been no material administrative, civil or criminal actions
within the past five years against CGM or any of its individual principals and
no such actions are currently pending, except as follows.
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 recommended and
sold unsuitable securities to Orange County. Salomon Smith Barney and the
remaining brokerage firms settled with Orange County in mid 1999. Salomon Smith
Barney paid $1,333,333 to settle this matter.
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 sought a
determination that Smith Barney Inc. and another underwriter would be
responsible for any damages that the City may incur in the event the Internal
Revenue Service ("IRS") 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.
In November 1998, a class action complaint was filed in the U.S. 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 plaintiffs filed a second
amended complaint. In November 1999, Salomon Smith Barney moved to dismiss the
amended complaint. In May 2001, the parties reached and the court preliminarily
approved a tentative settlement. Salomon Smith Barney paid $1,063,457 to settle
this matter and in September 2001, the court approved the settlement.
In connection with the Louisiana and Florida matters, the IRS and the SEC
conducted an industry-wide investigation into the pricing of Treasury securities
in advanced refunding transactions. In April 2000, Salomon Smith Barney and
several other broker-dealers entered into a settlement with the IRS and the SEC.
Thereafter, the plaintiffs filed voluntary discontinuances.
In December 1998, Salomon Smith Barney was one of 28 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
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committing or causing any violations of Sections 15(c)(1) and (2) of the
Securities Exchange Act of 1934 and SEC Rules 15c1-2, 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 April 2002, numerous class action complaints were filed against Salomon
Smith Barney and other investment banks in the U.S. District Court for the
Southern District of New York alleging violations of certain federal securities
laws (including Section 11 of the Securities Act of 1933 and Section 10(b) of
the Securities Exchange Act of 1934) with respect to the allocation of shares
for certain initial public offerings and related aftermarket transactions and
damage to investors caused by allegedly biased research analyst reports. On
February 19, 2003, the court issued an opinion denying the defendants' motion to
dismiss the complaints.
In April 2002, Citigroup and, in one case, Salomon Smith Barney were named
as defendants along with, among others, commercial and/or investment banks,
certain current and former Enron officers and directors, lawyers and accountants
in two alleged consolidated class action complaints that were filed in the U.S.
District Court for the Southern District of Texas seeking unspecified damages.
One action, brought on behalf of individuals who purchased Enron securities
(Newby, et al. v. Enron Corp., et al.), alleges violations of Sections 11 and 15
of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and the other action, brought on behalf of current and
former Enron employees (Tittle, et al. v. Enron Corp., et al.), alleges
violations of ERISA and the Racketeer Influenced and Corrupt Organizations Act,
as well as negligence and civil conspiracy. On May 8, 2002, Citigroup and
Salomon Smith Barney filed motions to dismiss the complaints. On December 19,
2002, the motions to dismiss the Newby complaint were denied. On September 30,
2003, all of the claims against Citigroup in the Tittle litigation were
dismissed.
Several additional actions, previously identified, have been consolidated
with the Newby action and are stayed, except with respect to certain discovery,
until after the Court's decision on class certification. In addition, on April
17, 2003, an action was brought by two investment firms in connection with
purchases of Osprey Trust certificates for alleged violations of federal
securities laws and state securities and other laws. Also, in July 2003, an
action was brought by purchasers in the secondary market of Enron bank debt
against Citigroup, Citibank, Citigroup Global Markets, and others, alleging
claims for common law fraud, conspiracy, gross negligence, negligence and breach
of fiduciary duty.
Since April 2002, Salomon Smith Barney and several other broker dealers
have received subpoenas and/or requests for information from various
governmental and self-regulatory agencies and Congressional committees,
including the NASD Inc. which has raised issues about Salomon Smith Barney's
internal e-mail retention practices and research on Winstar Communications, Inc.
With respect to Winstar, Salomon Smith Barney has entered into a settlement
agreement. Salomon Smith Barney agreed to pay a penalty in the amount of $5
million and did not admit to any wrongdoing. With respect to other such matters,
on December 20, 2002, Salomon Smith Barney and a number of other broker/dealers
reached a settlement-in-principle with the SEC, the NASD, the New York Stock
Exchange (the "NYSE") and the Attorney General of New York of all issues raised
in their research, initial public offerings allocation and spinning-related
inquiries. In addition, with respect to issues raised by the NASD, the NYSE and
the SEC about Salomon Smith Barney's and other firms' e-mail retention
6
practices, Salomon Smith Barney and several other broker/dealers and the NASD,
the NYSE and the SEC entered into a settlement agreement in December 2002.
Salomon Smith Barney agreed to pay a penalty in the amount of $1.65 million and
did not admit any wrongdoing.
Since May 2002, Citigroup, Salomon Smith Barney and certain principals and
current and former employees have been named as defendants in a number of
alleged class action complaints filed by purchasers of various securities
alleging they violated federal securities law, including Sections 10 and 20 of
the Securities Exchange Act of 1934 by issuing research reports without
reasonable basis and failing to disclose conflicts of interest in connection
with published investment research, including Global Crossing, WorldCom, Inc.,
AT&T, Winstar, Rhythm Net Connections, Level 3 Communications, MetroMedia Fiber
Network, XO Communications and Williams Communications Group Inc. Nearly all of
these actions are pending before a single judge in the U.S. District Court for
the Southern District of New York for coordinated proceedings. The court has
consolidated these actions into nine separate categories corresponding to the
companies named above.
Additional actions have been filed against Citigroup and certain of its
affiliates, including Salomon Smith Barney, and certain of their current and
former directors, officers and employees, along with other parties, including:
(1) three alleged class actions filed in state courts and federal courts on
behalf of persons who maintained accounts with Salomon Smith Barney asserting,
among other things, common law claims, claims under state statutes, and claims
under the Investment Advisers Act of 1940, for allegedly failing to provide
objective and unbiased investment research and investment management, seeking,
among other things, return of fees and commissions; (2) approximately fifteen
actions filed in different state courts by individuals asserting, among other
claims, common law claims and claims under state securities laws, for allegedly
issuing research reports without a reasonable basis in fact and for allegedly
failing to disclose conflicts of interest with companies in connection with
published investment research, including Global Crossing and WorldCom, Inc.; (3)
approximately five actions filed in different state courts by pension and other
funds asserting common law claims and statutory claims under, among other
things, state and federal securities laws, for allegedly issuing research
reports without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with companies in connection with published investment
research, including WorldCom, Inc. and Qwest Communications International Inc.;
and (4) more than two hundred arbitrations asserting common law claims and
statutory claims under, among other things, state and federal securities laws,
for allegedly issuing research reports without a reasonable basis in fact and
for allegedly failing to disclose conflicts of interest with companies in
connection with published investment research.
In July 2002, Citigroup, Salomon Smith Barney and various of its affiliates
and certain of their officers and other employees were named as defendants,
along with, among others, commercial and/or investment banks, certain current
and former Enron officers and directors, lawyers and accountants in an alleged
class action filed in the U.S. District Court for the Southern District of New
York on behalf of purchasers of the Yosemite Notes and Enron Credit-Linked
Notes, among other securities (Hudson Soft Co., Ltd v. Credit Suisse First
Boston Corporation, et al.). The complaint alleges violations of RICO and of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks
unspecified damages.
7
Additional actions have been filed against Citigroup and certain of its
affiliates, along with other parties, including (i) three actions brought in
state courts by state pension plans for alleged violations of state securities
law and common law fraud and unjust enrichment; (ii) an action by banks that
participated in two Enron revolving credit facilities, alleging fraud, gross
negligence and breach of implied duties in connection with the defendants'
administration of a credit facility with Enron; (iii) an action brought by
several funds in connection with secondary market purchases of Enron Corp. debt
securities alleging violations of federal securities law, including Section 11
of the Securities Act of 1933, and claims for fraud and misrepresentation; (iv)
a series of alleged class actions by purchasers of New Power Holdings common
stock alleging violations of federal securities law, including Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934;
(v) an action brought by two investment funds in connection with purchases of
Enron-related securities for alleged violations of state securities and unfair
competition statutes; (vi) an action brought by several investment funds and
fund owners in connection with purchases of notes of the Osprey I and Osprey II
Trusts for alleged violation of state and federal securities laws and claims for
common law fraud, misrepresentation and conspiracy; (vii) an action brought by
several investment funds and fund owners in connection with purchases of notes
of the Osprey I and Osprey II Trusts for alleged violation of state and federal
securities laws and state unfair competition laws and claims for common law
fraud and misrepresentation; (viii) an action brought by the Attorney General of
Connecticut in connection with various commercial and investment banking
services provided to Enron; (ix) an alleged class action brought by clients of
Salomon Smith Barney in connection with research reports concerning Enron,
alleging breach of contract; (x) actions brought by several investment funds in
connection with the purchase of notes and/or certificates of the Osprey Trusts,
the Marlin Trust, and the Marlin Water trust, as well as the purchase of other
Enron or Enron-related securities, alleging violation of state and federal
securities laws, and common law civil conspiracy and fraud; (xi) an action
brought by a retirement and health benefits plan in connection with the purchase
of certain Enron notes, alleging violation of federal securities law, including
Section 11 of the Securities Act of 1933, violations of state securities and
unfair competition law, and common law fraud and breach of fiduciary duty; and
(xii) an action brought by two broker/dealers in connection with the purchase of
certain notes, alleging violation of federal and state securities laws. Several
of these cases have been consolidated with the Newby action and stayed pending
the Court's decision on the pending motions of certain defendants to dismiss
Newby. On April 17, 2003, the motion to dismiss the complaints in the putative
class actions relating to the New Power Holdings common stock was denied.
Additionally, Citigroup and certain of its affiliates, including Salomon
Smith Barney, have provided substantial information to, and have entered into
substantive discussions with, the SEC regarding certain of their transactions
with Enron and a transaction with Dynegy Inc. Citigroup and certain of its
affiliates, including Salomon Smith Barney, also have received subpoenas and
requests for information from various other regulatory and governmental agencies
and Congressional committees, as well as from the Special Examiner in the Enron
bankruptcy, regarding certain transactions and business relationships with Enron
and its affiliates. Citigroup and its affiliates, including Salomon Smith
Barney, are cooperating fully with all such requests.
On July 28, 2003, Citigroup entered into a final settlement agreement with
the SEC to resolve the SEC's outstanding investigations into Citigroup
transactions with Enron and Dynegy. Pursuant to the settlement, Citigroup has,
among other terms, (1) consented to the entry of an administrative cease and
8
desist order, which bars Citigroup from committing or causing violations of
provisions of the federal securities laws, and (2) agreed to pay $120 million
($101.25 million allocable to Enron and $18.75 million allocable to Dynegy).
Citigroup entered into this settlement without admitting or denying any
wrongdoing or liability, and the settlement does not establish wrongdoing or
liability for purposes of any other proceeding. On July 28, 2003, Citibank, N.A.
entered into an agreement with the Office of the Comptroller of the Currency
("OCC") and Citigroup entered into an agreement with the Federal Reserve Bank of
New York ("FED") to resolve their inquiries into certain of Citigroup's
transactions with Enron. Pursuant to the agreements, Citibank and Citigroup have
agreed to submit plans to the OCC and FED, respectively, regarding the handling
of complex structured finance transactions. Also on July 28, 2003, Citigroup
entered into a settlement agreement with the Manhattan District Attorney's
Office to resolve its investigation into certain of Citigroup's transactions
with Enron; pursuant to the settlement, Citigroup has agreed to pay $25.5
million and to abide by its agreements with the SEC, OCC and FED.
Citigroup and Salomon Smith Barney are involved in a number of lawsuits
arising out of the underwriting of debt securities of WorldCom, Inc. These
lawsuits include alleged class actions filed in July 2002 by alleged purchasers
of WorldCom debt securities in the United States District Court for the Southern
District of New York (Above Paradise Investments Ltd. V. Worldcom, Inc., et al.;
Municipal Police Employees Retirement System Of Louisiana V. Worldcom, Inc., et
al.), and in the United States District Court for the Southern District of
Mississippi (Longacre Master Fund V. Worldcom, Inc., et al.). These alleged
class action complaints assert violations of federal securities law, including
Sections 11 and 12 of the Securities Act of 1933, and seek unspecified damages
from the underwriters.
On October 11, 2002, the Above Paradise and Municipal Police Employees
lawsuits filed in the United States District Court for the Southern District of
New York were superseded by the filing of a consolidated alleged class action
complaint in the United States District Court for the Southern District of New
York (In Re Worldcom, Inc. Securities Litigation). In the consolidated
complaint, in addition to the claims of violations by the underwriters of the
federal securities law, including Sections 11 and 12 of the Securities Act of
1933, the plaintiffs allege violations of Section 10(b) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by Salomon Smith
Barney arising out of alleged conflicts of interest of Salomon Smith Barney and
certain of its principals. The plaintiffs continue to seek unspecified
compensatory damages. In addition to the consolidated class action complaint,
the Southern District of Mississippi class action has been transferred by the
Judicial Panel on MultiDistrict Litigation to the Southern District of New York
for centralized pre-trial proceedings with other WorldCom-related actions. On
May 19, 2003, the motion to dismiss the amended complaint in the WorldCom, Inc.
Securities Litigation was denied.
