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 0-50272
SALOMON SMITH BARNEY AAA ENERGY FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 03-0407557
(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 $110,761,964
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, 112,077.0085 Limited Partnership Redeemable Units were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
(a) General development of business. Salomon Smith Barney AAA Energy Fund
L.P. II (the "Partnership") is a limited partnership organized on March 2, 2002
under the partnership laws of the State of New York to engage directly or
indirectly in the speculative trading of diversified portfolio of commodity
interests, including commodity options and commodity futures contracts on United
States exchanges and certain foreign exchanges. The Partnership may trade
commodity futures and options contracts of any kind, but currently trades solely
energy and energy related products. In addition, the Partnership may enter into
swap contracts on energy related products. The Partnership has invested all of
its assets in SB AAA Master Fund LLC, a New York Limited Liability Company (the
"Master"). The commodity interests that are traded by the Master are volatile
and involve a high degree of market risk. A total of 150,000 redeemable units of
Limited Partnership Interest in the Partnership ("Redeemable Units") have been
offered to the public. During the initial offering period (May 31, 2002 through
July 1, 2002) the Partnership sold 93,975 Redeemable Units. The Partnership
commenced trading on July 1, 2002. No securities which represent an equity
interest or any other interest in the Partnership trade on any public market.
Sales and redemptions of Redeemable Units and general partner contributions and
redemptions for the years ended December 31, 2003 and 2002 are reported in the
Statement of Partners' Capital on page F-7 under "Item 8. Financial Statements
and Supplementary Data."
The Partnership will be liquidated upon the first to occur of the
following: December 31, 2018; if the net asset value per Redeemable Unit falls
below $400 per Redeemable Unit as of the close of business on any business day
or upon the earlier occurrence of certain other circumstances set forth in the
Limited Partnership Agreement of the Partnership (the "Limited Partnership
Agreement").
Effective July 1, 2002, the Partnership allocated all of its capital to the
Master. With this cash, the Partnership purchased 64,945.0387 Units of the
Master with a fair value of $94,925,000. The Master was formed in order to
permit commodity pools managed now or in the future by AAA Capital Management,
Inc. ("AAA") (the "Advisor") using the Energy with Swaps Program, the Advisor's
proprietary trading program, to invest together in one trading vehicle.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management LLC,
acts as the general partner (the "General Partner") of the Partnership and the
managing member (the "Managing Member") of the Master. In addition, the Advisor
is a Special Limited Partner of the Partnership, an employee of CGM and a
related party. Individual and pooled accounts currently managed by the Advisor,
including the Partnership (collectively, the "Feeder Funds"), are permitted to
be non-managing members of the Master. The General Partner and the Advisor
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.
At December 31, 2003 and 2002, the Partnership owns 38.8% and 37.2%,
respectively, of the Master. It is the Partnership's intention to continue to
invest substantially all of its assets in the Master. The performance of the
Partnership is directly affected by the performance of the Master.
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Citigroup Global Markets Inc. ("CGM"), formerly known as Salomon Smith
Barney Inc., acts as the Partnership's and the Master Fund's commodity broker.
CGM is an affiliate of the General Partner. The General Partner is wholly owned
by Citigroup Global Markets Holdings Inc., formerly Salomon Smith Barney
Holdings Inc., ("CGMH"), which is the sole owner of CGM. CGMH is a wholly owned
subsidiary of Citigroup Inc. ("Citigroup").
The 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.
Under the Limited Partnership Agreement, the General Partner has sole
responsibility for the administration of the business and affairs of the
Partnership, but may delegate trading discretion to one or more trading
advisors. The Partnership will pay the General Partner a monthly administrative
fee in return for its services equal to 1/12 of 0.50% (0.50% per year) of
month-end Net Assets of the Partnership. 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.
The General Partner has entered into a management agreement (the
"Management Agreement") with the Advisor who will make all commodity trading
decisions for the Partnership. Mr. A. Anthony Annunziato is an employee of CGM.
The Advisor is not responsible for the organization or operation of the
Partnership.
The Partnership will pay the Advisor a monthly management fee equal to 1/6
of 1% (2% per year) of the adjusted month-end Net Assets allocated by the
Master. 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 Advisor is a
Special Limited Partner of the Partnership and receives an annual profit share
allocation to its capital account in the Partnership equal to 20% of New Trading
Profits (as defined in the Management Agreement) earned on behalf of the
Partnership during each calendar year in the form of Special Limited Partner
Units.
