SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10/A
(Amendment No. 2 to Form 10 filed April 30, 1999 as amended by
Amendment No. 1 on Form 10/A filed June 29, 1999)
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
SMITH BARNEY AAA ENERGY FUND L.P.
(Exact name of registrant as specified in
its limited partnership agreement)
New York 13-3986032
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
390 Greenwich Street-1st floor
New York, New York 10013
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code 212-723-5424
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
to be so registered which each class is to be
registered
Securities to be registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
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Item 1. Business
(a) General development of business. Smith Barney AAA Energy Fund L.P.
(the "Partnership") is a limited partnership organized on January 5, 1998 under
the partnership laws of the State of New York. The objective of the Partnership
is to achieve substantial appreciation of its assets through speculative
trading, directly or indirectly, in commodity interests generally including
commodity options and commodity futures contracts on United States exchanges and
certain foreign exchanges. At present, the Partnership may trade commodity
futures and options contracts of any kind, but initially it traded solely energy
and energy related products. In addition, the Partnership has entered into swap
contracts on energy related products (together with other traded futures and
options contracts, the "Commodity Interests"). During the initial offering
period (February 12, 1998 through March 15, 1998) the Partnership sold 49,538
Units. The Partnership commenced its Commodity Interest trading activities,
which is its business enterprise, on March 16, 1998. No securities which
represent an equity interest or any other interest in the Partnership trade on
any public market. A total of 66,013.2559 Units in the Partnership were offered
and sold. No units are currently offered, but the General Partner may, in its
sole discretion, offer additional Units at any time. Redemptions for the quarter
ended March 31, 1999 and the year ended December 31, 1998 are reported in the
Statements of Partners' Capital under "Item 13. Financial Statements and
Supplementary Data."
The Partnership engages in its trading through a commodity
brokerage account maintained with its commodity broker, Salomon Smith Barney
Inc. ("SSB"), pursuant to a Customer Agreement of February 12, 1998 between SSB
and the Partnership (the "Customer Agreement"). The Customer Agreement is
attached hereto as Exhibit 10(b)(i). SSB also acted as the Partnership's selling
agent.
Smith Barney Futures Management Inc., a corporation formed
under the laws of the State of Delaware, is the General Partner of the
Partnership (the "General Partner"). The General Partner is registered as a
commodity pool operator and commodity trading advisor with the Commodity Futures
Trading Commission (the "CFTC"). Registration as a commodity pool operator or as
a commodity trading advisor requires annual filings setting forth the
organization and identity of the management and controlling persons of the
commodity pool operator or commodity trading advisor. In addition, the
Partnership's monthly account statements and audited annual reports are
distributed to each limited partner in accordance with CFTC regulations 4.22(a),
(b) and (c). Limited partners are permitted to review the Partnership's and the
General Partner's CFTC filings at the General Partner's offices. In addition,
the CFTC has authority under the Commodity Exchange Act, as amended (the "CEA")
to require and review books and records of, and review documents prepared by, a
commodity pool operator or a commodity trading advisor. The CFTC has adopted
regulations which impose certain disclosure, reporting and record-keeping
requirements on commodity pool operators and commodity trading advisors. The
CFTC is authorized to suspend a person's registration as a commodity pool
operator or commodity trading advisor if the CFTC finds that such person's
trading practices tend to disrupt orderly market conditions, that any
controlling person thereof is subject to an order of the CFTC denying such
person trading privileges on any exchange, and in certain other circumstances.
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The General Partner is wholly owned by Salomon Smith Barney
Holdings, Inc. ("SSBH"), which is the sole owner of SSB. SSBH is itself a wholly
owned subsidiary of Citigroup Inc., a publicly held company whose shares are
listed on the New York Stock Exchange and which is engaged in various financial
services and other businesses.
Under the Limited Partnership Agreement of the Partnership
(the "Limited Partnership Agreement") the General Partner has sole
responsibility for the administration of the business and affairs of the
Partnership, but may delegate trading discretion to one or more trading
advisors. The General Partner currently has a Management Agreement in effect
with AAA Capital Management, Inc. (the "Advisor" or "AAA"), pursuant to which
the Advisor manages the Partnership's assets. Pursuant to the express terms of
the Management Agreement, the Advisor is considered to be an independent
contractor of the Partnership. The Advisor has managed the Partnership's assets
since the Partnership's commencement of trading. The General Partner selected
the Advisor on the basis of the trading strategies employed by the sole trading
principal of the Advisor, Mr. A. Anthony Annunziato, as well as the Mr.
Annunziato's previous background and experience in commodity trading.
(b) Conflicts of Interest. Other than as described below, neither the
Advisor, the General Partner, SSB nor any of their principals have any actual or
potential conflicts of interest. The Partnership's private offering document and
limited partnership agreement disclosed these conflicts and limited partners
acknowledged and consented to them at the time their investments were made.
Relationship among the Partnership, the General Partner, SSB and the Advisor
The General Partner is an affiliate of SSB and the sole
trading principal of the Advisor is an employee of SSB. SSB acts as the
commodity broker/dealer for the Partnership and as a selling agent for Units.
Because SSB receives brokerage commissions on a round turn basis, the General
Partner has an incentive to select advisors that generate a large number of
trades to benefit SSB. Similarly, Mr. Annunziato will have an incentive to
generate a large number of trades to benefit his employer. However, neither the
General Partner nor any of its principals will receive any portion of the
brokerage commissions paid by the Partnership.
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The sole trading principal of the Advisor, A. Anthony
Annunziato, is an employee of SSB (since 1984) and will continue to earn
brokerage income in connection with his employment. The Advisor will receive
office space and other services or products provided by SSB. Such services will
provide assistance to the Advisor in making investment decisions and may include
research reports or analyses about particular commodities, publications,
database software and services and quotation equipment. The Advisor will have an
incentive to generate brokerage commissions to cover the costs associated with
such benefits. However, the Advisor's principal goal is to trade its program
profitably. Moreover, the Advisor is compensated through a management fee and
profit share allocation. Under the Management Agreement with the Partnership,
the Advisor has agreed to act in the best interests of the Partnership with
respect to its management of the Partnership's account. Further, the Advisor
agreed that under no circumstances would it knowingly or deliberately use
trading strategies or methods for the Partnership that are inferior to
strategies or methods employed for any other client or account and that it would
not knowingly or deliberately favor any client or account managed by it over any
other client or account. Excessive trading of the Partnership's account would
not further the Advisor's principal goal of generating trading profits and would
breach the Management Agreement.
Financial Consultants who sold Units receive a portion of
the brokerage commissions paid to SSB. Consequently, these Financial Consultants
may have a conflict of interest between their obligations to advise limited
partners with respect to the purchase of additional Units or redemption of Units
and their interest in continuing to receive commissions and fees from SSB. Mr.
Annunziato will not share in the brokerage commissions generated by the
Partnership's account except that SSB will credit Mr. Annunziato with a portion
of the brokerage commissions attributable to the Units that he or the Advisor
owns in the Partnership. In addition, Mr. Douglas Forshagen manages the Houston,
Texas branch office of SSB and may receive compensation from SSB with respect to
supervision of Mr. Annunziato's activities for the Partnership. Mr. Forshagen's
compensation is computed with reference to the overall profits of SSB's Houston,
Texas office, which include a portion of the commissions generated by the
Partnership and other accounts managed by Mr. Annunziato. Further, because the
General Partner is an affiliate of SSB, the General Partner has a potential
conflict of interest in its decision to replace the Partnership's futures
commission merchant, if necessary. In addition, the brokerage fee to be paid by
the Partnership to SSB was not set by "arm's length" negotiation.
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Notwithstanding the potential conflicts of interest resulting
from these multiple relationships, the Limited Partnership Agreement
specifically permits the General Partner to enter into contracts on behalf of
the Partnership with or for the benefit of the General Partner, SSB and the
Advisor. Such contracts include the Customer Agreement with respect to brokerage
services between the Partnership and SSB and the Advisory Agreement with the
Advisor.
Brokerage Rate to be Charged by the Commodity Broker
Pursuant to the Customer Agreement between the Partnership and
SSB, SSB will act as the commodity broker/dealer for the Partnership. Because
the General Partner is an affiliate of SSB, the General Partner may have a
conflict of interest between its responsibility to manage the Partnership for
the benefit of the limited partners and its interest in obtaining brokerage
rates which are favorable to SSB. SSB charges the Partnership a brokerage fee
equal to $18.00 per round turn for futures transactions and $9.00 per side for
options transactions. These fees may be changed at any time by SSB. Although the
Customer Agreement is non-exclusive, so that the Partnership will have the right
to seek lower brokerage rates from other brokers at any time, the General
Partner believes that the arrangements between the Partnership and SSB are fair
to the Partnership and, further, does not intend to negotiate with SSB to obtain
lower commission rates or to refer brokerage transactions to other firms unless
its fiduciary duties so require. In addition, the Limited Partnership Agreement
provides that limited partners owning more than 50% of the outstanding Units may
terminate the Customer Agreement on sixty days' notice without penalty.
The General Partner reviews, at least annually, the brokerage
rates charged to other comparable commodity pools to the extent practicable, to
determine that the brokerage rates being paid by the Partnership are competitive
with such other rates. The General Partner, as a fiduciary to the limited
partners, must resolve any conflict in favor of the limited partners. Therefore,
at the time of such review, the General Partner will consider whether any action
need be taken in light of its obligations to the Partnership and will advise the
limited partners of any action so taken.
<PAGE>
Activities of Advisor's Non-Trading Principals
Mr. Angelo J. Annunziato and Mr. Gordon K. Rutledge are floor
brokers at the New York Mercantile Exchange ("NYMEX"), the principal futures
exchange for the trading of crude oil and other energy products. The Advisor may
direct some or all of the Partnership's NYMEX trades to these brokers for
execution. The Advisor, therefore, has a conflict of interest between its duty
to trade the Partnership's assets in the best interest of the Partnership and
its interest in generating brokerage income for its non-trading principals.
Accounts of SSB, the General Partner, the Advisor and their Affiliates
The officers, directors and employees of SSB, the General
Partner and the Advisor, as well as SSB, the General Partner and the Advisor
themselves may trade in commodity interests for their own accounts. The records
of such trading will not be available for inspection by limited partners. In
addition, SSB is a futures commission merchant and effects transactions in
commodity futures and options for its customers. Thus, it is possible that SSB
could effect transactions for the Partnership in which the other parties to the
transactions are its officers, directors or employees or its customers. Such
persons might also compete with the Partnership in making purchases or sales of
contracts without knowing that the Partnership is also bidding on such
contracts. Trading decisions for the Partnership are not currently made by the
General Partner, SSB or their affiliates. CFTC regulations require that SSB, to
the extent possible, insure that each order received from the Partnership which
is executable at or near the market price be transmitted to the floor of the
appropriate contract market before any order in the same commodity for any
proprietary account of SSB.
Management of Other Accounts by the Advisor
The Advisor manages the accounts of clients other than the
Partnership. In addition, the Advisor and its principals may trade commodity
futures, forwards and options contracts for their own accounts. Furthermore, the
Advisor may employ the same or different trading strategies for these other
accounts. All of the futures and options positions held by all such accounts
controlled by the Advisor and its principals will be aggregated with positions
of the Partnership for purposes of determining compliance with speculative
position limits. In addition, it is possible that the accounts of the Advisor
and the Partnership will be aggregated with those of the commodity broker and
its affiliates for such purpose. As a result, the Partnership might not be able
to enter into or maintain certain commodity interest positions if such
positions, when added to the positions held by such other accounts, would exceed
the applicable limits. It is possible that as a result of a neutral allocation
system, testing a new trading system, trading proprietary accounts more
aggressively, or other actions not constituting a violation of fiduciary duties,
the General Partner, the Advisor and/or their principals may take positions in
their proprietary accounts that are opposite or ahead of a client (including the
Partnership). However, in the placement of orders for the Partnership's account
and for the accounts of any other client, the Advisor will utilize a
pre-determined, systematic, fair and reasonable order entry system, which shall,
on an overall basis, be no less favorable to the Partnership than to any other
account managed by the Advisor.
