SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
SMITH BARNEY POTOMAC FUTURES FUND L.P.
(Exact name of registrant as specified in
its limited partnership agreement)
New York 13-3937275
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
399 Park Avenue-7th floor
New York, New York 10022
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code 212-559-2011
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)
Item 1. Business
(a) General development of business. Smith Barney Potomac Futures Fund L.P.
(the "Partnership") is a limited partnership which was organized on March 14,
1997 under the partnership laws of the State of New York. The objective of the
Partnership is to achieve substantial capital appreciation through speculative
trading in U.S. and international markets for currencies, interest rates, stock
indices, agricultural and energy products and precious and base metals
(collectively, "Commodity Interests"). The Partnership may employ futures,
options on futures, and forward contracts in those markets. The Partnership is
not registered under the Investment Company Act of 1940 as a mutual fund or
otherwise. At December 31, 2003, net assets of the Partnership totaled
$102,336,428.
Citigroup Managed Futures LLC, formerly known as Smith Barney Futures
Management LLC, a Delaware limited liability company, is the Partnership's
general partner and commodity pool operator (the "General Partner"). At the
commencement of trading the Partnership's general partner was Citigroup Managed
Futures LLC. From March 1, 1999 through March 31, 2001, SFG Global Investments,
Inc. was the Partnership's general partner and Citigroup Managed Futures LLC was
the Partnership's trading manager. Effective April 1, 2001, the limited partners
of the Partnership re-elected Citigroup Managed Futures LLC as the general
partner of the Partnership and consented to the withdrawal of SFG Global
Investments, Inc. as general partner. Concurrent with its election as general
partner, Citigroup Managed Futures LLC withdrew as the Partnership's trading
manager.
During the initial offering period (April 22, 1997 to September 30, 1997),
the Partnership sold 1,383 redeemable units of Limited Partnership Interest
("Redeemable Units") at $1,000 per Redeemable Unit. In addition, David J. Vogel,
as the initial limited partner, contributed $1,000 to the Partnership for one
Redeemable Unit of partnership interest. The Partnership commenced its
operations on October 1, 1997. No securities which represent an equity interest
or any other interest in the Partnership trade on any public market.
The Partnership privately and continuously offers up to 200,000 Redeemable
Units to persons and entities who are accredited investors as that term is
defined in Rule 501(a) of Regulation D as well as to a limited number of persons
who are not accredited investors but who have either (i) a net worth (exclusive
of home, furnishings and automobiles) individually or jointly with their spouse
of at least three times their investment in the Partnership (the minimum
investment for which is $25,000) or (ii) gross income for the past two years and
projected gross income for the current year of not less than three times their
investment in the Partnership (the minimum investment for which is $25,000) for
each year. Sales and redemptions of Redeemable Units and general partner
contributions and redemptions for the years ended December 31, 2003, 2002 and
2001 are reported in the Statement of Partners' Capital under "Item 13.
Financial Statements and Supplementary Data". A total of 86,512.4676 Redeemable
Units have been sold as of December 31, 2003. On December 31, 2003, the Net
Asset Value per Redeemable Unit was $1,634.64.
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Citigroup Global Markets Inc. ("CGM"), formerly known as Salomon Smith
Barney Inc., acts as the Partnership's commodity broker, pursuant to a second
amended and restated customer agreement, dated as of April 1, 2001 (the
"Customer Agreement"), by and between the Partnership and CGM. The Customer
Agreement is attached as Exhibit 10.2 hereto. CGM is also the Partnership's
selling agent pursuant to an amended and restated agency agreement, dated as of
April 1, 2001, attached as Exhibit 10.3 hereto.
The General Partner is the surviving company of a merger that occurred on
August 2, 1993 merging three commodity pool operators: Smith Barney Futures
Partners, Inc., Lehman Brothers Capital Management Corp. and Hutton Commodity
Management Inc. The General Partner changed its form of organization from a
corporation to a Delaware limited liability company effective October 1, 1999.
The General Partner is registered as a commodity pool operator and commodity
trading advisor with the Commodity Futures Trading Commission (the "CFTC") and
is a member of the National Futures Association (the "NFA") under the
registration and memberships of Smith Barney Futures Partners, Inc., which
became registered with the CFTC as a commodity pool operator and a member of the
NFA on September 2, 1986. 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 general partner prepares
and distributes monthly account statements and audited annual reports of the
Partnership to each limited partner in accordance with CFTC regulations 4.22(a),
(b) and (c). Limited partners of the Partnership 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
(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
recordkeeping 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.
The NFA is a self regulatory organization that regulates firms and individuals
that conduct futures trading business with public customers.
The General Partner is wholly owned by Citigroup Global Markets Holdings
Inc. ("CGMH"), formerly known as Salomon Smith Barney Holdings Inc., which is
also the sole owner of CGM. CGMH is itself a wholly owned subsidiary of
Citigroup Inc. ("Citigroup"), 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 second amended and restated limited partnership agreement of the
Partnership, dated as of April 1, 2001, (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.
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The General Partner currently has a management agreement dated as of April
1, 1997, as amended on March 1, 1999, and as further amended on April 1, 2001
(the "Management Agreement"), attached as Exhibit 10.1 hereto, in effect with
Campbell & Company, Inc. (the "Advisor" or "Campbell"), pursuant to which the
Advisor manages the Partnership's assets. The Partnership pays the Advisor a
monthly management fee equal to 1/6 of 1% (2% per year) of the adjusted
month-end Net Assets of the Partnership. The Advisor also receives an incentive
fee equal to 20% of new trading profits earned in each calendar quarter.
Pursuant to the express terms of the Management Agreement, the Advisor is
considered to be an independent contractor of the Partnership. The Management
Agreement expires each June 30th and may be renewed by the General Partner, in
its sole discretion, for additional one-year periods upon notice to the Advisor
not less than 30 days prior to the expiration of the previous period. The
Advisor has managed the Partnership's assets since the Partnership commenced
operations. The General Partner selected the Advisor on the basis of the trading
strategies employed by the Advisor and the Advisor's experience in commodity
trading. The General Partner may, in its discretion, select and appoint
additional or replacement trading advisors for the Partnership.
CGM will pay monthly interest to the Partnership on 80% of the average
daily equity maintained in cash in the Partnership's accounts during each month
(i.e., the sum of the daily cash balances in such accounts divided by the number
of calendar days in that month) at a 30-day 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 (or on the maturity date closest thereto) from the date on
which such weekly rate is determined, and/or CGM will place up to all of the
Partnership's assets in 90-day Treasury bills and pay the Partnership 80% of the
interest earned on the Treasury bills purchased.
Competition
The Partnership operates in a competitive environment in which it faces
several forms of competition, including, without limitation:
o The Partnership competes with other pools for investors.
o The Advisor may compete with other traders in the markets in
establishing or liquidating positions on behalf of the Partnership.
o The Partnership competes with other individual and pooled accounts
traded by the Advisor in entering into and liquidating contracts for
the Partnership. When similar orders are entered at the same time, the
prices at which the Partnership's trades are filled may be less
favorable than the prices allocated to the other accounts. Some orders
may be difficult or impossible to execute in markets with limited
liquidity where prices may rise or fall sharply in response to orders
entered. Furthermore, if the price of a futures contract has moved to
and is locked at its permitted one-day price move limit, the Advisor
may be unable to liquidate winning or losing positions without
incurring additional losses. The Advisor is required to use an
allocation methodology that is fair to all of its customers. The
Advisor attempts to minimize the impact of different prices received
on orders.
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Conflicts of Interest
Other than as described below, neither the Advisor, the General Partner,
CGM nor any of their principals have any actual or potential conflicts of
interest in their relationship with the Partnership. The Partnership's offering
memorandum and Limited Partnership Agreement disclosed these conflicts and
limited partners acknowledged and consented to them at the time their
investments were made.
(1) Relationship among the Partnership, the General Partner, CGM and
Citibank
The General Partner is an affiliate of CGM, the commodity broker and
selling agent for the Partnership. As a result of this affiliation, the
following conflicts arise:
o The affiliation between the General Partner and CGM creates a
potential conflict in that fees paid to CGM have not been set by "arm's
length" negotiation and the General Partner has no incentive to replace CGM
as commodity broker of the Partnership.
o The General Partner, in its discretion, determines whether any
distributions are made. To the extent that profits are retained by the
Partnership rather than distributed, net assets and therefore the amount of
brokerage fees paid to the General Partner's affiliate, CGM, will increase.
In addition, the amount of funds in segregated accounts at banks that
extend overdraft privileges to CGM will be greater to the extent that
profits are retained. The General Partner may have an interest in selecting
trading advisors that will generate a small number of trades, thus
incurring only small incidental charges (such as NFA fees), so that net
assets remain relatively higher.
o A limited partner's financial consultant has a financial incentive
to recommend that it purchase and not redeem Redeemable Units even when it
is not in its best interest to remain invested in the Partnership because
he or she will receive ongoing compensation for providing service to the
limited partner's account.
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 and its affiliates, including CGM. Such
contracts include the Customer Agreement with respect to brokerage services
entered into by the Partnership and CGM.
The Partnership's subscription account is maintained at Citibank N.A.
Citibank N.A. is an affiliate of the General Partner and CGM. The General
Partner's decision to maintain the Partnership's subscription account with
Citibank N.A. is based on its assessment that the rates charged to the
Partnership are favorable and competitive for the services provided,
notwithstanding the General Partner's conflict of interest in selecting an
affiliate.
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(2) Accounts of CGM, the General Partner and their Affiliates
CGM, the General Partner, and its officers, directors and employees may
trade in commodity contracts for their own accounts. CGM is a futures commission
merchant and effects transactions in commodity contracts for its customers. The
General Partner over the last five years has sponsored and established over 30
commodity pools and may sponsor or establish other commodity pools, as may the
Advisor. As of December 31, 2003, the General Partner acted as general partner
or trading manager to 23 active, public, private and offshore pools with assets
of approximately $1.9 billion and may operate additional commodity pools in the
future. These parties will not knowingly or deliberately favor any such pools
over the Partnership in their dealings on behalf of such pools. Nevertheless,
possible conflicts that arise from trading these accounts include:
o CGM, as the Partnership's broker, could effect transactions for the
Partnership in which the other parties to the transactions are its
officers, directors or employees or its customers, including other funds
sponsored by the General Partner.
o These persons might unknowingly compete with the Partnership in
entering into contracts.