All brokerage commissions, exchange, clearing, user, give-up, and NFA fees
will be borne by the Master and allocated to the Partnership through its
investment in the Master. The Customer Agreement between CGM and the Master
gives the Master the legal right to net unrealized gains and losses. Brokerage
fees will be paid for the life of the Partnership, although the rate at which
such fees are paid may be changed. CGM will pay the Partnership interest on 80%
of the average daily equity allocated to the Partnership by the Master during
each month at a 30-day U.S. Treasury bill rate determined weekly by CGM based on
the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30
days from the date on which such weekly rate is determined. 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
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Partnership's net income from operations for the year ended December 31, 2003
and the period from July 1, 2002 (commencement of trading operations) to
December 31, 2002 are set forth under "Item 6. Selected Financial Data." The
Partnership's capital as of December 31, 2003, was $96,602,912.
(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) 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 Holding 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 Global Markets Inc. ("CGM") is a New York corporation with its
principal place of business at 388 Greenwich Street, New York, New York 10013.
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 Citigroup Global Markets (formerly known as
Salomon Smith Barney) 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.
4
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
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.
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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
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:
6
(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.
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
7
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
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
8
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
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.
9
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
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.
10
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.
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
11
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.
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 1,639.
(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 21,674.2111 Redeemable Units
totaling $22,541,000. For the period from July 1, 2002
(commencement of operations) to December 31, 2002, there were
additional sales of 28,827.4310 Redeemable Units totaling
$28,797,000 and contributions by the General Partner representing
1,526.2826 Unit equivalents totaling $1,500,000. During the
initial offering period there were sales of 93,975 Redeemable
Units totaling $93,975,000 and contributions by the General
Partner representing 950 Unit equivalents totaling $950,000.
Proceeds from the sale of additional Redeemable Units are used in
the trading of commodity interests including futures contracts,
options, swaps and forward contracts.
12
Item 6. Selected Financial Data. The Partnership commenced trading operations on
July 1, 2002. Net realized and unrealized trading gains (losses) from Master,
interest income allocated from Master, net income (loss) and increase (decrease)
in Net Asset Value per Redeemable Unit for the year ended December 31, 2003 and
the period from July 1, 2002 (commencement of trading operations) to December
31, 2002 and total assets at December 31, 2003 and 2002 were as follows:
2003 2002
----------- ----------
Net realized and unrealized trading gains (losses)
net of expenses allocated from Master, brokerage
commissions and clearing fees of $5,822,971 and
$5,422,049, respectively $(36,992,242) $12,739,048
Interest income allocated from Master 977,786 731,136
----------- ----------
$(36,014,456) $13,470,184
----------- ----------
Net income (loss) before
Allocation to Special Limited Partner $(38,965,212) $11,945,991
----------- ----------
Allocation to Special Limited Partner -- 2,240,668
----------- ----------
Net income (loss) available for pro rata distribution
to Partners $(38,965,212) $9,705,323
----------- ----------
Increase (decrease) in Net Asset Value per Redeemable
Unit $(289.27) $80.92
----------- ----------
Total assets $99,038,186 $130,433,981
----------- ----------
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Partnership, through its investment in the Master, seeks to achieve
capital appreciation through speculative trading, directly or indirectly, in
commodity interests generally including, commodity futures and commodity option
contracts on United States exchanges and certain foreign exchanges and swaps.
The Partnership, through its investment in the Master, intends to trade only
energy and energy related products, as well as the Goldman Sachs Commodity Index
(an index future comprised of energy and other products), traded on the Chicago
Mercantile Exchange, but is authorized to trade commodity futures, swaps and
options contracts of any kind. The Partnerhsip has invested all of its assets in
the Master. The Advisor is authorized to trade forward contracts on behalf of
the Partnership and the Master but does not currently intend to do so (certain
swaps that the Advisor trades are, however, the substantial economic equivalent
of forward contracts).
The General Partner/Managing Member manages all business of the
Partnership/Master. The General Partner has delegated its responsibility for the
investment of the Partnership's assets to AAA. The Partnership has invested
these assets in the Master. 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 advisor for the Partnership, the General Partner
considered past performance, trading style, volatility of markets traded and fee
requirements.
Responsibilities of the General Partner/Managing Member include:
o due diligence examinations of the Advisor;
o selection, appointment and termination of the Advisor;
o negotiation of the management agreement; and
o monitoring the activity of the Advisor
In addition, the General Partner/Managing Member 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/Master. 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/Managing Member shall seek the best prices and services
available in its commodity futures brokerage transactions. The General
Partner/Managing Member reviews at least annually, the brokerage rates charged
to commodity pools similar to the Partnership/Master to determine that the
brokerage fee the Partnership/Master pays is competitive with other rates.
14
The Partnership's assets 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.
(a) Liquidity.
The Partnership does not engage in sales of goods or services. Its only
assets are its Investment in the Master and cash. The Master does not engage in
the sale of goods or services. Because of the low margin deposits normally
required in commodity trading, relatively small price movements may result in
substantial losses to the Partnership, through its investment in the Master.
Such substantial losses could lead to a material decrease in liquidity.