<PAGE>
Other Commodity Pools
During the past five years and year-to-date period, SSB and
the General Partner have sponsored over forty-five commodity pools and they, and
the Advisor may sponsor or establish additional commodity pools, which may
compete with the Partnership. As of March 31, 1999, twenty-one commodity pools
were operated or managed by the General Partner. In addition, the General
Partner may act as advisor to such pools. Neither SSB nor the General Partner
will knowingly or deliberately favor any such pools over the Partnership in
their dealings on behalf of such pools.
(c) Trading Program. The Advisor will trade the assets of the
Partnership in accordance with its sole trading program. The Advisor primarily
trades energy futures contracts and options on energy futures contracts on
domestic and international exchanges, as well as on the Goldman Sachs Commodity
Index (an index future comprised primarily of energy products) traded on the
Chicago Mercantile Exchange. The Advisor also engages in swap transactions (for
crude oil and other energy related products) on behalf of the Partnership from
time to time. Pursuant to such swap transactions, the Partnership makes payments
of collateral (similar to margin deposits that the Partnership makes on its
futures transactions) to an affiliate of Citibank N.A. located outside of the
United States or its territories. Such depositories are not subject to U.S.
regulation. The Partnership's assets held in these depositories are subject to
the risk that events could occur which would hinder or prevent the availability
of these funds for distribution to customers including the Partnership. Such
events may include actions by the government of the jurisdiction in which the
depository is located including expropriation, taxation, moratoria and political
or diplomatic events. At this time, the General Partner does not expect that
more than 15% of the Partnership's assets will be deposited in such offshore
depositories.
The Advisor will generally base its trading decisions on
"fundamental" factors, namely supply and demand for a particular group or type
of commodity. The Advisor attempts to buy undervalued commodities and sell
overvalued commodities, often--but not always--simultaneously. The Advisor uses
options to attempt either to reduce or define risks.
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The Advisor is aware of price trends but does not trade upon
trends. It often takes profits in positions with specific trends even though
that trend may still be intact or perhaps even strong. The Advisor occasionally
establishes positions that are countertrend.
Effective risk management is a crucial aspect of this 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 Partnership's account has been and is
expected to continue to be the Advisor's largest account.
The Advisor currently specializes in the energy markets. In
addition to other futures interests, the Advisor trades, or may trade, futures
and options contracts and swaps on crude oil, heating oil, gasoline, natural gas
and electricity. Additional energy related contracts may be also be traded. The
preference of a trade will depend upon which commodity futures or options the
Advisor expects will provide the best opportunities for profit.
The trading strategy to be followed by the Advisor does not
assure successful trading. Investment decisions made in accordance with this
strategy will be based on an assessment of available facts. However, because of
the large quantity of facts at hand, the number of available facts that may be
overlooked and the variables that may shift, any investment decision must, in
the final analysis, be based on the judgment of the Advisor.
The decision by the Advisor not to trade certain markets or
not to make certain trades may result at times in missing price moves and hence
profits of great magnitude, which other trading managers who are willing to
trade these commodities may be able to capture. The Advisor's approach is
dependent in part on the existence of certain fundamental indicators. There have
been periods in the past when there were no such market indicators, and those
periods may reoccur.
The specific trading methods underlying the Advisor's strategy
are proprietary and confidential. The foregoing description is of necessity
general and is not intended to be exhaustive. Clients of the Advisor will not be
able to determine the full details of those methods, or whether those methods
are being followed. There can be no assurance that any trading strategy of the
Advisor will produce profitable results or will not result in losses.
A limited partner may require the Partnership to redeem some
or all of its Units at Net Asset Value per Unit as of the last day of a month
(the "Redemption Date"). The right to redeem is contingent upon the
Partnership's having property sufficient to discharge its liabilities on the
Redemption Date and upon receipt by the General Partner of a written or oral
request for redemption at least 10 days prior to the Redemption Date. There is
no fee charged to limited partners in connection with redemptions. The General
Partner may also, at its sole discretion and upon 10 days' notice to a limited
partner, require that any limited partner redeem its Units if such redemption is
in the best interests of the Partnership.
<PAGE>
Additional Information About the Partnership.
The Partnership is a continuously and privately offered
single-advisor pool, as those terms are defined in Part 4 of the CFTC
regulations.
Fees and Expenses
The break-even point per Unit (that is, the trading profit the
Partnership must realize so that a participant does not realize a loss) during
the first year of a participant's investment, assuming the participant purchased
Units at $1,000 each, is 10.98% or $109.77 per Unit invested assuming a
partnership size of $90,000,000. These figures assume that such participant
would redeem its Units after one year of participation.
The following table is a summary of fees and expenses for the
Partnership and expresses the break-even point per Unit both as a dollar amount
and as a percentage of a $1,000 investment. (Note: The current minimum
investment is $25,000.)
Estimated Partnership Size: $90,000,000
Initial Selling Price per Unit (1) $1,000.00
---------
Interest Income Credit (2) $ (35.20)
Brokerage Fees (3) $ 126.00
Other Operating Expenses (4) $ 0.80
Advisory Fee (5) $ 18.17
---------
Amount of Trading Income Required
for the Partnership's Net Asset Value
per Unit at the End of One Year to Equal
the Selling Price per Unit $ 109.77
Percentage of Initial Selling Price per Unit to break even: 10.98%
<PAGE>
Explanatory Notes
(1) Investors initially purchased Units at $1,000. When Units
are offered they can be purchased at the Partnership's Net Asset Value per Unit
as of the purchase date.
(2) The Interest Income credit reprsents the amount of
interest paid by SSB to the Partnership on 80% of the average daily equity
maintained in cash in the Partnership's accounts at a rate equal to the average
yield on the 30-day U.S. Treasury bills issued during each month. For purposes
of this analysis, interest was estimated at an annual rate of 4.4% of 80% of the
Partnership's Net Asset Value. The calculation: $35.20 = [(80% x $1000.00) x
4.4%)]. Interest income was first used after trading commenced to reimburse SSB
for expenses incurred during the Initial Offering Period plus interest at the
prime rate as quoted by Chase Manhattan Bank. Such expenses were fully
reimbursed as of March 31, 1998. At March 31, 1998, December 31, 1998 and March
31, 1999, the amount of cash held for minimum margin requirements for all
Commodity Interests was $7,211,751, $13,798,637 and $15,392,360, respectively.
Minimum margin requirements vary with the Partnership's market positions. The
Partnership's margin requirements since inception have ranged from approximately
6% to 30%. It is not unusual for the Partnership to have a low margin to equity
ratio because the margin deposits for futures contracts are typically no more
than 2% to 5% of the contract's value.
(3) Brokerage fees were estimated at $21.00 per round turn
($18 for brokerage and $3 for other trading related expenses) based on 6,000
round turn transactions annually per $1,000,000 invested. In 1998, the
Partnership paid $5,527,260 in such fees, which is equal to approximately 7.89%
of the Partnership Net Assets. During the quarter ending March 31, 1999, the
Partnership paid approximately $2,245,671 in such fees, which is equal to
approximately 2.55% of the Partnership Net Assets. Pursuant to the Customer
Agreement, SSB will execute transactions for the Partnership's account in
accordance with orders placed by the Advisor. The services to be provided by SSB
include the execution of orders and the rendering of bookkeeping and clerical
assistance to the Partnership and the General Partner. The Customer Agreement
may be terminated upon notice by either party. SSB will share a portion of the
brokerage fee with its Financial Consultants who sell Units in the offering. Mr.
Annunziato will not share in the brokerage commissions generated by the
Partnership's account except that SSB will credit Mr. Annunziato with a portion
of the brokerage commissions attributable to the Units that he or the Advisor
owns in the Partnership.
<PAGE>
(4) Other operating expenses include periodic legal,
accounting, filing and reporting fees; expenses of printing and other
administrative costs; and expenses of the Continuous Offering. These expenses
are expected to amount to 0.08% of Net Asset Value (based upon $75,000 in
estimated expenses and an estimated Partnership size of $90,000,000).
(5) The Partnership pays an advisory fee of 2% per annum
(payable monthly) which is split evenly between the Advisor and SSB. The trading
advisor's Profit Share allocation of 20% is not included in computing the
break-even point per Unit because it is paid, if at all, after deducting all
other expenses.
The Partnership's Organizational & Offering Expenses, which
include the expenses of the Initial Offering Period, were $75,951. Such expenses
were borne initially by SSB. The Partnership has reimbursed SSB for the offering
and organizational expenses of the initial offering period.
ERISA Considerations
The Units in the Partnership which are offered may be
purchased by employee benefit plans subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") and/or Section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"). The phrase "employee benefit plan" refers to
plans of various types including corporate pension and profit-sharing plans
(including 401(k) plans), "simplified employee pension plans", so-called "Keogh"
(H.R. 10) plans for self-employed individuals, including partners, and
"Individual Retirement Accounts" (or "IRAs") for persons (including employees
and self-employed persons) who receive compensation income.
Units may not be purchased by an employee benefit plan if the
selling agent or its Financial Consultants, the General Partner or their
affiliates (a) exercise any discretionary authority or discretionary control
respecting management of such employee benefit plan, (b) exercise any authority
or control respecting management or disposition of the assets of such employee
benefit plan, (c) render investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of such
employee benefit plan, (d) have any authority or responsibility to render
investment advice with respect to any moneys or other property of such employee
benefit plan, or (e) have any discretionary authority or discretionary
responsibility in the administration of such employee benefit plan. For the
purposes of this paragraph, "investment advice" shall mean rendering investment
advice as to the value of securities or other property, or making
recommendations as to the advisability of investing in securities, directly or
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indirectly, and either (i) having discretionary authority or control, whether or
not pursuant to an agreement, arrangement or understanding, with respect to
purchasing or selling securities or other property for the plan, or (ii)
rendering such investment advice on a regular basis to the employee benefit plan
pursuant to a mutual agreement, arrangement or understanding, written or
otherwise, between such person and the employee benefit plan or a fiduciary with
respect to such employee benefit plan, that such services will serve as a
primary basis for investment decisions with respect to assets of the employee
benefit plan, and that such person will render individualized investment advice
to the employee benefit plan based on the particular needs of the employee
benefit plan regarding such matters, as, among other things, investment policies
or strategy, overall portfolio composition, or diversification of plan
investments.
Under ERISA, a fiduciary of an employee benefit plan is
required, among other things, to discharge his duties toward such plan with the
care, skill, prudence and diligence under the circumstances then prevailing that
a prudent man acting in a like capacity and familiar with such matters would use
in the conduct of an enterprise of a like character and with like aims. In
considering an investment in the Partnership of a portion of the assets of an
employee benefit plan, a fiduciary having investment responsibilities with
respect to an employee benefit plan should give appropriate consideration to
those facts and circumstances that, given the scope of his or her investment
duties, he or she knows or should know are relevant to investment in the
Partnership, including the role the investment in the Partnership plays in that
portion of the plan's investment portfolio with respect to which the fiduciary
has investment duties.
A fiduciary having investment responsibilities with respect to
an employee benefit plan should consult regulations of the Department of Labor
to determine whether he or she has made appropriate consideration of relevant
factors in investing in the Partnership. In addition to any factors which must
be considered by such fiduciary with respect to investment of assets of an
employee benefit plan in the Partnership under the above regulation, such
fiduciary should also consider (i) whether the investment is in accordance with
the documents and instruments governing said plan, (ii) whether the investment
satisfies the diversification rules of Section 404(a)(1)(C) of ERISA, if
applicable, (iii) whether the investment will result in unrelated business
taxable income to the Plan, (iv) whether the investment provides sufficient
liquidity, (v) the need to value the assets of the plan annually, and (vi)
whether the investment is prudent.
Assets of employee benefit plans ("plan assets") are generally
subject to the fiduciary duty provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code. ERISA does not define "plan assets", however,
the Department of Labor has published a final regulation defining the term "plan
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assets" (the "Final Regulation") for purposes of Title I of ERISA and Section
4975 of the Code. Under the Final Regulation, generally, when a plan makes an
equity investment in another entity, the underlying assets of that entity will
be considered plan assets unless (i) the equity interest is a "publicly offered"
security or a security issued by an investment company registered under the
Investment Company Act of 1940, (ii) the entity is an "operating company", or
(iii) equity participation by benefit plans is not "significant".