The records of any such trading will not be available for inspection by
limited partners. Neither will the General Partner have access to such records,
except for those of accounts that it operates or manages. CFTC regulations
require that CGM transmit to the floor each futures or options order received
for customers executable at or near the market price before any competing order
for any of its own proprietary accounts. Transactions in forward, spot and swap
contracts are not governed by any similar regulations.
(3) Control of Other Accounts of the Advisor and its Affiliates
The Advisor manages and operates the accounts of clients other than the
Partnership, including other commodity pools, and intends to manage and operate
other accounts in the future. The Advisor currently advises other pools operated
by the General Partner. In addition, the Advisor, its principals and affiliates
may trade for their own accounts. Conflicts that arise from this trading
include:
o The Advisor or its principals or affiliates may sometimes take
positions in their proprietary accounts that are opposite or ahead of the
Partnership. Trading ahead of the Partnership presents a conflict because
the trade first executed may receive a more favorable price than the same
trade later executed for the Partnership.
o The Advisor may have financial incentives to favor other accounts
over the Partnership because of differing fee structures. The Advisor
currently trades other client accounts that pay higher advisory fees than
the Partnership. Accounts managed by the Advisor in the future may pay
higher fees as well.
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o Other individual and pooled accounts traded by the Advisor will
compete with the Partnership in entering into and liquidating contracts for
the Partnership. When similar orders are entered at the same time, the
prices at which the Partnership's trades are filled may be less favorable
than the prices allocated to the other accounts. Some orders may be
difficult or impossible to execute in markets with limited liquidity where
prices may rise or fall sharply in response to orders entered. Furthermore,
if the price of a futures contract has moved to and is locked at its
permitted one-day price move limit, the Advisor may be unable to liquidate
winning or losing positions without incurring additional losses. The
Advisor is required to use an allocation methodology that is fair to all of
its customers. The Advisor attempts to minimize the impact of different
prices received on orders.
o The Advisor may be required to revise trading orders as a result of
the aggregation for speculative position limit purposes of all accounts
traded, owned or controlled by the Advisor. The more accounts the Advisor
has under management, the more likely the Advisor is to be constrained by
position limits. In this case, the Advisor will modify its orders in a
manner that will not disproportionately affect the Partnership.
Limited partners do not have access to the trading records of the other
accounts managed by the Advisor or its principals through CGM nor the records of
trading accounts managed by the Advisor or its principals at other commodity
brokers. The General Partner, however, does have access to the trading accounts
managed by the Advisor on behalf of other funds for which it acts as general
partner. The General Partner will not have access to the accounts traded by the
Advisor or its principals at other commodity brokers or on behalf of other
general partners.
(4) Other Activities of CGM
CGM maintains a commodity research department that makes trading
recommendations on a daily basis. These trading recommendations may include
transactions that are similar or opposed to transactions of the Partnership. The
trading records of such recommendations will not be made available to limited
partners.
Trading Program
Trading Systems. The Advisor makes trading decisions for all accounts using
proprietary technical trading models which analyze market statistics. Since the
trading models are proprietary, it is not possible to determine whether the
Advisor is following the models or not. There can be no assurance that the
trading models currently being used will produce results similar to those
produced in the past.
The Advisor trades six portfolios:
(1) The Financial, Metal & Energy Large Portfolio,
(2) The Financial, Metal & Energy Small (Above $5 Million) Portfolio,
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(3) The Financial, Metal & Energy Small (Below $5 Million) Portfolio (closed to
new investors),
(4) The Foreign Exchange Portfolio,
(5) The Global Diversified Large Portfolio, and
(6) The Ark Portfolio (closed to new investors).
The Advisor initially traded the Global Diversified Small Portfolio (which
has since closed) on behalf of the Partnership. Since February 1, 1999, the
Advisor has traded the Partnership's account pursuant to the FME Small
Portfolio. In July 2000, the Advisor divided its FME Small Portfolio into two
distinct portfolios: The FME Small (Above $5 Million) Portfolio and the FME
Small (Below $5 Million) Portfolio. The Advisor trades its FME Small (Above $5
Million) Portfolio for the Partnership. Since the Advisor's allocation from the
Partnership is over $10 million, the Advisor may, with the General Partner's
approval, begin trading its FME Large Portfolio on behalf of the Partnership.
Accounts in the FME Large Portfolio trade certain contracts in the cash markets
that do not have futures equivalents. The objective of both Portfolios is the
same and is consistent with the Partnership's objective of seeking positive
returns from the speculative trading of a portfolio of futures and forward
contracts.
The Advisor's trading models are designed to detect and exploit medium-term
to long-term price changes, while also applying risk management and portfolio
management principles. No one market exceeds 15% of a total portfolio
allocation.
The Advisor believes that utilizing multiple trading models provides an
important level of diversification, and is most beneficial when multiple
contracts in each market are traded. Every trading model may not trade every
market. It is possible that one trading model may signal a long position while
another trading model signals a short position in the same market. It is the
Advisor's intention to offset those signals to reduce unnecessary trading, but
if the signals are not simultaneous, both trades will be taken and since it is
unlikely that both positions would prove profitable, in retrospect, one or both
trades will appear to have been unnecessary. It is the Advisor's policy to
follow trades signaled by each trading model independently of the other models.
Over the course of a medium- to long-term trend, there are times when the
risk of the market does not appear to be justified by the potential reward. In
such circumstances, some of the Advisor's trading models may exit a winning
position prior to the end of a price trend. While there is some risk to this
method (for example, being out of the market during a significant portion of a
price trend), the Advisor's research indicates that this is well compensated for
by the decreased volatility of performance that may result.
The Advisor's trading models may include trend-following trading models,
counter-trend trading models and trading models that do not seek to identify or
follow price trends at all. The Advisor expects to develop additional trading
models and to modify models currently in use and may or may not employ all such
models for all of the Partnership's accounts. The trading models currently used
by the Advisor may be eliminated from use if the Advisor ever believes such
action is warranted.
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While the Advisor normally follows a disciplined systematic approach to
trading, on occasion, it may override the signals generated by the trading
models, such as when market conditions dictate otherwise. While such action may
be taken for any reason at any time at the Advisor's discretion, it will
normally only be taken to reduce risk in the portfolio and may or may not
enhance the results that would otherwise be achieved.
The Advisor applies risk management and portfolio management strategies to
measure and manage overall portfolio risk. These strategies include portfolio
structure, risk balance, capital allocation and risk limitation. One objective
of risk and portfolio management is to determine periods of relatively high and
low portfolio risk, and when such points are reached, the Advisor may reduce or
increase position size accordingly. It is possible, however, that this reduction
or increase in position size may not enhance the results achieved over time.
From time to time, the Advisor may increase or decrease the total number of
contracts held based on increases or decreases in an account's assets, changes
in market conditions, perceived changes in portfolio-wide risk factors, or other
factors which may be deemed relevant.
The Advisor estimates that, based on the amount of margin required to
maintain positions in the markets currently traded, aggregate margin for all
positions held in the Partnership's account will range between 5% and 30% of the
account's net assets. From time to time, margin commitments may be above or
below this range.
The success of the Advisor depends to a great extent upon the occurrence of
market conditions favorable to the Advisor's trading strategy. Factors such as
lack of major price trends or increased governmental control of, or
participation in, the markets, may reduce the Advisor's ability to trade
profitably in the future.
The number of contracts that the Advisor believes can be bought or sold in
a particular market without unduly influencing price adversely may at times be
limited. In such cases, a client's portfolio would be influenced by liquidity
factors because the positions taken in such markets might be substantially
smaller than the positions that would otherwise be taken. When the volume of buy
and sell orders in a market is small relative to the size of an order that the
Advisor wants to execute for the Partnership, it is more difficult to execute
the order at the desired price or to quickly exit a losing position.
Market Sectors. Distribution of markets traded by volatility weighting
(i.e., risk exposure) as of April 1, 2004:
FME Small
(Above $5
Million) FME Large
Interest rates 34% 33%
Currencies 45% 45%
Stock indices 14% 14%
Energy 6% 7%
Precious and base metals 1% 1%
------ -----
Total 100% 100%
----- -----
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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
Based on $102 million in net assets (the approximate size of the
Partnership as of December 31, 2003), an investment of $25,000 (the current
minimum investment) must earn profits of $2,061.15 in order to "break-even" at
the end of one year of trading. At a Partnership size of $200 million in net
assets (based upon the maximum number of Redeemable Units the Partnership is
currently offering), an investment of $25,000 must earn profits of $2,046.45 in
order to "break-even" at the end of one year of trading. The estimated fees and
expenses that determine these amounts have been calculated in the sequence used
by the Partnership. Therefore, each item of expense and the related percentage
of the minimum investment amount, reflects the Partnership's effective cost
structure.
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Estimated Partnership Size
-----------------------------------------------------------------
$102,000,000 $200,000,000
------------------------------ ----------------------------
Minimum Investment Amount $25,000 $25,000
------------------------------ ----------------------------
Dollar Amount Percentage Dollar Amount Percentage
------------- ---------- ------------- ----------
Advisor's Management Fee (1) $468.14 1.87% $468.44 1.87%
Brokerage Fees 1,636.31 6.55 1,636.31 6.55
Transaction Fees 100.70 0.40 100.70 0.40
Operating Expenses 30.00 0.12 15.00 0.06
--------- ----- --------- -----
Total Fees $2,235.15 8.94% $2,220.45 8.88%
Interest Income $(174.00) (0.70)% $(174.00) (0.70)%
---------- ------ --------- ------
Amount of Trading Income Required for the
Partnership's Net Asset Value per
Redeemable Unit at the End of One Year
to Equal the Minimum Investment Amount. $2,061.15 $2,046.45
-------- ---------
Percentage of Minimum Investment Amount... 8.24% 8.18%
===== =====
(1) Because the management fee is based on net assets (assets as reduced by
brokerage charges accrued and other liabilities of the Partnership), the
management fee does not equal exactly 2% of the minimum investment amount. The
Advisor's incentive fee has not been included in the computation of break-even
point per minimum investment amount since it is paid, if at all, after the
deduction of all of the Partnership's expenses.
