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 third 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 nine months ended September 30, 2005, Partnership capital increased 34.4% from $118,783,824 to $159,643,706. This increase was attributable to net income from operations of $21,509,037 coupled with additional sales of 22,630.8331 Redeemable Units of Limited Partnership totaling $33,149,000, which was partially offset by the redemption of 9,361.9776 Redeemable Units resulting in an outflow of $13,798,155. 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, Willowbridge 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 third quarter of 2005, the net asset value per Redeemable Unit increased 5.7% from $1,509.66 to $1,595.19 as compared to an increase of 8.8% in the third quarter of 2004. The Partnership experienced a net trading gain before brokerage commissions and related fees in the third
quarter of 2005 of $12,519,744. Gains were primarily attributable to the Partnership's trading of commodity futures in energy, grains, metals and indices, and were partially offset by losses in currencies, U.S. and non-U.S. interest rates, livestock, lumber and softs. The Partnership experienced a net trading loss before brokerage commissions and related fees in the third quarter of 2004 of $10,992,375. Gains 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 losses in energy and livestock.
Third Quarter results reflect robust trends and profitable trading in the energy and stock index markets. Reducing these gains were smaller losses in the interest rate and currency markets as a result of volatile price action. Periodic trading opportunities in metals and grains generated additional gains for the partnership. The overall net result was strongly positive for the quarter.
The most profitable trends for the quarter were in the energy markets as crude oil and natural gas prices rose to historic levels. Substantial profits were made in trading these markets which saw recent trends exacerbated by the impact of the two Gulf Coast hurricanes. The two storms caused a virtual shut-down of both production and refining facilities.
Interest rate markets, however, experienced reversing trends in U.S., European and Australian fixed income instruments as yields began to rise prompted by U.S. central bank rate increases. This volatility continued through the remainder of the quarter and led to the greatest sector loss for the partnership.
Prospects of improving economic conditions in Japan led to strong profits in Nikkei stock index trading and combined with solid second quarter corporate profits led to profits in U.S. stock index trading as well. Offsetting profitable stock index trading were losses in foreign currency trading. The most notable event in this markets was the Chinese government decision to unpeg the yuan from the U.S. dollar and its consequent upward revaluation. This led to near continuous adjustments in the relation of the major currencies throughout the quarter and range-bound trading in the U.S. dollar. While other commodity markets produced lackluster price trends, precious metals, particularly gold rose to over $400 an ounce, its highest level in 15 years and produced additional profits for the partnership's advisors.
During the nine months ended September 30, 2005, the net asset value per Redeemable Unit increased 16.6% from $1,368.33 to $1,595.19 as compared to an increase of 12.1% during the nine months ended September 30, 2004. The Partnership experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2005 of $33,801,631. Gains were primarily attributable to the Partnership's trading of commodity futures in energy, indices and lumber and were partially offset by losses in currencies, grains, U.S. and non-U.S. interest rates, livestock, metals and softs. The Partnership experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2004 of $17,293,087. 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 nine months ended September 30,
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2005 decreased and increased by $108,591 and $100,337 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 nine months ended September 30, 2005 as compared to the corresponding periods in 2004.
Brokerage commissions are based on the number of trades executed by the Advisors. Brokerage commissions and fees for the three and nine months ended September 30, 2005 increased by $378,713 and $1,012,694, 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 nine months ended September 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 nine months ended September 30, 2005 increased by $226,146 and $529,179, 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 nine months ended September 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 nine months ended September 30, 2005 increased by $62,543 and $145,528, as compared to the corresponding periods in 2004. The increase in administrative fees is due to an increase in net assets during the three and nine months ended September 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 nine months ended September 30, 2005 resulted in incentive fees of $2,219,153 and $7,548,870, respectively. Trading performance for the three and nine months ended September 30, 2004 resulted in incentive fees of $1,109,973 and $2,689,036 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
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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.
The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of September 30, 2005 and the highest, lowest and average value during the three months ended September 30, 2005. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of September 30, 2005, the Partnership's total capitalization was $159,643,706. 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.
September 30, 2005
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended September 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 | | $ | 175,937 | | | | 0.11 | % | | $ | 508,800 | | | $ | 28,305 | | | $ | 82,814 | |
| Energy | | | 510,000 | | | | 0.32 | % | | | 910,500 | | | | 76,500 | | | | 538,667 | |
| Grains | | | 35,275 | | | | 0.02 | % | | | 166,600 | | | | 35,275 | | | | 50,575 | |
| Interest Rates U.S. | | | — | | | | 0.00 | % | | | 178,500 | | | | — | | | | 91,233 | |
| Interest Rates Non-U.S. | | | 92,334 | | | | 0.06 | % | | | 440,492 | | | | 30,659 | | | | 110,685 | |
| Livestock | | | 20,800 | | | | 0.01 | % | | | 27,200 | | | | 13,600 | | | | 20,800 | |
| Metals | | | | | | | | | | | | | | | | | | | | |
| – Exchange Traded Contracts | | | 153,000 | | | | 0.10 | % | | | 238,000 | | | | 34,000 | | | | 175,667 | |
| Softs | | | 42,000 | | | | 0.03 | % | | | 134,300 | | | | 17,000 | | | | 41,767 | |
| Totals | | $ | 1,029,346 | | | | 0.65 | % | | | | | | | | | | | | |
|
| |
| * | Average month-end Values at Risk |
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 as of the end of the period covered by the 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 during the registrant's last fiscal quarter, 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 Reports on Form 10-Q for the quarters ended March 31, 2005 and June 30, 2005.