In addition to the several alleged class actions that have been commenced,
certain individual actions have been filed in various federal and state courts
against Citigroup and Salomon Smith Barney, along with other parties, concerning
WorldCom debt securities including individual state court actions brought by
approximately 18 pension funds and other institutional investors in connection
with the underwriting of debt securities of WorldCom alleging violations of
Section 11 of the Securities Act of 1933 and, in one case, violations of various
state securities laws and common law fraud. Citigroup and/or Salomon Smith
Barney are now named in approximately 35 of these individual state court
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actions. Most of these actions have been removed to federal court and have been
transferred to the Southern District of New York for centralized pre-trial
proceedings with other WorldCom-related actions. On October 24, 2003, the court
granted plaintiffs' motion to have this matter certified as a class action.
An alleged class action on behalf of participants in WorldCom's 401(k)
salary savings plan and those WorldCom benefit plans covered by ERISA alleging
violations of ERISA and common law fraud, which was commenced in the United
States District Court for the District of Columbia, also has been transferred by
the Judicial Panel on MultiDistrict Litigation to the Southern District of New
York for centralized pre-trial proceedings with other WorldCom-related actions.
In December 2002, the claims against Salomon Smith Barney and the other
underwriters were dismissed without prejudice.
On or about January 27, 2003, the lead plaintiff in a consolidated alleged
class action in the United States District Court for the District of New Jersey
(In Re AT&T Corporation Securities Litigation) sought permission to amend its
complaint on behalf of purchasers of AT&T common stock asserting claims against,
among others, AT&T Corporation, to add as named defendants Citigroup, Salomon
Smith Barney and certain executive officers and current and former employees,
asserting claims under federal securities laws for allegedly issuing research
reports without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with AT&T in connection with published investment
research. By order dated March 27, 2003, the court denied plaintiffs' request to
amend their complaint to add as defendants Citigroup, Salomon Smith Barney and
certain of their executive officers and current and former employees.
On or about January 28, 2003, the lead plaintiff in a consolidated alleged
class action in the United States District Court for the Southern District of
New York (In Re Global Crossing, Ltd. Securities Litigation) filed a
consolidated complaint on behalf of purchasers of the securities of Global
Crossing and its subsidiaries, which names as defendants, among others,
Citigroup, Salomon Smith Barney and certain executive officers and current and
former employees, asserting claims under federal securities laws for allegedly
issuing research reports without a reasonable basis in fact and for allegedly
failing to disclose conflicts of interest with Global Crossing in connection
with published investment research.
On March 5, 2003, an action was brought on behalf of the purchasers of the
Yosemite Notes and Enron Credit Linked Notes, alleging violation of federal
securities laws.
On April 9, 2003, an action was brought by a group of related mutual funds
that purchased certain Yosemite Notes, alleging violations of state securities
laws and common law claims.
On April 28, 2003, Citigroup Global Markets (formerly known as Salomon
Smith Barney) announced final agreements with the SEC, the NASD, the NYSE and
the New York Attorney General (as lead state among the 50 states, the District
of Columbia and Puerto Rico) to resolve on a civil basis all of their
outstanding investigations into its research and IPO allocation and distribution
practices. As part of the settlements, Salomon Smith Barney has consented to the
entry of (1) an injunction under the federal securities laws to be entered in
the United States District Court for the Southern District of New York, barring
Salomon Smith Barney from violating provisions of the federal securities laws
and related NASD and NYSE rules relating to research, certain IPO allocation
10
practices, the safeguarding of material nonpublic information and the
maintenance of required books and records, and requiring Salomon Smith Barney to
adopt and enforce new restrictions on the operation of research; (2) an NASD
Acceptance Waiver and Consent requiring Salomon Smith Barney to cease and desist
from violations of corresponding NASD rules and requiring Salomon Smith Barney
to adopt and enforce the same new restrictions; (3) an NYSE Stipulation and
Consent requiring Salomon Smith Barney to cease and desist from violations of
corresponding NYSE rules and requiring Salomon Smith Barney to adopt and enforce
the same new restrictions; and (4) an Assurance of Discontinuance with the New
York Attorney General containing substantially the same or similar restrictions.
As required by the settlements, Salomon Smith Barney expects to enter into
related settlements with each of the other states, the District of Columbia and
Puerto Rico. Consistent with the settlement-in-principle announced in December
2002, these settlements require Salomon Smith Barney to pay $300 million for
retrospective relief, plus $25 million for investor education, and commit to
spend $75 million to provide independent third-party research to its clients at
no charge. Salomon Smith Barney reached these final settlement agreements
without admitting or denying any wrongdoing or liability. The settlements do not
establish wrongdoing or liability for purposes of any other proceeding. The $300
million was accrued during the fourth quarter of 2002.
On June 23, 2003, the West Virginia Attorney General filed an action
against Citigroup Global Markets Holdings Inc. and nine other firms that were
parties to the April 28, 2003 settlement with the SEC, the NASD, the NYSE and
the New York Attorney General (the "Research Settlement"). The West Virginia
Attorney General alleges that the firms violated the West Virginia Consumer
Credit and Protection Act in connection with their research activities and seeks
monetary penalties.
In May 2003, the SEC, NYSE and NASD issued a subpoena and letters to
Citigroup Global Markets Holdings Inc. requesting documents and information with
respect to their continuing investigation of individuals in connection with the
supervision of the research and investment banking departments of Citigroup
Global Markets Holdings Inc. Other parties to the Research Settlement have
received similar subpoena and letters.
In April 2003, to effectuate the Research Settlement, the SEC filed a
Complaint and Final Judgment in the United States District Court for the
Southern District of New York. Also in April 2003, the NASD accepted the Letter
of Acceptance, Waiver and Consent entered into with Citigroup Global Markets
Holdings Inc. in connection with the Research Settlement; and in May 2003, the
NYSE advised Citigroup Global Markets Holdings Inc. that the Hearing Panel's
Decision, in which it accepted the Research Settlement, had become final.
Citigroup Global Markets Holdings Inc. is currently in discussion with various
of the states with respect to completion of the state components of the Research
Settlement. Payment will be made in conformance with the payment provisions of
the Final Judgment. On October 31, 2003, the Final Judgment was entered against
Salomon Smith Barney and nine other investment banks. In addition, Salomon Smith
Barney has entered into separate settlement agreements with numerous states and
certain U.S. territories.
On June 6, 2003, the complaint in a pre-existing putative class action
pending in the United States District Court for the Southern District of Texas,
brought by purchasers of publicly traded debt and equity securities of Dynegy,
Inc., was amended to add Citigroup, Citibank and Citigroup Global Markets
Holdings Inc., as well as other banks, as defendants. The plaintiffs allege
violations of the federal securities laws against the Citigroup defendants.
11
On July 6, 2003, an adversary proceeding was filed by the Official
Committee of Unsecured Creditors on behalf of Adelphia against certain lenders
and investment banks, including Citigroup Global Markets Holdings Inc.,
Citibank, N.A., Citicorp USA, Inc., and Citigroup Financial Products, Inc.
(together, the Citigroup Parties). The Complaint alleges that the Citigroup
Parties and numerous other defendants committed acts in violation of the Bank
Company Holding Act and the common law. The complaint seeks equitable relief and
an unspecified amount of compensatory and punitive damages.
In addition, Salomon Smith Barney Inc. (predecessor of Citigroup Global
Markets Inc.) is among the underwriters named in numerous civil actions brought
to date by investors in Adelphia debt securities in connection with Adelphia
securities offerings between September 1997 and October 2001. Three of the
complaints also assert claims against Citigroup Inc. and Citibank, N.A. All of
the complaints allege violations of federal securities laws, and certain of the
complaints also allege violations of state securities laws and the common law.
The complaints seek unspecified damages.
On August 15, 2003, a purported class action was brought by purchasers of
Enron stock alleging state law claims of negligent misrepresentation, fraud,
breach of fiduciary duty and aiding and abetting a breach of fiduciary duty.
On August 29, 2003, an investment company filed a lawsuit alleging that
Citigroup, Citigroup Global Markets and several other defendants (including,
among others, Enron's auditor, financial institutions, outside law firms and
rating agencies) engaged in a conspiracy, which purportedly caused plaintiff to
lose credit (in the form of a commodity sales contract) it extended to an Enron
subsidiary in purported reliance on Enron's financial statements. On September
24, 2003, Enron filed a preferential proceeding in its Chapter 11 bankruptcy
proceedings to recover alleged preferential payments and fraudulent transfers
involving Citigroup, Citigroup Global Markets and other entities, and to
disallow or to subordinate bankruptcy claims that Citigroup, Citigroup Global
Markets and other entities have filed against Enron.
In the course of its business, Citigroup Global Markets, 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 Citigroup Global Markets.
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.
12
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 Redeemable Units of Limited Partnership
Interest.
(b) Holders. The number of holders of Redeemable Units of Partnership
Interest as of December 31, 2003, was 971.
(c) Distribution. The Partnership did not declare a distribution in 2003
or 2002.
(d) Use of Proceeds. For the twelve months ended December 31, 2003, there
were additional sales of 49,916.3153 Redeemable Units totaling
$57,164,000. For the twelve months ended December 31, 2002, there were
additional sales of 38,299.1963 Redeemable Units totaling $39,261,000
and contributions by the General Partner representing 281.8446 Unit
equivalents totaling $282,000. For the twelve months ended December
31, 2001, there were additional sales of 11,161.1581 Redeemable Units
totaling $10,958,000 and contributions by the General Partner
representing 22.4146 Unit equivalents totaling $21,000.
Proceeds from the sale of additional Redeemable Units are used in the
trading of commodity interests including futures contracts, options,
swaps and forward contracts.
13
Item 6. Selected Financial Data. The Partnership commenced trading operations on
June 10, 1999. Net realized and unrealized trading gains (losses), interest
income, net income (loss) and increase (decrease) in Net Asset Value per
Redeemable Unit for the years ended December 31, 2003, 2002, 2001, 2000 and the
period from June 10, 1999 (commencement of trading operations) to December 31,
1999 and total assets at December 31, 2003, 2002, 2001, 2000 and 1999 were as
follows:
2003 2002 2001 2000 1999
---------- ----------- ---------- ---------- ------------
Net realized and unrealized trading
gains (losses) net of expenses
allocated from Master, brokerage
commissions including clearing fees of
$3,537,835, $2,636,618, $819,109,
$673,549 and $445,021, respectively $(3,359,607) $12,214,350 $1,023,270 $1,773,658 $(3,203,151)
Interest income 809,001 674,247 435,099 644,558 317,738
---------- ----------- ---------- ---------- ------------
$(2,550,606) $12,888,597 $1,458,369 $2,418,216 $(2,885,413)
Net income (loss) $(5,512,979) $9,196,700 $355,163 $1,815,569 $(3,174,684)
---------- ----------- ---------- ---------- ------------
Increase (decrease) in Net Asset Value
per Redeemable Unit $(60.63) $208.59 $57.30 $149.10 $(240.73)
---------- ----------- ---------- ---------- ------------
Total assets $91,801,583 $63,262,447 $20,993,463 $12,590,859 $15,082,916
---------- ----------- ---------- ---------- ------------
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Partnership/Master aims to achieve substantial capital appreciation
through speculative trading, directly or indirectly, in U.S. and international
markets for currencies, interest rates, stock indices, agricultural and energy
products and precious and base metals. The Partnership/Master may employ
futures, options on futures, and forward contracts in those markets. The
Partnership may also enter into swap transactions relating to the value of crude
oil and other energy related products.
The General Partner manages all business of the Partnership. The General
Partner has delegated its responsibility for the investment of the Partnership's
assets to AAA Capital Management, Inc. ("AAA"), Willowbridge Associates Inc.
("Willowbridge"), and Winton Capital Management ("Winton"), (collectively, the
"Advisors"). The General Partner employs a team of approximately 15
professionals whose primary emphasis is on attempting to maintain quality
control among the Advisors to the Partnerships operated or managed by the
General Partner. A full-time staff of due diligence professionals use
state-of-the-art technology and on-site evaluations to monitor new and existing
futures money managers. The accounting and operations staff provide processing
of trading activity and reporting to limited partners and regulatory
authorities. In selecting the Advisors for the Partnership, the General Partner
considered past performance, trading style, volatility of markets traded and fee
requirements.
Responsibilities of the General Partner include:
o due diligence examinations of the Advisors;
o selection, appointment and termination of the Advisors;
o negotiation of the management agreements; and
o monitoring the activity of the Advisors.
In addition, the General Partner prepares the books and records and
provides the administrative and compliance services that are required by law or
regulation from time to time in connection with operation of the Partnership.
These services include the preparation of required books and records and reports
to limited partners, government agencies and regulators; computation of net
asset value; calculation of fees; effecting subscriptions, redemptions and
limited partner communications; and preparation of offering documents and sales
literature.
The General Partner shall seek the best prices and services available in
its commodity futures brokerage transactions. The General Partner reviews at
least annually, the brokerage rates charged to commodity pools similar to the
Partnership to determine that the brokerage fee the Partnership pays is
competitive with other rates.
15
The programs traded by each Advisor on behalf of the Partnership are: AAA -
Energy With Swaps Program; Willowbridge - Argo and Vulcan Trading Systems; and
Winton - Diversified Program. As of December 31, 2003, the Partnership's assets
were allocated among the trading Advisors in the following approximate
percentages: AAA, 38%, Willowbridge, 31%, and Winton 31%.
AAA Capital Management, Inc.
The portion of the Partnership's assets that are currently allocated to AAA
for trading are not invested in commodity interests directly. AAA's allocation
of the Partnership's assets is currently invested in the Master. AAA trades the
Master's, and thereby the Partnership's, assets in accordance with its Energy
with Swaps Program.