The Units will not be deemed to be "publicly offered"
securities for purposes of the Final Regulation. In addition, the Partnership is
not an "operating company" within the meaning of the Final Regulation. The final
exception to the "plan assets" rule is for investment in entities in which there
is not "significant" investment by "benefit plan investors". "Benefit plan
investors" include employee-benefit plans subject to ERISA as well as plans not
subject to ERISA, such as governmental plans and IRAs. Investment by benefit
plan investors is not "significant" as defined in the Final Regulation, if the
aggregate investment by benefit plan investors in each class of securities of
the investment entity is less than 25%. Determinations of the percentage of
participation by benefit plan investors must be made after each such investment
or redemption, and investments held by the investment entity's managers,
investment advisers and their affiliates must be disregarded in calculating the
percentage.
The Partnership intends to qualify under the "significant
participation" exception in the Final Regulation by monitoring the percentage
investment by benefit plan investors and maintaining it below 25%. In order to
accomplish this, the subscription agreement requires that a benefit plan
investor may be required to redeem its Units upon notice from the General
Partner.
In the unlikely event that the Partnership were deemed to hold
plan assets, prohibited transactions could arise under ERISA and the Code. In
addition, investment by a fiduciary of an employee-benefit plan could be deemed
an improper delegation of investment authority, and the fiduciary could be
liable, either directly or under the co-fiduciary rules of ERISA, for the acts
of the General Partner. Additional issues relating to "plan assets" and
"prohibited transactions" under ERISA and the Code could arise by virtue of the
General Partner's ownership of interests in the Partnership and the possible
relationship between an affiliate of the General Partner and any
employee-benefit plan which may purchase Units. Further, certain transactions
between the Partnership and the General Partner and certain affiliates of the
General Partner could be prohibited transactions.
<PAGE>
It should be noted that even if the Partnership's assets are
not deemed to be plan assets, the Department of Labor has stated in Interpretive
Bulletin 75-2 (29 C.F.R. ss.2509.75-2, as amended by the Final Regulation) that
it would consider a fiduciary who makes or retains an investment in a
partnership for the purpose of avoiding application of the fiduciary
responsibility provisions of ERISA to be in contravention of the fiduciary
provisions of ERISA. The Department of Labor has indicated further that if a
plan invests in or retains its investment in a partnership and as part of the
arrangement it is expected that the partnership will enter into a transaction
with a party in interest to the plan (within the meaning of ERISA) which
involves a direct or indirect transfer to or use by the party in interest of any
assets of the plan, the plan's investment in the partnership would be a
prohibited transaction under ERISA.
A prohibited transaction may result in the imposition of
potential personal liability upon fiduciaries of employee-benefit plans subject
to ERISA and an excise tax under Section 4975 of the Code upon the "disqualified
person" with respect to the plan (as explained in Section 4975 of the Code). Any
fiduciary that has engaged in any prohibited transaction would be required to
(i) restore to the plan any profit realized on the transaction and (ii) make
good to the plan any losses suffered by the plan as a result of such investment.
The disqualified person involved would be liable to pay an excise tax of 15% of
the amount involved in the prohibited transaction for each year in which the
investment is in place and would be required to eliminate the prohibited
transaction by reversing the transaction and making good to the employee-benefit
plan any losses resulting from the prohibited transaction. If the transaction is
not corrected within a certain time period, the disqualified person could also
be liable for an additional excise tax in an amount equal to 100% of the amount
involved.
In addition to liability for plan losses, ERISA imposes a
civil penalty against fiduciaries of employee-benefit plans who breach the
prudence and other fiduciary standards of ERISA and against non-fiduciaries who
knowingly participate in the transaction giving rise to the breach. A prohibited
transaction by an employee-benefit plan fiduciary would constitute a breach of
the ERISA fiduciary standards. The civil penalty is equal to 20% of the amount
recovered from a fiduciary or non-fiduciary with respect to such breach or
knowing participation pursuant to a settlement agreement with the United States
Secretary of Labor or a court order resulting from a proceeding instituted by
the Secretary. The penalty may be waived and, in any event, would be offset to
the extent of the responsible party's liability for excise tax under the Code.
Each limited partner will be furnished with monthly statements
and annual reports which include the Net Asset Value per Unit. The General
Partner believes that these statements will be sufficient to permit plan
fiduciaries to provide an annual valuation of plan investments as required by
ERISA; however, fiduciaries should note that they have the ultimate
responsibility for providing such valuation. Accordingly, plan fiduciaries
should consult with their attorneys or other advisors regarding their
obligations under ERISA with respect to making such valuations.
<PAGE>
Plan fiduciaries should understand the potentially illiquid
nature of an investment in the Partnership and that a secondary market does not
exist for a Unit. Accordingly, plan fiduciaries should review both anticipated
and unanticipated liquidity needs for their respective plans, particularly those
for a participant's termination of employment, retirement, death, disability or
plan termination. Plan fiduciaries should be aware that distributions to
participants may be required to commence in the year after the participant
attains age 70-1/2.
The Advisor does not participate in any way in the decision by
any particular employee benefit plan to invest in the Partnership, including any
determination with respect to fees and expenses to be paid by the Partnership.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests including commodity options, commodity futures contracts and swap
contracts, with an emphasis on energy and energy related products. The
Partnership's net income available for pro rata distribution to limited partners
from operations for the year ended December 31, 1998 (the period from March 16,
1998 (commencement of trading) to December 31, 1998) are set forth under "Item
2. Financial Information." The Partnership does not engage in sales of goods or
services. Partnership capital as of March 31, 1999, December 31, 1998 and March
31, 1998, was $90,079,396, $79,727,340, and $48,504,879, respectively.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - not applicable.
(xi) through (xii) - not applicable.
(xiii) - The Partnership has no employees. The directors and officers
of the General Partner and the Advisor are listed in "Item 5. Directors and
Executive Officers".
<PAGE>
Item 2. Financial Information.
(a) The Partnership commenced trading operations on March 16, 1998.
Realized and unrealized trading gains (losses), interest income, net income
(loss) and increase (decrease) in net asset value per Unit for the quarter ended
March 31, 1999 and for the period from March 16, 1998 (commencement of trading)
to December 31, 1998 and total assets at March 31, 1999 and December 31, 1998
were as follows:
<TABLE>
<CAPTION>
March 16, 1998
Quarter Ended (commencement of
March 31, 1999 trading) to
(unaudited) December 31, 1998
--------------------- ---------------------
<S> <C> <C>
Realized and unrealized trading gains net of
brokerage commissions and clearing fees of
$282,428 and $686,659, respectively $ 15,627,505 $14,675,192
Interest income 765,028 $ 1,978,202
---------- ----------
16,392,533 $16,653,394
========== ==========
Net Income before Special Allocation to Advisor $15,941,793 $15,401,913
Allocation to Special Limited Partner*
$3,035,353 $2,699,932
--------- ----------
Net Income available for pro rata distribution
to Limited Partners $12,906,440 $12,701,981
========== ==========
Increase in net asset value per unit $ 195.05 $ 184.33
=========== ==========
Total assets $99,339,852 $84,035,617
========== ==========
</TABLE>
*Allocation to Special Limited Partner, if any, is made annually based on net
profits as of the year end.
Investors should note that past performance is not necessarily
indicative of future performance and the Partnership's level of future
performance cannot be predicted.
(b) Management's Discussion and Analysis of Financial
Condition and Results of Operations
(1) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its (i) equity in its commodity futures trading
account, consisting of cash and cash equivalents, net unrealized appreciation
(depreciation) on open futures contracts and interest receivable, and (ii)
collateral in the form of cash deposited with its swaps counterparty. Because of
the low margin deposits normally required in commodity futures trading,
relatively small price movements may result in substantial losses to the
Partnership. Such substantial losses could lead to a material loss in liquidity.
To minimize this risk, the Partnership follows certain trading policies,
including:
<PAGE>
(i) Partnership funds are invested only in futures contracts which are
traded in sufficient volume to permit, in the opinion of the Advisor at the time
a position is entered into, 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 does not initiate additional positions in any
commodity for the Partnership if such additional positions would result in
aggregate positions for all commodities requiring a margin of more than 66-2/3%
of net assets of the Partnership managed by the Advisor.
(iii) The Partnership may occasionally accept delivery of a commodity.
(iv) The Partnership does not employ the trading technique commonly
known as "pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchases or sale of additional positions
in the same or related commodities.
(v) The Partnership does not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
(vi) The Advisor may, from time to time, employ trading strategies such
as spreads or straddles on behalf of the Partnership. The term "spread" or
"straddle" describes a commodity futures trading strategy involving the
simultaneous buying and selling of futures contracts on the same commodity but
involving different delivery dates or markets and in which the trader expects to
earn a profit from a widening or narrowing of the difference between the prices
of the contracts.
(vii) The Partnership will not permit the "churning" of its commodity
trading account. The term "churning" refers to the practice of entering and
exiting trades with a frequency unwarranted by legitimate efforts to profit from
the trades, driven by the desire to generate commission income.
(See also "Item 13. Financial Statements and Supplementary Data" for
further information on financial instrument risk included in the notes to
financial statements.)
<PAGE>
Other than the risks inherent in commodity futures and swaps trading,
the Partnership knows of no trends, demands, commitments, events or
uncertainties which will result in or which are reasonably likely to result in
the Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, in its
discretion, cause the Partnership to cease trading operations and liquidate all
open positions under certain circumstances including a decrease in Net Asset
Value per Unit to less than $400 as of the close of business on any business
day.
Between February 12, 1998 and July 1, 1998, the Partnership privately
offered 66,013.2559 Units of limited partnership interest resulting in aggregate
proceeds to the Partnership of $65,511,000, which includes proceeds of
$49,538,000 from the initial offering of 49,538 Units of limited partnership
interest. No Units have been offered or sold since July 1, 1998. All of the
proceeds of the Partnership's offering of its Units were deposited in its
commodity trading account at SSB where they are available to margin the
Partnership's commodity futures trading.
The Partnership is not currently offering additional Units, but its
Limited Partnership Agreement permits it to do so in the future.
(2) Capital Resources. (i) The Partnership has made no material
commitments for capital expenditures.
(ii) The Partnership's capital consists of the capital contributions
of the partners as increased or decreased by gains or losses on Commodity
Interest trading and by expenses, interest income, redemptions of Units and
distributions of profits, if any. Gains or losses on commodity futures trading
cannot be predicted. Market moves in commodities are dependent upon fundamental
and technical factors which the Partnership may or may not be able to identify,
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, management
fees and a profit share allocation to the Advisor. The level of these expenses
is dependent upon the level of trading and the ability of the Advisor to
identify and take advantage of price movements in the commodity markets, in
addition to the level of Net Assets maintained. The amount of interest income
payable by SSB is dependent upon interest rates over which the Partnership has
no control. No forecast can be made as to the level of redemptions in any given
period. During the first quarter of 1999, 2,014.0413 Units were redeemed for a
total of $2,554,384. In 1998, 1,642.7041 Units were redeemed for a total of
$1,848,573.
<PAGE>
(c) Results of Operations. During the quarter ended March 31, 1999, the
net asset value per Unit increased 16.47% from $1,184.33 to $1,379.38. From
March 16, 1998, the commencement of trading, until December 31, 1998, the net
asset value per Unit increased 18.43% from $1,000.00 to $1,184.33. "Net Assets"
is defined as the total assets of the Partnership including all cash, accrued
interest, and the market value of all open commodity positions maintained by the
Partnership, less brokerage charges accrued and less all other liabilities of
the Partnership. Net Assets equal Net Asset Value. Net Asset Value of a Unit
means Net Asset Value divided by the number of Units outstanding.
The Partnership experienced a net trading gain of $17,873,176 before
commissions and expenses for the quarter ended March 31, 1999. Trading gains for
the first quarter of 1999 were primarily attributable to gains recognized in
Energy contracts. The Partnership experienced a net trading gain of $20,202,452
before commissions and expenses for the period from March 16, 1998 (the
commencement of trading)to December 31, 1998. Trading gains for the year ended
December 31, 1998 were primarily attributable to gains recognized in Energy
contracts.
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the ability of the Advisor to identify correctly commodity positions that
will profit from price changes. Such price changes could be 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 is able to take advantage of commodity price
changes, the Partnership expects to increase capital through operations.