Enron Corp.
On August 4, 2005, a breach of contract action was filed in the United States District Court for the Southern District of New York, WESTPAC BANKING CORPORATION v. CITIBANK, N.A. The complaint alleges that Citibank breached a representation and warranty in a Credit Default Swap agreement entered into in December 2000 concerning Enron.
On August 26, 2005, a group of 15 plaintiffs filed an action in the United States District Court for the Southern District of Texas, AVENUE CAPITAL MANAGEMENT II, L.P., ET AL. v. J.P. MORGAN-CHASE & CO., ET AL. The complaint names as defendants Citigroup Inc., Citibank, N.A., Citigroup Global Markets Inc., and several J.P. Morgan entities and alleges fraud, breach of fiduciary duty and breach of contract arising out of Enron bank debt incurred under two syndicated revolving credit facilities and a syndicated letter of credit facility.
WorldCom, Inc.
In STURM, ET AL. v. CITIGROUP, ET AL., an NASD arbitration seeking very significant compensatory and punitive damages, Claimants' common law claims, including fraud, arising out of alleged research analyst conflicts of interest related to SSB research coverage of WorldCom, were heard this quarter.
Citigroup, along with other financial institution defendants, entered into a settlement in NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM v. EBBERS, ET AL., resolving all claims against the Citigroup-related defendants in this WorldCom-related action, which was brought by a plaintiff that opted out of the settlement of the WorldCom class action. The settlement amount is covered by existing litigation reserves.
Citigroup along with other financial institutions and other defendants, entered into a settlement resolving all claims against the Citigroup-related defendants in 32 individual actions filed by a single law firm on behalf of 70 institutional plaintiffs that have opted out of the WorldCom class action settlement. Plaintiffs in these actions asserted various claims under federal and state law, including, among other things, federal and state securities claims, fraud, negligent misrepresentation and breach of fiduciary duty, in connection with the Citigroup-related defendants' research coverage, and underwriting of WorldCom securities. The settlement amount is covered by existing litigation reserves.
Global Crossing
On September 12, 2005, Citigroup entered into a settlement with the Global Crossing Estate Representative, resolving all claims pending in United States Bankruptcy Court for the Southern District of New York against the Citigroup-related defendants. The settlement amount is covered by existing litigation reserves.
Research
On September 27, 2005, Citigroup entered into a memorandum of agreement settling all claims against the Citigroup-related defendants in IN RE SALOMON ANALYST AT&T LITIGATION, a putative class action alleging research analyst conflicts of interest. The settlement amount is covered by existing litigation reserves. The settlement is subject to judicial approval.
On September 22, 2005, Citigroup reached an agreement-in-principle to settle all claims against the Citigroup-related defendants in NORMAN v. SALOMON SMITH BARNEY, ET AL., a putative class
18
action asserting violations of the Investment Advisers Act of 1940 and various common law claims in connection with certain investors who maintained guided portfolio management accounts at Smith Barney. The settlement amount is covered by existing litigation reserves. The settlement is subject to judicial approval.
On August 17, 2005, in DISHER v. CITIGROUP GLOBAL MARKETS INC., the United States Court of Appeals for the Seventh Circuit reversed the district court's grant of plaintiffs' motion to remand the case to state court, and directed the district court to dismiss the case as preempted under the Securities Litigation Uniform Standards Act ("SLUSA"). The United States Supreme Court has granted review in another case involving SLUSA that may affect the Seventh Circuit's dismissal of the Disher matter.
Adelphia
In May and July of 2005, the United States District Court for the Southern District of New York granted motions to dismiss several claims, based on the running of applicable statute of limitations, asserted in the putative class and individual actions being coordinated under IN RE ADELPHIA COMMUNICATIONS CORPORATION SECURITIES AND DERIVATIVE LITIGATION. With the exception of one individual action that was dismissed with prejudice, the court granted the putative class and individual plaintiffs leave to re-plead certain of those claims the court found to be time-barred. Additional motions to dismiss the class complaint and the remaining individual complaints on other grounds remain pending.
IPO Securities Litigation
On June 30, 2005, the United States Court of Appeals for the Second Circuit entered an order in IN RE INITIAL PUBLIC OFFERING SECURITIES LITIGATION agreeing to review the district court's order granting plaintiffs' motion for class certification.
IPO Antitrust Litigation
On September 28, 2005 the United States Court of Appeals for the Second Circuit in IN RE INITIAL PUBLIC OFFERING ANTITRUST LITIGATION vacated the district court's order dismissing these actions and remanded for further proceedings.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the three months ended September 30, 2005 there were additional sales of 8,238.7827 Redeemable Units of Limited Partnership totaling $12,685,000. 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.
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 |
July 1, 2005 −
July 31, 2005 | | | 1,308.4216 | | | $ | 1,464.24 | | | | N/A | | | | N/A | |
August 1, 2005 −
August 31, 2005 | | | 849.3002 | | | $ | 1,615.22 | | | | N/A | | | | N/A | |
September 1, 2005 −
September 30, 2005 | | | 759.1939 | | | $ | 1,595.12 | | | | N/A | | | | N/A | |
| Total | | | 2,916.9157 | | | $ | 1,558.19 | | | | 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: | | November 9, 2005 |
| By: | | /s/ Daniel R. McAuliffe, Jr |
| | | Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director |
| Date: | | November 9, 2005 |
|
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