In the first quarter of 2003, the Master and therefore the Partnership
experienced a cumulative loss of 25%. 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 2003, 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,
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
15
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 Master follows
certain trading policies, including:
(i) The Master invests its assets only in commodity interests that the
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.
(ii) The 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 Master's net assets allocated to the
Advisor.
(iii)The Master 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 Master 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 Master does not utilize borrowings except short-term borrowings if
the Master takes delivery of any cash commodities.
(vi) The Advisor may, from time to time, employ trading strategies such as
spreads or straddles on behalf of the Master. 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.
16
(vii)The Master 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.
The Partnership, through its investment in the Master, is party to
financial instruments with off-balance sheet risk, including derivative
financial instruments and derivative commodity instruments.
The Master is party to financial instruments with off-balance sheet risk,
including derivative financial instruments and derivative commodity instruments
in the normal course of its business. These financial instruments include
forwards, futures, 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 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 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 statement of financial condition and not represented
by the contract or notional amounts of the instruments. The Master has credit
risk and concentration risk because the sole counterparty or broker with respect
to the Master's assets is CGM.
The General Partner/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 General Partner/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. (See
also "Item 8. Financial Statements and Supplementary Data" for further
information on financial instrument risk included in the notes to financial
statements.)
17
Other than the risks inherent in commodity futures and swaps trading, the
Master knows of no trends, demands, commitments, events or uncertainties which
will result in or which are reasonably likely to result in the Master'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
Advisor 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.
For the year ended December 31, 2003, there were additional sales of
21,674.2111 Redeemable Units totaling $22,541,000. For the period from July 1,
2002 (commencement of operations) to December 31, 2002, there were additional
sales of 28,827.4310 Redeemable Units totaling $28,797,000 and contributions by
the General Partner representing 1,526.2826 Unit equivalents totaling
$1,500,000.
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, 16,891.2743
Redeemable Units were redeemed totaling $13,818,158. For the period from July 1,
2002 (commencement of operations) to December 31, 2002, 7,684.5966 Redeemable
Units were redeemed totaling $8,032,041 and 2,076.6158 Units of Special Limited
Partnership Interest totaling $2,240,668 were redeemed.
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.
18
(c) Results of Operations.
For the year ended December 31, 2003 the Net Asset Value per Redeemable
Unit decreased 26.8% from $1,078.66 to $789.39. For the period from July 1, 2002
(commencement of operations) to December 31, 2002 the Net Asset Value per
Redeemable Unit increased 7.8% from $1,000.00 to $1,078.66.
The Partnership, through its investment in the Master, experienced a net
trading loss of $31,169,271 before commissions and expenses for the year ended
December 31, 2003. Losses were primarily attributable to the trading of NYMEX
Natural Gas, NYMEX Heating Oil, NYMEX Unleaded Gas, IPE and energy swaps and
were partially offset by gains in, IPE Gas Oil and NYMEX Crude Oil.
The year 2003 presented numerous challenges for the Partnership/Master and
AAA.
In a broad sense, the year can be viewed in three parts: (1) the first
quarter saw the emergence of hyper-volatility in US natural gas markets and a
steep drawdown in net asset value of the Partnership; (2) in the second and
third quarters the Advisor's focus was on recovery and solid gains were
achieved; (3) and the fourth quarter was progressing well until early December
when sizable losses were incurred in a rapidly climbing US natural gas market.
In the first quarter, February and March saw extraordinary volatility
strike the natural gas and crude oil markets as explained under Liquidity. As a
discretionary advisor relying upon its principals' assessment of fundamental
supply and demand relationships, this volatility was both unexpected and greatly
disruptive. Once this unusual price disequilibrium was shaken out of the
markets, more normal conditions resurfaced and trading results resumed a course
more typical of AAA's performance.
Over the course of the next seven months, the Patnership had two negative
months of performance (-1.6% in July and -.30% in September) with the other five
months ranging in returns from +0.70% to +6.80%. By the end of November, the
Partnership had recovered 24%.
In early December, a sharp drop in NAV occurred as the result of sizable
losses in a rapidly climbing US natural gas market. The price of a natural gas
rose over 50% in a few weeks despite weak/discounted cash markets for heating
fuels and surprisingly small draw in high underground storage levels during an
extremely cold weather period. Petroleum also rallied to new post war highs near
$35.00 on growing signs that the persistent weakness in the US dollar versus the
Euro and expectations of a widespread commodity boom/inflationary period has
brought new money to the buy side of these markets. Long positions in forward
petroleum helped mitigate losses in NAV during December.
So while progress was thwarted for the month, the Advisor modified its
views and approach to trading to adjust to a new emerging market dynamic. For
much of this year that has entailed smaller positions and reduced exposure to
natural gas markets. Going forward the changes are also likely to include a
further reduction in the types of trades the Advisor expects to make in natural
gas and a greater focus on limited risk/long option positions.