The Master currently trades energy futures contracts and options on energy
futures contracts on domestic and international exchanges, as well as the
Goldman Sachs Commodity Index (an index future comprised of energy and other
products) traded on the Chicago Mercantile Exchange. The Master also currently
engages in swap transactions involving crude oil and other energy related
products. References herein to energy and energy related products include all of
the foregoing.
AAA generally bases its trading decisions on "fundamental" factors, namely
supply and demand for a particular group or type of commodity. AAA attempts to
buy undervalued commodities and sell overvalued commodities, often but not
always simultaneously. AAA uses options to attempt either to reduce or define
risks.
AAA is aware of price trends but does not trade upon trends. AAA often
takes profits in positions with specific trends even though that trend may still
be intact or perhaps even strong. AAA occasionally establishes positions that
are countertrend.
Effective risk management is a crucial aspect of AAA's trading program.
Account size, expectation, volatility of the market traded and the nature of
other positions taken are all factors in determining the amount of equity
committed to each trade. The Master is AAA's largest account.
Willowbridge Associates, Inc.
Willowbridge trades the Partnership's assets allocated to it in accordance
with its Select Investment Program, whereby the General Partner determined the
initial allocation of the Partnership's assets among one or more of
Willowbridge's strategies and may determine subsequent reallocations (if any).
Of the Partnership's assets allocated to Willowbridge, 69% is currently traded
using the Vulcan Trading System and 31% is currently traded using the Argo
Trading System, each of which is described below.
For each of these systems, risk is managed on a market by market level as
well as on an overall portfolio level. On the market level, risk is managed
primarily by utilizing proprietary volatility filters. When these filters detect
a certain excessive level of volatility in the markets traded, they will signal
that the systems should no longer be trading in the markets in which the filters
have detected excessive volatility. In this way, the systems do not participate
in markets in which there are extremes in market action. On the portfolio level,
16
risk is managed by utilizing a proprietary portfolio cutback rule. When
cumulative profits have reached a certain level, this rule determines that
positions should be halved across the entire portfolio. In this way, risk is
reduced while allowing the systems to continue to participate in the markets,
albeit at a reduced level. After the portfolio has been traded at half, the
portfolio cutback rule will then determine when to increase positions to again
trade at the full level.
The Vulcan Trading System, which commenced trading in 1988, is a
computerized technical trading system. It is not a trend-following system, but
does ride a trend when the opportunity arises. Vulcan uses the concepts of
pattern recognition, support/resistance levels, and counter-trend liquidations
in making trading decisions. In effect, Vulcan is more akin to a systematic
technical charting system, as opposed to most computer systems which are based
on pure trend-following calculations.
The Vulcan System is based on general technical trading principles. It
applies these principles to a diversified portfolio of commodities and
currencies. Given that the system is based on general principles, the system
parameters used are the same for all items in the portfolio and are not
optimized. In this manner, the Vulcan System minimizes the problem of
data-fitting.
The Argo Trading System commenced trading in 1988. Argo essentially
incorporates Vulcan's concepts of pattern recognition, support/resistance levels
and counter-trend liquidations to trade a portfolio similar to Vulcan. However,
Argo has a relatively slower time horizon than Vulcan and attempts to capture
longer-term price moves.
Pattern recognition, support/resistance levels and counter-trend
liquidations are defined as follows:
Pattern recognition is the ability to identify patterns that appear to have
acted as precursors of price advances or declines in the past.
A support level is a previous low--a price level under the current market
price at which point buying interest is expected to be sufficiently strong to
overcome selling pressure.
A resistance level is a previous high--a price level over the current
market price at which point selling pressure is expected to overcome buying
pressure and a price advance is expected to be turned back.
A counter-trend liquidation is the closing out of a position after a
significant price move on the assumption that the market is due for a
correction.
Winton Capital Management Limited
Winton trades its Diversified Program on behalf of the Partnership. The
Diversified Program trades approximately 95 futures and forward contracts on
United States and non-United States exchanges and markets.
17
Winton employs a fully computerized, technical, trend-following trading
system developed by its principals. This system tracks the daily price movements
from these markets around the world, and carries out certain computations to
determine each day how long or short the portfolio should be in an attempt to
maximize profit within a certain range of risk. If rising prices in a particular
market are anticipated, a long position will be established in that market; if
prices in a particular market are expected to fall, a short position in that
market will be established.
Technical analysis refers to analysis based on data intrinsic to a market,
such as price and volume. In contrast, fundamental analysis relies on factors
external to a market, such as supply and demand. The Winton Program employs no
fundamental factors.
A trend-following system is one that attempts to take advantage of the
observable tendency of the markets to trend, and to tend to make exaggerated
movements in both upward and downward directions as a result of such trends.
These exaggerated movements are largely explained as a result of the influence
of crowd psychology or the "herd instinct" among market participants.
A trend-following system does not anticipate a trend. In fact,
trend-following systems are frequently unprofitable for long periods of time in
particular markets or market groups, and occasionally they are unprofitable for
periods of more than a year. However, the principals believe that such an
approach will, in the long term, be profitable.
Trade selection is not subject to intervention by Winton's principals and
therefore is not subject to the influences of individual judgment. As a
mechanical trading system, the Winton model embodies all the expert knowledge
required to analyze market data and direct trades, thus eliminating the risk of
basing a trading program on one indispensable person. Equally as important is
the fact that mechanical systems can be tested in simulation for long periods of
time and the model's empirical characteristics can be measured.
The system's output is rigorously adhered to in trading the portfolio and
intentionally no importance is given to any external or fundamental factors.
While it may be seen as unwise to ignore information of obvious value, such as
that pertaining to political or economic developments, Winton believes that the
disadvantage of this approach is far outweighed by the advantage of the
discipline that rigorous adherence to such a system instills. Winton believes
that significant profits may be realized by the Winton system by holding on to
positions for much longer than conventional wisdom would dictate. Winton
believes that a trader who pays attention to day-to-day events could be
distracted from the chance of fully capitalizing on such trends.
The Winton system trades in all liquid U.S. and non-U.S. futures and
forward contracts. Forward markets include major currencies and precious and
base metals, the latter two categories being traded on the London Metal
Exchange. Winton seeks out new opportunities to add additional markets to the
portfolio, with the goal of increasing the portfolio's diversification.
Winton believes that taking positions in a variety of unrelated markets
will, over time, decrease system volatility. By employing a sophisticated and
systematic method for placing orders in a wide array of markets, Winton believes
that profits can be realized over time.
18
No assurance is given that Winton's trading program will be profitable or
that it will not experience losses.
(a) Liquidity.
The Partnership does not engage in sales of goods or services. Its only
assets are its (i) equity in its commodity futures trading account, consisting
of cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures positions, unrealized appreciation on open forward contracts and
interest receivable and (ii) its investment in the Master. 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 loss in liquidity.
In the first quarter of 2003, the Master experienced a cumulative loss of
25%. This resulted in a cumulative loss to the Partnership of 10%. This loss was
primarily attributable to extraordinary price activity during the first quarter
of 2003 in U.S. natural gas and crude oil markets which led to losses in the
Master's energy market positions.
In February, the Master had a short position in the April natural gas
futures contract as a partial offset to an overall long position in delivery
months later in the year in the same contract. During the last week of February
2003, natural gas prices rose sharply reflecting relatively high short-term
demand in the eastern and mid-continental United States along with a reduced
ability of natural gas suppliers to deliver natural gas from storage due to low
storage inventories. Volatility in the natural gas markets was exacerbated
during that period as the markets became relatively illiquid when many traders
stayed out of the market to wait for the volatility to pass. During this period,
the April natural gas futures contract experienced an upward increase in price
of over 50% in two days and related cash market prices experienced a 300%
increase in price. Deferred delivery months in the natural gas futures contract
did not experience comparable price increases. The spread between the price of
the April contract and those of the deferred months changed suddenly and
unexpectedly. Such extreme moves generally happen only in exceptionally rare
circumstances and can lead to illiquid market conditions.
In March 2003, volatility struck the crude oil market, and the Master again
experienced losses as prices for crude oil dropped over $8.00 per barrel, or
21%, in the course of a week. The Master's and the Partnership's liquidity was
not hindered as a result of these market movements as the Master and the
Partnership each had adequate cash reserves to absorb market volatility and to
meet redemption requests during that period.
The performance for the year ended December 31, 2003 is discussed in (c)
Results of Operations.
To minimize this risk relating to low margin deposits, the Partnership
follows certain trading policies, including:
(i) The Partnership invests its assets only in commodity interests that an
Advisor believes are traded in sufficient volume to permit ease of
taking and liquidating positions. Sufficient volume, in this context,
refers to a level of liquidity that the Advisor believes will permit
it to enter and exit trades without noticeably moving the market.
19
(ii) An Advisor will not initiate additional positions in any commodity if
these positions would result in aggregate positions requiring a margin
of more than 66 2/3% of the Partnership's net assets allocated to that
Advisor.
(iii)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
clearinghouse, the physical commodity position is fully hedged.
(iv) 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.
(v) The Partnership does not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
(vi) The Advisors may, from time to time, employ trading strategies such as
spreads or straddles on behalf of the Partnership. The term "spread"
or "straddle" describes a commodity futures trading strategy involving
the simultaneous buying and selling of futures contracts on the same
commodity but involving different delivery dates or markets and in
which the trader expects to earn a profit from a widening or narrowing
of the difference between the prices of the two contracts.
(vii)The Partnership will not permit the churning of its commodity trading
account. The term "churning" refers to the practice of entering and
exiting trades with a frequency unwarranted by legitimate efforts to
profit from the trades, driven by the desire to generate commission
income.
In the normal course of business, the Partnership directly, and through its
investment in the Master, is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments. These financial instruments include forwards, futures, options and
swaps, whose values are 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, or, in the case of derivative commodity interests, to
have a reasonable possibility to be settled in cash, through physical delivery
or with another financial instrument. These instruments may be traded on an
exchange or over-the-counter ("OTC"). Exchange traded instruments are
standardized and include futures and certain option contracts. OTC contracts are
negotiated between contracting parties and include forwards, swaps and certain
options. Each of these instruments is subject to various risks similar to those
relating to the underlying financial instruments including market and credit
risk. In general, the risks associated with OTC contracts are greater than those
associated with exchange traded instruments because of the greater risk of
default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership/Master due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity or
20
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 counterparty to the transactions. The
Partnership's/Master'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/Master has credit risk and concentration risk
because the sole counterparty or broker with respect to the
Partnership's/Master's Fund's assets is CGM.
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. (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 and swaps trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, in its
discretion, cause the Partnership to cease trading operations and liquidate all
open positions under certain circumstances including a decrease in Net Asset
Value per Redeemable 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 trading and by
expenses, interest income, redemptions of Redeemable Units and distributions of
profits, if any. Gains or losses on trading cannot be predicted. Market moves in
commodities are dependent upon fundamental and technical factors which the
Advisors may or may not be able to identify, such as changing supply and demand
relationships, weather, government agricultural, commercial and trade programs
and policies, national and international political and economic events and
changes in interest rates. Partnership expenses consist of, among other things,
commissions, advisory fees and administrative fees. The level of these expenses
is dependent upon the level of trading and the ability of the Advisors to
identify and take advantage of price movements in the commodity markets, in
addition to the level of Net Assets maintained. In addition, the amount of
interest income payable by CGM is dependent upon interest rates over which the
Partnership has no control.
21
The Partnership continues to offer Redeemable Units at the Net Asset Value
per Redeemable Unit as of the end of each month. For the year ended December 31,
2003, there were additional sales of 49,916.3153 Redeemable Units totaling
$57,164,000. For the year ended December 31, 2002, there were additional sales
of 38,299.1963 Redeemable Units totaling $39,261,000 and contributions by the
General Partner representing 281.8446 Unit equivalents totaling $282,000. For
the year ended December 31, 2001, there were additional sales of 11,161.1581
Redeemable Units totaling $10,958,000 and contributions by the General Partner
representing 22.4146 Unit equivalents totaling $21,000.
No forecast can be made as to the level of redemptions in any given period.
A limited partner may require the Partnership to redeem their Redeemable Units
at their Net Asset Value as of the last day of a month on 10 business days
notice to the General Partner. For the year ended December 31, 2003, 23,954.9557
Redeemable Units were redeemed totaling $26,334,840. For the year ended December
31, 2002, 6,833.7748 Redeemable Units were redeemed totaling $7,340,717. For the
year ended December 31, 2001, 1,990.1403 Redeemable Units were redeemed totaling
$1,949,369.
Redeemable 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 under the Securities Act of 1933, 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 their 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
their investment in the Partnership for each year.
(c) Results of Operations.
For the year ended December 31, 2003 the Net Asset Value per Redeemable
Unit decreased 5.2% from $1,160.82 to $1,100.19. For the year ended December 31,
2002 the Net Asset Value per Redeemable Unit increased 21.9% from $952.23 to
$1,160.82. For the year ended December 31, 2001, the Net Asset Value per
Redeemable Unit increased 5.5% from $902.20 to $952.23.
The Partnership experienced net trading gains of $178,228 before
commissions and expenses in 2003. Gains were primarily attributable to the
trading of currencies, grains, metals and indices and were partially offset by
losses recognized in energy, softs, livestock, U.S. and non-U.S. interest rates.
In 2003, the markets traded by the Partnership's Advisors had periodic
strong trends and then just as strong reversals resulting in a slight down year
for the Partnership's overall performance.