The Partnership pays the Advisor a monthly management fee at an annual rate
of 2% of adjusted net assets allocated to the Advisor (computed monthly by
multiplying the adjusted net assets of the Partnership as of the last business
day of each month by 2% and multiplying the result thereof by the ratio which
the total number of calendar days in that month bears to the number of days in
the year). For purposes of calculating the management fee, adjusted net assets
are "net assets" increased by the current month's incentive fee accrual and any
redemptions or distributions as of the end of such month.
Net assets are defined in the Limited Partnership Agreement as the total
assets of the Partnership including all cash, Treasury bills, 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
Redeemable Unit means net asset value divided by the aggregate number of all
units of limited and general partnership interest outstanding.
The Partnership pays the Advisor an incentive fee payable quarterly equal
to 20% of new trading profits earned by the Advisor during each calendar
quarter. New trading profits are defined as the excess, if any, of net assets
managed by the Advisor at the end of the calendar quarter over the higher of net
assets allocated to the Advisor at the date trading commenced, or net assets
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managed by the Advisor at the end of the highest previous calendar quarter. New
trading profits are further adjusted to eliminate the effect of various
non-trade-related activities on net assets. These activities may include new
capital contributions, redemptions, reallocations or capital distributions,
organizational and offering expenses and interest or other income earned on the
Partnership's assets. Interest income earned, if any, will not be taken into
account in computing new trading profits earned by the Advisor. Substantial
incentive fees may be paid to the Advisor during a year even though the
Partnership may incur a net loss for the full year.
If any payment is made to the Advisor with respect to new trading profits,
and the Advisor thereafter incurs a net loss for a subsequent period, the
Advisor will retain the amount previously paid. If net assets allocated to the
Advisor are reduced due to net redemptions, distributions or reallocations,
there will be a proportional reduction in the related loss carryforward amount
that must be recouped before the Advisor is eligible to receive another
incentive fee. However, the Advisor would not be paid any incentive fee
thereafter until all remaining loss carryforward amounts were recovered and the
Advisor achieved additional new trading profits.
In addition, upon the expiration of the Management Agreement with the
Advisor and/or upon the selection of replacement advisors, the General Partner
will have to negotiate the management and/or incentive fees to be paid to the
new trading advisor. Such fees could be either higher or lower than those
currently charged by the Advisor.
The Partnership pays CGM a monthly brokerage fee equal to 6.5% per year of
the adjusted month-end net assets (computed monthly by multiplying the adjusted
net assets of the Partnership as of the last business day of each month by 6.5%
and multiplying the result thereof by the ratio that the total number of
calendar days in that month bears to the number of days in the year). For
purposes of calculating the brokerage fee, adjusted net assets are "net assets"
increased by that current month's management fee, incentive fee accrual, other
expenses and any redemptions or distributions as of the end of such month. In
addition, the Partnership pays CGM (or reimburses CGM if previously paid) for
the floor brokerage, exchange, clearing, give-up, user and NFA fees, which are
payable on a per transaction basis. Although it is impossible to predict exactly
the amount of these per transaction fees payable by the Partnership, based on
the past performance of the Advisor, the aggregate of such fees is estimated at
approximately 0.4% of net assets per year.
CGM pays a portion of the brokerage fee it receives from the Partnership to
its financial consultants who place units in this offering and who are
registered with the CFTC as associated persons of CGM. In compensation for their
services, the financial consultants are credited monthly with an amount
representing in the aggregate a maximum of 6.5% of the Partnership's adjusted
month-end net assets per year. The services provided by the financial
consultants include (i) answering questions regarding daily net asset value and
computations thereof, monthly statements, annual reports and tax information
provided by the Partnership; (ii) providing assistance to investors including
when and whether to purchase or redeem the units and (iii) general servicing of
accounts.
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The brokerage fee will be paid for the life of the Partnership, although
the rate at which such fee is paid may change.
The Partnership may enter into spot and forward transactions, including
foreign currency transactions, with CGM or an affiliate of CGM as principal, at
prices quoted by CGM or the affiliate that reflect a price differential between
bid and ask prices (which differential includes anticipated profits and costs of
CGM or the affiliate as dealer) but do not include a mark-up.
CGM initially paid all of the offering and organizational expenses related
to the initial offering which were $81,677. The Partnership reimbursed CGM for
such expenses over the first 24 months after the commencement of trading.
The Partnership pays its periodic legal, accounting, filing and reporting
fees as well as the expenses of its ongoing offering of Redeemable Units. These
expenses are estimated at $125,000 per year, depending on the number of
Redeemable Units sold. The Partnership also pays any extraordinary expenses
incurred.
Interest income to be paid by CGM was estimated at an annual rate of 0.87%
on 80% of the Partnership's net assets maintained in cash.
ERISA Considerations
The Redeemable Units in the Partnership which are offered may be purchased
by "employee benefit plans" as defined in the Employee Retirement Income
Security Act of 1974 ("ERISA") and/or "plans" as defined in Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code"). "Employee benefit plans"
and "plans" are referred to below as "Plans", and fiduciaries with investment
discretion are referred to as "Plan Fiduciaries". Plans include, for example,
corporate pension and profit sharing plans, 401(k) plans, "simplified employee
pension plans", Keogh plans for self-employed persons and IRAs.
Each Plan Fiduciary must consider the facts and circumstances that are
relevant to an investment in the Partnership, including the role that an
investment in the Partnership would play in the Plan's overall investment
portfolio. Each Plan Fiduciary, before deciding to invest in the Partnership,
must be satisfied that the investment is prudent for the Plan, that the
investments of the Plan are diversified so as to minimize the risk of large
losses and that an investment in the Partnership complies with the terms of the
Plan.
Each limited partner will be furnished with monthly statements and annual
reports which include the Net Asset Value per Redeemable 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, Plan Fiduciaries 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.
13
Plan Fiduciaries should understand the potentially illiquid nature of an
investment in the Partnership and that a secondary market does not exist for
Redeemable Units. 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 the age 70-1/2.
The Advisor will not participate in any way in the decision by any
particular Plan to invest in the Partnership, including any determination with
respect to fees and expenses to be paid by the Partnership.
A regulation issued under ERISA (the "ERISA Regulation") contains rules for
determining when an investment by a Plan in an equity interest of a limited
partnership will result in the underlying assets of the partnership being assets
of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., "plan
assets"). Those rules provide that assets of a limited partnership will not be
plan assets of a Plan that purchases an equity interest in the Partnership if:
(a) the equity interest is a "publicly offered" security or a security issued by
an investment company registered under the Investment Company Act of 1940, (b)
the entity is an "operating company", or (c) equity participation by benefit
plans is not "significant".
The Redeemable Units will not be deemed to be "publicly offered" securities
for purposes of the ERISA Regulation. In addition, the Partnership is not an
"operating company" within the meaning of the ERISA 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, foreign plans and IRAs. Investment
by benefit plan investors is not "significant" as defined in the ERISA
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
investment. Investments held by the investment entity's managers, investment
advisors and their affiliates must be disregarded in calculating the percentage.
The Partnership intends to qualify under the "significant participation"
exception in the ERISA Regulation by monitoring the percentage investment by
benefit plan investors and maintaining it below 25%. In order to accomplish
this, the subscription agreement of the Partnership, attached as Exhibit 10.4
hereto, requires that a benefit plan investor may be required to redeem its
Redeemable 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 Section 4975 of 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 Section 4975 of the Code could arise
by virtue of the General Partner's ownership of Redeemable Units in the
Partnership and the possible relationship between an affiliate of the General
14
Partner and any employee-benefit plan that may purchase Redeemable Units.
Further, certain transactions between the Partnership and the General Partner
and certain affiliates of the General Partner could be prohibited transactions.
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 ERISA Regulation) that it would
consider a fiduciary who makes or retains an investment in a fund 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 fund and as part of the arrangement it is expected that the
fund 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
fund would be a prohibited transaction under ERISA.
In general, Redeemable Units may not be purchased with the assets of a Plan
if the General Partner, commodity broker, Advisor or any of their affiliates or
employees either: (a) exercise any discretionary authority or discretionary
control respecting management of the Plan; (b) exercise any authority or control
respecting management or disposition of the assets of the Plan; (c) render
investment advice for a fee or other compensation, direct or indirect, with
respect to any moneys or other property of the Plan; (d) have any authority or
responsibility to render investment advice with respect to any moneys or other
property of the Plan; or (e) have any discretionary authority or discretionary
responsibility in the administration of the Plan. In order to comply with these
prohibitions, a Plan Fiduciary must represent that one of the following is true:
(1) Neither CGM nor any of its employees or affiliates (a) manages any part
of the Plan's investment portfolio or (b) has an agreement or understanding with
the Plan Fiduciary where CGM or any of its employees or affiliates regularly
provides the Plan Fiduciary with individualized information, recommendations or
advice used as a primary basis for the Plan's investment decisions.
(2) A relationship described in (1) above applies to only a portion of the
Plan's assets, and the Plan Fiduciary will invest in the Partnership only from
the portion of the Plan's assets as to which no such relationship exists.
(b) Financial information about industry segments. The Partnership's business
consists of only one segment: speculative trading of Commodity Interests
including futures, options on futures and forward contracts. The Partnership
does not engage in sales of goods or services. The Partnership's net income from
operations for the years ended December 31, 2003, 2002, 2001 is set forth under
"Item 2. Financial Information". The Partnership's capital as of December 31,
2003, 2002 and 2001 was $102,336,428, $54,862,658 and $17,424,190, respectively.
15
(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".
(d) Financial information about geographic areas. The Partnership does not
engage in sales of goods or services or own any long lived assets, and therefore
this item is not applicable.
(e) Not applicable.
(f) Not applicable.
(g) Not applicable.
Item 2. Financial Information.