The business reason for the success or failure of the Partnership's
operations in any given period (including the quarter ended March 31, 1999 and
the period from March 16, 1998 (commencement of trading) to December 31, 1998)
is the relative success or failure of the Advisor's trading strategy in trading
various worldwide commodity markets during the relevant periods. In addition,
during the period from February 12, 1998 (commencement of offering period) to
July 1, 1998, the Partnership sold 66,013.2559 Units of limited partnership
interest, respectively, resulting in aggregate proceeds to the Partnership of
$65,511,000. No Units have been offered or sold since July 1, 1998. The increase
in the Partnership's capital over these periods entailed a commensurate increase
in the Partnership's contracts traded on various markets worldwide, particularly
energy markets, with an increased exposure to the possibility of gain or loss on
any given contract. There is no assurance that the Partnership's performance in
the past will be the same or different in the future.
<PAGE>
d. Quantitative and Qualitative Disclosures about Market
Risk.
(1) Past Results Not Necessarily Indicative of Future
Performance. The Partnership is a speculative commodity pool. The
market sensitive instruments held by it are acquired for speculative trading
purposes, and all or substantially all of the Partnership's assets are subject
to the risk of trading loss. Unlike an operating company, the risk of market
sensitive instruments is integral, not incidental, to the Partnership's main
line of business.
The risk to the limited partners that have purchased interests in the
Partnership is limited to the amount of their capital contributions to the
Partnership and their share of Partnership assets and undistributed profits.
This limited liability is a consequence of the organization of the Partnership
as a limited partnership under applicable law.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. 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, but could also include the level and
volatility of interest rates, exchange rates, equity price levels, the market
value of financial instruments and contracts, the diversification effects among
the Partnership's open positions and the liquidity of the markets in which it
trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership 's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
<PAGE>
(2) Standard of Materiality. Materiality as used in this section,
"Qualitative and Quantitative Disclosures About Market Risk," is based on an
assessment of reasonably possible market movements and the potential losses
caused by such movements, taking into account the leverage, optionality and
multiplier features of the Partnership's market sensitive instruments.
(3) Quantifying the Fund's Trading Value at Risk.
The Partnership's risk exposure in the various market sectors traded by
the Advisor is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized) and cash flow (at least in the case of exchange-traded
contracts in which profits and losses on open positions are settled daily
through variation margin).
Exchange maintenance margin requirements have been used by the Fund 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 (such as swaps on various energy-related products), the margin
requirements for the equivalent futures positions have been used as Value at
Risk. When a futures-equivalent margin is not available, dealers' margins have
been used.
The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, the Advisor trades commodity
options. The Value at Risk associated with options is reflected in the table set
forth below 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 instruments whereas, in fact the fair values of the
options traded by the Partnership in all cases fluctuate to a lesser extent than
those of the underlying Instruments.
<PAGE>
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been aggregated to determine each trading category's
aggregate Value at Risk. The diversification effects resulting from the fact
that the Partnership's positions are rarely, if ever, 100% positively correlated
have not been reflected.
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of March 31, 1999 and
December 31, 1998, respectively. All open position trading risk exposures of the
Partnership have been included in calculating the figures set forth below. As of
March 31, 1999 and December 31, 1998, the Partnership's total capitalization
were approximately $90,079,396 and $79,727,340, respectively.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
% of Total % of Total
Market Sector Value at Risk Capitalization Value at Risk Capitalization
- ------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Energy $ 9,664,111 10.73% $11,939,250 14.98%
Energy Swaps 3,949,098 4.38% 1,644,887 2.06%
Indices - - 214,500 0.27%
----------- ----- ----------- -----
Total $13,613,209 15.11% $13,798,637 17.31%
=========== ===== =========== =====
</TABLE>
(4) Material Limitations on Value at Risk as an Assessment
of Market Risk. The face value of the market sector instruments
held by the Partnership is typically many times the applicable maintenance
margin requirement (maintenance margin requirements generally ranging between
approximately 1% and 10% of contract face value) as well as many times the
capitalization of the Partnership. The magnitude of the Partnership's open
positions creates a "risk of ruin" not typically found in most other investment
vehicles. Because of the size of its positions, certain market conditions
- --unusual, but historically recurring from time to time -- could cause the
Partnership to incur severe losses over a short period of time. The foregoing
Value at Risk table -- as well as the past performance of the Partnership --
give no indication of this "risk of ruin."
<PAGE>
Additionally, the Fund enters into swap agreements with respect to
certain energy related products. While these swaps are represented in the table
above, such representation is achieved through the addition of maintenance
margins corresponding to exchange-traded futures contracts that would be needed
to achieve equivalent positions to the swaps. However, it may not be possible to
fully ascertain an exact equivalent of an off-exchange swap with exchange-traded
futures. Swaps may have unique terms not present in such futures. Furthermore,
swaps carry an element of counterparty risk which may not be accurately
represented in exchange-set maintenance margins. As of March 31, 1999 and
December 31, 1998, the Partnership's only counterparties in these transactions
were Citibank N.A. and Morgan Stanley Capital Group Inc. The General Partner
attempts to reduce the Partnership's counterparty risk by permitting the
Partnership to contract only with well-capitalized counterparties.
(5) Qualitative Disclosures Regarding Primary Trading Risk
Exposures. The Partnership's primary market risk exposures as well
as the strategies used and to be used by the General Partner and the Advisor for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of any of the Advisor's
risk controls to differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid markets, the
emergence of dominant fundamental factors, political upheavals, changes in
historical price relationships, an influx of new market participants, increased
regulation and many other factors could result in material losses as well as in
material changes to the risk exposures and the risk management strategies of the
Partnership. There can be no assurance that the Partnership's current market
exposure and/or risk management strategies will not change materially or that
any such strategies will be effective in either the short- or long-term.
Investors must be prepared to lose all or substantially all of their investment
in the Partnership.
The following were the primary trading risk exposures of the
Partnership as of March 31, 1999 and December 31, 1998, respectively, by market
sector.
(a) Energy. Energy related products, such as crude oil, heating oil,
gasoline, natural gas and electricity, constitute the principal market exposure
of the Fund. The Partnership has substantial market exposure to gas and oil
price movements, often resulting from political developments in the Middle East.
Political developments in other countries or regions can also materially impact
upon the prices of energy products, as could changing supply and demand
relationships, weather, governmental, commercial and trade programs and
policies, and other significant economic events. Energy prices can be volatile
and substantial profits and losses have been and are expected to continue to be
experienced in these markets.
<PAGE>
The Partnership engages in swap transactions in crude oil and other
energy related products. In this connection, the Partnership contracts with its
counterparty to exchange a stream of payments computed by reference to a
notional amount and the price of the energy product that is the subject of the
swap. Swap contracts are not guaranteed by an exchange or clearing house. SSB
does not engage in swap transactions as a principal. The Advisor has never
suffered a loss from counterparty defaults in the swap market.
The Partnership will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the agreement, with the Partnership receiving or paying, as
the case may be, only the net amount of the two payments. Swaps do not involve
the delivery of underlying assets or principal. Accordingly, the risk of loss
with respect to swaps is limited to the net amount of payments that the
Partnership is contractually obligated to make. If the counterparty to a swap
defaults, the Partnership's risk of loss consists of the net amount of payments
that the Partnership is contractually entitled to receive.
The Partnership may also enter into spot transactions to purchase or
sell commodities with SSB, or one of its affiliates, as principal. Such spot
transactions provide for two day settlement and are not margined. Such
transactions may be entered into in connection with exchange for physical
transactions. Like the swap contract market, the spot market is a principals'
market so there is no clearinghouse guarantee of performance. Instead, the
Partnership is subject to the risk of inability of, or refusal by, a
counterparty to perform with respect to the underlying contract.
(b) Other Commodity Interests. The Fund primarily emphasizes the
trading of energy products, but may also trade some portion of its assets in
other commodity interests, including, but not limited to, commodity interest
contracts on the Goldman Sachs Commodity Index (an index future comprised
primarily of energy products). Commodity interest prices can be affected by
numerous factors, including political developments, weather conditions, seasonal
effects and other factors which affect supply and demand for the underlying
commodity.
(6) Qualitative Disclosures Regarding Non-Trading Risk
Exposure. The following were the non-trading risk exposures of the
Partnership as of March 31, 1999 and December 31, 1998, respectively.
<PAGE>
(a) Non-Segregated Account. Since 10% or more of the Units are owned by
employees of SSB, the General Partner and their principals and employees
(including the principals of the Advisor), the Partnership's commodity futures
account with SSB will be carried as a "proprietary account". Such accounts do
not receive the protections afforded by Section 4d(2) of the Commodity Exchange
Act relating to the segregation of customer funds. This means that in the event
of a bankruptcy of the futures commission merchant carrying the account, the
balance in the account would be classified in the liquidation as that of a
general creditor. As such, the Partnership's account would not be a
first-priority distribution of the firm's assets. By contrast, segregated
accounts are a first priority distribution.
(b) 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.
Technological Risk - the risk of loss attributable to technological
limitations or hardware failure that constrain the Partnership's ability to
gather, process, and communicate information efficiently and securely, without
interruption, within the Partnership and among limited partners, and in the
markets where the Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to
deficiencies in the documentation of transactions (such as trade confirmations)
or errors that result in noncompliance with applicable legal and regulatory
requirements.
Financial Control Risk - the risk of loss attributable to limitations
in financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
authorization, and that financial information utilized by the Advisor and
communicated to external parties, including limited partners and regulators, is
free of material errors.
<PAGE>
(c) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. SFAS 133 is
effective for fiscal year beginning after June 15, 1999. SFAS 133 is expected to
have no material impact on the financial statements of the Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses.
(d) Risk of Computer System Failure (Year 2000 Issue)
The Year 2000 issue is the result of existing computers in many
businesses using only two digits to identify a year in the date field. These
computers and programs, often referred to as "information technology," were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, many computer applications could fail or create
erroneous results at the Year 2000. Such systems and processes are dependent on
correctly identifying dates in the next century.
The General Partner administers the business of the Partnership through
various systems and processes maintained by SSBH and SSB. In addition, the
operation of the Partnership is dependent on the capability of the Partnership's
Advisor, the brokers and exchanges through which the Advisor trades, and other
third parties to prepare adequately for the Year 2000 impact on their systems
and processes. The Partnership itself has no systems or information technology
applications relevant to its operations.
The General Partner, SSB, SSBH and their parent organization Citigroup
Inc. have undertaken a comprehensive, firm-wide evaluation of both internal and
external systems (systems related to third parties) to determine the specific
modifications needed to prepare for the year 2000. The combined Year 2000
program in SSB is expected to cost approximately $140 million over the four
years from 1996 through 1999, and involve over 450 people at the peak staffing
level. SSB expects to complete all compliance and certification work by June
1999. At this time, over 95% of SSBH systems have completed the correction
process and are Year 2000 compliant. Over 73% of the systems have completed
certification testing. The Year 2000 project at SSBH remains on schedule.
The systems and components supporting the General Partner's business
that require remediation have been identified and modifications have been made
to bring them into Year 2000 compliance. Successful testing of these systems was
completed in the fourth quarter of 1998. Final testing and certification are
expected to be completed by June 30, 1999.
<PAGE>
This expenditure and the General Partner's resources dedicated to the
preparation for Year 2000 do not and will not have a material impact on the
operation or results of the Partnership.
The General Partner has requested and received statements from the
Advisor that it has undertaken its own evaluation and remediation plans to
identify any of its computer systems that are Year 2000 vulnerable. The Advisor
has confirmed it is taking immediate actions to remedy those systems as
necessary. The General Partner will continue to inquire into and to confirm the
Advisor's readiness for Year 2000. More importantly, the sole trading principal
of the Advisor is dually registered as an associated person of SSB and as such
is dependent on the systems and infrastructure of SSB for Year 2000 readiness.
SSB and the General Partner are highly confident of their readiness and,
therefore they do not believe additional recourse to the Advisor is necessary.
The most likely and most significant risk to the Partnership associated
with the lack of Year 2000 readiness is the failure of outside organizations,
including the commodities exchanges, clearing organizations, or regulators with
which the Partnership interacts to resolve their Year 2000 issues in a timely
manner. This risk could involve the inability to determine the value of the
Partnership at some point in time and would make effecting purchases or
redemptions of Units in the Partnership infeasible until such valuation was
determinable.