As noted above, the Partnership is designed as an aggressive investment
seeking to achieve high rates of absolute return with commensurate risk through
speculative trading by a team of experienced trading Advisors. In prior years,
22
the combination of Advisors in the Partnership has tended to have performance
characteristics distinct from the traditional trend-following trading Advisors
in managed futures. The same characteristics that led to the Advisors being able
to excel in markets typically not favorable to other Advisors are the elements
that resulted in a difficult 2003.
The most significant market events for 2003 surrounded the onset and still
evolving outcome of the Iraqi war. The energy and currency markets had the most
significant impact on the Partnership's results for the year while the other
financial and commodity markets tended to offset each other.
Over the course of the year, on a very broad basis, the year 2003 can be
divided into three periods: the time surrounding the Iraq War (January through
May), the transition to higher world growth (June through October), and the
renewed dollar decline (November and December).
The first two months of the year represented a period of pre-war
uncertainty. January's performance was strong and performance in February ended
flat in spite of extraordinary price volatility in natural gas trading. This
volatility in energy markets carried over to March when the price of crude
dropped $10/barrel on the expectation of a quick end to the war. This reversal
affected all the Partnership's Advisors as well as did trend reversals in stock
indices, interest rates, and precious metals.
With this volatility and losses, the Advisors reduced leverage and
lightened positions until trends reasserted themselves. This began to occur in
April and May resulting in a substantial recovery for Partnership performance
with profits coming from short dollar, long interest rate and long commodity
positions. At the end of April, the General Partner determined to terminate
Beacon Capital Management Inc. as an Advisor to the Partnership. This was done
based on the assessment that Beacon's trading results no longer met the
objectives of the Partnership. A new Advisor, Winton Capital Ltd. was added as
an Advisor to the Partnership and allocated approximately 20% of the
Partnership's assets to trade.
With the end of the active hostilities in May, interest rates trended
lower, and the major markets began to reflect expectations of improved economic
growth. Unexpectedly, the announcements of no further easing actions by the ECB
and the Federal Reserve Board greatly disrupted these trends and led to losses
for June and July. Additionally, the dollar actually rallied on the positive US
economic news, reversing the year-long slide. In both cases, earlier profits
were surrendered as the markets transitioned to new trends. Cushioning the
losses in the financial markets was profitable energy trading during June and
August.
Regardless of the strong growth exhibited in the United States in the third
quarter, the dollar began a new significant slide against both the euro and yen.
This led to a profitable October, a weak November, when interest rates again
reversed course and trading in energy and agricultural markets was unprofitable.
The year ended mixed with strong trends favorable to the Advisors in currencies,
interest rates, precious metals and agricultural markets being offset by losses
incurred in volatile energy markets.
In the General Partner's opinion, the Partnership's Advisors continue to
employ trading methods consistent with the objectives of the Partnership. The
23
General Partner monitors the Advisors' performance on a daily, weekly, monthly
and annual basis to assure these objectives are met.
The Partnership experienced net trading gains of $14,850,968 before
commissions and expenses in 2002. Gains were primarily attributable to the
trading of currencies, U.S and non-U.S. interest rates, livestock and grains and
were partially offset by losses recognized in indices, metals, energy and softs.
The Partnership experienced net trading gains of $1,842,379 before
commissions and expenses in 2001. Gains were primarily attributable to the
trading of energy, softs and U.S. interest rates and were partially offset by
losses recognized in currencies, livestock, metals, non-U.S. interest rates and
indices.
It should be noted that 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
Master and the Partnership depends on the Advisors' ability to forecast changes
in energy and energy related commodities. Such price changes 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 the Advisors correctly make such forecasts, the Master and
the Partnership expect to increase capital through operations.
(d) Operational Risk.
The Partnership is directly exposed to market risk and credit risk, which
arise in the normal course of its business activities. Slightly less direct, but
of critical importance, are risks pertaining to operational and back office
support. This is particularly the case in a rapidly changing and increasingly
global environment with increasing transaction volumes and an expansion in the
number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss
and legal liability attributable to operational problems, such as inaccurate
pricing of transactions, untimely trade execution, clearance and/or settlement,
or the inability to process large volumes of transactions. The Partnership is
subject to increased risks with respect to its trading activities in emerging
market securities, where clearance, settlement, and custodial risks are often
greater than in more established markets.
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 Redeemable 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
24
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
Redeemable Unit holders, creditors, and regulators, is free of material errors.
(e) Critical Accounting Policies.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities in the financial statements and accompanying notes.
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
period, 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 period.
Realized gains (losses) and changes in unrealized values on commodity interests
and foreign currencies are recognized in the period in which the contract is
closed or the changes occur and are included in net gains (losses) on trading of
commodity interests.
Foreign currency contracts are those contracts where the Partnership agrees
to receive or deliver a fixed quantity of foreign currency for an agreed-upon
price on an agreed future date. Foreign currency contracts are valued daily, and
the Partnership's net equity therein, representing unrealized gain or loss on
the contracts as measured by the difference between the forward foreign exchange
rates at the dates of entry into the contracts and the forward rates at the
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statement of income and expenses and partners'
capital.
The General Partner believes that the accounting policies that will be most
critical to the Partnership's financial condition and results of operations
relate to the valuation of the Partnership's positions. The majority of the
Partnership's/Master's positions will be exchange-traded futures contracts,
which will be valued daily at settlement prices published by the exchanges. Swap
contracts held by the Master generally will be valued by reference to published
settlement prices or dealers' quotes in related markets or other measures of
fair value deemed appropriate by the General Partner. The General Partner
expects that under normal circumstances substantially all of the Partnership's
assets will be valued by objective measures and without difficulty.
25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership/Master is a speculative commodity pool. The market
sensitive instruments held by the Partnership/Master are acquired for
speculative trading purposes, and all or substantially all of the
Partnership's/Master'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/Master's main line of business.
The risk to the limited partners that have purchased interests in the
Partnership is limited to the amount of their capital contributions to the
Partnership and their share of Partnership assets and undistributed profits.
This limited liability is a consequence of the organization of the Partnership
as a limited partnership under applicable law.
Market movements result in frequent changes in the fair market value of the
Partnership's/Master's open positions and, consequently, in its earnings and
cash flow. The Partnership's/Master's market risk is influenced by a wide
variety of factors. These primarily include factors which affect energy price
levels, including supply factors and weather conditions, but could also include
the level and volatility of interest rates, exchange rates, equity price levels,
the market value of financial instruments and contracts, the diversification
effects among the Partnership's/Master's open positions and the liquidity of the
markets in which it trades.
The Partnership/Master 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/Master's past performance is not necessarily indicative of its
future results.
Value at Risk is a measure of the maximum amount which the
Partnership/Master could reasonably be expected to lose in a given market
sector. However, the inherent uncertainty of the Partnership's/Master's
speculative trading and the recurrence in the markets traded by the
Partnership/Master 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/Master'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/Master's losses in any market sector will be limited to Value at
Risk or by the Partnership's/Master's attempts to manage its market risk.
Quantifying the Partnership's/Master's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's/Master'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
26
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/Master'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/Master's mark-to-market accounting, any loss in the fair value of
the Partnership's/Master's open positions is directly reflected in the
Partnership's/Master's earnings (realized or unrealized) and cash flow.
Exchange maintenance margin requirements have been used by the
Partnership/Master 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/Master), 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/Master's futures and forward positions
does not have any optionality component. However, the Advisor does trade
commodity options. The Value at Risk associated with options is reflected in the
following table as the margin requirement attributable to the instrument
underlying each option. Where this instrument is a futures contract, the futures
margin, and where this instrument is a physical commodity, the
futures-equivalent maintenance margin has been used. This calculation is
conservative in that it assumes that the fair value of an option will decline by
the same amount as the fair value of the underlying instrument, whereas, in
fact, the fair values of the options traded by the Partnership/Master in almost
all cases fluctuate to a lesser extent than those of the underlying instruments.
In quantifying the Partnership's/Master'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/Master's positions are rarely, if ever, 100% positively correlated
have not been reflected.
27
The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of December 31, 2003 and the
highest and lowest value at any point during the year. All open position trading
risk exposures of the Partnership have been included in calculating the figures
set forth below. As of December 31, 2003, the Partnership's total capitalization
was $87,468,980.
December 31, 2003
Year to Date
----------------------------------
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk*
- -----------------------------------------------------------------------------------------
Currencies
- - Exchange Traded
Contracts $ 1,890,015 2.16% 2,101,070 444,732 1,317,170
Energy 2,830,950 3.24% 3,186,750 123,600 1,694,688
Grains 708,686 0.81% 1,802,600 189,472 653,127
Interest rates U.S. 995,400 1.14% 1,104,750 54,370 579,512
Interest rates Non-U.S. 2,055,358 2.35% 3,261,061 148,412 1,380,092
Livestock 63,250 0.07% 410,010 23,800 148,311
Metals
- - Exchange Traded
Contracts 689,900 0.79% 1,137,100 100,500 588,608
- - OTC Contracts 522,060 0.60% 1,537,237 33,175 178,064
Softs 244,631 0.28% 937,100 123,581 476,496
Indices 1,356,529 1.55% 1,453,025 95,480 802,232
Lumber 2,800 0.00%** 628,851 1,100 1,621
---------- -----
Total $11,359,579 12.99%
---------- -----
*Monthly average based on month-end value at risk
**Due to rounding
28
As of December 31, 2002, the Partnership's total capitalization was $62,152,799.
December 31, 2002
Year to Date
----------------------------------
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk*
Currencies
- - Exchange Traded
Contracts $1,189,000 1.9% $1,189,000 $ 260,775 754,235
Energy 1,541,000 2.5% 1,541,000 17,900 769,175
Grains 567,908 0.9% 779,850 145,000 387,796
Interest rates U.S. 669,900 1.1% 718,200 64,700 454,444
Interest rates Non-U.S. 809,630 1.3% 1,195,778 141,881 724,320
Livestock 343,900 0.5% 440,250 49,920 196,622
Metals
- - Exchange Traded
Contracts 624,800 1.0% 879,200 111,800 580,950
Softs 540,850 0.9% 999,600 142,600 469,688
Indices 444,993 0.7% 508,163 182,626 368,572
---------- -----
Total $6,731,981 10.8%
---------- -----
*Quarterly average based on month-end value at risk
29
The Master's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of December 31, 2003 and the
highest and lowest value at any point during the year. All open position trading
risk exposures of the Master have been included in calculating the figures set
forth below. As of December 31, 2003, the Master's total capitalization was
$255,057,637.
December 31, 2003
Year to Date
----------------- ---------------------------------
% of Total High Low Average Value at
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Risk*
- --------------------------------------------------------------------------------------------------------------
Energy $25,111,381 9.85% $131,820,411 $12,880,254 $36,036,174
Energy Swaps 6,027,189 2.36% $33,232,031 $900,000 $7,862,309
----------- ------
Total $31,138,570 12.21%
----------- ------
*Monthly average based on month-end value at risk
30
As of December 31, 2002, the Master's total capitalization was $350,283,453.
December 31, 2002
Year to Date
----------------------------------- -------------------
% of Total High Low Average Value at
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Risk*
- ------------------------ ------------------- ----------------- ----------------- ----------------- ------------------
Energy $ 47,253,146 13.49% $64,130,606 $5,737,107 $32,002,122
Energy Swaps 9,245,703 2.64% $30,923,087 $1,395,629 $ 5,271,479
----------- ------
Total $ 56,498,849 16.13%
----------- ------
*Quarterly average based on month-end value at risk
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/Master is typically many times the applicable margin requirement
(margin requirements generally range between 2% and 15% of contract face value)
as well as many times the capitalization of the Partnership/Master. The
magnitude of the Partnership's/Master'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/Master 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/Master -- give no indication of this "risk
of ruin."
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/Master's market sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's/Master's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership/Master manages
its primary market risk exposures - constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act. The Partnership's/Master'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/Master's risk control 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/Master. There can be no assurance that
the Partnership's/Master'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/Master.
The following were the primary trading risk exposures of the
Partnership/Master as of December 31, 2003, by market sector.
Interest Rates. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-8 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations - e.g., Australia.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic Partnership's currency sector will change significantly in the
future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in functional currency other than dollars.
32
Stock Indices. The Partnership's primary equity exposure is to equity price
risk in the G-8 countries. The stock index futures traded by the Partnership are
limited to futures on broadly based indices. As of December 31, 2003, the
Partnership's primary exposures were in the Financial Times (England) and Nikkei
non-G-8 stock indices. The Partnership is primarily exposed to the risk of
adverse price trends or static markets in the major U.S., European and Japanese
indices. (Static markets would not cause major market changes but would make it
difficult for the Partnership to avoid being "whipsawed" into numerous small
losses.)
Metals. The Partnership's primary metal market exposure is to fluctuations
in the price of gold and silver. Although certain of the Advisors will from time
to time trade base metals such as aluminum and copper, the principal market
exposures of the Partnership have consistently been in the precious metals, gold
and silver.
Softs. The Partnership's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Corn, cotton, sugar, soybeans, soybean meal, soybean oil and
wheat accounted for the substantial bulk of the Partnership's commodity exposure
as of December 31, 2003.
Energy. The Partnership's/Master's primary energy market exposure is to gas
and oil price movements, often resulting from political developments in the
Middle East. Oil prices can be volatile and substantial profits and losses have
been are expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and controls the Partnership's/Master'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/Master subject.