(a) Selected Financial Data. The Partnership commenced trading operations
on October 1, 1997. Realized and unrealized gains (losses), interest income, net
income (loss) and increase (decrease) in Net Asset Value per Redeemable Unit for
the years ended December 31, 2003, 2002, 2001, 2000 and 1999 and total assets at
December 31, 2003, 2002, 2001, 2000 and 1999 were as follows:
16
2003 2002 2001 2000 1999
--------- ---------- ----------- ----------- -----------
Realized and unrealized
trading gains (losses), net
of brokerage commissions and
clearing fees of $5,141,634,
$2,393,869, $714,031,
$478,182 and $486,323,
respectively $ 14,536,489 $ 6,640,010 $ 189,137 $ 499,572 $ 422,456
Interest income 592,252 432,817 258,886 311,081 253,288
---------- ----------- ----------- ---------- -----------
$ 15,128,741 $ 7,072,827 $ 448,023 $ 810,653 $ 675,744
=========== =========== =========== ========== ===========
Net Income (loss) before
Incentive Fee to Advisor $ 13,506,886 $ 6,260,387 $ 83,514 $ 589,200 $ 441,053
=========== =========== =========== ========== ===========
Net Income (loss) available
for pro rata distribution to
partners $ 11,181,118 $ 4,978,790 $ (23,512) $ 546,396 $ 381,356
=========== =========== =========== ========== ===========
Increase (decrease) in net
asset value per Redeemable
Unit $ 240.36 $ 142.51 $ (5.15) $ 92.98 $ 48.34
=========== =========== =========== ========== ===========
Total assets $104,112,505 $ 55,595,799 $ 17,658,713 $ 7,546,109 $ 8,259,489
=========== ========== ========== ========= ==========
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 the sale of goods
or services. Its only assets are its equity in its commodity futures trading
account, consisting of cash, net unrealized appreciation (depreciation) on open
futures and forward contracts, commodity options 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 during the year ended December 31, 2003.
To minimize the risk relating to low margin deposits, the Partnership
follows certain trading policies, including:
(i) The Partnership invests its assets only in commodity interests
that the Advisor believes are traded in sufficient volume to permit ease of
taking and liquidating positions. Sufficient volume, in this context, refers to
17
a level of liquidity that the Advisor believes will permit it to enter and exit
trades without noticeably moving the market.
(ii) The Advisor will not initiate additional positions in any commodity if
these positions would result in aggregate positions requiring margin of more
than 66 2/3% of the Partnership's net assets allocated to the Advisor.
Historically, between 5% and 20% of the Partnership's assets have been committed
to margin by the Advisor.
(iii) The Partnership may occasionally accept delivery of a commodity.
Unless such delivery is disposed of promptly by retendering the warehouse
receipt representing the delivery to the appropriate clearinghouse, the physical
commodity position is fully hedged.
(iv) The Partnership does not employ the trading technique commonly known
as "pyramiding," in which the speculator uses unrealized profits on existing
positions as margin for the purchase 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 holding of futures contracts on the same commodity but involving
different delivery dates or markets and in which the trader expects to earn a
profit from a widening or narrowing of the difference between the prices of the
two contracts.
(vii) The Partnership will not permit the churning of its commodity trading
account. The term "churning" refers to the practice of entering and exiting
trades with a frequency unwarranted by legitimate efforts to profit from the
trades, driven by the desire to generate commission income.
In the normal course of its business, the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments
may include forwards, futures and options, whose values are based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, 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 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 portion of the Partnership's assets invested in OTC contracts at December
31, 2003 was 0%.
18
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 statements of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has credit risk and concentration risk because the sole counterparty
or broker with respect to the Partnership's assets is CGM.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
Other than the risks inherent in commodity futures and swaps trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, in its
discretion, cause the Partnership to cease trading operations and liquidate all
open positions under certain circumstances including a decrease in Net Asset
Value per Redeemable Unit to less than $400 as of the close of business on any
business day.
(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 realized and/or unrealized gains or losses
on commodity futures and other trading, expenses, interest income, additions and
redemptions of Redeemable Units and distributions of profits, if any. Gains or
losses on trading cannot be predicted. Market moves in commodities are dependent
upon fundamental and technical factors which the Advisor may or may not be able
to identify, such as changing supply and demand relationships, weather,
government agricultural, commercial and trade programs and policies, national
and international political and economic events and changes in interest rates.
Partnership expenses consist of, among other things, commissions and advisory
fees. 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. In
19
addition, the amount of interest income payable by CGM is dependent upon
interest rates over which the Partnership has no control.
For the year ended December 31, 2003, Partnership capital increased 86.53%
from $54,862,658 to $102,336,428. This increase was attributable to net income
from operations of $11,181,118, coupled with additional sales of Redeemable
Units totaling $58,273,000, which was partially offset by redemptions totaling
$21,980,348. Future redemptions can impact the amount of funds available for
investments in commodity contract positions in subsequent periods.
For the year ended December 31, 2002, Partnership capital increased 214.86%
from $17,424,190 to $54,862,658. This increase was attributable to net income
from operations of $4,978,790, coupled with additional sales of Redeemable Units
totaling $42,081,000, which was partially offset by redemptions totaling
$9,621,322. Future redemptions can impact the amount of funds available for
investments in commodity contract positions in subsequent periods.
For the year ended December 31, 2001, Partnership capital increased 137.76%
from $7,328,521 to $17,424,190. This increase was attributable to additional
sales of Redeemable Units totaling $10,969,000, which was partially offset by
net loss from operations of $23,512 coupled with redemptions totaling $849,819.
Future redemptions can impact the amount of funds available for investments in
commodity contract positions in subsequent periods.
Critical Accounting Policies. 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, 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.
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 date of entry into the contracts and the forward rates at the
20
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statement of income and expenses.
(3) Results of Operations. During the year ended December 31, 2003, the
Partnership's net asset value per Redeemable Unit increased 17.2% from $1,394.28
to $1,634.64. The Partnership experienced a net trading gain before brokerage
commissions and related fees during the same period of $19,678,123.
A substantial portion of the first quarter gains were generated from the
market response to concerns about the impending war with Iraq, but an initial
calming in the second quarter ended with one of the most dramatic drops in the
prices of U.S. Treasuries in 20 years, wiping out almost all gains in the
interest rates sector. In the second half of 2003, profits were derived
primarily from short positions in the U.S. dollar and long positions in global
equity indices. These positions were also responsible for most of the gains for
the full year.
During the year ended December 31, 2002, the Partnership's net asset value
per Redeemable Unit increased 11.4% from $1,251.77 to $1,394.28. The Partnership
experienced a net trading gain before brokerage commissions and related fees
during the same period of $9,033,879.
During the year ended December 31, 2001, the Partnership's net asset value
per Redeemable Unit decreased 0.4% from $1,256.92 to $1,251.77. The Partnership
experienced a net trading gain before brokerage commissions and related fees
during the same period of $903,168.
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 Advisor to
identify correctly 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 Advisor is able to identify them,
the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership's daily equity maintained in cash
was earned at the monthly average 30-day U.S. Treasury bill rate determined
weekly by CGM based on the non-competitive yield on three month U.S. Treasury
bills maturing 30 days from the date in which such weekly rate is determined.
CGM may continue to maintain the Partnership assets in cash and/or place all of
the Partnership assets in 90-day Treasury bills and pay the Partnership 80% of
the interest earned on the Treasury bills purchased. Interest income for the
year ended December 31, 2003 was $592,252 as compared to $432,817 for the year
ended December 31, 2002, an increase of 36.8%. This increase is primarily
attributable to an increase in net assets during the year ended December 31,
2003 as compared to the year ended December 31, 2002.
21
Brokerage commissions are calculated on the adjusted net asset value on the
last day of each month and, therefore, vary according to trading performance and
redemptions. Accordingly, they must be analyzed in relation to the fluctuations
in the monthly net asset values. Commissions and fees for the year ended
December 31, 2003 were $5,141,634 as compared to $2,393,869 for the year ended
December 31, 2002, an increase of 114.8%. This increase is primarily due to an
increase in net assets during the year ended December 31, 2003 as compared to
the year ended December 31, 2002.
Management fees are calculated on the portion of the Partnership's net
asset value allocated to the Advisor at the end of the month and, therefore, are
affected by trading performance and redemptions. Management fees for the year
ended December 31, 2003 were $1,513,837 as compared to $697,460, an increase of
117.1%. This increase is primarily due to an increase in net assets during the
year ended December 31, 2003 as compared to the year ended December 31, 2002.
Incentive fees are based on the new trading profits generated by the
Advisor at the end of the quarter, as defined in the advisory agreement between
the Partnership, the General Partner and the Advisor. Trading performance for
the year ended December 31, 2003 resulted in incentive fees of $2,325,768.
(4) Off-balance Sheet Arrangements. Not applicable.
(5) Tabular Disclosure of Contractual Obligations. Not applicable.
(c) 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.
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,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification 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
22
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.
(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 Partnership's Trading Value at Risk. All quantitative
disclosures in this section are forward-looking statements except for statements
of historical fact (such as the terms of particular contracts and the number of
market risk sensitive instruments held during or at the end of the reporting
period).
The Partnership's 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 and
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 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
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange traded
(almost exclusively currencies in the case of the Partnership), the margin
requirements for the equivalent futures positions have been used as Value at
Risk. In those rare cases in which a futures-equivalent margin is not available,
dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does not
have any optionality component. However, the Advisor may trade commodity
options. The Value at Risk associated with options is reflected in the following
table as the margin requirement attributable to the instrument underlying each
option. Where this instrument is a futures contract, the futures margin, and
23
where this instrument is a physical commodity, the futures-equivalent
maintenance margin has been used. This calculation is conservative in that it
assumes that the fair value of an option will decline by the same amount as the
fair value of the underlying instrument, whereas, in fact, the fair values of
the options traded by the Partnership in almost all cases fluctuate to a lesser
extent than those of the underlying instruments.
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 added 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.
24
The Partnership's Trading Value at Risk in Different Market Sectors. The
following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of December 31, 2003
including the highest and lowest value at any point and the average value during
the year then ended. All open position trading risk exposures of the Partnership
have been included in calculating the figures set forth below. As of December
31, 2003, the Partnership's total capitalization was $102,336,428.
December 31, 2003
Year to Date
----------------------------------------------
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Value at Risk
- -------------------------- ------------ -------------- ------------- ------------- -------------
Currencies
- -Exchange Traded Contracts $2,774,184 2.71% $2,865,324 $892,219 $1,735,467
Energy 1,157,250 1.13% 2,062,962 71,200 813,125
Interest rates U.S. 1,340,100 1.31% 1,340,100 36,400 416,250
Interest rates Non-U.S. 2,016,237 1.97% 2,016,237 388,037 966,794
Indices 3,059,311 2.99% 4,054,564 58,248 2,095,546
--------- ------
Total $10,347,082 10.11%
========== ======
25
(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 (margin
requirements generally range between 2% and 15% 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."