SSB has successfully participated in industry-wide testing including:
The Streetwide Beta Testing organized by the Securities Industry Association
(SIA), a government securities clearing test with the Federal Reserve Bank of
New York, The Depository Trust Company, and The Bank of new York, and Futures
Industry Association participants test. The firm is also participating in the
streetwide testing which commenced in March 1999.
It is possible that problems may occur that would require some time to
repair. Moreover, it is possible that problems will occur outside SSBH for which
SSBH could experience a secondary effect. Consequently, SSBH is preparing
comprehensive, written contingency plans so that alternative procedures and a
framework for critical decisions are defined before any potential crisis occurs.
Preliminary contingency plans are in place for Year 2000 risks as well as an
unforeseen "disaster" scale event. These plans call for principals of the
General Partner to be contacted and a team assembled of key personnel in an
off-site location with other SSB systems and operations personnel to effect
functions as required by the events.
<PAGE>
The goal of Year 2000 contingency planning is a set of alternate
procedures to be used in the event of a critical system failure or a failure by
a supplier or counterparty. Planning work was completed in December 1998, and
testing of alternative procedures will be conducted in the first half of 1999.
(7) Qualitative Disclosures Regarding Means of Managing Risk
Exposure. The General Partner monitors the Partnership's
performance and the concentration of its open positions, and consults with the
Advisor concerning the Partnership's overall risk profile. If the General
Partner felt it necessary to do so, the General Partner could require the
Advisor to close out individual positions as well as enter programs traded on
behalf of the Partnership. However, any such intervention would be a highly
unusual event. The General Partner primarily relies on the Advisor's own risk
control policies while maintaining a general supervisory overview of the
Partnership's market risk exposures. See also Item 2(b), "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
The General Partner controls the risk of the Partnership's non-trading
assets by depositing them in bank accounts and pays monthly interest to the
Partnership on 80% of the average daily equity maintained in cash in such
accounts during each month at a 30-day U.S. Treasury bill rate.
Item 3. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners. The Partnership
knows of no person who beneficially owns more than 5% of the Units outstanding.
<PAGE>
(b) Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner, and the General Partner is required to contribute to the Partnership an
amount at least equal to the greater of 1% of capital contributions or $25,000.
As set forth in the table below, the General Partner owned Units of General
Partnership interest equivalent to 667.0550 Units at March 31, 1999. David J.
Vogel, the President and a Director of the General Partner, owned 75 Units at
March 31, 1999. Michael R. Schaefer, a Director of the General Partner, owned 50
Units at March 31, 1999. Daniel R. McAuliffe, Jr., the Director of
Administration and a Director of the General Partner, owned 10.3165 Units at
March 31, 1999. Other than Messrs. Vogel, Schaefer and McAuliffe, none of the
directors and executive officers of the General Partner beneficially owns any
Units. The Advisor owned 2,708.7128 Units as of March 31, 1999, and receives a
20% profit share allocation of new trading profits in the form of Units.
<TABLE>
<CAPTION>
Amount and nature of
Title of Class Name of beneficial owner beneficial ownership Percent of class
- -------------- ------------------------ --------------------- -------------------
<S> <C> <C> <C>
Units of general Smith Barney Futures 667.0550 100%
partnership interest Management Inc.
Units of limited David J. Vogel 75.0000 0.11%
partnership interest
Units of limited Michael R. Schaefer 50.0000 0.075%
partnership interest
Units of limited Daniel R. McAuliffe, Jr. 10.3165 0.02%
partnership interest
Units of limited AAA Capital Management, 2,708.7128 3.42%
partnership interest Inc. (and principal)
</TABLE>
(c) Changes in control. None.
<PAGE>
Item 5. Directors and Executive Officers
The Partnership has no officers or directors and its affairs are
managed by its General Partner, Smith Barney Futures Management Inc. The
officers and directors of the General Partner are Jack H. Lehman, III (Chairman
and Director), David J. Vogel (Director and President), Michael R. Schaefer
(Director), Steven J. Keltz (Secretary and Director), Daniel A. Dantuono (Chief
Financial Officer, Treasurer and Director), Daniel R. McAuliffe, Jr. (Director),
Shelley Ullman (Senior Vice President and Director) and Maureen O'Toole (Senior
Vice President). Each director and officer is subject to re-appointment
annually.
The business background for the past five years of each director and
officer of the General Partner is as follows:
Mr. Lehman, age 52, has been a Senior Executive Vice President and
Director of SSB's commodity division since May 1992. In addition, he has been a
Director of the General Partner since July 1993 and was Co-Chairman of SSB's
commodity division from July 1992 through May 1996. Before joining SSB, he was
employed for twenty years at the brokerage firm of Shearson Lehman Brothers Inc.
("SLB") where from 1982 through April 1992 he was a Senior Executive Vice
President and Director of Commodities. He was a director and the Chairman of
Lehman Brothers Capital Management Corp., one of the predecessors of the General
Partner. Mr. Lehman is a past Chairman of the Futures Industry Association and
currently serves on its Executive Committee. He has been a member of the Board
of Governors of the Commodity Exchange, Inc. and the Comex Clearing Association.
Mr. Vogel, age 53, became an Executive Vice President of SSB and a
Director of the General Partner on August 2, 1993. In May 1996, he was appointed
President of the General Partner. From January 1993 to July 1993, Mr. Vogel was
an Executive Vice President of SLB. Formerly, Mr. Vogel was the chairman and CEO
of LIT America, Inc. (September 1988 through December 1992) and an Executive
Vice President of Thomson McKinnon Securities Inc. (June 1979 through August
1988). Mr. Vogel is also a past chairman of the Futures Industry Association, a
past Director of Comex Clearing Corporation and the Commodity Exchange, Inc. and
a past Governor of the Chicago Mercantile Exchange.
Mr. Schaefer, age 48, has been involved in the securities and
commodities brokerage business for over thirty years and is an Executive Vice
President of SSB since early 1992. He has been employed with the firm in various
capacities associated with its commodity businesses since 1981. His principal
areas of responsibility include futures research, trade execution, clearing and
administration. He is a member of various major U.S. commodity exchanges and a
Director of the NFA. He has been a Director of the General Partner since its
organization in 1986.
<PAGE>
Mr. Keltz, age 49, is an Associate General Counsel in the Law
Department of SSB. He became Secretary and Director of the General Partner on
August 2, 1993. He has been a Director of the General Partner since October
1995. From October 1988 through July 1993, Mr. Keltz was employed by SLB as
First Vice President and Associate General Counsel where he provided legal
counsel to various derivative products businesses. Mr. Keltz was Vice President,
Product Manager-Futures and an Associate General Counsel for Paine Webber
Incorporated from 1985 through September 1988.
Mr. Dantuono, age 41, is a Senior Vice President of SSB (since March
1994) prior to which he was a First Vice President (since August 1993). Mr.
Dantuono was a Vice President at SLB where he was employed since 1980. He has
been Chief Financial Officer, Treasurer and Director of the General Partner
since August 1993. Prior to August 1993, Mr. Dantuono was Controller and
Treasurer of a corporate predecessor of the General Partner.
Mr. McAuliffe, age 49, is a Senior Vice President of SSB (since August
1990) and became a Director of the General Partner in April 1994. Mr. McAuliffe
is Director of Administration for Smith Barney Managed Futures. From 1986
through 1997, he was responsible for the marketing and sales of retail futures
products, including public and private futures funds and managed account
programs. Prior to joining SLB, Mr. McAuliffe was employed by Merrill Lynch
Pierce Fenner & Smith from 1983 through 1986. Prior to joining Merrill Lynch,
Mr. McAuliffe was employed by Citibank from 1973 to 1983. He is a member of the
Managed Fund Association.
Ms. Ullman, age 40, is a Senior Vice President of SSB (since October
1989) and a Senior Vice President and Director of the General Partner (since May
1997 and April 1994, respectively). Previously, Ms. Ullman was a First Vice
President of SLB and a vice president and assistant secretary of a predecessor
of the General Partner, with responsibility for execution, administration,
operations and performance analysis for managed futures funds and accounts.
Ms. O'Toole, age 41, is a Senior Vice President of SSB (since April
1995) and a Senior Vice President of the General Partner (since 1997). Ms.
O'Toole is Director of Managed Futures Sales and Marketing. Prior to joining SSB
in March 1993, Ms. O'Toole was the director of managed futures quantitative
analysis at Rodman and Renshaw from 1989 to 1993. Ms. O'Toole began her career
in the futures industry in 1981 when she joined Drexel Burnham Lambert in the
research department of the Financial Futures Division. She has an MBA with a
concentration in Finance from Northwestern University.
<PAGE>
There have been no administrative, civil or criminal actions pending,
on appeal or concluded against the General Partner or any of its individual
principals within the past five years.
As mentioned above, the General Partner has selected AAA Capital
Management, Inc. as the Partnership's trading advisor. The principals of the
Advisor are: A. Anthony Annunziato, Angelo Joseph Annunziato and Gordon K.
Rutledge.
The business background for the past five years of each director and
executive officer of the Advisor is as follows:
Mr. A. Anthony Annunziato, age 51, is president and the sole trading
principal of the Advisor and will make all trading decisions on behalf of the
Partnership. Mr. Annunziato has been involved in the commodity business since
1973. Since 1984 Mr. Annunziato has been an associated person of SSB (and its
predecessors) where he currently is a Senior Vice President/Financial Consultant
in Houston, Texas, and where he continues to trade commodity interests on behalf
of client accounts. Since March 1991, Mr. Annunziato has operated Petrocom
Energy Trading Corp., a privately held company which makes energy related
investments with proprietary funds.
Mr. Angelo Joseph Annunziato and Mr. Gordon K. Rutledge are also
principals of the Advisor. They do not participate in making trading decisions
for the Advisor or supervise or select persons so engaged. They are each
registered as a floor broker at the New York Mercantile Exchange ("NYMEX"). The
Advisor may direct all or a portion of the Partnership's NYMEX trades to them
for execution.
There have been no administrative, civil or criminal actions pending,
on appeal or concluded against the Advisor or any of its individual principals
within the past five years.
Item 6. Executive Compensation
The Partnership has no directors or officers. Its affairs are managed
by the General Partner, which receives compensation for its services, as set
forth under "Item 1. Business". SSB, an affiliate of the General Partner, is the
commodity broker for the Partnership and receives brokerage commissions for such
services, as described under "Item 1. Business". For the quarter ended March 31,
1999 and the year ended December 31, 1998, SSB earned $2,245,671 and $5,527,260,
respectively, in brokerage commissions and clearing fees. The directors and
officers of the General Partner are employees of SSB and do not receive any
compensation from the Partnership or the General Partner. One hundred percent
(100%) of the compensation paid by SSB to Daniel A. Dantuono, Chief Financial
Officer and Treasurer of the General Partner, and Daniel R. McAullife, Jr.,
Director of Administration of the General Partner, is allocated to the General
<PAGE>
Partner. No part of any compensation paid by SSB to any other officer of the
General Partner is allocated to the General Partner. The Directors and Officers
of the General Partner may have an indirect interest in the affairs of the
Partnership insofar as they are employed by SSB, and SSB is the broker and
selling agent of the Partnership. In addition to his interest as sole trading
principal of the Advisor, Mr. A. Anthony Annunziato may have an indirect
interest in the affairs of the Partnership insofar as he is employed by SSB.
As compensation for its services, the Partnership pays the Advisor the
fees described under "Item 1. Business". For the quarter ended March 31, 1999
and the year ended December 31, 1998, the Partnership paid $433,892 and
$1,125,531, respectively, in management fees. The Partnership makes a profit
share allocation in the form of limited partnership units to the Advisor as
Special Limited Partner as of the end of each calendar year. For the year ended
December 31, 1998, the Advisor received a profit share allocation of $2,699,932
in the form of limited partnership units. As of the quarter ended March 31,
1999, the Advisor's accrued profit share allocation was approximately
$3,035,353.