The General Partner monitors the Partnership's/Master's performance and the
concentration of its open positions, and consults with the Advisor concerning
the Partnership's/Master'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/Master. 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/Master'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.
33
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY ORION FUTURES FUND L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation. F-2
Independent Auditors' Report. F-3 - F-4
Financial Statements:
Statement of Financial Condition
at December 31, 2003 and 2002. F-5
Condensed Schedules of Investments
at December 31, 2003 and 2002. F-6 - F-7
Statement of Income and Expenses
for the years ended December 31,
2003, 2002 and 2001. F-8
Statement of Partners' Capital
for the years ended December 31,
2003, 2002 and 2001. F-9
Notes to Financial Statements. F-10 - F-14
Selected Unaudited Quarterly Financial
Data. F-15
Financial Statements of the SB AAA
Master Fund LLC
Oath or Affirmation F-16
Independent Auditors' Report. F-17 - F-18
Statement of Financial Condition at
December 31, 2003 and 2002. F-19
Condensed Schedule of Investments at
December 31, 2003 and 2002. F-20 - F-21
Statement of Income and Expenses for
the years ended December 31, 2003, 2002 and
the period from September 1, 2001
(commencement of trading operations)
to December 31, 2001. F-22
Statement of Members' Capital for
the years ended December 31, 2003 and 2002
for the period from September 1, 2001
(commencement of trading operations)
to December 31, 2001. F-23
Notes to Financial Statements. F-24 - F-25
Selected Unaudited Quarterly Financial
Data. F-26
To the Limited Partners of
Salomon Smith Barney Orion Futures Fund L.P.
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By:/s/Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Citigroup Managed Futures LLC
General Partner, Salomon Smith Barney
Orion Futures Fund L.P.
Citigroup Managed Futures LLC
399 Park Avenue
7th Floor
New York, N.Y. 10022
212-559-2011
F-2
Independent Auditors' Report
To the Partners of
Salomon Smith Barney Orion Futures Fund L.P.:
We have audited the accompanying statements of financial condition of Salomon
Smith Barney Orion Futures Fund L.P. (the Partnership), including the condensed
schedules of investments, as of December 31, 2003 and 2002, and the related
statements of income and expenses, and partners' capital for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The statements of income and expenses and
partners' capital of the Partnership for the year ended December 31, 2001 were
audited by other auditors whose report dated February 28, 2002 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Salomon Smith Barney Orion
Futures Fund L.P., as of December 31, 2003 and 2002, and the results of its
operations and its partners' capital for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
New York, New York
February 27, 2004
F-3
Report of Independent Auditors
To the Partners of
Salomon Smith Barney Orion Futures Fund L.P.:
In our opinion, the accompanying statements of income and expenses and partners'
capital present fairly, in all material respects, the results of Salomon Smith
Barney Orion Futures Fund L.P.'s operations for the year ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
management of the General Partner; our responsibility is to express an opinion
on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-4
Salomon Smith Barney
Orion Futures Fund L.P.
Statements of Financial Condition
December 31, 2003 and 2002
2003 2002
-------------- -------------
Assets:
Investment in Master, at fair value $33,531,892 $25,471,986
Cash (restricted $13,779,146 and $8,657,392 in 2003 and
2002, respectively) in commodity futures trading account (Note 3c) 50,594,930 32,697,307
Net unrealized appreciation on open futures positions 5,706,691 5,057,217
Unrealized appreciation on open forward contracts 1,928,011 --
-------------- -------------
91,761,524 63,226,510
Interest receivable (Note 3c) 40,059 35,937
-------------- -------------
$91,801,583 $63,262,447
-------------- -------------
Liabilities and Partners' Capital:
Liabilities:
Unrealized depreciation on open forward contracts $ 638,809 $ --
Accrued expenses:
Commissions (Note 3c) 160,866 115,201
Management fees (Note 3b) 142,083 107,113
Administrative fees (Note 3a) 38,612 26,778
Incentive fees (Note 3b) 539,454 272,957
Professional fees 68,739 81,265
Other 8,171 7,731
Redemptions payable (Note 5) 2,735,869 498,603
-------------- -------------
4,332,603 1,109,648
Partners' capital (Notes 1 and 5):
General Partner, 499.8084 Unit equivalents outstanding in 2003 and 2002 549,884 580,188
Limited Partners, 79,003.6728 and 53,042.3132 Redeemable Units of Limited
Partnership Interest outstanding in 2003 and 2002, respectively 86,919,096 61,572,611
-------------- -------------
87,468,980 62,152,799
-------------- -------------
$91,801,583 $63,262,447
-------------- -------------
See accompanying notes to financial statements.
F-5
Salomon Smith Barney Orion
Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2003
Sector Contract Fair Value
- ------- -------- -----------
Currencies Futures contracts sold (0.04)% $(34,802)
Futures contracts purchased 3.12% 2,726,064
----------
Total Currencies 3.08% 2,691,262
---------
Total Energy (0.05)% Futures contracts purchased (0.05)% (47,000)
---------
Grains Futures contracts sold (0.12)% (107,275)
Futures contracts purchased 1.70% 1,487,795
----------
Total Grains 1.58% 1,380,520
---------
Total Interest Rates U.S. (0.15)% Futures contracts purchased (0.15)% (129,958)
---------
Interest Rates Non-U.S.
Futures contracts sold (0.00)%* (343)
Futures contracts purchased 0.70% 617,411
----------
Total Interest Rates Non-U.S. 0.70% 617,068
---------
Total Lumber 0.01% Futures contracts purchased 0.01% 6,402
---------
Livestock
Futures contracts sold 0.01% 5,570
Futures contracts purchased (0.03)% (25,410)
----------
Total Livestock (0.02)% (19,840)
---------
Metals
Futures contracts sold (0.00)%* (3,655)
Futures contracts purchased 0.96% 842,863
----------
Total futures contracts 0.96% 839,208
Unrealized depreciation on forward contracts (0.73)% (638,809)
Unrealized appreciation on forward contracts 2.20% 1,928,011
----------
Total forward contracts 1.47% 1,289,202
---------
Total Metals 2.43% 2,128,410
----------
Softs Futures contracts sold 0.06% 56,990
Futures contracts purchased (0.18)% (159,535)
----------
Total Softs (0.12)% (102,545)
---------
Total Indices 0.54% Futures contracts purchased 0.54% 471,574
----------
Total Fair Value 8.00% $6,995,893
---------
Country Composition Investments at Fair % of Investments at Fair
Value Value
Australia $141,159 2.02%
Canada 83,342 1.19
France 30,769 0.44
Germany 309,378 4.42
Hong Kong 7,903 0.11
Italy (20,955) (0.30)
Japan 44,926 0.64
Spain 22,028 0.32
United Kingdom 1,802,208 25.76
United States 4,575,135 65.40
---------- -------
$6,995,893 100.00%
---------- -------
Percentages are based on Partners' Capital unless otherwise indicated.
* Due to rounding.
See accompanying notes to financial statements.
F-6
Salomon Smith Barney Orion
Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2002
Sector Contract Fair Value
- ------ -------- ----------
Currencies Futures contracts sold (0.13)% $(80,588)
Futures contracts purchased 2.67% 1,657,233
----------
Total Currencies 2.54% 1,576,645
----------
Total Energy 1.48% Futures contracts purchased 1.48% 919,154
----------
Grains Futures contracts sold 0.38% 232,822
Futures contracts purchased (0.09)% (55,021)
----------
Total Grains 0.29% 177,801
----------
Total Interest Rates U.S. 1.42% Futures contracts purchased 1.42% 884,285
----------
Total Interest Rates Non-U.S. 1.07% Futures contracts purchased 1.07% 666,065
----------
Total Livestock 0.25% Futures contracts purchased 0.25% 152,910
----------
Total Metals 0.90% Futures contracts purchased 0.90% 562,580
----------
Softs Futures contracts sold (0.01)% (9,135)
Futures contracts purchased 0.31% 195,779
----------
Total Softs 0.30% 186,644
----------
Total Indices (0.11)% Futures contracts purchased (0.11)% (68,867)
----------
Total Fair Value 8.14% $5,057,217
---------
Country Composition Investments at Fair % of Investments at Fair
Value Value
Australia $32,003 0.63%
Canada 79,115 1.56
France (273) 0.00 *
Germany 283,701 5.61
United Kingdom 244,964 4.84
United States 4,417,707 87.36
---------- -------
$5,057,217 100.00%
---------- -------
Percentages are based on Partners' Capital unless otherwise indicated.
* Due to rounding.
See accompanying notes to financial statements.
F-7
Salomon Smith Barney
Orion Futures Fund L.P.
Statements of Income and Expenses
for the years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------- ------------- -------------
Income:
Realized gains (losses) on closed positions from Master $ (5,348,130) $ 6,322,866 $ 1,085,086
Change in unrealized gains (losses) on open positions
from Master (579,968) 896,865 (191,981)
Interest income allocated from Master 329,660 259,735 977
Expenses allocated from Master (1,624,842) (1,467,787) (144,984)
Net gains (losses) on trading of commodity interests:
Realized gains on closed positions 4,167,650 3,569,924 3,215,948
Change in unrealized gains (losses) on open positions 1,938,676 4,061,313 (2,266,674)
------------- ------------- -------------
(1,116,954) 13,642,916 1,698,372
Interest income (Note 3c) 479,341 414,512 434,122
------------- ------------- -------------
(637,613) 14,057,428 2,132,494
------------- ------------- -------------
Expenses:
Brokerage commissions including clearing fees of
$374,550, $262,071 and $65,204, respectively (Note 3c) 1,912,993 1,168,831 674,125
Management fees (Note 3b) 1,547,397 864,165 294,230
Administrative fees (Note 3a) 402,664 216,041 73,532
Incentive fees (Note 3b) 837,878 2,447,070 541,028
Professional fees 155,297 134,166 181,485
Other expenses 19,137 30,455 12,931
------------- ------------- -------------
4,875,366 4,860,728 1,777,331
------------- ------------- -------------
Net income (loss) $ (5,512,979) $ 9,196,700 $ 355,163
------------- ------------- -------------
Net income (loss) per Redeemable Unit of Limited
Partnership Interest and General Partner
Unit equivalent (Notes 1 and 6) $(60.63) $208.59 $57.30
------------- ------------- -------------
See accompanying notes to financial statements.
F-8
Salomon Smith Barney
Orion Futures Fund L.P.
Statements of Partners' Capital
for the years ended December 31, 2003, 2002 and 2001
Limited General
Partners Partner Total
-------------- ------------- -------------
Partners' capital at December 31, 2000 $11,192,598 $176,424 $11,369,022
Net income 345,035 10,128 355,163
Sale of 11,161.1581 Redeemable Units of Limited
Partnership Interest and General Partner's
contribution representing 22.4146 Unit
equivalents 10,958,000 21,000 10,979,000
Redemption of 1,990.1403 Redeemable Units of
Limited Partnership Interest (1,949,369) - (1,949,369)
-------------- ------------- -------------
Partners' capital at December 31, 2001 20,546,264 207,552 20,753,816
Net income 9,106,064 90,636 9,196,700
Sale of 38,299.1963 Redeemable Units of Limited
Partnership Interest and General Partner's
contribution representing 281.8446 Unit
equivalents 39,261,000 282,000 39,543,000
Redemption of 6,833.7748 Redeemable Units of
Limited Partnership Interest (7,340,717) -- (7,340,717)
-------------- ------------- -------------
Partners' capital at December 31, 2002 61,572,611 580,188 62,152,799
Net loss (5,482,675) (30,304) (5,512,979)
Sale of 49,916.3153 Redeemable Units of
Limited Partnership Interest 57,164,000 -- 57,164,000
Redemption of 23,954.9557 Redeemable
Units of Limited Partnership Interest (26,334,840) -- (26,334,840)
-------------- ------------- -------------
Partners' capital at December 31, 2003 $ 86,919,096 $ 549,884 $ 87,468,980
-------------- ------------- -------------
See accompanying notes to financial statements.
F-9
Salomon Smith Barney
Orion Futures Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Salomon Smith Barney Orion Futures Fund L.P. (the "Partnership") is a
limited partnership which was organized on March 22, 1999 under the
partnership laws of the State of New York to engage, directly and
indirectly, in the speculative trading of a diversified portfolio of
commodity interests, including commodity options, commodity futures and
forward contracts on United States exchanges and certain foreign exchanges.
The commodity interests that are traded by the Partnership are volatile and
involve a high degree of market risk.
Between March 31, 1999 (commencement of the offering period) and June 10,
1999, 10,499 redeemable units of Limited Partnership Interest ("Redeemable
Units") were sold at $1,000 per Redeemable Unit. The proceeds of the
initial offering were held in an escrow account until June 10, 1999, at
which time they were turned over to the Partnership for trading. The
Partnership continues to offer Redeemable Units.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
LLC, a Delaware limited liability company, is the Partnership's general
partner and commodity pool operator (the "General Partner"). At the
commencement of trading, the Partnership's general partner was SFG Global
Investments, Inc. ("SFG") and Citigroup Managed Futures LLC was the
Partnership's trading manager. Effective April 1, 2001, the limited
partners of the Partnership elected Citigroup Managed Futures LLC as the
General Partner of the Partnership and consented to the withdrawal of SFG
as general partner. Concurrent with this election as General Partner,
Citigroup Managed Futures LLC withdrew as the Partnership's trading
manager.
Effective September 1, 2001, the Partnership allocated the portion of the
Partnership's capital that was allocated to AAA Capital Management, Inc.