(5) Qualitative Disclosures Regarding Primary Trading Risk Exposures. The
following qualitative disclosures regarding the Partnership's market risk
exposures - except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Partnership manages its primary market
risk exposures - are forward-looking statements.
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 the Partnership'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 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 December 31, 2003, by market sector.
Interest Rates. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-8 countries.
However, at times the Partnership could take futures positions on the government
debt of smaller nations.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
26
Stock Indices. The Partnership's primary equity exposure is to equity price
risk in the G-8 countries. The stock index futures traded by the Partnership are
by law limited to futures on broadly based indices. As of December 31, 2003, the
Partnership's primary exposures were in the EUREX and stock indices traded on
Chicago Mercantile Exchange (U.S). The General Partner anticipates little, if
any, trading in non-G-8 stock indices. The Partnership is primarily exposed to
the risk of adverse price trends or static markets in the major U.S. and
European indices. (Static markets would not cause major market changes but would
make it difficult for the Partnership to avoid being "whipsawed" into numerous
small losses.)
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle East.
Oil prices can be volatile and substantial profits and losses have been and are
expected to continue to be experienced in this market.
(6) Qualitative Disclosures Regarding Non-Trading Risk Exposure. The
following were the only non-trading risk exposures of the Partnership as of
December 31, 2003.
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 Advisors and
communicated to external parties, including limited partners and regulators, is
free of material errors.
Foreign Currency Balances. The Partnership has non-trading market risk on
its foreign cash balances not needed for margin. However, these balances (as
well as any market risk they represent) are immaterial. The Partnership's
primary foreign currency balances are in Japanese yen and the Euro. The Advisor
regularly converts foreign currency balances to U.S. dollars in an attempt to
control the Partnership's non-trading risk.
27
New Accounting Pronouncements. In November 2002, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" which provides accounting and disclosure requirements
for certain guarantees. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Interpretation's initial recognition and measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", which provides new criteria for determining whether
or not consolidation accounting is required. The Interpretation may require the
Partnership to consolidate or provide additional disclosures of the financial
information for certain of its investments. This interpretation is effective for
Variable Interest Entities created after January 31, 2003; otherwise, it is
applicable for the end of the first annual reporting period beginning after June
15, 2003 (effectively December 31, 2004 for the Partnership). This
Interpretation will have no impact on net assets or net income. However, if
applicable, this Interpretation would require consolidation of other entities'
assets and liabilities, schedule of investments, and results of operations, with
minority interest recorded for the ownership share applicable to other
investors. Where consolidation is not required, additional disclosure may be
required of investee financial information.
These pronouncements will not have an effect on the financial statements of
the Partnership.
(7) Qualitative Disclosures Regarding Means of Managing Risk Exposure. 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.
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 certain positions 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.
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.
28
Item 3. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, CGM.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners. As of March 31, 2004,
one beneficial owner who is neither a director nor an executive officer owned
more than five percent (5%) of the outstanding Redeemable Units issued by the
Partnership as follows:
Amount and nature of
Title of Class Name of beneficial owner beneficial ownership Percent of class
- -------------------------- ------------------------ ------------------------- ----------------
Redeemable Units of Limited JVA Enterprises Holdings, 5,493.2566 Redeemable Units 8.20%
Partnership Interest LLC
2905 Lucerne St. SE
Grand Rapids, MI 49546
(b) Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner. The General Partner is not required to maintain an ownership interest
in the Partnership. However, the General Partner currently holds and intends to
maintain at least a 1% ownership interest in the Partnership. As set forth in
the table below, the General Partner owned units of general partnership interest
equivalent to 637.1691 Redeemable Units at March 31, 2004. David J. Vogel, the
President and a Director of the General Partner, owned 15.6688 Redeemable Units
at March 31, 2004. Other than Mr. Vogel, none of the directors and executive
officers of the General Partner beneficially owns any Redeemable Units. However,
the General Partner, CGM and their principals and employees are free to purchase
units for investment purposes. In no event will contributions by such persons
equal or exceed 10% of the total contributions to the Partnership at any time.
Amount and nature of
Title of Class Name of beneficial owner beneficial ownership Percent of class
- -------------------------- ------------------------ ------------------------- ----------------
Units of General Partnership Citigroup Managed Futures 637.1691 Unit Equivalents 100%
Interest LLC
Redeemable Units of Limited David J. Vogel 15.6688 Redeemable Units 0.02%
Partnership Interest
(c) Changes in control. None.
Item 5. Directors and Executive Officers.
The Partnership has no officers or directors and its affairs are managed by
its General Partner. The officers and directors of the General Partner are David
J. Vogel (President and Director), Steven J. Keltz (Secretary and Director),
Daniel R. McAuliffe, Jr. (Chief Financial Officer and Director), Shelley Ullman
29
(Senior Vice President and Director) and Maureen O'Toole (Senior Vice President
and Director). Each director holds office until his successor is elected, or
until his earlier death, resignation or removal. Vacancies on the board of
directors may be filled by appointment of the sole member of the General
Partner, CGMH, or by unanimous vote of the remaining directors, depending on the
circumstance of the vacancy. The officers of the General Partner are designated
by the General Partner's Board of Directors. Each officer holds office until his
death, resignation or removal.
The business background of each director and officer of the General Partner
is as follows:
Mr. Vogel, age 59, is a Managing Director of CGM and of Citigroup
Alternative Investments and has been a Director of the General Partner since
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
Shearson Lehman Brothers Inc. ("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 currently a Director of the Institute for Financial Markets,
and has served as a director of the Managed Funds Association. Mr. Vogel is also
a past chairman of the Futures Industry Association, a past Director of Comex
Clearing Corporation and the Comex Exchange and a past Governor of the Chicago
Mercantile Exchange.
Mr. Keltz, age 53, is an Associate General Counsel in the Law Department of
CGM. He became Secretary 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. McAuliffe, age 53, is a Managing Director of Citigroup Alternative
Investments. He became a Director of the General Partner in April 1994 and the
Chief Financial Officer of the General Partner in August 2001. From 1986 through
1997, he was responsible for the marketing and sales of managed 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 Funds Association.
Ms. Ullman, age 45, is a Director of CGM's Futures Division 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 46, is a Managing Director of Citigroup Alternative
Investments and a Senior Vice President and Director of the General Partner
(since May 1997 and August 2001, respectively). Ms. O'Toole is National Sales
Director for Citigroup Alternative Investments products distributed by CGM.
Prior to joining CGM 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.
30
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 Campbell & Company,
Inc. as the Partnership's trading advisor. The principals of the Advisor and
their business backgrounds are set forth below:
Theresa D. Becks, born in 1963, joined Campbell & Company in June 1991 and
has served as the Chief Financial Officer and Treasurer since 1992, and
Secretary and a Director since 1994. In addition to her role as CFO, Ms. Becks
also oversees administration, compliance and trade operations. Ms. Becks is
currently a member of the Board of Directors of the Managed Funds Association.
From 1987 to 1991, she was employed by Bank Maryland Corp, a publicly held
company, as a Vice President and Chief Financial Officer. Prior to that time,
she worked with Ernst & Young. Ms. Becks is a C.P.A. and has a B.S. in
Accounting from the University of Delaware. Ms. Becks is an Associated Person of
Campbell & Company.
D. Keith Campbell, born in 1942, has served as the Chairman of the Board of
Directors of Campbell & Company since it began operations, was President until
1994, and was Chief Executive Officer until 1997. Mr. Campbell is the majority
voting stockholder of Campbell & Company. From 1971 to 1978, he was a registered
representative of a futures commission merchant. Mr. Campbell has acted as a
commodity trading advisor since 1972 when, as general partner of the Campbell
Fund, a limited partnership engaged in commodity futures trading, he assumed
sole responsibility for trading decisions made on behalf of the Fund. Since
then, he has applied various technical trading models to numerous discretionary
futures trading accounts. Mr. Campbell is registered with the CFTC and NFA as a
commodity pool operator. Mr. Campbell is an Associated Person of Campbell &
Company.
William C. Clarke, III, born in 1951, joined Campbell & Company in June
1977 and has served as an Executive Vice President since 1991 and a Director
since 1984. Mr. Clarke holds a B.S. in Finance from Lehigh University where he
graduated in 1973. Mr. Clarke currently oversees all aspects of research, which
involves the development of proprietary trading models and portfolio management
methods. Mr. Clarke is an Associated Person of Campbell & Company.
Bruce L. Cleland, born in 1947, joined Campbell & Company in January 1993
and has served as President and a Director since 1994, and Chief Executive
Officer since 1997. Mr. Cleland has worked in the international derivatives
industry since 1973, and has owned and managed firms engaged in global clearing,
floor brokerage, trading and portfolio management. Mr. Cleland is currently a
member of the Board of Directors of the National Futures Association, and
previously served as a member of the Board of Directors of the Managed Funds
Association and as a member of the Board of Governors of the COMEX, in New York.
Mr. Cleland is a graduate of Victoria University in Wellington, New Zealand
where he earned a Bachelor of Commerce and Administration degree. Mr. Cleland is
an Associated Person of Campbell & Company.
31
Kevin M. Heerdt, born in 1958, joined Campbell & Company in March 2003 as
Executive Vice President-Research and was appointed Executive Vice
President-Research and Information Technology in November 2003. His duties
include risk management, research, and the development of quantitatively based
hedge fund and options strategies, as well as providing managerial oversight of
the information technology team. From February 2002 to March 2003, he was
self-employed through Integrity Consulting. Previously, Mr. Heerdt worked for
twelve years at Moore Capital Management, Inc., where he was a Director until
1999, and a Managing Director from 2000 to 2002. Mr. Heerdt holds a B.A. in
Economics and in International Relations from the University of Southern
California. Mr. Heerdt is an Associated Person of Campbell & Company.
James M. Little, born in 1946, joined Campbell & Company in April 1990 and
has served as Executive Vice President-Business Development and a Director since
1992. Mr. Little holds a B.S. in Economics and Psychology from Purdue
University. From 1989 to 1990, Mr. Little was a registered representative of
A.G. Edwards & Sons, Inc. From 1984 to 1989, he was the Chief Executive Officer
of James Little & Associates, Inc., a commodity pool operator and broker-dealer.
Mr. Little is the co-author of The Handbook of Financial Futures, and is a
frequent contributor to investment industry publications. Mr. Little is an
Associated Person of Campbell & Company.