19
To put the Advisor in perspective, during the past five years, AAA has
built a team of energy trading professionals to help broaden AAA's research and
trading capabilities as well as to tap into new market opportunities. AAA now
comprises over a dozen people and four trading principals who are responsible
for specific market sectors and a well-defined portion of AAA's assets under
management.
The Partnership, through its investment in the Master, experienced net
trading gains of $18,161,097 before commissions and expenses for the period from
July 1, 2002 (commencement of operations) to December 31, 2002. Gains were
primarily attributable to the Master's trading of NYMEX Natural Gas, IPE Gas Oil
and NYMEX Heating Oil and energy swaps were partially offset by losses in NYMEX
Crude Oil, NYMEX Unleaded Gas and IPE Brent Crude.
Commodity markets are highly volatile. Broad price fluctuations and rapid
inflation increase the risks involved in commodity trading, but also increase
the possibility of profit. The profitability of the Master and the Partnership
depends on the Advisor's 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
Advisor correctly makes 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/Master 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/Master's ability
to gather, process, and communicate information efficiently and securely,
without interruption, to customers, among Redeemable Units within the
Partnership/Master, and in the markets where the Partnership/Master
participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in
the documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
20
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
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/Master
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/Master'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 Master's positions. The majority of the Master's
positions will be exchange-traded futures contracts, which will be valued daily
at settlement prices published by the exchanges. Swap contracts 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/Master's assets will be valued by objective
measures and without difficulty.
21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Master is a speculative commodity pool. The market sensitive
instruments held by the Master are acquired for speculative trading purposes,
and all or substantially all of the Partnership's assets are subject to the risk
of trading loss through its investment in the Master. Unlike an operating
company, the risk of market sensitive instruments is integral, not incidental,
to the Master's and the Partnership'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
Master's open positions and, consequently, in its earnings and cash flow. The
Master's and the Partnership'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, the diversification effects
among the Master's open positions and the liquidity of the markets in which it
trades.
The 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
Master's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Master could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Master's speculative trading and the recurrence in the
markets traded by the 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 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
Master's losses in any market sector will be limited to Value at Risk or by the
Master's attempts to manage its market risk.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Master's and the
Partnership's market risk exposures contain "forward-looking statements" within
the meaning of the safe harbor from civil liability provided for such statements
by the Private Securities Litigation Reform Act of 1995 (set forth in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor except for statements
of historical fact (such as the terms of particular contracts and the number of
market risk sensitive instruments held during or at the end of the reporting
period).
22
The Master's and the Partnership's risk exposure in the various market
sectors traded by the Advisor is quantified below in terms of Value at Risk. Due
to the Master's mark-to-market accounting, any loss in the fair value of the
Master's open positions is directly reflected in the Master's earnings (realized
or unrealized) and cash flow.
Exchange maintenance margin requirements have been used by the 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 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 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 Master in almost all cases fluctuate to a lesser extent than those of the
underlying instruments.
In quantifying the 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 Master's positions
are rarely, if ever, 100% positively correlated have not been reflected.
23
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 $36,036,714
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
24
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, 2002. 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 Value at Risk
25
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the 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 Master. The magnitude of the 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 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 -- 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 Master's market
sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Master's market risk
exposures - except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the 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
of 1934. The 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 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 Master. There
can be no assurance that the 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.
The following were the primary trading risk exposures of the Master as of
December 31, 2003, by market sector.
Energy. Energy related products, such as crude oil, heating oil, gasoline
and natural gas, constitute the principal market exposure of the Master. The
Master has substantial market exposure to gas and oil price movements, often
resulting from political developments in the Middle East. Political developments
in other countries or regions can also materially impact upon the prices of
energy products, as could changing supply and demand relationships, weather,
governmental, commercial and trade programs and policies, and other significant
economic events. Energy prices can be volatile and substantial profits and
losses have been and are expected to continue to be experienced in these
markets.
The Master engages in swap transactions in crude oil and other energy
related products. In this connection, the Master contracts with its counterparty
to exchange a stream of payments computed by reference to a notional amount and
the price of the energy product that is the subject of the swap. Swap contracts
are not guaranteed by an exchange or clearinghouse. CGM does not engage in swap
transactions as a principal.
26
The Master usually enters into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the agreement, with the Master receiving or paying, as the case may
be, only the net amount of the two payments. Swaps do not involve the delivery
of underlying assets or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that the Master is contractually
obligated to make. If the counterparty to a swap defaults, the Master's risk of
loss consists of the net amount of payments that the Master is contractually
entitled to receive.
The Master may also enter into spot transactions to purchase or sell
commodities with CGM, or one of its affiliates, as principal. Such spot
transactions provide for two-day settlement and are not margined. Such
transactions may be entered into in connection with exchange for physical
transactions. Like the swap contract market, the spot market is a principals'
market so there is no clearinghouse guarantee of performance. Instead, the
Master is subject to the risk of inability of, or refusal by, a counterparty to
perform with respect to the underlying contract.
