Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The Partnership does not engage in the sale of goods or services. The Partnership's only assets are its equity in its commodity futures trading account consisting of cash, investment in Partnerships, net unrealized appreciation on open futures and forward contracts, commodity options, if applicable, and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a decrease in liquidity, no such losses occurred in the second quarter of 2005.
The Partnership's capital consists of the capital contributions of the partners as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.
For the six months ended June 30, 2005, Partnership capital increased 20.4% from $118,783,824 to $143,049,709. This increase was attributable to net income from operations of $13,101,331 coupled with additional sales of 14,392.0504 Redeemable Units of Limited Partnership totaling $20,464,000, which was partially offset by the redemption of 6,445.0619 Redeemable Units resulting in an outflow of $9,299,446. Future redemptions can impact the amount of funds available for investment in the Partnership in subsequent periods.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
All commodity interests (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statement of financial condition at fair value on the last business day of the period, which represents market value for those commodity interests for which market quotations are readily available or other measures of fair value deemed appropriate by management of the General Partner for those commodity interests and foreign currencies for which market quotations are not readily available, including dealer quotes for swaps and certain option contracts. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the period. Realized gains (losses) and changes in unrealized values on commodity interests and foreign currencies are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests. The investment in AAA Master and Winton Master are recorded at fair value, based upon the Partnership's proportionate interest held.
Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting dates, is included in the statement of financial condition. Realized gains (losses) and changes in unrealized values on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the statements of income and expenses and partners' capital.
During the Partnership's second quarter of 2005, the net asset value per Redeemable Unit increased 1.4% from $1,489.55 to $1,509.66 as compared to a decrease of 8.6% in the second quarter of 2004. The Partnership experienced a net trading gain before brokerage commissions and related fees in the second
quarter of 2005 of $6,042,828. Gains were primarily attributable to the Partnership's trading of commodity futures in currencies, non-U.S. interest rates, livestock and indices, and were partially offset by losses in energy, grains, U.S. interest rates, metals and softs. The Partnership experienced a net trading loss before brokerage commissions and related fees in the second quarter of 2004 of $8,092,578. Losses were primarily attributable to the Partnership's trading of commodity futures in currencies, metals, grains, softs, indices and U.S. and non-U.S. interest rates and were partially offset by gains in energy and livestock.
Trading in the second quarter of 2005 began with a continuation of the volatile and directionless markets that had characterized the first quarter. Trading losses in April were predominantly attributable to trading in energy markets, global stock indices and U.S. interest rates. A big sell of crude oil whipsawed the advisors' net long positions, then rallied mid-month only to drop precipitously in the final week of the month. May was a transition period as macro-economic trends emerged generating profits in currency and fixed income markets. June witnessed a continuation of both financial and commodity trends leading to a recovery of net profits and an overall positive quarter.
Lower interest rates in Europe were the primary drivers of profitability for the quarter and had a concomitant impact on strengthening the U.S. dollar to recent highs versus the Euro, British pound and Swiss franc. Lower interest rates were favorable for the Advisor's positions as lower inflation reports, weak European markets, and improved productivity caused markets to shrug off another increase in short-term rates by the U.S. Federal Reserve Bank. Trading in foreign currencies was the second most profitable sector for the Fund. Trading in global stock indices was also profitable.
Offsetting a portion of these gains were losses in the commodity markets. A combination of lower inflation expectations and increased supplies disrupted price trends across several markets leading to losses in energy, primarily crude oil, base and precious metals, and grains.
During the six months ended June 30, 2005, the net asset value per Redeemable Unit increased 10.3% from $1,368.33 to $1,509.66 as compared to an increase of 3.1% during the six months ended June 30, 2004. The Partnership experienced a net trading gain before brokerage commissions and related fees in the six months ended June 30, 2005 of $21,281,887. Gains were primarily attributable to the Partnership's trading of commodity futures in energy, U.S. and non-U.S. interest rates, indices and lumber and were partially offset by losses in currencies, grains, livestock, metals and softs. The Partnership experienced a net trading gain before brokerage commissions and related fees in the six months ended June 30, 2004 of $6,300,712. Gains were primarily attributable to the Partnership's trading of commodity futures in energy, grains, livestock, indices and lumber and were partially offset by losses in currencies, U.S. and non-U.S. interest rates, metals and softs.
Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations. AAA is aware of price trends but does not trade upon trends. AAA often makes profits in positions with specific trends even though that trend may still be intact or perhaps even stronger. AAA occasionally establishes positions that are counter-trend.
Interest income is earned on 100% of the Partnership's average daily equity maintained in cash in its account during each month at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. CGM may continue to maintain the Partnership's assets in cash and/or place all of the Partnership's assets in 90-day Treasury bills and pay the Partnership 100% of the interest earned on Treasury bills purchased. Interest income for the three and six months ended June 30, 2005 increased by $134,909 and $208,928 as compared to the corresponding periods in 2004. The increase in interest income is primarily due to higher net assets and higher interest rates in the three and six months ended June 30, 2005 as compared to the corresponding periods in 2004.
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Brokerage commissions are based on the number of trades executed by the Advisors. Brokerage commissions and fees for the three and six months ended June 30, 2005 increased by $548,810 and $633,981, as compared to the corresponding period in 2004. The increase in commissions and fees is primarily due to an increase in the number of trades during the three and six months ended June 30, 2005 as compared to the corresponding periods in 2004.
Management fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and six months ended June 30, 2005 increased by $181,909 and $303,033, as compared to the corresponding period in 2004. The increase of management fees is due to an increase in net assets during the three and six months ended June 30, 2005 as compared to the corresponding periods in 2004.
Administrative fees are paid to the General Partner for administering the business and affairs of the Partnership. These fees are calculated as a percentage of the Partnership's net asset value as of the end of each month and are affected by trading performance and redemptions. Administrative fees for the three and six months ended June 30, 2005 increased by $50,491 and $82,985, as compared to the corresponding periods in 2004. The increase in administrative fees is due to higher net assets during the three and six months ended June 30, 2005 as compared to the corresponding periods in 2004.
Incentive fees paid by the Partnership are based on the new trading profits generated by each Advisor at the end of the quarter, as defined in the management agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three and six months ended June 30, 2005 resulted in incentive fees of $2,304,369 and $5,329,712, respectively. Trading performance for the three and six months ended June 30, 2004 resulted in incentive fees of $0 and $1,579,063, respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the value of financial instruments and contracts, the diversification effects of 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 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 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.
Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. 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.
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The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of June 30, 2005 and the highest, lowest and average value during the three months ended June 30, 2005. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of June 30, 2005, the Partnership's total capitalization was $143,049,709. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2004.
June 30, 2005
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended June 30, 2005 |
| Market Sector | | Value at Risk | | % of Total
Capitalization | | High
Value at Risk | | Low
Value at Risk | | Average Value
at Risk* |
| Currencies: | |
| – Exchange Traded Contracts | | $ | 2,322,992 | | | | 1.62 | % | | $ | 2,952,913 | | | $ | 89,160 | | | $ | 1,832,197 | |
| Energy | | | 1,321,937 | | | | 0.92 | % | | | 3,868,500 | | | | 76,500 | | | | 1,424,812 | |
| Grains | | | 928,850 | | | | 0.65 | % | | | 1,265,900 | | | | 23,800 | | | | 843,808 | |
| Interest Rates U.S. | | | 921,600 | | | | 0.64 | % | | | 1,432,200 | | | | 52,000 | | | | 692,600 | |
| Interest Rates Non-U.S. | | | 2,429,489 | | | | 1.70 | % | | | 2,433,812 | | | | 266,582 | | | | 1,927,084 | |
| Livestock | | | 88,000 | | | | 0.06 | % | | | 88,000 | | | | 10,400 | | | | 59,733 | |
| Metals | | | | | | | | | | | | | | | | | | | | |
| – Exchange Traded Contracts | | | 1,352,000 | | | | 0.95 | % | | | 1,546,000 | | | | 93,000 | | | | 680,889 | |
| Softs | | | 326,000 | | | | 0.23 | % | | | 885,900 | | | | 273,800 | | | | 508,033 | |
| Totals | | $ | 9,690,868 | | | | 6.77 | % | | | | | | | | | | | | |
|
| |
| * | Average month-end Values at Risk |
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Item 4. Controls and Procedures
The General Partner of the Partnership, with the participation of the General Partner's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) with respect to the Partnership within 90 days of the filing date of this quarterly report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information supplements and amends our discussion set forth under Item, 3 "Legal Proceedings" in the Partnership's Annual Report on Form 10-K for the year ended December 31, 2004 and under Part II, Item 1, "Legal Proceedings" in the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
Enron-Related Civil Actions
On June 13, 2005, Citigroup announced a settlement of the Enron class action litigation (Newby, et al. v. Enron Corp., et al.) currently pending in the United States District Court for the Southern District of Texas, Houston Division. This settlement resolves all claims against Citigroup brought on behalf of the class of purchasers of publicly traded equity and debt securities issued by Enron and Enron-related entities between September 9, 1997 and December 2, 2001. The settlement, which involves a pre-tax payment of $2.0 billion to the settlement class, is fully covered by Citigroup's existing litigation reserves. It is subject to approval by the Board of Regents of the University of California (the lead plaintiff), the Citigroup Board and the District Court in Texas.