Craig A. Weynand, born in 1969, joined Campbell & Company in October 2003
as Vice President and has served as General Counsel since November 2003. In this
capacity, he is involved in all aspects of legal affairs and regulatory
oversight, as well as managerial oversight of trade operations. From May 1990 to
September 2003, Mr. Weynand was employed by Morgan Stanley, serving as Senior
Trader for Morgan Stanley Futures and Currency Management Inc., a commodity
trading advisor, until 1998 and as Vice President - Director of Product
Origination & Analysis for the Morgan Stanley Managed Futures Department until
his departure. Mr. Weynand holds a B.S. in International Business and Marketing
and an M.B.A. in Economics from New York University, and a J.D. from the Fordham
University School of Law. Mr. Weynand is a member of the New York State Bar and
serves on the Government Relations Committee of the Managed Funds Association.
Mr. Weynand is an Associated Person of Campbell & Company.
C. Douglas York, born in 1958, has been employed by Campbell & Company
since November 1992, was appointed a Senior Vice President-Trading in 1997, and
has served as Executive Vice President-Trading since 2003. His duties include
managing daily trade execution for the assets under Campbell & Company's
management. From 1991 to 1992, Mr. York was the Global Foreign Exchange Manager
for Black & Decker. He holds a B.A. in Government from Franklin and Marshall
College. Mr. York is an Associated Person of Campbell & Company.
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. CGM, an affiliate of the General Partner, is the commodity
broker for the Partnership and receives brokerage fees for such services, as
32
described under "Item 1. Business". For the years ended December 31, 2003, 2002
and 2001, CGM earned $5,141,634, $2,393,869 and $714,031, respectively, in
brokerage fees and clearing fees. The directors and officers of the General
Partner are employees of CGM and do not receive any compensation from the
Partnership or the General Partner. One hundred percent (100%) of the
compensation paid by CGM to Daniel R. McAuliffe, Jr., Chief Financial Officer of
the General Partner, is allocated to the General Partner. No part of any
compensation paid by CGM 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 CGM, and CGM is the broker and selling agent of the
Partnership.
As compensation for its services, the Partnership pays the Advisor
management fees and incentive fees described under "Item 1. Business". For the
years ended December 31, 2003, 2002 and 2001, the Partnership paid $1,513,837,
$697,460 and $206,320, respectively, in management fees. For the years ended
December 31, 2003, 2002 and 2001, the Partnership paid $2,325,768, $1,281,597
and $107,026, respectively, in incentive fees.
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".
(b) Certain Business Relationships. Not applicable.
(c) Indebtedness of Management. Not applicable.
(d) Transactions with Promoters. Not applicable.
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 or any of its directors or executive officers within the
past five years.
There have been no material administrative, civil or criminal actions
within the past five years to which CGM (formerly known as Salomon Smith Barney)
or certain of its affiliates have been a party or to which any of their property
has been subject and no such actions are currently pending, except as follows.
SETTLEMENT OF CERTAIN LEGAL AND REGULATORY MATTERS
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
Salomon Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California. (County of Orange et al. v. Bear Stearns & Co. Inc. et al.) The
complaint alleged, among other things, that the brokerage firms recommended and
sold unsuitable securities to Orange County. Salomon Smith Barney and the
remaining brokerage firms settled with Orange County in mid 1999. Salomon Smith
Barney paid $1,333,333 to settle this matter.
33
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans sought a
determination that Smith Barney Inc. and another underwriter would be
responsible for any damages that the City may incur in the event the Internal
Revenue Service ("IRS") denies tax exempt status to the City's General
Obligation Refunding Bonds Series 1991. The complaints were subsequently
amended. Salomon Smith Barney has asked the court to dismiss the amended
complaints. The court denied the motion but stayed the case. Subsequently, the
City withdrew its lawsuit.
In November 1998, a class action complaint was filed in the U.S. District
Court for the Middle District of Florida (Dwight Brock as Clerk for Collier
County v. Merrill Lynch, et al.). The complaint alleged that, pursuant to a
nationwide conspiracy, 17 broker-dealer defendants, including Salomon Smith
Barney, charged excessive mark-ups in connection with advanced refunding
transactions. Among other relief, plaintiffs sought compensatory and punitive
damages, restitution and/or rescission of the transactions and disgorgement of
alleged excessive profits. In October 1999, the plaintiffs filed a second
amended complaint. In November 1999, Salomon Smith Barney moved to dismiss the
amended complaint. In May 2001, the parties reached and the court preliminarily
approved a tentative settlement. Salomon Smith Barney paid $1,063,457 to settle
this matter and in September 2001, the court approved the settlement.
In connection with the Louisiana and Florida matters, the IRS and the SEC
conducted an industry-wide investigation into the pricing of Treasury securities
in advanced refunding transactions. In April 2000, Salomon Smith Barney and
several other broker-dealers entered into a settlement with the IRS and the SEC.
Thereafter, the plaintiffs filed voluntary discontinuances.
Since April 2002, Salomon Smith Barney and several other broker dealers
have received subpoenas and/or requests for information from various
governmental and self-regulatory agencies and Congressional committees,
including the NASD Inc. which has raised issues about Salomon Smith Barney's
internal e-mail retention practices and research on Winstar Communications, Inc.
With respect to Winstar, Salomon Smith Barney has entered into a settlement
agreement. Salomon Smith Barney agreed to pay a penalty in the amount of $5
million and did not admit to any wrongdoing. In addition, with respect to issues
raised by the NASD, the New York Stock Exchange ("NYSE") and the SEC about
Salomon Smith Barney's and other firms' e-mail retention practices, Salomon
Smith Barney and several other broker/dealers and the NASD, the NYSE and the SEC
entered into a settlement agreement in December 2002. Salomon Smith Barney
agreed to pay a penalty in the amount of $1.65 million and did not admit any
wrongdoing.
On April 28, 2003, Salomon Smith Barney announced final agreements with the
SEC, the NASD, the NYSE and the New York Attorney General to resolve on a civil
basis all of their outstanding investigations into its research and IPO
allocation and distribution practices (the "Research Settlement"). To effectuate
the Research Settlement, the SEC filed a Complaint and Final Judgment in the
United States District Court for the Southern District of New York. On October
31, 2003, final judgment was entered against Salomon Smith Barney and nine other
investment banks. The NASD has accepted the Letter of Acceptance, Waiver and
Consent entered into with Salomon Smith Barney in connection with the Research
Settlement. In May 2003, the NYSE advised Salomon Smith Barney that the Hearing
Panel's Decision, in which it accepted the Research Settlement, had become
34
final. As required by the Research Settlement, Salomon Smith Barney has entered
into separate settlement agreements with 48 states and various U.S. territories
and is in settlement negotiations with the remaining 2 states. These settlements
require Salomon Smith Barney to pay $300 million for retrospective relief, plus
$25 million for investor education, and commit to spend $75 million to provide
independent third-party research to its clients at no charge.
REGULATORY MATTERS.
Both the Department of Labor and the IRS have advised CGM that they were or
are reviewing transactions in which Ameritech Pension Trust purchased from CGM
and certain affiliates approximately $20.9 million in participations in a
portfolio of motels owned by Motels of America, Inc. and Best Inns, Inc. With
respect to the IRS review, CGM and certain affiliated entities 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.
ENRON CORP.
In April 2002, Citigroup was named as a defendant along with, among others,
commercial and/or investment banks, certain current and former Enron officers
and directors, lawyers and accountants in an alleged consolidated class action
complaint that was filed in the United States District Court for the Southern
District of Texas seeking unspecified damages. The action, brought on behalf of
individuals who purchased Enron securities (Newby, et al. v. Enron Corp., et
al.), alleges violations of Sections 11 and 15 of the Securities Act of 1933, as
amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended. Citigroup's motion to dismiss the complaint was denied in December
2002, and Citigroup filed an answer in January 2003. In May 2003, plaintiffs
filed an amended consolidated class action complaint, and Citigroup filed a
motion to dismiss in June 2003. Plaintiffs filed a motion for class
certification in May 2003. Discovery is proceeding pending the Court's decision
on class certification.
Additional actions have been filed against Citigroup and certain of its
affiliates, including CGM, along with other parties, including (i) actions
brought by a number of pension and benefit plans, investment funds, mutual
funds, and other individual and institutional investors in connection with the
purchase of Enron and Enron-related equity and debt securities, alleging
violations of various state and federal securities laws, state unfair
competition statutes, common law fraud, misrepresentation, unjust enrichment,
breach of fiduciary duty, conspiracy, and other violations of state law; (ii) an
action by banks that participated in two Enron revolving credit facilities,
originally alleging fraud, gross negligence, breach of implied duties, aiding
and abetting and civil conspiracy in connection with defendants' administration
of a credit facility with Enron; the Court granted Citigroup's motion to dismiss
with respect to all claims except for certain claims of aiding and abetting and
civil conspiracy; (iii) an action brought by several funds in connection with
secondary market purchases of Enron debt securities, alleging violations of the
federal securities law, including Section 11 of the Securities Act of 1933, as
amended, and claims for fraud and misrepresentation; (iv) a series of alleged
class actions by purchasers of NewPower Holdings common stock, alleging
violations of the federal securities law, including Section 11 of the Securities
Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of
1934, as amended; (v) an alleged class action brought by clients of CGM in
35
connection with research reports concerning Enron, alleging breach of contract;
(vi) an action brought by a retirement and health benefits plan in connection
with the purchase of certain Enron notes, alleging violation of federal
securities law, including Section 11 of the Securities Act of 1933, as amended,
violations of state securities and unfair competition law, and common law fraud
and breach of fiduciary duty; (vii) an action brought by the Attorney General of
Connecticut in connection with various commercial and investment banking
services provided to Enron; (viii) an action brought by purchasers in the
secondary market of Enron bank debt, alleging claims for common law fraud,
conspiracy, gross negligence, negligence and breach of fiduciary duty; (ix) an
action brought by an investment company, alleging that Enron fraudulently
induced it to enter into a commodity sales contract; (x) five adversary
proceedings filed by Enron in its chapter 11 bankruptcy proceedings to recover
alleged preferential payments and fraudulent transfers involving Citigroup,
certain of its affiliates and other entities, and to disallow or to subordinate
claims that Citigroup and other entities have filed against Enron; (xi)
third-party actions brought by former Enron officers and directors, alleging
violation of state securities and other laws and a right to contribution from
Citigroup, in connection with claims under state securities and common law
brought against the officers and directors and others; and (xii) an alleged
class action brought on behalf of Connecticut municipalities, alleging violation
of state statutes, conspiracy to commit fraud, aiding and abetting a breach of
fiduciary duty and unjust enrichment. Several of these cases have been
consolidated or coordinated with the Newby action and are now generally inactive
pending the Court's decision on the pending motion on class certification.