Other Commodity Interests. The Master primarily emphasizes the trading of
energy products, but may also trade some portion of its assets in other
commodity interests, including, but not limited to, commodity interest contracts
on the Goldman Sachs Commodity Index (an index future comprised primarily of
energy products). Commodity interest prices can be affected by numerous factors,
including political developments, weather conditions, seasonal effects and other
factors which affect supply and demand for the underlying commodity.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and controls the Partnership's, through its
investment in the Master, 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 and the Partnership are subject.
The General Partner monitors the Master's performance and the concentration
of its open positions, and consults with the Advisor concerning the 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 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 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.
27
Item 8. Financial Statements and Supplementary Data.
SALOMON SMITH BARNEY AAA ENERGY FUTURES PARTNERSHIP L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation. F-2
Independent Auditors' Report. F-3
Financial Statements:
Statement of Financial Condition
at December 31, 2003 and 2002. F-4
Statement of Income and Expenses
for the years ended December 31,
2003 and 2002. F-5
Statement of Partners' Capital
for the year ended December 31,
2003, and for the period from March 25, 2002
(date Partnership was organized) to December 31, 2002. F-6
Notes to Financial Statements. F-7 - F-11
Selected Unaudited Quarterly Financial
Data. F-12
Financial Statements of the SB AAA
Master Partnership LLC
Oath or Affirmation F-13
Independent Auditors' Reports. F-14 - 15
Statement of Financial Condition at
December 31, 2003 and 2002. F-16
Condensed Schedule of Investments at
December 31, 2003 and 2002. F-17 - F-18
Statement 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. F-19
Statement 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. F-20
Notes to Financial Statements. F-21 - F-24
Selected Unaudited Quarterly Financial Data. F-25
To the Limited Partners of
Salomon Smith Barney AAA Energy Fund L.P. II
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 AAA
Energy Fund L.P. II
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 AAA Energy Fund L.P. II:
We have audited the accompanying statements of financial condition of Salomon
Smith Barney AAA Energy Fund L.P. II (the Partnership), as of December 31, 2003
and 2002, and the related statements of income and expenses for the year ended
December 31, 2003 and the period from July 1, 2002 (commencement of operations)
through December 31, 2002 and its partners' capital for the year ended December
31, 2003 and the period from March 25, 2002 (date Partnership was organized) to
December 31, 2002. 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.
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 AAA Energy
Fund L.P. II as of December 31, 2003 and 2002, and the results of its operations
for the year ended December 31, 2003 and the period from July 1, 2002 through
December 31, 2002 and its partners' capital for the year ended December 31, 2003
and the period from March 25, 2002 to December 31, 2002, 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
Salomon Smith Barney AAA
Energy Fund L.P. II
Statements of Financial Condition
December 31, 2003 and 2002
2003 2002
------------- -------------
Assets:
Investment in Master, at fair value $98,995,554 $130,402,024
Cash 42,632 31,957
------------- -------------
$99,038,186 $130,433,981
------------- -------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Management fees (Note 3b) $168,162 $221,483
Administrative fees (Note 3a) 42,041 55,371
Professional fees 36,275 38,750
Other 3,314 4,243
Due to CGM (Note 6) -- 40,426
Redemptions payable (Note 5) 2,185,482 3,228,426
------------- -------------
2,435,274 3,588,699
Partners' capital (Notes 1 and 5):
General Partner, 2,476.2826 Unit equivalents outstanding
in 2003 and 2002 1,954,753 2,671,067
Limited Partners, 119,900.7712 and 115,117.8344 Redeemable
Units of Limited Partnership Interest outstanding in 2003
and 2002, respectively 94,648,159 124,174,215
------------- -------------
96,602,912 126,845,282
------------- -------------
$99,038,186 $130,433,981
------------- -------------
See accompanying notes to financial statements.
F-4
Salomon Smith Barney AAA
Energy Fund L.P. II
Statements of Income and Expenses
for the year ended December 31, 2003
and for the period from July 1, 2002
(commencement of operations)
to December 31, 2002
2003 2002
------------- --------------
Income:
Realized gains (losses) on closed positions
from Master $(37,025,140) $19,284,905
Change in unrealized gains (losses) on
open positions from Master 5,855,869 (1,123,808)
Interest income allocated from Master 977,786 731,136
Expenses allocated from Master (5,822,971) (5,422,049)
------------- --------------
(36,014,456) 13,470,184
Expenses:
Management fees (Note 3b) 2,233,848 1,181,093
Administrative fees (Note 3a) 558,459 295,274
Professional fees 142,414 38,750
Other expenses 16,035 9,076
------------- --------------
2,950,756 1,524,193
Net income (loss) before allocation to the Special
Limited Partner (38,965,212) 11,945,991
Allocation to the Special Limited Partner -- 2,240,668
------------- --------------
Net income (loss) available for pro rata distribution $(38,965,212) $9,705,323
------------- --------------
Net income (loss) per Redeemable Unit of Limited
Partnership Interest and General Partner Unit
equivalent (Notes 1 and 7) $(289.27) $80.92
------------- --------------
See accompanying notes to financial statements.