Item 7. Certain Relationships and Related Transactions
a. Transactions with Management and Others. Not applicable to Directors
or Officers of the General Partner, except as described under "Item 6. Executive
Compensation". The profit share allocation to the Advisor is described in the
Special Limited Partner section of the Summary of Limited Partnership Agreement
under "Item 11. Description of Registrant's Securities to be Registered".
b. Certain Business Relationships. Not applicable.
c. Indebtedness of Management. Not applicable.
d. Transactions with Promoters.
1. SSB is the broker-dealer and selling agent for the
Partnership, providing both commodity brokerage and clearing services. SSB
charges the Partnership a brokerage fee equal to $18.00 per round turn for
futures transactions and $9.00 per side for options transactions. These fees may
be changed at any time by SSB. SSB advanced $75,951 for initial offering and
organizational expenses. SSB was reimbursed for these expenses by the
Partnership. Citibank N.A., an affiliate of the General Partner, was a swaps
counterparty for the Partnership as of March 31, 1999 and December 31, 1998.
2. The assets raised by SSB as selling agent for the
Partnership are transferred entirely to the Partnership. No portion of the
assets are retained by SSB.
<PAGE>
Item 8. Legal Proceedings
There are no material legal proceedings pending, on appeal or concluded
to which the Partnership is a party or to which any of its assets is subject.
There have been no material legal proceedings pending, on appeal or concluded
against the General Partner, the Advisor, or any of their respective directors
or executive officers within the past five years.
This section describes the major legal proceedings, other than ordinary
routine litigation incidental to the business, to which SSBH, the parent company
of the General Partner or its subsidiaries is a party or to which any of their
property is subject.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of
Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers
Realty Corporation ("SBRC") in the U.S. District Court for the Northern District
of Illinois (Harris Trust Savings Bank, not individually but solely as trustee
for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
MOA portfolio and for the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and state law. SBI had acquired the
participation interests in transactions in which it purchased as principal
mortgage notes issued by MOA and Best to finance purchases of motel portfolios;
95% of three such interests and 100% of one such interest were sold to APT for
purchase prices aggregating approximately $20.9 million. Plaintiffs' second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of the four participation interests (approximately $20.9 million), for
rescission and for disgorgement of profits, as well as other relief, and (b)
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
damages in excess of $37 million on certain of the state law claims as well as
other relief. The court dismissed the RICO, breach of contract, and unjust
enrichment claims. The court also found that defendants did not qualify as an
ERISA fiduciary and dismissed the claims based on that allegation. Defendants
moved for summary judgment on the sole remaining claim. The motion was denied,
and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit.
Defendants are awaiting a decision.
<PAGE>
Both the Department of Labor and the Internal Revenue Service have
advised SBI that they were or are reviewing the transactions in which APT
acquired such participation interests. With respect to the Internal Revenue
Service review, SSBH, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent
SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to
the transactions and SSBH, SBI and SBRC were given an opportunity to comment on
whether the IRS should issue 30-day letters, which would actually commence the
assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum
setting forth reasons why the IRS should not issue 30-day letters with respect
to the transactions.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
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.).
Plaintiff alleges, among other things, that defendants recommended and sold to
plaintiff unsuitable securities and that such transactions were outside the
scope of plaintiff's statutory and constitutional authority (ultra vires).
Defendants' motion for summary judgment was granted with respect to the ultra
vires claims in February 1999. The court allowed the filing of an amended
complaint asserting claims based on alleged breaches of fiduciary duty.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
declaratory judgment that Smith Barney Inc. and another underwriter are
responsible for any damages that the City may incur in the event the Internal
Revenue Service denies tax exempt status to the City's General Obligation
Refunding Bonds Series 1991. SSBH filed a motion to dismiss the complaints in
September 1998, and the complaints were subsequently amended. SSBH has filed a
motion to dismiss the amended complaints.
In November 1998, a purported class action complaint was filed in the
United States District Court for the Middle District of Florida (Dwight Brock as
Clerk for Collier County v. Merrill Lynch, et al.). The complaint alleges that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
SSBH intends to contest this complaint vigorously.
<PAGE>
Environmental Matters
In July 1996, the City and County of Denver ("Denver") enacted an
ordinance imposing a substantial fee on any radioactive waste or
radium-contaminated material disposed of in the City of Denver. Under this
ordinance, Denver assessed a subsidiary of Salomon, the S.W. Shattuck Chemical
Company, Inc. ("Shattuck"), $9.35 million for certain disposal already carried
out. Shattuck sued to enjoin imposition of the fee on constitutional grounds.
The United States also sued, seeking to enjoin imposition of the fee on
constitutional grounds. Denver counterclaimed and moved to add SSBH as a
defendant for past costs. These cases have been consolidated before the U.S.
District Court in Colorado, which granted Shattuck's motion for a preliminary
injunction enjoining Denver from enforcing the ordinance during the pendency of
the litigation. The parties have reached a settlement. SSB's share of the
settlement costs associated with this action is immaterial. The impact of
environmental matters is expected to be immaterial on all financial statements,
including the income statements, statements of cash flows and statements of
changes in stockholders' equity.
SSBH and various subsidiaries have also been named as defendants in
various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which the SSBH's broker-dealer subsidiaries have been named, arising
in the normal course of business out of activities as a broker and dealer in
securities, as an underwriter of securities, as an investment banker or
otherwise. In the opinion of SSBH's management, none of these actions or any
other legal actions discussed herein are expected to have a material adverse
effect on the consolidated financial condition of SSBH and its subsidiaries.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) Market Information. The Partnership has issued no stock. There is
no public market for the Units of Limited Partnership Interest.
(b) Holders. The number of holders of Units of Partnership Interest as
of March 31, 1999 and December 31, 1998, was 803 and 807, respectively.
(c) Distributions. The Partnership did not declare a distribution as of
the quarter ended March 31, 1999 or during 1998.
Item 10. Recent Sales of Unregistered Securities.
(a) Securities sold. As of March 16, 1998, the initial private offering
of Units of limited partnership interest resulted in aggregate proceeds to the
Partnership of $49,538,000. Between March 16, 1998 and July 1, 1998, the
Partnership sold additional limited partnership Units which resulted in
aggregate proceeds to the Partnership of $15,973,000.
<PAGE>
(b) Underwriters and other purchasers. Units of Limited Partnership
Interest were sold to persons and entities who are accredited investors as that
term is defined in Rule 501(a) of Regulation D as well as to those persons who
are not accredited investors but who have either a net worth (exclusive of home,
furnishings and automobiles) either individually or jointly with the investor's
spouse of at least three times his investment in the Partnership (the minimum
investment for which is $25,000) or gross income for the two previous years and
projected gross income for the current fiscal year of not less than three times
his investment in the Partnership for each year.
(c) Consideration. The aggregate proceeds of securities sold during the
period from February 12, 1998 (commencement of offering period) through July 1,
1998 was $66,172,000, of which $661,000 was from Units sold to the General
Partner. No Units have been offered or sold since July 1, 1998.
Units have been sold monthly at net asset value per Unit. No
underwriting discounts or commissions are paid in connection with the Units. At
the present time, no Units are offered for sale.
(d) Exemption from registration claimed. Exemption is claimed from
registration under Securities Act Section 4(2) and Regulation D promulgated
thereunder. The purchasers are accredited investors under Rule 501(a) of
Regulation D, as discussed in paragraph (a) above.
The minimum subscription for Units is $25,000. The General Partner may
in its sole discretion accept subscriptions of less than $25,000. The minimum
additional subscription for investors who are currently limited partners is
$10,000.
In accordance with Part 4 of the CFTC regulations, before making any
investment in the Partnership, each investor is provided with a Disclosure
Document, as supplemented, that contains information concerning the Partnership
as prescribed in CFTC regulations.
Item 11. Description of Registrant's Securities to be Registered.
The Partnership is registering Units of Limited Partnership Interest,
which are privately offered. Profits and losses of the Partnership are allocated
among the partners on a monthly basis in proportion to their capital accounts
(the initial balance of which is the amount paid for their Units). Distributions
of profits will be made at the sole discretion of the General Partner.
<PAGE>
The Units may not be transferred without the written consent of the
General Partner except in the cases of the death of an individual limited
partner or the termination of an entity that is a limited partner as provided in
the Limited Partnership Agreement. No transfer or assignment will be permitted
unless the General Partner is satisfied that such transfer or assignment will
not violate federal or state securities laws and will not jeopardize the
Partnership's status as a partnership for federal income tax purposes. No
substitution may be made unless the transferor delivers an instrument of
substitution, the transferee adopts the terms of, and executes, the Limited
Partnership Agreement, and the General Partner consents to such substitution
(which consent may be withheld at its sole and absolute discretion). A
transferee who becomes a substituted limited partner will be subject to all of
the rights and liabilities of a limited partner of the Partnership. A transferee
who does not become a substituted limited partner will be entitled to receive
the share of the profits or the return of capital to which his transferor would
otherwise be entitled, but will not be entitled to vote, to an accounting of
Partnership transactions, to receive tax information, or to inspect the books
and records of the Partnership. Under the New York Revised Limited Partnership
Act, an assigning limited partner remains liable to the Partnership for any
amounts for which he may be liable under such law regardless of whether any
assignee to whom he has assigned Units becomes a substituted limited partner.
A limited partner may require the Partnership to redeem some or all of
his Units at Net Asset Value per Unit as of the last day of any month (the
"Redemption Date"). The right to redeem is contingent upon the Partnership's
having property sufficient to discharge its liabilities on the Redemption Date
and upon receipt by the General Partner of a written or oral request for
redemption at least 10 days prior to the Redemption Date. Because Net Asset
Value fluctuates daily, limited partners will not know the Net Asset Value
applicable to their redemption at the time a notice of redemption is submitted.
Payment for a redeemed interest will be made within 10 business days following
the Redemption Date. There is no fee charged to limited partners in connection
with redemptions. The General Partner reserves the right in its sole discretion
to permit redemptions more frequently than monthly and to waive the 10-day
notice period. The General Partner may also, at its sole discretion and upon 10
days' notice to a limited partner, require that any limited partner redeem his
Units if such redemption is in the best interests of the Partnership.
Summary of the Limited Partnership Agreement
The following is an explanation of the material terms and provisions of
the Limited Partnership Agreement, a copy of which is attached as Exhibit 3(ii)
hereto and is incorporated herein by this reference. Each prospective investor
should read the Limited Partnership Agreement thoroughly before investing. The
following description is a summary only, is not intended to be complete, and is
qualified in its entirety by reference to the Limited Partnership Agreement
itself.
<PAGE>
Liability of Limited Partners
The Partnership was formed under the laws of the State of New York on
January 5, 1998. The General Partner has been advised by its counsel that except
as required by New York law and as set forth in Paragraph 7(f) of the Limited
Partnership Agreement, Units of limited partnership interest purchased and paid
for pursuant to this offering will be fully paid and non-assessable, and a
limited partner will not be liable for amounts in excess of his contributions to
the Partnership and his share of Partnership assets and undistributed profits.
The General Partner will be liable for all obligations of the Partnership to the
extent that assets of the Partnership are insufficient to discharge such
obligations.
Special Limited Partner
The Advisor is a Special Limited Partner of the Partnership. In partial
consideration for its advisory services to the Partnership, it will receive a
Profit Share allocation, in the form of Units, equal to 20% of the Partnership's
New Trading Profits (as that term is defined in the Limited Partnership
Agreement), if any, earned during a year.
Management of Partnership Affairs
The limited partners will not participate in the management or control
of the Partnership. Under the Limited Partnership Agreement, responsibility for
managing the Partnership is vested solely in the General Partner. The General
Partner may select one or more trading advisors to direct all trading for the
Partnership. Other responsibilities of the General Partner include, but are not
limited to, the following: reviewing and monitoring the trading of the trading
advisors; administering redemptions of limited partners' Units; preparing
monthly and annual reports to the limited partners; preparing and filing
necessary reports with regulatory authorities; calculating the Net Asset Value;
executing various documents on behalf of the Partnership and the limited
partners pursuant to powers of attorney; and supervising the liquidation of the
Partnership if an event causing dissolution of the Partnership occurs.
Additional Partners
The General Partner has the sole discretion to determine whether to
offer for sale additional Units of limited partnership interest and to admit
additional limited partners. There is no limitation on the number of Units which
may be outstanding at any time. All Units offered by the Partnership will be
sold at the Partnership's then current Net Asset Value per Unit. The General
Partner may make arrangements for the sale of additional Units in the future.