("AAA") for trading to the SB AAA Master Fund LLC, a New York Limited
Liability Company (the "Master"). With this cash, the Partnership purchased
5,173.4381 Units of the Master at a fair value of $5,173,438. The Master
was formed in order to permit accounts managed now or in the future by AAA
using the Energy with Swaps Program, to invest together in one trading
vehicle. The General Partner is the managing member of the Master.
Individual and pooled accounts currently managed by AAA, including the
Partnership (collectively, the "Feeder Funds"), are permitted to be
non-managing members of the Master. The General Partner and AAA believe
that trading through this master/feeder structure should promote efficiency
and economy in the trading process. Expense to investors as a result of the
investment in the Master are approximately the same and redemption rights
are not affected.
The Partnership's/Master's commodity broker is Citigroup Global Markets
Inc. ("CGM"), formerly Salomon Smith Barney Inc. CGM is an affiliate of the
General Partner. The General Partner is wholly owned by Citigroup Global
Markets Holdings Inc. ("CGMHI"), formerly Salomon Smith Barney Holdings
Inc., which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of
Citigroup Inc. ("Citigroup").
At December 31, 2003 and 2002, the Partnership owns 13.1% and 7.3%,
respectively, of the Master. It is AAA's intention to continue to invest
the assets allocated to it by the Partnership in the Master. The
performance of the Partnership is directly affected by the performance of
the Master.
The General Partner and each limited partner share in the profits and
losses of the Partnership in proportion to the amount of Partnership
interest owned by each except that no limited partner shall be liable for
obligations of the Partnership in excess of their 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, 2019; the net asset value of a Redeemable Unit
decreases to less than $400 per Redeemable Unit as of a close of any
business day; a decline in net assets after trading commences to less than
$1,000,000; or under certain other circumstances as defined in the Limited
Partnership Agreement.
F-10
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments
and derivative commodity instruments) held by the Partnership and the
Master are used for trading purposes. The commodity interests are
recorded on trade date and open contracts are recorded in the
statements of financial condition at fair value on the last business
day of the year, which represents market value for those commodity
interests for which market quotations are readily available.
Investments in commodity interests denominated in foreign currencies
are translated into U.S. dollars at the exchange rates prevailing on
the last business day of the year. Realized gains (losses) and changes
in unrealized gains (losses) on open positions 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.
The value of the Partnership's investment in the Master reflects the
Partnership's proportional interest in the members' capital of the
Master. Profits and losses from trading in the Master, net of trading
and give-up fees, are allocated pro rata to the capital account of
each Feeder Fund based on the net assets in the capital account
compared to the aggregate net assets of all other capital accounts in
the Master. Advisory fees and brokerage commissions will continue to
be charged at the level of each individual Feeder Fund. Such fees and
commissions may differ among the non-managing members. Other expenses
will be charged pro rata to the accounts of the Feeder Funds in the
Master. The costs of organizing the Master were borne by the General
Partner. Therefore, there should be no material increase in expenses
to limited partners as a result of an investment in the Master.
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 statements 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 their share of the Partnership's
income and expenses.
d. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent 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.
e. Certain prior period amounts have been reclassified to conform to
current year presentation.
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. The Partnership pays the General
Partner a monthly administrative fee equal to 1/24 of 1% (0.5% per
year) of month-end net assets. Month-end Net Assets, for the purpose
of calculating administrative fees are Net Assets, as defined in the
Limited Partnership Agreement, prior to the reduction of redemptions
and incentive fees. Prior to April 1, 2001, the Partnership paid SFG
Global Investments, Inc. a monthly fee of $2,000.
F-11
b. Management Agreement:
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with Winton Capital Management, Willowbridge
Associates Inc., and AAA (collectively, the "Advisors"), each of which are
registered commodity trading advisors. Beacon Management Corporation was
terminated as an advisor to the Partnership on April 30, 2003 and Winton
Capital Management was added on the same date. The Advisors are not
affiliated with one another, are not affiliated with the General Partner or
CGM except AAA, and are not responsible for the organization or operation
of the Partnership. Mr. A. Anthony Annunziato is the sole trading principal
of AAA and is also an employee of CGM. The Partnership will pay each
Advisor a monthly management fee equal to 1/6 of 1% (2% a year) of
month-end Net Assets allocated to each Advisor. Month-end Net Assets, for
the purpose of calculating management fees are Net Assets, as defined in
the Limited Partnership Agreement, prior to the reduction of redemptions
and incentive fees.
In addition, the Partnership is obligated to pay each Advisor an incentive
fee payable quarterly equal to 20% of the New Trading Profits, as defined
in the Management Agreements, earned by each Advisor for the Partnership.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay CGM brokerage commissions at $18 per round turn
for futures and forwards transactions and $9 per half turn for options. The
brokerage fee is inclusive of applicable floor brokerage. The Partnership
will also be allocated brokerage commissions through its investment in the
Master. In addition, the Partnership will pay CGM National Futures
Association fees, as well as exchange, clearing, user and give-up fees. CGM
will pay a portion of brokerage fees to its financial consultants who have
sold Redeemable Units in this Partnership. Substantially all of the
Partnership's assets are deposited in the Partnership's account at CGM. The
Partnership's assets are deposited by CGM in segregated bank accounts to
the extent required by Commodity Futures Trading Commission regulations. At
December 31, 2003 and 2002, the amount of cash held for margin requirements
was $13,779,146 and $8,657,392, respectively. CGM has agreed to pay the
Partnership interest on 100% 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 CGM 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 CGM 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/Master's trading activities are shown in the statements of
income and expenses.
All of the commodity interests owned by the Partnership/Master are held for
trading purposes. The average fair value of the commodity interests held by
the Partnership during the years ended December 31, 2003 and 2002, based on
a monthly calculation, was $4,553,850 and $2,689,879, respectively.
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 their Units at their redemption value per Redeemable Unit as of the
last day of a month on 10 days notice to the General Partner. For the
purpose of a redemption, any accrued liability for reimbursement of
offering and organization expenses for the initial offering period will not
F-12
reduce redemption value per Redeemable Unit. There is no fee charged to
limited partners in connection with redemptions.
The Partnership is permitted to withdraw all or a portion of its interest
in the Master as of each month-end in order to meet its obligations with
respect to the redemption rights of limited partners.
6. Net Asset Value Per Unit:
Changes in the Net Asset Value per Redeemable Unit of Partnership interest
for the years ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001
---------- ---------- ----------
Net realized and unrealized gains (losses) * $(27.22) $283.72 $105.32
Interest income 11.42 16.93 31.56
Expenses ** (44.83) (92.06) (79.58)
---------- ---------- ----------
Increase (decrease) for year (60.63) 208.59 57.30
Net asset value per Unit, beginning of year 1,160.82 952.23 902.20
Redemption/subscription value per Redeemable Unit
versus net asset value per Unit -- -- (7.27)
---------- ---------- ----------
Net asset value per Redeemable Unit, end of year $1,100.19 $1,160.82 $952.23
---------- ---------- ----------
---------- ---------- ----------
Redemption/subscription net asset value per Redeemable Unit *** $1,100.19 $1,160.82 $952.23
---------- ---------- ----------
* Includes Partnership brokerage commissions and brokerage commissions
allocated from Master.
** Excludes Partnership brokerage commissions and brokerage commissions
allocated from Master.
*** For the purpose of a redemption/subscription, any remaining liability
for reimbursement of offering costs will not reduce redemption/
subscription net asset value per Redeemable Unit.
Ratios to average net assets:
Net investment loss before incentive fees **** (6.3)% (8.0)% (6.8)%
------ ------ -------
Operating expenses 7.4% 9.6% 9.8%
Incentive fees 1.1% 6.0% 3.8%
Total expenses 8.5% 15.6% 13.6%
------ ------ -------
Total return:
Total return before incentive fees (4.3)% 26.7% 10.2%
Incentive fees (0.9)% (4.8)% (4.6)%
Total return after incentive fees (5.2)% 21.9% 5.6%
------ ------ -------
****Interest income less total expenses (exclusive of incentive fees).
The above ratios may vary for individual investors based on the timing of
capital transactions during the year. Additionally, these ratios are
calculated for the Limited Partner class using the Limited Partners' share
of income, expenses and average net assets.
F-13
7. Financial Instrument Risks:
In the normal course of business, the Partnership directly, and through its
investment in the Master, is party to financial instruments with
off-balance sheet risk, including derivative financial instruments and
derivative commodity instruments. These financial instruments may include
forwards, futures, options and swaps, whose values are based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, or to purchase or sell
other financial instruments at specific terms at specified future dates,
or, in the case of derivative commodity instruments, to have a reasonable
possibility to be settled in cash, through physical delivery or with
another financial instrument. These instruments may be traded on an
exchange or over-the-counter ("OTC"). Exchange traded instruments are
standardized and include futures and certain option contracts. OTC
contracts are negotiated between contracting parties and include forwards,
swaps 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 Master's swaps contracts are OTC contracts.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership/Master due to market changes,
including interest and foreign exchange rate movements and fluctuations in
commodity or security prices. Market risk is directly impacted by the
volatility and liquidity in the markets in which the related underlying
assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that
an exchange or clearing organization acts as a counterparty to the
transactions. The Partnership's/Master's risk of loss in the event of
counterparty default is typically limited to the amounts recognized in the
statements of financial condition and not represented by the contract or
notional amounts of the instruments. The Partnership/Master has credit risk
and concentration risk because a significant counterparty or broker with
respect to the Partnership's/Master's assets is CGM.
The General Partner monitors and controls the Partnership's/Master'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/Master 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 majority of these instruments mature within one year of December 31,
2003. However, due to the nature of the Partnership's/Master's business,
these instruments may not be held to maturity.
F-14
Selected unaudited quarterly financial data for the years ended December 31,
2003 and 2002 are summarized below:
For the period from For the period from For the period from For the period from
October 1, 2003 to July 1, 2003 to April 1, 2003 to January 1, 2003 to
December 31, 2003 September 30, 2003 June 30, 2003 March 31, 2003
Net realized and unrealized trading
gains (losses) net of brokerage
commissions, clearing fees and
expenses allocated from Master
including interest income $ 531,678 $ (209,295) $ 3,496,086 $ (6,369,075)
Net Income (loss) $ (620,450) $ (727,910) $ 2,992,395 $ (7,157,014)
Increase (decrease) in Net Asset
Value per Redeemable Unit $ (7.00) $ (5.93) $ 42.77 $ (90.47)
For the period from For the period from For the period from For the period from
October 1, 2002 to July 1, 2002 to April 1, 2002 to January 1, 2002 to
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
Net realized and unrealized trading
gains (losses) net of brokerage
commissions, clearing fees and
expenses allocated from Master
including interest income $ (1,304,391) $ 5,988,669 $ 7,293,348 $ 910,971
Net Income (loss) $ (1,985,744) $ 4,782,784 $ 6,019,944 $ 379,716
Increase (decrease) in Net Asset
Value per Redeemable Unit $ (47.57) $ 112.39 $ 154.59 $ (10.82)
F-15
To the Members of
SB AAA Master Fund LLC
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By:/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Citigroup Managed Futures LLC
Managing Member, SB AAA Master Fund LLC
Citigroup Managed Futures LLC
399 Park Avenue
7th Floor
New York, N.Y. 10022
212-559-2011
F-16
Independent Auditors' Report
To the Members of
SB AAA Master Fund LLC:
We have audited the accompanying statements of financial condition of SB AAA
Master Fund LLC (the Company), including the condensed schedules of investments,
as of December 31, 2003 and 2002, and the related statements of income and
expenses, and members' capital for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The statements of income and expenses and members' capital of the
Company for the period from September 1, 2001 (commencement of trading
operations) to December 31, 2001 were audited by other auditors whose report
dated February 28, 2002 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SB AAA Master Fund LLC as of
December 31, 2003 and 2002, and the results of its operations and its members'
capital for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
New York, New York
February 27, 2004
F-17
Report of Independent Auditors
To the Members of
SB AAA Master Fund LLC:
In our opinion, the accompanying statements of income and expenses and members'
capital present fairly, in all material respects, the results of SB AAA Master
Fund LLC's operations for the period from September 1, 2001 (commencement of
trading operations) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the management of the Managing Member; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit 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 Managing Member,
and evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-18
SB AAA Master Fund LLC
Statements of Financial Condition
December 31, 2003 and 2002
2003 2002
------------- -------------
Assets:
Equity in commodity futures trading account:
Cash (restricted $48,471,997 and $53,522,255, respectively) $231,361,103 $330,218,077
Net unrealized appreciation on open futures positions 8,845,539 9,188,483
Unrealized appreciation on open swaps positions 50,093,912 38,011,771
Commodity options owned, at fair value (cost $49,687,512
and $63,879,907, respectively) 42,630,230 83,252,102
-------------- -------------
332,930,784 460,670,433
Due from brokers 2,148,690 12,595,792
Interest receivable 159,050 283,620
-------------- -------------
$335,238,524 $473,549,845
-------------- -------------
Liabilities and Members' Capital:
Liabilities:
Unrealized depreciation on open swap positions $18,654,566 $48,470,222
Commodity options written, at fair value
(premium received $47,549,852 and $59,666,185, respectively) 57,804,597 67,724,777
Accrued expenses:
Commissions 1,670,425 5,210,167
Professional fees 59,625 20,117
Due to brokers 1,815,015 1,541,223
Due to CGM 22,978 22,978
Distribution payable 153,681 276,908
-------------- -------------
80,180,887 123,266,392
Members' Capital:
Members' Capital, 211,023.7320 and 216,158.4103 Units
outstanding in 2003 and 2002, respectively 255,057,637 350,283,453
-------------- -------------
$335,238,524 $473,549,845
------------- -------------
See accompanying notes to financial statements.