Mutual Funds
On May 31, 2005, Citigroup announced that Smith Barney Fund Management LLC and Citigroup Global Markets completed a settlement with the SEC resolving an investigation by the SEC into matters relating to arrangements between certain Smith Barney mutual funds, an affiliated transfer agent and an unaffiliated sub-transfer agent. Under the terms of the settlement, Citigroup agreed to pay fines totaling $208.1 million. The settlement, in which Citigroup neither admitted nor denied any wrongdoing or liability, includes allegations of willful misconduct by Smith Barney Fund Management LLC and Citigroup Global Markets in failing to disclose aspects of the transfer agent arrangements to certain mutual fund investors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended June 30, 2005 there were additional sales of 8,912.8974 Redeemable Units of Limited Partnership totaling $12,973,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated there under.
Proceeds from the sale of additional Redeemable Units are used in the trading of commodity interests including futures contracts, options, forwards and swap contracts.
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The following chart sets forth the purchases of Redeemable Units by the Partnership.
| | | | | | | | | | | | | | | | | | |
| Period | | (a) Total Number
of Shares
(or Units) Purchased* | | (b) Average
Price Paid per
Share (or Unit)** | | (c) Total Number
of Shares (or Units)
Purchased as Part
of Publicly Announced
Plans or Programs | | (d) Maximum Number
(or Approximate
Dollar Value) of Shares
(or Units) that
May Yet Be
Purchased Under the
Plans or Programs |
April 1, 2005 −
April 30, 2005 | | | 504.3407 | | | $ | 1,389.48 | | | | N/A | | | | N/A | |
May 1, 2005 −
May 31, 2005 | | | 1,957.5962 | | | $ | 1,461.31 | | | | N/A | | | | N/A | |
June 1, 2005 −
June 30, 2005 | | | 1,733.2729 | | | $ | 1,509.66 | | | | N/A | | | | N/A | |
| Total | | | 4,195.2098 | | | $ | 1,453.48 | | | | N/A | | | | N/A | |
|
| |
| * Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days' notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership's business in connection with effecting redemptions for Limited Partners. |
| |
| ** Redemptions of Redeemable Units are effected as of the last day of each month at the Net Asset Value per Redeemable Unit as of that day. |
Item 3. Defaults Upon Senior Securities – None
Item 4. Submission of Matters to a Vote of Security Holders – None
Item 5. Other Information – None
Item 6. Exhibits
| |
| | The exhibits required to be filed by Item 601 of Regulation S-K are incorporated herein by reference to the exhibit index of the Partnership's Annual Report on Form 10-K for the period ended December 31, 2004. |
Exhibit – 31.1 – Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).
Exhibit – 31.2 – Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director).
Exhibit – 32.1 – Section 1350 Certification (Certification of President and Director).
Exhibit – 32.2 – Section 1350 Certification (Certification of Chief Financial Officer and Director).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SALOMON SMITH BARNEY ORION FUTURES FUND L.P.
| | | | | | |
| By: | | Citigroup Managed Futures LLC |
| | | (General Partner) |
| By: | | /s/ David J. Vogel |
| | | David J. Vogel
President and Director |
| Date: | | August 9, 2005 |
| By: | | /s/ Daniel R. McAuliffe, Jr |
| | | Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director |
| Date: | | August 9, 2005 |
|
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