<PAGE>
Dissolution of the Partnership
The affairs of the Partnership will be wound up and the Partnership
liquidated as soon as practicable upon the first to occur of the following: (i)
December 31, 2018; (ii) the vote to dissolve the Partnership by limited partners
owning more than 50% of the Units; (iii) assignment by the General Partner of
all of its interest in the Partnership, or the withdrawal, removal, bankruptcy
or dissolution of the General Partner, unless the Partnership is continued as
described in the Limited Partnership Agreement; (iv) a decline in Net Asset
Value to less than $400 per Unit as of the end of any trading day; or (v) the
occurrence of any event which shall make it unlawful for the existence of the
Partnership to be continued. In addition, the General Partner may, in its sole
discretion, cause the Partnership to dissolve if the Partnership's aggregate Net
Assets decline to less than $1,000,000.
Removal or Admission of General Partner
The General Partner may be removed and successor general partners may
be admitted upon the vote of a majority of the outstanding Units.
Amendments; Meetings
The Limited Partnership Agreement may be amended if approved in writing
by the General Partner and limited partners owning more than 50% of the
outstanding Units. In addition, the General Partner may amend the Limited
Partnership Agreement without the consent of the limited partners in order to
clarify any clerical inaccuracy or ambiguity or reconcile any inconsistency
(including any inconsistency between the Limited Partnership Agreement and the
Prospectus); to delete or add any provision of or to the Limited Partnership
Agreement required to be deleted or added by the staff of any federal or state
agency; or to make any amendment to the Limited Partnership Agreement which the
General Partner deems advisable (including but not limited to amendments
necessary to effect the allocations proposed therein) provided that such
amendment is not adverse to the limited partners, or is required by law.
Any limited partner, upon written request addressed to the General
Partner, may obtain from the General Partner a list of the names and addresses
of record of all limited partners and the number of Units held by each for a
purpose reasonably related to such limited partner's interest as a limited
partner in the Partnership. Upon receipt of a written request, signed by limited
partners owning at least 10% of the outstanding Units, that a meeting of the
Partnership be called to consider any matter upon which limited partners may
vote pursuant to the Limited Partnership Agreement, the General Partner, by
<PAGE>
written notice to each limited partner of record mailed within fifteen days
after such receipt, must call a meeting of the Partnership. Such meeting must be
held at least thirty but not more than sixty days after the mailing of such
notice and the notice must specify the date, a reasonable time and place, and
the purpose of such meeting.
At any such meeting, upon the approval by an affirmative vote of
limited partners owning more than 50% of the Units, the following actions may be
taken: (i) the Limited Partnership Agreement may, with certain exceptions, be
amended; (ii) the Partnership may be dissolved; (iii) the General Partner may be
removed and a new general partner may be admitted; (iv) a new general partner or
general partners may be admitted if the General Partner elects to withdraw from
the Partnership; (v) any contracts with the General Partner or any of its
affiliates or any trading advisor may be terminated without penalty on 60 days'
notice; and (vi) the sale of all assets of the Partnership may be approved.
However, no such action may be taken unless the General Partner has been
furnished with an opinion of counsel that the action to be taken will not
adversely affect the status of the limited partners as limited partners under
the New York Revised Limited Partnership Act and that the action is permitted
under such law.
Reports to Limited Partners
The books and records of the Partnership will be maintained at its
principal office and the limited partners have the right at all times during
reasonable business hours to have access to and copy the Partnership's books and
records for a purpose reasonably related to such limited partner's interest as a
limited partner in the Partnership. Within 30 days of the end of each month, the
General Partner will provide the limited partners with a financial report
containing information relating to the Net Assets and Net Asset Value of a Unit
as of the end of such month, as well as other information relating to the
operations of the Partnership which is required to be reported to the limited
partners by CFTC regulations. In addition, if any of the following events occur,
notice thereof will be mailed to each limited partner within seven business days
of such occurrence: a decrease in the Net Asset Value of a Unit to $400 or less
as of the end of any trading day; any change in trading advisors; any change in
commodity brokers; any change in the General Partner; any material change in the
Partnership's trading policies or any material change in an advisor's trading
strategies. In addition, a certified annual report of financial condition will
be distributed to the limited partners not more than 90 days after the close of
the Partnership's fiscal year. Not more than 75 days after the close of the
fiscal year and if required by the then applicable tax law, tax information
necessary for the preparation of the limited partners' annual federal income tax
returns will be distributed to the limited partners.
<PAGE>
Income Tax Aspects
The following statements regarding the federal income tax consequences
to the limited partners of an investment in the Partnership are based upon the
opinions of the Partnership's counsel, Willkie Farr & Gallagher, and the
provisions of the Internal Revenue Code as currently in effect and the existing
administrative and judicial interpretations thereunder. The trading activities
of the Partnership, in general, generate capital gain and loss and ordinary
income. The Partnership pays no federal income tax; rather, limited partners are
allocated their proportionate share of the taxable income or losses realized by
the Partnership during the period of the Partnership's taxable year that Units
were owned by them. Unrealized gains on "Section 1256 contracts" (as defined in
the Code) held by the Partnership at the end of its taxable year must be
included in income under the "mark-to-market" rule and will be allocated to
partners in proportion to their respective capital accounts.
Item 12. Indemnification of Directors and Officers.
Section 17 of the Limited Partnership Agreement (attached as Exhibit
3(ii) hereto) provides for indemnification of the General Partner, its officers,
directors, more than 10% stockholders, and persons who directly or indirectly
control, are controlled by or under common control with the General Partner. The
Registrant is not permitted to indemnify the General Partner or its affiliates
for liabilities resulting from a violation of the Securities Act of 1933 or any
State securities law in connection with the offer or sale of the Units of
Limited Partnership Interest.
Section 6 of the Management Agreement (attached as Exhibit 10(a)
hereto) provides for indemnification by the General Partner of the Advisor for
any loss, liability, damage, cost, expense (including, without limitation,
attorneys' and accountants' fees), judgments and amounts paid in settlement
actually and reasonably incurred by it in connection with such action, suit, or
proceeding if the Advisor acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the Partnership and
provided that its conduct did not constitute negligence, intentional misconduct,
or a breach of its fiduciary obligations to the Partnership as a commodity
trading advisor, unless and only to the extent that the court or administrative
forum in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all circumstances of
the case, the Advisor is fairly and reasonably entitled to indemnity for such
expenses which such court or administrative forum shall deem proper; and further
provided that no indemnification shall be available from the Partnership if such
indemnification is prohibited by Section 17 of the Limited Partnership
Agreement.
<PAGE>
Furthermore, under certain circumstances, the Advisor will indemnify,
defend and hold harmless the General Partner, the Partnership and their
affiliates against any loss, liability, damage, cost or expense (including,
without limitation, attorneys' and accountants' fees), judgments and amounts
paid in settlement actually and reasonably incurred by them (A) as a result of
the material breach of any material representations and warranties made by the
Advisor in the Management Agreement, or (B) as a result of any act or omission
of the Advisor relating to the Partnership if there has been a final judicial or
regulatory determination or, in the event of a settlement of any action or
proceeding with the prior written consent of the Advisor, a written opinion of
an arbitrator, to the effect that such acts or omissions violated the terms of
the Management Agreement in any material respect or involved negligence, bad
faith, recklessness or intentional misconduct on the part of the Advisor (except
as otherwise provided in Section 1(g) of the Management Agreement).
Item 13. Financial Statements and Supplementary Data.
The registrant does not have securities registered pursuant to Section
12(b) of the Securities Exchange Act of 1934, is not an insurance company and
does not have securities registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934 which are quoted on the National Association of Securities
Dealers Automated Quotation System.
The Annual Reports of the Partnership and the General Partner for 1998
were filed as Exhibits 99.1 and 99.2, respectively, to the Partnership's Form 10
filed on April 30, 1999 and are incorporated herein by reference.
The Partnership's unaudited financial statements through March 31, 1999
follow.
<PAGE>
Smith Barney AAA Energy Fund L.P.
Statement of Financial Condition
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited)
----------------------- ------------------
<S> <C> <C>
ASSETS:
Equity in commodity futures trading account:
Cash $91,531,051 $70,049,894
Net unrealized appreciation
on open futures contracts 3,466,479 6,718,299
Net unrealized appreciation (depreciation)
on open swaps contracts (1,685,938) 606,945
Commodity options owned,
at market value (cost $2,787,950
and $8,098,837, respectively) 5,748,270 6,443,285
----------------------- ------------------
99,059,862 83,818,423
Interest receivable 279,990 217,194
======================= ==================
$99,339,852 $84,035,617
======================= ==================
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $658,044 $488,115
Management fees 158,617 135,859
Due Salomon Smith Barney - 951
Due to Special Limited Partner 3,035,353 -
Other fees 27,198 29,536
Redemptions payable 105,924 118,433
Commodity options written,
at market value (premium $2,168,800
and $4,970,916, respectively) 5,275,320 3,535,383
----------------------- ------------------
9,260,456 4,308,277
----------------------- ------------------
<PAGE>
Smith Barney AAA Energy Fund L.P.
Statement of Financial Condition
(continued)
Partners' Capital:
General Partner, 667.0550 Unit equivalents
outstanding in 1999 and 1998, respectively 920,122 790,013
Limited Partners, 64,029.5105 and
64,371.5518 Units of Limited Partnership
Interest outstanding in 1999 and 1998,
respectively 88,574,924 76,237,395
Special Limited Partner, 607.7128 and
2,279.7128 Units of Limited Partnership
Interest outstanding in 1999 and 1998,
respectively 584,350 2,699,932
----------------------- ------------------
90,079,396 79,727,340
----------------------- ------------------
$99,339,852 $84,035,617
======================= ==================
</TABLE>
See Notes to Financial Statements.
Smith Barney AAA Energy Fund L.P.
Statement of Partners' Capital
for the Three Months Ended March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SB AAA ENERGY Limited Special General Total
FUND L.P. Partners Limited Partner
Partner
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Partners' capital at December $76,237,395 $2,699,932 $790,013 $79,727,340
31,1998
Net Income 12,776,331 - 130,109 12,906,440
Redemption 342.0413 Units of
Limited
Partnership Interest (438,802) - - (438,802)
Redemption 1,672 Units by
Special Limited
Partner - (2,115,582) - (2,115,582)
Partners' capital at March 31,
1999 $88,574,924 $584,350 $920,122 $90,079,396
============ ========= ========= ===========
</TABLE>
<PAGE>
SMITH BARNEY AAA ENERGY FUND L.P.
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Period from
March 16,
(commencement
Three of trading
Months Ended operations)
March 31, to March 31,
1999 1998
<S> <C> <C>
Income:
Net gains on trading of commodity futures:
Realized gains on closed positions $ 23,344,060 $ 140,577
Change in unrealized gains/losses on
open positions (5,470,884) (1,359,765)
----------------- -----------------
17,873,176 (1,219,188)
Less, brokerage commissions including
clearing fees of $282,428 and $19,241,
respectively (2,245,671) (286,478)
----------------- -----------------
Net realized and unrealized losses 15,627,505 (1,505,666)
Interest income 765,028 90,299
----------------- -----------------
16,392,533 (1,415,367)
----------------- -----------------
Expenses:
Management fees 433,892 42,562
Organization expense - 75,000
Other expenses 16,848 2,192
----------------- -----------------
450,740 119,754
----------------- -----------------
Net income (loss) before accrual for allocation to the Special
Limited Partner
15,941,793 (1,535,121)
Accrued Allocation to the Special Limited Partner*
(3,035,353) -
-------------------- -----------------
Net Income available for pro rata distribution
$12,906,440 (1,535,121)
Redemptions (2,554,384) -
----------------- ------------------
Net increase (decrease) in Partners' capital 10,352,056 (1,535,121)
Partners' capital, beginning of period 79,727,340 50,040,000
----------------- -----------------
Partners' capital, end of period $ 90,079,396 $ 48,504,879
================= =================
Net asset value per Unit
(65,304.2783 and 50,040 Units outstanding
at March 31, 1999 and 1998, respectively) $ 1,379.38 $ 969.32
=============== ================
Net income (loss) per Unit of Limited
Partnership Interest and General Partner
Unit equivalent $ 195.05 $ (30.68)
=============== ================
</TABLE>
*Allocation to Special Limited Partner, if any, is made annually based on net
profits as of the year end.