F-19
SB AAA Master Fund LLC
Condensed Schedule of Investments
December 31, 2003
Number of
Sector Contracts Contract Fair Value
- ------ --------- -------- ----------
Energy Futures contracts purchased 5.35% $13,637,465
Futures contracts sold (1.88)% (4,791,926)
------------
Total futures contracts 3.47% 8,845,539
Options owned 16.71%
6,488 NYMEX Natural Gas Put Feb. 04 - Oct 04 8.98% 22,900,060
Other 7.73% 19,730,170
------------
42,630,230
Options written (22.66)%
7,335 NYMEX Natural Gas Call Feb. 04 - Dec 04 (16.04)% (40,916,710)
Other (6.62)% (16,887,887)
------------
(57,804,597)
Unrealized appreciation on Swaps contracts 19.64%
1,000 HH Natural Gas Feb - 04 8.22% 20,967,521
Other 11.42% 29,126,391
------------
50,093,912
Unrealized depreciation on Swaps contracts (7.31)% (18,654,566)
------------
Total Energy Fair Value 9.85% $25,110,518
------------
Investments at % of Investments at
Country Composition Fair Value Fair Value
-------------------- --------------- --------------
United Kingdom $(113,943) (0.45)%
United States 25,224,461 100.45
----------- -------
$25,110,518 100.00%
----------- -------
Percentages are based on Members' Capital unless otherwise indicated.
See accompanying notes to financial statements.
F-20
SB AAA Master Fund LLC
Condensed Schedule of Investments
December 31, 2002
Number of
Sector Contracts Contract Fair Value
- ------ --------- -------- ----------
Energy Futures contracts purchased 17.92%
6,228 IPE Gas Oil 5.45% Jan. - Feb. 2003 $19,089,003
Other 12.47% 43,677,214
------------
62,766,217
Futures contracts sold (15.30)%
13,454 NYMEX Light Sweet Crude Oil (7.22)% Feb. 03 - June 04 (25,271,391)
7,578 NYMEX Natural Gas (6.05)% Feb. 03 - Feb. 04 (21,203,640)
Other (2.03)% (7,102,703)
------------
(53,577,734)
Options owned 23.77%
7,293 NYMEX Natural Gas Call 10.40% Feb. 03 - June 03 36,430,400
5,325 NYMEX Natural Gas Put 5.37% Feb. 03 - June 03 18,812,110
Other 8.00% 28,009,592
------------
83,252,102
Options written (19.33)%
12,086 NYMEX Light Sweet Crude Call (6.90)% Feb. 03 - June 03 (24,193,640)
Other (12.43)% (43,531,137)
------------
(67,724,777)
Unrealized appreciation on Swaps contracts 10.85%
3,354 NYMEX Natural Gas 5.46% 19,130,237
Other 5.39% 18,881,534
------------
38,011,771
Unrealized depreciation on Swaps contracts (13.84)%
1,809 NYMEX Natural Gas (5.17)% (18,107,814)
Other (8.67)% (30,362,408)
------------
(48,470,222)
------------
Total Energy 4.07% 14,257,357
------------
Total Fair Value 4.07% $14,257,357
------------
Investments at % of Investments at
Country Composition Fair Value Fair Value
------------------- ------------ -----------
United Kingdom $25,728,485 180.46%
United States (11,471,128) (80.46)
----------- -------
$14,257,357 100.00%
----------- -------
Percentages are based on Members' Capital unless otherwise indicated.
See accompanying notes to financial statements.
F-21
SB AAA Master Fund LLC
Statements of Income and Expenses
for the years ended December 31, 2003 and 2002
and for the period from September 1, 2001
(commencement of trading operations)
to December 31, 2001
2003 2002 2001
------------ ------------ ------------
Income:
Net gains (losses) on trading
of commodity interests:
Realized gains (losses) on closed positions $(89,228,388) $96,247,547 $23,522,245
Change in unrealized gains (losses) on
open positions 12,929,224 7,940,877 (5,652,277)
------------ ------------ ------------
(76,299,164) 104,188,424 17,869,968
Interest income 2,459,477 3,255,591 21,054
------------ ------------ ------------
(73,839,687) 107,444,015 17,891,022
------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $2,041,075, $2,515,609 and $361,342,
respectively 13,877,538 21,769,166 2,992,446
Other expenses 347,628 37,083 38,000
------------ ------------ ------------
14,225,166 21,806,249 3,030,446
------------ ------------ ------------
Net income (loss) $(88,064,853) $85,637,766 $14,860,576
------------ ------------ ------------
Net income (loss) per Unit of Member Interest
(Notes 1 and 6) $(400.99) $525.84 $109.24
------------ ------------ ------------
See accompanying notes to financial statements.
F-22
SB AAA Master Fund LLC
Statements of Members' Capital
for the years ended December 31, 2003 and 2002
and for the period from September 1, 2001
(commencement of trading operations)
to December 31, 2001
Members'
Capital
-------------
Initial in-kind contribution from the Members
representing 133,712.5867 Units $133,712,587
Net Income 14,860,576
Sale of 6,891.1523 Units of
Member Interest 6,104,660
Redemptions of 3,379.4396 Units of
Member Interest (2,463,100)
-------------
Members' Capital at December 31, 2001 152,214,723
Net Income 85,637,766
Sale of 103,668.6762 Units of
Member Interest 149,182,059
Redemptions of 24,734.5653 Units of
Member Interest (33,598,368)
Distribution of Interest to feeder funds (3,152,727)
-------------
Members' Capital at December 31, 2002 350,283,453
Net Loss (88,064,853)
Sale of 39,745.9253 Units of
Member Interest 54,393,460
Redemptions of 44,880.6036 Units of
Member Interest (59,184,213)
Distribution of Interest to feeder funds (2,370,210)
-------------
Members' Capital at December 31, 2003 $255,057,637
-------------
See accompanying notes to financial statements.
F-23
SB AAA Master Fund LLC
Notes to Financial Statements
1. General:
SB AAA Master Fund LLC (the "Master") is a limited liability company formed
under the New York Limited Liability Company Law. The Master's purpose is
to engage in the speculative trading of a diversified portfolio of
commodity interests including commodity futures contracts and commodity
options contracts on United States exchanges and certain foreign exchanges.
The Master may trade commodity futures and option contracts of any kind but
intends initially to trade solely energy and energy related products. In
addition, the Master may enter into swap contracts. The Master is
authorized to sell an unlimited number of units ("Units") of member
interest.
On September 1, 2001 (date Master commenced trading), Smith Barney AAA
Energy Fund L.P. ("AAA") allocated substantially all of its capital and
Smith Barney Orion Futures Fund L.P ("Orion") allocated a portion of its
capital to the Master. With this cash, the Partnerships purchased
133,712.5867 Units of the Master with a fair value of $133,712,587
(including unrealized appreciation of $7,755,035). On July 1, 2002, Salomon
Smith Barney AAA Energy Fund L.P. II ("AAA II") allocated substantially all
of its capital to the Master and purchased 64,945.0387 Units with a fair
value of $94,925,000. The Master was formed to permit commodity pools
managed now or in the future by AAA Capital Management, Inc. (the
"Advisor") using the Energy with Swaps Program, the Advisor's proprietary
trading program, to invest together in one vehicle.
The Master operates under a "master/feeder fund" structure where its
investors consist of AAA, AAA II, Orion and Pinnacle Natural Resources, LP
(each a "Member", collectively the "Feeder Funds") with 47.6%, 38.8%, 13.1%
and 0.5% investments in the Master at December 31, 2003, respectively.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
LLC, acts as the managing member (the "Managing Member") of the Master. The
Master's commodity broker is Citigroup Global Markets Inc. ("CGM"),
formerly Salomon Smith Barney Inc. CGM is an affiliate of the Managing
Member. The Managing Member is wholly-owned by Citigroup Global Markets
Holdings Inc. ("CGMHI"), formerly Salomon Smith Barney Holdings Inc., which
is the sole owner of CGM. CGMHI is a wholly-owned subsidiary of Citigroup
Inc. Effective as of December 31, 2001, all trading decisions for the
Master are made by the Advisor.
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 statements 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 Managing Member 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 gains (losses) on open positions
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 Master 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.
F-24
When the Master writes an option, the premium received is recorded as
a liability in the statements of financial condition and marked to
market daily. When the Master purchases an option, the premium paid is
recorded as an asset in the statements of financial condition and
marked to market daily.
c. All of the income and expenses and realized and unrealized gains and
losses on trading of commodity interests are determined on each
valuation day and allocated pro rata among the Feeder Funds at the
time of such determination.
d. Income taxes have not been provided as each partner of each of the
members (the Feeder Funds) is individually liable for the taxes, if
any, on their share of the Master's income and expenses.
e. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
f. Certain prior period amounts have been reclassified to conform to
current year presentation.
3. Agreements:
a. Managing Member Agreement:
The Managing Member administers the business affairs of the Master.
b. Management Agreement:
The Managing Member, on behalf of the Master has entered into a
Management Agreement with the Advisor, a registered commodity trading
advisor. The Advisor is affiliated with the Managing Member and CGM
but is not responsible for the organization or operation of the
Master. The Management Agreement provides that the Advisor has sole
discretion in determining the investment of the assets of the Master.
All management fees in connection with the Management Agreement shall
be borne by the Feeder Funds.
c. Customer Agreement:
The Master has entered into a Customer Agreement with CGM whereby CGM
provides services which include, among other things, the execution of
transactions for the Master's account in accordance with orders placed
by the Advisor. The Master will pay CGM brokerage commissions at $18
per round turn for futures, options and swap transactions. The
brokerage fee is inclusive of applicable floor brokerage. All
exchange, clearing, user, give-up and National Futures Association
fees are borne by the Master. All other fees (management fees,
administrative fees, incentive fees and offering costs) shall be borne
by the Feeder Funds. All of the Master's cash is deposited by CGM in
segregated bank accounts, to the extent required by Commodity Futures
Trading Commission regulations. At December 31, 2003 and 2002, the
amount of cash held by the Master for margin requirements was
$48,471,997 and $53,522,255, respectively. The Customer Agreement
between the Master and CGM gives the Master the legal right to net
unrealized gains and losses. The Customer Agreement may be terminated
by either party. All commissions in connection with the Customer
Agreement shall be borne by the Feeder Funds.
F-25
4. Trading Activities:
The Master was formed for the purpose of trading contracts in a variety of
commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Master's trading
activities are shown in the statements of income and expenses.
All of the commodity interests owned by the Master are held for trading
purposes. The average fair values for the years ended December 31, 2003 and
2002 based on a monthly calculation, were $39,703,607 and $13,217,805,
respectively. The fair values of these commodity interests, including
options thereon, if applicable, at December 31, 2003 and 2002 were
$25,110,518 and $14,257,357, respectively.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of
the Managing Member and at such time as the Managing Member may decide. A
member may require the Master to redeem their Units at their Net Asset
Value as of the last day of the month. The Managing Member, at its sole
discretion, may permit redemptions more frequently than monthly. There is
no fee charged to members in connection with redemptions.
6. Financial Highlights:
Changes in the Net Asset Value per Unit of Member interest for the years
ended December 31, 2003 and 2002 and for the period from September 1, 2001
(commencement of trading operations) to December 31, 2001 were as follows:
2003 2002 2001
--------- ----------- ----------
Net realized and unrealized gains (losses)* $(410.62) $510.93 $109.36
Interest income 11.23 15.13 0.16
Expenses ** (1.60) (0.22) (0.28)
--------- ----------- ----------
Increase (decrease) for year (400.99) 525.84 109.24
Distributions (10.84) (14.59) --
Net asset value per Unit, beginning of year/period 1,620.49 1,109.24 1,000.00
--------- ----------- ----------
Net asset value per Unit, end of year/period $1,208.66 $1,620.49 $1,109.24
--------- ----------- ----------
* Includes brokerage commissions
** Excludes brokerage commissions
Ratio to average net assets:
Net investment loss *** (4.1)% (8.9)% (2.1)%****
Operating expenses 5.0% 9.0% 6.5%****
Total Return (24.7)% 47.4% 10.9%
*** Interest income less total expenses
**** Annualized
The above ratios may vary for individual investors based on the timing of
capital transactions during the year.
F-26
7. Financial Instrument Risks:
In the normal course of its business, the Master is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial
instruments may include forwards, futures and options, whose values are
based upon an underlying asset, index, or reference rate, and generally
represent future commitments to exchange currencies or cash flows, to
purchase or sell other financial instruments at specific terms at specified
future dates, or, in the case of derivative commodity instruments, to have
a reasonable possibility to be settled in cash, through physical delivery
or with another financial instrument. These instruments may be traded on an
exchange or over-the-counter ("OTC"). Exchange traded instruments are
standardized and include futures and certain option contracts. OTC
contracts are negotiated between contracting parties and include forwards
and certain options. Each of these instruments is subject to various risks
similar to those related to the underlying financial instruments including
market and credit risk. In general, the risks associated with OTC contracts
are greater than those associated with exchange traded instruments because
of the greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Master due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or
security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that
an exchange or clearing organization acts as a counterparty to the
transactions. The Master's risk of loss in the event of counterparty
default is typically limited to the amounts recognized in the statements of
financial condition and not represented by the contract or notional amounts
of the instruments. The Master has concentration risk because a significant
counterparty or broker with respect to the Master's assets is CGM. As of
December 31, 2003, the counterparties to the Master's swap contracts were
Citibank, N.A., which is affiliated with the Master, Morgan Stanley Capital
Group Inc., J. Aron & Company and Hess Trading Company, LLC.