F-5
Salomon Smith Barney AAA
Energy Fund L.P. II
Statements of Partners' Capital
for the year ended December 31, 2003
and for the period from March 25, 2002
(date Partnership was organized)
to December 31, 2002
Special
Limited Limited General
Partners Partner Partner Total
-------------- ------------- ------------- -------------
Initial capital contributions, 1 Unit of Limited
Partnership Interest and General Partner's
contribution representing 1 Unit equivalent $ 1,000 $ -- $ 1,000 $ 2,000
Proceeds from offering of 93,974 Redeemable Units
of Limited Partnership Interest and General
Partner's contribution representing 949 Unit
equivalents (Note 1) 93,974,000 -- 949,000 94,923,000
Offering costs (Note 6) (49,500) -- (500) (50,000)
-------------- ------------- ------------- -------------
Opening Partnership capital for operations 93,925,500 -- 949,500 94,875,000
Sale of 28,827.4310 Redeemable Units
of Limited Partnership Interest and
General Partner's contribution representing
1,526.2826 Unit equivalents 28,797,000 -- 1,500,000 30,297,000
Redemption of 7,684.5966 Redeemable Units
of Limited Partnership Interest (8,032,041) -- -- (8,032,041)
Redemption of 2,076.6158 Redeemable Units
of Special Limited Partnership Interest -- (2,240,668) -- (2,240,668)
Allocation of net income for the year ended
December 31, 2002:
Allocation of 2,076.6158 Redeemable Units
of Limited Partnership Interest to the Special
Limited Partner (Note 3b) -- 2,240,668 -- 2,240,668
Net income available for pro rata distribution 9,483,756 -- 221,567 9,705,323
-------------- ------------- ------------- -------------
Partners' capital at December 31, 2002 124,174,215 -- 2,671,067 126,845,282
Net loss available for pro rata distribution (38,248,898) -- (716,314) (38,965,212)
Sale of 21,674.2111 Redeemable Units
of Limited Partnership Interest 22,541,000 -- -- 22,541,000
Redemption of 16,891.2743 Redeemable Units of
Limited Partnership Interest (13,818,158) -- -- (13,818,158)
-------------- ------------- ------------- -------------
Partners' capital at December 31, 2003 $94,648,159 $ -- $1,954,753 $96,602,912
-------------- ------------- ------------- -------------
See accompanying notes to financial statements.
F-6
Salomon Smith Barney AAA
Energy Fund L.P. II
Notes to Financial Statements
1. Partnership Organization:
Salomon Smith Barney AAA Energy Fund L.P. II (the "Partnership") is a
limited partnership which was organized on March 25, 2002 under the
partnership laws of the State of New York to engage, directly or
indirectly, in the speculative trading of a diversified portfolio of
commodity interests, including commodity options and commodity futures
contracts on United States exchanges and certain foreign exchanges. The
Partnership may trade commodity futures and options contracts of any kind
but intends initially to trade solely energy and energy related products.
In addition, the Partnership may enter into swap contracts on energy
related products. The commodity interests that are traded by the
Partnership are volatile and involve a high degree of market risk. During
the initial offering period (May 31, 2002 through July 1, 2002), the
Partnership sold 93,975 redeemable units of Limited Partnership Interest
("Redeemable Units"). The Partnership commenced trading on July 1, 2002.
Effective July 1, 2002, the Partnership allocated all of its capital to the
SB AAA Master Fund LLC, a New York Limited Liability Company (the
"Master"). With this cash, the Partnership purchased 64,945.0387 Units of
the Master with a fair value of $94,925,000. The Master was formed in order
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 trading
vehicle. In addition, the Advisor is a Special Limited Partner of the
Partnership, an employee of CGM and a related party. Individual and pooled
accounts currently managed by the Advisor, including the Partnership
(collectively, the "Feeder Funds"), are permitted to be non-managing
members of the Master. The General Partner and the Advisor 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 financial statements of the Master, including the condensed schedules
of investments, should be read together with the Partnership's financial
statements.
At December 31, 2003 and 2002, the Partnership owns 38.8% and 37.2% of the
Master. It is the Partnership's intention to continue to invest
substantially all of its assets in the Master. The performance of the
Partnership is directly affected by the performance of the Master.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
LLC, acts as the general partner (the "General Partner") of the Partnership
and a managing member of the Master. 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").