<PAGE>
Smith Barney AAA Energy Fund L.P.
Notes to Financial Statements (Unaudited)
1. Partnership Organization:
Smith Barney AAA Energy Fund L.P. (the "Partnership") is a limited partnership
which was organized on January 5, 1998 under the partnership laws of the State
of New York to engage in the speculative trading of a diversified portfolio of
commodity interests, generally including commodity options and commodity futures
contracts on United States exchanges and certain foreign exchanges. The
Partnership may trade commodity futures and options contracts of any kind but
intends initially to trade solely energy and energy related products. In
addition, the Partnership may enter into swap contracts on energy related
products. The commodity interests that are traded by the Partnership are
volatile and involve a high degree of market risk.
Between February 12, 1998 (commencement of the offering period) and March 14,
1998, 49,538 Units of Limited Partnership Interest ("Units") were sold at $1,000
per Unit. The proceeds of the initial offering were held in an escrow account
until March 15, 1998, at which time they were turned over to the Partnership for
trading.
Smith Barney Futures Management Inc. acts as the general partner (the "General
Partner") of the Partnership. On September 1, 1998, the Partnership's commodity
broker, Smith Barney Inc., merged with Salomon Brothers Inc and changed its name
to Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General
Partner. The General Partner is wholly owned by Salomon Smith Barney Holdings
Inc., ("SSBH") which is the sole owner of SSB. On October 8, 1998, Travelers
Group Inc. merged with Citicorp Inc. and changed its name to Citigroup Inc. SSBH
is a wholly owned subsidiary of Citigroup Inc.
The General Partner and each limited partner share in the profits and losses of
the Partnership, after the allocation to the Special Limited Partner, in
proportion to the amount of partnership interest owned by each except that no
limited partner shall be liable for obligations of the Partnership in excess of
his initial capital contribution and profits, if any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2018; the net asset value of a Unit decreases to less than $400 as
of a close of any business day; or under certain other circumstances as defined
in the Limited Partnership Agreement.
<PAGE>
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The commodity
interests are recorded on trade date and open contracts are recorded in the
statement of financial condition at fair value on the last business day of the
year, which represents market value for those commodity interests for which
market quotations are readily available or other measures of fair value deemed
appropriate by management of the General Partner for those commodity interests
for which market quotations are not readily available, including dealer quotes
for swaps and certain option contracts. Investments in commodity interests
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates prevailing on the last business day of the year. Realized gains
(losses) and changes in unrealized values on commodity interests are recognized
in the period in which the contract is closed or the changes occur and are
included in net gains (losses) on trading of commodity interests.
b. Income taxes have not been provided as each partner is individually liable
for the taxes, if any, on his share of the Partnership's income and expenses.
c. The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the Partnership
including selecting one or more advisors to make trading decisions for the
Partnership.
b. Management Agreement:
The General Partner, on behalf of the Partnership, has entered into a Management
Agreement with AAA Capital Management, Inc. (the "Advisor"), registered
commodity trading advisor. Mr. A. Anthony Annunziato is the sole trading
principal of the Advisor and is also an employee of SSB. The Partnership will
pay the Advisor a monthly management fee equal to 1/6 of 1% (2% per year) of
month-end Net Assets allocated to the Advisor. In addition, the Advisor will be
a Special Limited Partner of the Partnership and will receive an annual profit
share allocation to its capital account in the Partnership equal to 20% of New
Trading Profits, as defined, earned on behalf of the Partnership during each
calendar year in the form of Units. As of March 31, 1999, the Partnership has
accrued a liability for the allocation to the Special Limited Partner in the
amount of $3,035,353, based on performance data available as of March 31, 1999.
The Units are contingently issuable as of December 31, 1999, based on
performance for the year and as such are not reflected as issued in the
Statement of Partners' Capital.
<PAGE>
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that the
Partnership will pay SSB brokerage commissions at $18 per round turn for futures
and swap transactions and $9 per side for options. The brokerage fee is
inclusive of applicable floor brokerage. In addition, the Partnership will pay
SSB National Futures Association ("NFA") fees, exchange, clearing, user and
give-up fees. SSB will pay a portion of brokerage fees to its financial
consultants who have sold Units in this Partnership. All of the Partnership's
assets are deposited in the Partnership's account at SSB. The Partnership's cash
is deposited by SSB in segregated bank accounts to the extent required by
Commodity Futures Trading Commission regulations. At March 31, 1999 and December
31, 1998, the amount of cash held for margin requirements was $11,443,262 and
$12,153,750, respectively. SSB has agreed to pay the Partnership interest on 80%
of the average daily equity maintained in cash in its account during each month
at a 30-day U.S. Treasury bill rate determined weekly by SSB based on the
average noncompetitive yield on 3-month U.S. Treasury bills maturing in 30 days
from the date on which such weekly rate is determined. The Customer Agreement
between the Partnership and SSB gives the Partnership the legal right to net
unrealized gains and losses. The Customer Agreement may be terminated upon
notice by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety of
commodity interests, including derivative financial instruments and derivative
commodity interests. The results of the Partnership's trading activity are shown
in the statement of income and expenses.
All of the commodity interests, owned by the Partnership, are held for trading
purposes. The fair value of these commodity interests, including options and
swaps thereon, if applicable, at March 31, 1999 and December 31, 1998, was
$2,253,491 and $10,233,146, respectively, and the average fair value of months
with net gains was $4,974,258 and $6,022,877, respectively, and the average fair
value of months with net losses was $0 and $4,052,431, respectively, during the
periods then ended, based on a monthly calculation. There were no months during
the first quarter of 1999 with net losses.
<PAGE>
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner and at such times as the General Partner may decide. Beginning
with the first full month ending at least three months after the commencement of
trading, a limited partner may require the Partnership to redeem his Units at
their Net Asset Value as of the last day of a month on 10 days' notice to the
General Partner. There is no fee charged to limited partners in connection with
redemptions.
6. Offering and Organization Costs:
Offering and organization expenses of $75,951 relating to the issuance and
marketing of Units offered were initially paid by SSB. As of December 31, 1998,
the Partnership had reimbursed SSB for $75,951 of offering and organization
expenses from the interest earned on funds held in its account.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the quarter
ended March 31, 1999, and for the period from March 16, 1998 (commencement of
trading operations) to December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Quarter Ended March 16, 1998 to
March 31, 1999 March 31, 1998
<S> <C> <C>
Net realized and unrealized gains
$236.16 $(30.09)
Interest income 11.57 1.80
Expenses (52.68) (2.39)
------- ------
Increase for period
195.05 (30.68)
Net asset value per Unit, beginning of
period 1,184.33 1,000.00
-------- --------
Net asset value per Unit, end of period
$1,379.38 $969.32
========= =======
</TABLE>
<PAGE>
8. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet risk,
including derivative financial instruments and derivative commodity instruments,
in the normal course of its business. These financial instruments may include
forwards, futures, options and swaps, whose value is based upon an underlying
asset, index, or reference rate, and generally represent future commitments to
exchange currencies or cash flows, or to purchase or sell other financial
instruments at specific terms at specified future dates, or, in the case of
derivative commodity instruments, to have a reasonable possibility to be settled
in cash, through physical delivery or with another financial instrument. These
instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange
traded instruments are standardized and include futures and certain option
contracts. OTC contracts are negotiated between contracting parties and include
forwards, swaps and certain options. Each of these instruments is subject to
various risks similar to those related to the underlying financial instruments
including market and credit risk. In general, the risks associated with OTC
contracts are greater than those associated with exchange traded instruments
because of the greater risk of default by the counterparty to an OTC contract.
The Partnership's swap contracts are OTC contracts.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is SSB. As of March 31, 1999, the only
counterparties to the Partnership's swap contracts were Citibank, N.A. which is
affiliated with the Partnership, and Morgan Stanley Capital Group Inc.
The General Partner monitors and controls the Partnership's risk exposure on a
daily basis through financial, credit and risk management monitoring systems,
and accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject. These
monitoring systems allow the General Partner to statistically analyze actual
trading results with risk adjusted performance indicators and correlation
statistics. In addition, on-line monitoring systems provide account analysis of
futures, forwards and options positions by sector, margin requirements, gain and
loss transactions and collateral positions.
The notional or contractual amounts of these instruments, while appropriately
not recorded in the financial statements, reflect the extent of the
Partnership's involvement in these instruments.
<PAGE>
At March 31, 1999 (unaudited), the Partnership's commitment to purchase and sell
these instruments was $239,588,137 and $225,895,991, respectively, as detailed
below. All of these instruments mature within one year of March 31, 1999.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity. At March 31, 1999 the fair value of the Partnership's
derivatives, including options thereon, if applicable, was $2,253,491, as
detailed below.
March 31, 1999
------------------------------------------------
Notional or Contractual
Amount of Commitments
-----------------------------------------------
To Purchase To Sell Fair Value
-------------------------------------------------
Energy $231,031,992 $219,778,516 $ 3,939,429
Energy swaps 8,556,145 6,117,475 (1,685,938)
------------ ------------ ------------
Total $239,588,137 $225,895,991 $ 2,253,491
============ ============ ============
At December 31, 1998, the Partnership's commitment to purchase and sell these
instruments was $175,493,309 and $151,251,090, respectively, as detailed below.
All of these instruments mature within one year of December 31, 1998. However,
due to the nature of the Partnership's business, these instruments may not be
held to maturity. At December 31, 1998, the fair value of the Partnership's
derivatives, including options thereon, if applicable, was $10,233,146, as
detailed below.
December 31, 1998
------------------------------------------------
Notional or Contractual
Amount of Commitments
------------------------------------------------
To Purchase To Sell Fair Value
------------------------------------------------
Energy $160,941,944 $147,860,010 $ 9,604,751
Energy swaps 9,818,065 3,391,080 606,945
Indices 4,733,300 - 21,450
------------ ------------ ------------
Total $175,493,309 $151,251,090 $ 10,233,146
============ ============ ============
9. New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. SFAS 133 is expected
to have no material impact on the financial statements of the Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses.
<PAGE>
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements.
The following financial statements have been filed as part of
this registration statement:
Statements of Financial Condition of the Partnership at March
31, 1999 (unaudited) and December 31, 1998
Statements of Income and Expenses for quarter ended March 31,
1999 (unaudited) and for the period from March 16, 1998
(commencement of trading) to December 31, 1998
Statements of Partners' Capital for quarter ended March 31,
1999 (unaudited) and for the period from January 5, 1998 (date
Partnership was organized) to December 31, 1998
Notes to Financial Statements
Statements of Financial Condition of Smith Barney Futures
Management Inc. at March 31, 1999 (unaudited) and December 31,
1998
<PAGE>
(b) Exhibits.
*Exhibit 3(i)- Certificate of Limited Partnership
*Exhibit 3(ii)- Limited Partnership Agreement
*Exhibit 10(a)- Management Agreement among the Partnership, the General
Partner and AAA Capital Management, Inc.
*Exhibit 10(b)(i)- Customer Agreement between the Partnership and Smith Barney
Inc. (the predecessor to Salomon Smith Barney Inc.)
*Exhibit 10(c)- Form of Subscription Agreement
*Exhibit 27- Financial Data Schedule
*Exhibit 99.1- Annual Report of the Partnership
*Exhibit 99.2- Annual Report of the General Partner
*Incorporated by reference to the Partnership's Form 10 previously
filed on April 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY AAA ENERGY FUND L.P.
(Registrant)
Date: June 30, 1999
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001057051
<NAME> Smith Barney AAA Energy Fund L.P.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-02-1998
<PERIOD-END> DEC-31-1998
<CASH> 70,049,894
<SECURITIES> 13,768,529
<RECEIVABLES> 217,194
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,035,617
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,035,617
<CURRENT-LIABILITIES> 4,308,277
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 79,727,340
<TOTAL-LIABILITY-AND-EQUITY> 84,035,617
<SALES> 0
<TOTAL-REVENUES> 16,653,394
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,251,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,701,981
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,701,981
<EPS-BASIC> 184.33
<EPS-DILUTED> 0
</TABLE>