On July 28, 2003, Citigroup entered into a final settlement agreement with
the SEC to resolve the SEC's outstanding investigations into Citigroup
transactions with Enron and Dynegy. Pursuant to the settlement, Citigroup has,
among other terms, (1) consented to the entry of an administrative cease and
desist order, which bars Citigroup from committing or causing violations of
provisions of the federal securities laws, and (2) agreed to pay $120 million
($101.25 million allocable to Enron and $18.75 million allocable to Dynegy).
Citigroup entered into this settlement without admitting or denying any
wrongdoing or liability, and the settlement does not establish wrongdoing or
liability for purposes of any other proceeding. On July 28, 2003, Citibank, N.A.
entered into an agreement with the Office of the Comptroller of the Currency
("OCC") and Citigroup entered into an agreement with the Federal Reserve Bank of
New York ("FED") to resolve their inquiries into certain of Citigroup's
transactions with Enron. Pursuant to the agreements, Citibank and Citigroup have
agreed to submit plans to the OCC and FED, respectively, regarding the handling
of complex structured finance transactions. Also on July 28, 2003, Citigroup
entered into a settlement agreement with the Manhattan District Attorney's
Office to resolve its investigation into certain of Citigroup's transactions
with Enron; pursuant to the settlement, Citigroup has agreed to pay $25.5
million and to abide by its agreements with the SEC, OCC and FED.
In July 2002, Citigroup, CGM and certain officers were named as defendants
in an alleged class action filed in the United States District Court for the
Southern District of New York, brought on behalf of purchasers of Citigroup
common stock between July 24, 1999 and July 23, 2002. The complaint seeks
unspecified compensatory and punitive damages for alleged violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and for common law
fraud. Fourteen virtually identical complaints have been filed and consolidated.
The complaints allege that Citigroup misstated the extent of its Enron-related
exposure, and that Citigroup's stock price fell once the true extent of the
company's Enron involvements became known. Plaintiffs filed an amended complaint
36
on March 10, 2003, which incorporated the allegations in the 15 separate actions
and added new material as well. The amended complaint focuses on certain
transaction Citigroup did with Enron and alleged analyst conflicts of interest.
The class period for the consolidated amended complaint is July 24, 1999 to
December 11, 2002. On June 2, 2003, Citigroup filed a motion to dismiss the
consolidated amended complaint. Plaintiffs' response was filed on July 30, and
Citigroup's reply was filed on October 3, 2003. Oral argument before Judge Swain
was held on November 20, 2003.
DYNEGY INC.
On June 6, 2003, the complaint in a pre-existing alleged class action
pending in the United States District Court for the Southern District of Texas
(In Re: Dynegy Inc. Securities Litigation) brought by purchasers of publicly
traded debt and equity securities of Dynegy Inc. was amended to add Citigroup,
Citibank and CGM as defendants. The plaintiffs allege violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against the
Citigroup defendants.
WORLDCOM, INC.
Citigroup, CGM and certain executive officers and current and former
employees have been named as defendants -- along with twenty-two other
investment banks, certain current and former WorldCom officers and directors,
and WorldCom's former auditors -- in a consolidated class action brought on
behalf of individuals and entities who purchased or acquired publicly traded
securities of WorldCom between April 29, 1999 and June 25, 2002 (In Re: Worldcom
Inc. Securities Litigation). The class action complaint asserts claims against
CGM under (i) Sections 11 and 12(a)(2) of the Securities Act of 1933, as
amended, in connection with certain bond offerings in which it served as
underwriter, and (ii) Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated under Section 10(b), alleging that
it participated in the preparation and/or issuance of misleading WorldCom
registration statements and disseminated misleading research reports concerning
WorldCom stock. On May 19, 2003, the Court denied CGM's motion to dismiss the
consolidated class action complaint. On October 24, 2003, the Court granted the
plaintiffs' motion for class certification. On December 31, 2003, the United
States Court of Appeals for the Second Circuit granted CGM's petition seeking
leave for an interlocutory appeal of the class certification order. The District
Court has scheduled trial to begin in January 2005.
Pursuant to an order entered May 28, 2003, the District Court consolidated
approximately seventy individual actions with the class action for pretrial
proceedings. Certain individual plaintiffs have appealed the district court's
order denying their motions to remand. The claims asserted in these individual
actions are substantially similar to the claims alleged in the class action and
assert state and federal securities law claims based on CGM's research reports
concerning WorldCom and/or CGM's role as an underwriter in WorldCom offerings.
Numerous other actions asserting claims against CGM in connection with its
research reports about WorldCom and/or its role as an investment banker for
WorldCom are pending in other federal and state courts. These actions have been
remanded to various state courts, are pending in other federal courts, or have
been conditionally transferred to the United States District Court for the
Southern District of New York to be consolidated with the class action. In
addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its WorldCom research reports are pending in numerous
37
arbitrations around the country. These arbitration proceedings assert claims
that are substantially similar to the claims asserted in the class action.
GLOBAL CROSSING
On or about January 28, 2003, lead plaintiff in a consolidated alleged
class action in the United States District Court for the Southern District of
New York (In Re: Global Crossing, Ltd. Securities Litigation) filed a
consolidated complaint on behalf of purchasers of the securities of Global
Crossing and Asia Global Crossing, which names as defendants, among others,
Citigroup, CGM, CGMH and certain executive officers and current and former
employees. The alleged class action complaint asserts claims against these
Citigroup defendants under (i) Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933, as amended, and Section 14(a) of the Securities Exchange Act of
1934, as amended and Rule 14A-9A promulgated thereunder, in connection with
certain offerings in which CGM served as underwriter and in connection with
certain transactions in which CGM issued fairness opinions, and (ii) Section
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder, alleging that they disseminated misleading
research reports concerning Global Crossing and Asia Global Crossing. The
Citigroup-related defendants have moved to dismiss these claims.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its Global Crossing research reports are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the alleged
class action.
ADELPHIA COMMUNICATIONS CORPORATION
On July 6, 2003, an adversary proceeding was filed by the Official
Committee of Unsecured Creditors on behalf of Adelphia Communications
Corporation against certain lenders and investment banks, including CGM,
Citibank, N.A., Citicorp USA, Inc., and Citigroup Financial Products, Inc.
(together, the Citigroup Parties). The complaint alleges that the Citigroup
Parties and numerous other defendants committed acts in violation of the Bank
Holding Company Act and the common law. The complaint seeks equitable relief and
an unspecified amount of compensatory and punitive damages. In November 2003, a
similar adversary proceeding was filed by the Equity Holders Committee of
Adelphia.
In addition, CGM is among the underwriters named in numerous civil actions
brought to date by investors in Adelphia debt securities in connection with
Adelphia securities offerings between September 1997 and October 2001. Three of
the complaints also assert claims against Citigroup Inc. and Citibank, N.A. All
of the complaints allege violations of federal securities laws, and certain of
the complaints also allege violations of state securities laws and the common
law. The complaint seeks unspecified damages. In December 2003, a second amended
complaint was filed and consolidated before the same judge of the United States
District Court for the Southern District of New York.
MUTUAL FUNDS
In 2003, several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The Company has received subpoenas and
other requests for information from various government regulators regarding
market timing, fees, sales practices and other mutual fund issues in connection
38
with various investigations, including an investigation by the SEC and a United
States Attorney into the arrangements under which CGMH became the transfer agent
for many of the mutual funds in the Smith Barney fund complex. CGMH is
cooperating fully with all such reviews.
RESEARCH
Since May 2002, Citigroup, CGM and certain executive officers and current
and former employees have been named as defendants in numerous alleged class
action complaints, individual actions, and arbitration demands by purchasers of
various securities, alleging that they violated federal securities law,
including Sections 10 and 20 of the Securities Exchange Act of 1934, as amended,
and certain state laws for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with companies in connection with published investment research,
including AT&T Corp., Winstar Communications, Inc., Rhythm NetConnections, Inc.,
Level 3 Communications, Inc., Metromedia Fiber Network, Inc., XO Communications,
Inc., Williams Communications Group Inc., and Qwest Communications International
Inc. The alleged class actions relating to research of these companies are
pending before a single judge in the United States District Court for the
Southern District of New York for coordinated proceedings. The Court has
consolidated these actions into separate proceedings corresponding to the
companies named above. On January 30, 2004, plaintiffs in the Rhythm
NetConnections, Inc. action voluntarily dismissed their complaint with
prejudice.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its research reports on these companies are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the class and
individual actions.
Three additional alleged class actions are pending in federal courts
against Citigroup and certain of its affiliates, including CGM, and certain of
their current and former directors, officers and employees, along with other
parties, on behalf of persons who maintained accounts with CGM. These actions
assert, among other things, common law claims, claims under state statutes, and
claims under the Investment Advisers Act of 1940, for allegedly failing to
provide objective and unbiased investment research and investment management,
seeking, among other things, return of fees and commissions. In all three of
these actions, the Citigroup-related defendants have moved to dismiss the
complaints. In two of these alleged class actions, these motions were granted
and appeals are now pending.
In May 2003, the SEC, NYSE and NASD issued a subpoena and letters to CGM
requesting documents and information with respect to their continuing
investigation of individuals in connection with the supervision of the research
and investment banking departments of CGM. Other parties to the Research
Settlement have received similar subpoena and letters.
On June 23, 2003, the West Virginia Attorney General filed an action
against CGM and nine other firms that were parties to the Research Settlement.
The West Virginia Attorney General alleges that the firms violated the West
Virginia Consumer Credit and Protection Act in connection with their research
activities and seeks monetary penalties. CGM and the other defendants have moved
to dismiss the action.