The General Partner and each limited partner share in the profits and
losses of the Partnership, after the allocation to the Special Limited
Partner (as defined in Note 3b), 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, 2018; the net asset value of a Redeemable Unit
decreases to less than $400 per Redeemable Unit as of a close of any
business day; the aggregate net assets of the Partnership decline to less
than $1,000,000; or under certain other circumstances as defined in the
Limited Partnership Agreement.
F-7
2. Accounting Policies:
a. The value of the Partnership's investment in the Master reflects the
Partnership's proportional interest in the Members' Capital of the
Master. All of the unrealized and realized gains and losses from the
commodity transactions of the Master are allocated pro rata among the
investors at the time of such determination. All commodity interests
(including derivative financial instruments and derivative commodity
instruments) held by 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
or other measures of fair value deemed appropriate by management of
the General Partner for those commodity interests and foreign
currencies for which market quotations are not readily available,
including dealer quotes for swaps and certain option contracts.
Investments in commodity interests denominated in foreign currencies
are translated into U.S. dollars at the exchange rates prevailing on
the last business day of the year. Realized gains (losses) and changes
in unrealized 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. 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.
c. 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.
d. 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 will pay the General
Partner a monthly administrative fee in return for its services equal
to 1/12 of 0.50% (0.50% per year) of month-end Net Assets of the
Partnership. 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.
b. Management Agreement:
The General Partner, on behalf of the Partnership, has entered into a
Management Agreement with the Advisor, a registered commodity trading
advisor. Mr. A. Anthony Annunziato is the sole trading principal of
the Advisor and is also an employee of CGM. The Partnership is
obligated to pay the Advisor a monthly management fee equal to 1/6 of
1% (2% per year) of month-end Net Assets allocated by the Master.
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 Advisor is a Special Limited Partner of the
Partnership and receives an annual profit share allocation to its
capital account in the Partnership equal to 20% of New Trading
Profits, as defined in the Management Agreement, earned on behalf of
F-8
the Partnership during each calendar year in the form of Special
Limited Partner Units.
c. Customer Agreement:
All brokerage commissions, exchange, clearing, user, give-up, and
National Futures Association fees will be borne by the Master and
allocated to the Partnership through its investment in the Master. CGM
will pay a portion of brokerage fees to its financial consultants who
have sold Redeemable Units in this Partnership. The Partnership's
assets not held at the Master are held in the Partnership's account at
CGM. The Partnership's cash is deposited by CGM in segregated bank
accounts to the extent required by Commodity Futures Trading
Commission regulations. CGM will pay the Partnership interest on 80%
of the average daily equity allocated to the Partnership by the Master
during each month at a 30-day U.S. Treasury bill rate determined
weekly by CGM based on the average non-competitive yield on 3-month
U.S. Treasury bills maturing in 30 days from the date on which such
weekly rate is determined. The Customer Agreement between CGM and the
Master gives the Master the legal right to net unrealized gains and
losses. The Customer Agreement may be terminated upon notice by either
party.
4. Trading Activities:
The results of the Master's trading activities are shown in the statements
of income and expenses.
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 Redeemable Units at the Net Asset Value as of the last day of
a month on 10 days notice to the General Partner. There is no fee charged
to limited partners in connection with redemptions.
6. Offering Costs:
Offering costs of approximately $50,000 relating to the issuance of the
Partnership's Redeemable Units offered were initially paid by CGM. These
costs were reimbursed to CGM by the Partnership over the first 12 months
(together with interest at the prime rate quoted by JPMorgan Chase & Co.).
For the period ended December 31, 2003 and 2002, $40,426 and $9,574 of
these costs have been reimbursed to CGM, by the Partnership. In addition,
the Partnership has recorded interest expense of $669 and $1,076 for the
period ended December 31, 2003 and 2002, which is included in other
expenses.
F-9
7. Financial Highlights:
Changes in the Net Asset Value per Redeemable Unit of Partnership interest
for the year ended December 31, 2003 and the period from July 1, 2002
(commencement of operations) to December 31, 2002, is as follows:
2003 2002
------------- ------------
Net realized and unrealized gains (losses) * $(273.05) $107.47
Interest income 7.42 6.55
Expenses ** (23.64) (33.10)
------------- ------------
Increase (decrease) for the period (289.27) 80.92
Net asset value per Redeemable Unit, beginning of period 1,078.66 1,000.00
Offering cost adjustment -- (2.26)
------------- ------------
Net asset value per Redeemable Unit, end of period 789.39 1,078.66
Redemption/subscription value per Unit versus
net asset value per Redeemable Unit -- 0.34
------------- ------------
Redemption/subscription value per Redeemable Unit,
end of period *** $789.39 $1,079.00
------------- ------------
* Includes commissions expense allocated from Master
** Excludes commissions expense allocated from Master and includes
incentive fee allocation to special limited partner.