The Managing Member monitors and controls the Master'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 Master is
subject. These monitoring systems allow the Managing Member 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 majority of these instruments mature within one year of December 31,
2003. However, due to the nature of the Master's business, these
instruments may not be held to maturity.
F-27
Selected unaudited quarterly financial data for the years ended December 31,
2003 and 2002 are summarized below:
For the period from For the period from For the period from For the period from
October 1, 2003 to July 1, 2003 to April 1, 2003 to January 1, 2003 to
December 31, 2003 September 30, 2003 June 30, 2003 March 31, 2003
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $ (19,076,349) $ 5,417,949 $ 43,551,945 $ (117,610,770)
Net Income (loss) $ (19,209,758) $ 5,222,221 $ 43,542,648 $ (117,619,964)
Increase (decrease) in Net Asset
Value per Redeemable Unit $ (91.62) $ 24.17 $ 196.92 $ (530.46)
For the period from For the period from For the period from For the period from
October 1, 2002 to July 1, 2002 to April 1, 2002 to January 1, 2002 to
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
Net realized and unrealized trading
gains net of brokerage
commissions and clearing fees
including interest income $ 24,053,583 $ 13,555,805 $ 21,669,451 $ 26,396,010
Net Income $ 24,044,185 $ 13,546,406 $ 21,660,359 $ 26,386,816
Increase in Net Asset
Value per Redeemable Unit $ 111.45 $ 62.01 $ 158.46 $ 193.92
F-28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the principal accountant for the
Partnership. On July 9, 2002, that firm was dismissed as principal accountant
and KPMG LLP was engaged as principal accountant. The decision to change
accountants was approved by the General Partner of the Partnership.
In connection with the audit of the fiscal year ended December 31, 2001,
and through July 9, 2002, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference thereto in their report on the financial statements for the year.
The audit report of PricewaterhouseCoopers LLP on the financial statements
of the Partnership as of and for the year ended December 31, 2001 did not
contain any adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope, or accounting principle.
Item 9A. Control and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of year end, the Chief Executive Officer and Chief Financial
Officer have concluded that such controls and procedures are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation as of year end.
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, Citigroup Managed Futures Management LLC. Investment
decisions are made by the Advisors, AAA Capital Management, Inc. Willowbridge
Associates Inc. and Winton Capital Management.
The Partnership has not adopted a code of ethics that applies to officers
because it has no officers.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by
Citigroup Managed Futures Management LLC, its General Partner, which receives
compensation for its services, as set forth under "Item 1. Business." CGM, 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, 2003, CGM earned $3,493,763 in
brokerage commissions and clearing fees from the Partnership and through the
Partnership's investment in the Master. The Advisors earned $1,547,397 in
management fees during 2003.
34
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners. As of March 1, 2004,
one beneficial owner who is neither a director nor executive officer owns more
than five percent (5%) of the outstanding Redeemable Units issued by the
Registrant as follows:
Name and Address Amount and Nature of Percent
Title of Class of Beneficial Owner Beneficial Ownership of Class
Redeemable Units of Limited Arthur S. Demoss Foundation Fixed Inc 5,839.4423 Redeemable Units 7.4%
Partnership Interest Income- Private
Mr. Larry R. Nelson
777 South Flager Drive
West Tower
West Palm Beach, FL 33401
(b) Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnerships affairs are managed by the General
Partner. The General Partner owns Units of general partnership interest
equivalent to 499.8084 Units of Limited Partnership Interest (0.6%) as of
December 31, 2003.
Principals who own Redeemable Units of the Partnership:
David J. Vogel 17.9921 Redeemable Units
(c). Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Citigroup Global Markets Inc. and Citigroup Managed Futures 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."
Item 14. Principal Accountant Fees and Services
(a) Audit Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by KPMG for the audit of the
Partnership's annual financial statements, review of financial statements
included in the Partnership's Forms 10-Q and other services normally provided in
connection with regulatory filings or engagements are as follows:
2002 $18,414
2003 $16,571
(b) Audit-Related Fees. None
35
(c) Tax Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by KPMG for tax compliance and tax
advice given in the preparation of the Partnership's Schedule K1s, the
preparation of the Partnership's Form 1065 and preparation of all State Tax
Returns are as follows:
2002 $4,809
2003 $4,809
(d) All Other Fees. None.
(e) Not Applicable.
(f) Not Applicable.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements: Statements of Financial Condition at
December 31, 2003 and 2002.
Statements of Income and Expenses for the years ended
December 31, 2003, 2002 and 2001.
Statements of Partners' Capital for the years ended December
31, 2003, 2002 and 2001.
Notes to Financial Statements
(2) Financial Statement Schedules: Financial Data Schedule for
year ended December 31, 2003.
(3) Exhibits:
3.1- Certificate of Limited Partnership (filed as Exhibit 3.1 to
the Partnership Form 10) (previously filed)
3.2- Certificate of Amendment to the Certificate of Limited
Partnership (filed as Exhibit 3.2 to the Partnership Form
10 (previously filed)
3.3- Amended and Restated Limited Partnership Agreement (filed as
Exhibit 3.3 to the Partnership Form 10) (previously filed)
10.1-Management Agreement among the Partnership, the General
Partner, SFG Global Investments, Inc. and AAA Capital
Management, Inc.(filed as Exhibit 10.1 to the Partnership
Form 10) (previously filed)
10.2-Management Agreement among the Partnership, the General
Partner, SFG Global Investments, Inc. and Beacon Management
Corporation (filed as Exhibit 10.2 to the Partnership Form
10) (previously filed)
10.3-Management Agreement among the Partnership, the General
Partner, SFG Global Investments, Inc. and Willowbridge
Associates Inc. (filed as Exhibit 10.3 to the Partnership
Form 10) (previously filed)
10.4-Amended and Restated Customer Agreement between the
Partnership and Salomon Smith Barney Inc. (the predecessor
to CGM) (filed as Exhibit 10.4 to the Partnership Form
10) (previously filed)
10.5-Amended and Restated Agency Agreement between the
Partnership and Salomon Smith Barney Inc. (the predecessor
to CGM) (filed as Exhibit 10.5 to the Partnership Form 10)
(previously filed)
10.6-Form of Subscription Agreement (filed as Exhibit 10.6 to
the Partnership Form 10) (previously filed)
10.7-Amendment to the Management Agreement among the Partnership,
the General Partner, SFG Global Investments, Inc. and AAA
Capital Management, Inc. (filed as Exhibit 10.7 to the
Partnership Form 10) (previously filed)
10.8-Amendment to the Management Agreement among the Partnership,
the General Partner, SFG Global Investments, Inc. and Beacon
Management Corporation (filed as Exhibit 10.8 to the
Partnership Form 10) (previously filed)
10.9-Amendment to the Management Agreement among the Partnership,
the General Partner, SFG Global Investment, Inc. and
Willowbridge Associates Inc. (filed as Exhibit 10.9 to the
Partnership Form 10) (previously filed)
36
10.10- Letter from the General Partner to AAA Capital Management,
Inc. extending the Management Agreement for 2000(filed as
Exhibit 10.10 to the Partnership Form 10) (previously filed)
10.11- Letter from the General Partner to Beacon Management
Corporation extending the Management Agreement for 2000
(filed as Exhibit 10.11 to the Partnership Form 10)
(previously filed)
10.12- Letter from the General Partner to AAA Capital Management,
Inc. extending the Management Agreement for 2001 (filed as
Exhibit 10.12 to the Partnership Form 10) (previously filed)
10.13- Letter from the General Partner to Beacon Management
Corporation extending the Management Agreement for 2001
(filed as Exhibit 10.13 to the Partnership Form 10)
(previously filed)
10.14- Letter from the General Partner to Willowbridge
Associates, Inc. extending the Management Agreement for 2001
(filed as Exhibit 10.14 to the Partnership Form 10)
(previously filed)
10.15- Letter from the General Partner to AAA Capital Management,
Inc. extending the Management Agreement for 2002 (filed as
Exhibit 10.15 to the Partnership Form 10) (previously filed)
10.16- Letter from the General Partner to Beacon Management
Corporation extending the Management Agreement for 2002
(filed as Exhibit 10.16 to the Partnership Form 10)
(previously filed)
10.17- Letter from the General Partner to Willowbridge
Associates, Inc. extending the Management Agreement for 2002
(filed as Exhibit 10.17 to the Partnership Form 10)
(previously filed)
10.17- Letter from the General Partner to Willowbridge
Associates, Inc., AAA Capital Management, Inc. extending the
Management Agreement for 2003 (file herein)
10.18-Management Agreement among the Partnership, the General
Partner, Winton Capital Management (file herein)
10.19- Letter from the General Partner to Beacon Management
Corporation terminating the Management Agreement. (filed
herein)
The exhibits required to be filed by Item 601 of Regulations
S-K are incorporated herein by reference.
16.1 - Letter from PricewaterhouseCoopers LLP (filed herein).
31.1 - Rule 13a-14(a)/15d-14(a) Certification (Certification of
President and Director).
31.2 - Rule 13a-14(a)/15d-14(a) Certification (Certification of
Chief Financial Officer and Director).
32.1 - Section 1350 Certification (Certification of President and
Director).
32.2 - Section 1350 Certification (Certification of Chief
Financial Officer and Director).
(b) Report on Form 8-K: None Filed.
37
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
No proxy material has been sent to Limited Partners.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K authorized, in the City of New York and State of New York on the 15th day
of March 2004.
SALOMON SMITH BARNEY ORION FUTURES FUND L.P.
By: Citigroup Managed Futures LLC
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.
/s/ David J. Vogel /s/ Shelley Ullman
David J. Vogel Shelley Ullman
Director, Principal Executive Director
Officer and President
/s/ Maureen O'Toole /s/ Steve J. Keltz
Maureen O'Toole Steve J. Keltz
Director Secretary and Director
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
39
Exhibit 31.1
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-K of Salomon Smith Barney
Orion Futures Fund L.P. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 15, 2004
/s/ David J. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
40
Exhibit 31.2
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-K of Salomon Smith Barney
Orion Futures Fund L.P. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: March 15, 2004
/s/ Daniel R. Mcauliffe, Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
41
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Salomon Smith Barney Orion Futures Fund
L.P. (the "Partnership") on Form 10-K December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, David
J. Vogel, President and Director of Citigroup Managed Futures LLC, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ David J. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
Date: March 15, 2004
42
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Salomon Smith Barney Orion Futures Fund
L.P. (the "Partnership") on Form 10-K December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel
R. McAuliffe, Jr., Chief Financial Officer and Director of Citigroup Managed
Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Daniel r. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
Date: March 15, 2004
43
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
AAA Capital Management Inc.
5051 Westheimer - Suite 2100
Houston, Texas 77056
Attention: Mr. Anthony Annunziato
Re: Management Agreement Renewals
Dear Mr. Annunziato:
We are writing with respect to your management agreements concerning the
commodity pools to which reference is made below (the "Management Agreements").
We are extending the term of the Management Agreements through June 30, 2003 and
all other provisions of the Management Agreements will remain unchanged.
o Smith Barney AAA Energy Fund L.P.
o SB AAA Master Fund LLC
o Salomon Smith Barney Orion Futures Fund L.P.
o Aurora 2001
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
AGREED AND ACCEPTED
AAA Capital Management Inc.
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
Willowbridge Associates Inc.
101 Morgan Lane - Suite 180
Plainsboro, N.J. 08536
Attention: Ms. Bonnie Huff / Ms. Janet Boyer
Re: Management Agreement Renewals
Dear Ms. Huff and Ms. Boyer:
We are writing with respect to your management agreements concerning the
commodity pools to which reference is made below (the "Management Agreements").
We are extending the term of the Management Agreements through June 30, 2003 and
all other provisions of the Management Agreements will remain unchanged.
o Salomon Smith Barney Orion Futures Fund L.P.
o Smith Barney Principal Plus Futures Fund L.P. II
o Smith Barney Diversified Futures Fund L.P.
o Smith Barney Diversified Futures Fund L.P. II
o
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. Mcauliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
AGREED AND ACCEPTED
By:/s/ Bonnie Huff
Citigroup Managed Futures LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
April 29, 2003
Beacon Management Corporation
47 Hullfish Street
Princeton, N.J. 08542
Attn: Mr. Mark S. Stratton
Re: Salomon Smith Barney Orion Futures Fund L.P. - (Acct. #258-19000)
Salomon Smith Barney Diversified 2000 Fund L.P. - (Acct. #258-20001)
Dear Mr. Mark S. Stratton:
Please liquidate all of your positions in the above referenced funds in an
orderly fashion beginning immediately so that the amounts are flat as of April
30 close of business . This will effectively terminate your management agreement
with these funds. Thank you for your service and we look forward to the
possibility of working together in the future.
If you have any questions, please call myself or Jennifer Magro at
(212)723-5413.
Very Truly Yours,
/s/ Daniel R. Mcauliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer
Agreed to and accepted
BEACON MANAGEMENT CORPORATION
By: /s/ Mark S. Stratton