*** For the purpose of a redemption/subscription, any remaining accrued
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 fee allocation **** (7.0)% (5.4)%
------- ------
Operating expenses 7.8% 6.0%
Incentive fee allocation --% 2.0%
------- ------
Total expenses and incentive fee allocation 7.8% 8.0%
------- ------
Total return:
Total return before incentive fee allocation (26.8)% 10.0%
Incentive fee allocation --% (1.9)%
------- ------
Total return after incentive fee allocation (26.8)% 8.1%
------- ------
**** Interest income less total expenses (exclusive of incentive fee
allocation)
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-10
8. Financial Instrument Risks:
In the normal course of business, the Partnership, through the
Partnership's 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 or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and
certain option contracts. OTC contracts are negotiated between contracting
parties and include forwards and certain options. Each of these instruments
is subject to various risks similar to those related to the underlying
financial instruments including market and credit risk. In general, the
risks associated with OTC contracts are greater than those associated with
exchange traded instruments because of the greater risk of default by the
counterparty to an OTC contract. The Master's swap contracts are OTC
contracts.
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 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 through its investment
in the Master has concentration risk because a significant counterparty or
broker with respect to the 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-11
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 $ (7,385,256) $ 2,099,664 $ 17,563,353 $ (48,292,217)
Net Income (loss) $ (8,153,908) $ 1,342,880 $ 16,871,566 $ (49,025,750)
Increase (decrease) in Net Asset
Value per Redeemable Unit $ (65.83) $ 10.23 $ 127.27 $ (360.94)
For the period from
For the period from July 1, 2002
October 1, 2002 to (commencement of operations)
December 31, 2002 to September 30, 2002
Net realized and unrealized trading
gains net of brokerage
commissions, clearing fees and
expenses allocated from Master
including interest income $ 8,753,578 $ 4,716,606
Net Income $ 6,421,745 $ 3,283,578
Increase in Net Asset
Value per Redeemable Unit $ 55.85 $ 25.07
F-12
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-13
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-14
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-15
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-16
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-17
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-18
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-19
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-20
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-21
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-22
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-23
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-24
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-25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the principal accountant for the
Master. 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 Master as of and for the year ended December 31, 2001 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principle.
Item 9A. Controls 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 LLC. Investment decisions are
made by the Advisor, AAA Capital Management, Inc.
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 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 $5,685,484 in brokerage
commissions and clearing fees from the Partnership and through the Partnership's
investment in the Master. The Advisor earned $2,233,848 in management fees
during 2003. The General Partner earned $558,459 in administrative fees during
2003.
28
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners. The Partnership knows
of no person who beneficially owns more than 5% of the Redeemable Units
outstanding.
(b) Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner. The General Partner owns Units of general partnership interest
equivalent to 2,476.2826 (2.0%) Units of Limited Partnership Interest as of
December 31, 2003.
Principals who own Redeemable Units of the Partnership:
David J. Vogel 20.0000 Redeemable Units
Maureen O'Toole 23.4030 Redeemable Units
Steve Keltz 24.1187 Redeemable Units
(c) Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Citigroup Global Markets 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 $17,974
2003 $29,494
(b) Audit-Related Fees. None
(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.
29
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 year ended December 31,
2003 and the period July 1, 2002 (commencement of operations) to
December 31, 2002.
Statements of Partners' Capital for the year ended December 31,
2003 and the period March 25, 2002 (date Partnership was
organized) to December 31, 2002.
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 (previously filed).
3.2 Limited Partnership Agreement (previously filed).
10.1 - Advisory Agreement among the Partnership, the General
Partner and AAA Capital Management, Inc. (previously filed).
10.2 - Customer Agreement between the Partnership, Salomon Smith
Barney Inc. (the predecessor to CGM) and the Master
Partnership (previously filed).
10.3 - Customer Agreement between the Master Partnership and
Salomon Smith Barney Inc. (the predecessor to CGM)
(previously filed).
10.4 - Agency Agreement between the Partnership, Citigroup
Managed Futures LLC and Salomon Smith Barney Inc. (the
predecessor to CGM) (previously filed).
10.5 - Form of Subscription Agreement (previously filed).
10.6 - Letter from the General Partner to AAA Capital Management,
Inc. extending the Advisory Agreement for 2003 (filed
herein).
The exhibits required to be filed by item 601 of Regulation
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.
30
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.
31
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 AAA ENERGY FUTURES PARTNERSHIP L.P II
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
/a/ Maureen O'Toole /s/ Steve J. Keltz
Maureen O'Toole Steve J. Keltz
Director Secretary and Director
/a/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
32
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
AAA Energy Partnership L.P. II (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. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
33
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
AAA Energy Partnership L.P. II (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
34
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 AAA Energy
Partnership L.P. II (the "Partnership") on Form 10-K for the period ending
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
35
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 AAA Energy
Partnership L.P. II (the "Partnership") on Form 10-K for the period ending
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
36
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.