39
In April 2002, consolidated amended complaints were filed against CGM and
other investment banks named in numerous alleged class actions filed in the
United States District Court for the Southern District of New York, alleging
violations of certain federal securities laws (including Section 11 of the
Securities Act of 1933, as amended, and Section 10(b) of the Securities Exchange
Act of 1934, as amended) with respect to the allocation of shares for certain
initial public offerings and related aftermarket transactions and damage to
investors caused by allegedly biased research analyst reports. On February 19,
2003, the Court issued an opinion denying defendants' motion to dismiss. Also
filed in the Southern District of New York against CGM and other investment
banks were several alleged class actions that were consolidated into a single
class action, alleging violations of certain federal and state antitrust laws in
connection with the allocation of shares in initial public offerings when acting
as underwriters. On November 3, 2003, the Court granted CGM's motion to dismiss
the consolidated amended complaint in the antitrust case.
In the course of its business, CGM, as a major futures commission merchant
and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings that the General Partner believes do not have a
material effect on the business of CGM.
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 Redeemable Units.
(b) Holders. The number of holders of Redeemable Units and Units of General
Partner Interest as of December 31, 2003 was 674.
(c) Distributions. The Partnership did not declare any distributions during
the years ended December 31, 2003 or 2002.
(d) Securities authorized for issuance under equity compensation plans. Not
applicable.
Item 10. Recent Sales of Unregistered Securities.
(a) Securities sold. From January 1, 2000 through December 31, 2003, the
Partnership sold limited partnership Redeemable Units which resulted in
aggregate proceeds to the Partnership of $112,218,000.
(b) Underwriters and other purchasers. Redeemable Units of Limited
Partnership Interest were sold to persons and entities who are accredited
investors as that term is defined in Rule 501(a) of Regulation D as well as to
those persons who are not accredited investors but who have either (i) a net
worth (exclusive of home, furnishings and automobiles) individually or jointly
with their spouse of at least three times their investment in the Partnership
(the minimum investment for which is $25,000) or (ii) gross income for the past
two years and projected gross income for the current year of not less than three
times their investment in the Partnership (the minimum investment for which is
$25,000) for each year. The offering is limited to 35 non-accredited investors.
40
(c) Consideration. The aggregate proceeds of securities sold during the
period from January 1, 2000 through December 31, 2003 was $112,784,000, of which
$566,000 was from units of general partnership interest sold to the General
Partner.
Redeemable Units have been sold monthly at Net Asset Value per Redeemable
Unit. No underwriting discounts or commissions are paid in connection with the
Redeemable Units.
(d) Exemption from registration claimed. Exemption is claimed from
registration under Securities Act Section 4(2) and Section 506(a) of Regulation
D promulgated thereunder. The purchasers are accredited investors under Rule
501(a) of Regulation D and a limited number of non-accredited investors, as
discussed in paragraph (a) above. As of December 31, 2003, 12 non-accredited
investors had purchased Redeemable Units in the Partnership.
The minimum subscription for Redeemable 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.
(e) Terms of conversion or exercise. Not applicable.
(f) Use of proceeds. Not applicable.
Item 11. Description of Registrant's Securities to be Registered.
The Partnership is registering Redeemable Units 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 Redeemable Units). Distributions of
profits will be made at the sole discretion of the General Partner.
The Redeemable 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 Redeemable Units becomes a substituted limited
partner.
41
A limited partner may require the Partnership to redeem some or all of his
Redeemable Units at Net Asset Value per Redeemable 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 business 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 by crediting a limited partner's CGM securities
account with the proceeds of the redemption. 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 its Redeemable Units if such redemption is in the best
interests of the Partnership.
Summary of the Limited Partnership Agreement
The following is an explanation of all of the material terms and provisions
of the Limited Partnership Agreement, a copy of which is attached as Exhibit 3.6
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 the Limited Partnership Agreement itself.
Liability of Limited Partners
The Partnership was formed under the laws of the State of New York on March
14, 1997. The General Partner has been advised by its counsel, Willkie Farr &
Gallagher LLP, that except as required by the New York Revised Limited
Partnership Act (the "New York Act") and as set forth in Paragraph 7(f) of the
Limited Partnership Agreement, Redeemable Units 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 New York Act
provides that a limited partner who knowingly receives a prohibited distribution
is liable to the limited partnership for the amount of the distribution for a
period of three years from the date of distribution. A limited partner who
participates in the control of the Partnership's business may become liable as a
general partner to persons who transact business with the Partnership reasonably
believing, based upon the limited partner's conduct, that the limited partner is
a general partner. 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.
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
42
Partnership. Other responsibilities of the General Partner include, but are not
limited to, the following: reviewing and monitoring the trading of the trading
advisor(s); administering redemptions of Redeemable 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.
Sharing of Profits and Losses; Partnership Accounting
Each partner will have a capital account, and its initial balance will be
the amount he paid for his Redeemable Units or, in the case of a contribution by
the general partner, its capital contribution (which shall be treated as units
of general partnership interest). Any increase or decrease in the Net Assets of
the Partnership will be allocated among the partners on a monthly basis and will
be added to or subtracted from the accounts of the partners in the ratio that
each account bears to all accounts.
Additional Partners
The General Partner has the sole discretion to determine whether to offer
for sale additional Redeemable Units and to admit additional limited partners.
There is no limitation on the number of Redeemable Units which may be
outstanding at any time. All Redeemable Units offered by the Partnership will be
sold at the Partnership's then current Net Asset Value per Redeemable Unit. The
General Partner may make arrangements for the sale of additional Redeemable
Units in the future.
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, 2017; (ii) receipt by the General Partner of an election to
dissolve the Partnership by limited partners owning more than 50% of the
Redeemable Units then outstanding; (iii) assignment by the General Partner of
all of its interest in the Partnership, withdrawal, removal, bankruptcy or any
other event that causes the General Partner to cease to be a general partner
under the New York Revised Uniform Limited Partnership Act, unless the
Partnership is continued as described in the Limited Partnership Agreement; (iv)
a decline in Net Asset Value to less than $400 per Redeemable 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 Redeemable Units.
43
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
Redeemable 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
offering memorandum); 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 Redeemable 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 Redeemable 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
written notice to each limited partner of record mailed within 15 days after
such receipt, must call a meeting of the Partnership. Such meeting must be held
at least 30 but not more than 60 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 Redeemable 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 Partnership's books and records are 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 Redeemable 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
44
of such occurrence: a decrease in the Net Asset Value of a Redeemable 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.
Income Tax Aspects
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 Redeemable 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 16 of the Limited Partnership Agreement (attached as Exhibit 3.6
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 Redeemable
Units.
Section 6 of the Management Agreement (attached as Exhibit 10.1 hereto)
provides for indemnification by the General Partner and the Partnership 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
16 of the Limited Partnership Agreement.
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
45
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.
(a) Selected quarterly financial data. The Partnership does not have
securities registered pursuant to Sections 12(b) or 12(g) of the Securities
Exchange Act of 1934.
(b) Information about gas producing activities. The Partnership is not
engaged in oil and gas producing activities.
The Financial Statements of the Partnership are attached hereto as
exhibits.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the independent accountant for
the Partnership. On July 9, 2002, that firm was dismissed as principal
independent accountant and KPMG LLP was engaged as principal independent
accountant. The decision to change independent accountants was approved by the
General Partner.
In connection with the audit of the two fiscal years ended December 31,
2001 and 2000 and through July 9, 2002, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference thereto in their reports on the financial statements for such
time period.
The audit reports of PricewaterhouseCoopers LLP on the financial statements
of the Partnership as of and for the years ended December 31, 2001 and 2000 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principle.
A letter from PricewaterhouseCoopers is attached hereto as Exhibit 16.
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 December 31,
2003 and 2002.
Statements of Income and Expenses for the years ended December 31,
2003, 2002 and 2001.
46
Statements of Partners' Capital for the years ended December 31, 2003,
2002 and 2001.
Condensed Schedule of Investments of the Partnership at December 31,
2003 and 2002.
Statement of Financial Condition of the General Partner at December
31, 2003.
47
(b) Exhibits.
Exhibit 3.1- Certificate of Limited Partnership
Exhibit 3.2- Certificate of Amendment to the Certificate of Limited
Partnership
Exhibit 3.3- Certificate of Change
Exhibit 3.4- Certificate of Amendment to the Certificate of Limited
Partnership
Exhibit 3.5- Certificate of Amendment to the Certificate of Limited
Partnership
Exhibit 3.6- Second Amended and Restated Limited Partnership Agreement
Exhibit 10.1- Management Agreement among the Partnership, Smith Barney
Futures Management Inc. (the predecessor to the General
Partner) and Campbell & Company, Inc.
Exhibit 10.1(a)- First Amendment to the Management Agreement Letter among
the Partnership, Smith Barney Futures Management Inc.(the
former name of the General Partner), Campbell & Company,
Inc. and SFG Global Investments, Inc.
Exhibit 10.1(b)- Second Amendment to the Management Agreement Letter among
the Partnership, Smith Barney Futures Management LLC (the
former name of the General Partner) and Campbell &
Company, Inc.
Exhibit 10.2- Second Amended and Restated Customer Agreement between
the Partnership and Salomon Smith Barney Inc. (the former
name of CGM)
Exhibit 10.3- Amended and Restated Agency Agreement between the
Partnership, Smith Barney Futures Management LLC (the
former name of the General Partner) and Salomon Smith
Barney Inc. (the former name of CGM)
Exhibit 10.4- Form of Subscription Agreement
Exhibit 10.5- Form of Letter from the General Partner to Campbell &
Company, Inc. extending the Management Agreement from
July 1, 1997 to June 30, 1998.
Exhibit 10.6- Letter from the General Partner to Campbell & Company,
Inc. extending the Management Agreement from July 1, 1998
to June 30, 1999.
Exhibit 10.7- Letter from the General Partner to Campbell & Company,
Inc. extending the Management Agreement from July 1, 1999
to June 30, 2000.
Exhibit 10.8- Letter from the General Partner to Campbell & Company,
Inc. extending the Management Agreement from July 1, 2000
to June 30, 2001.
48
Exhibit 10.9- Letter from the General Partner to Campbell & Company, Inc.
extending the Management Agreement from July 1, 2001 to
June 30, 2002.
Exhibit 10.10- Letter from the General Partner to Campbell & Company, Inc.
extending the Management Agreement from July 1, 2002 to
June 30, 2003.
Exhibit 10.11- Letter from the General Partner to Campbell & Company, Inc.
extending the Management Agreement from July 1, 2003 to
June 30, 2004.
Exhibit 16- Letter regarding Change in Certifying Accountant
Exhibit 99.1- Annual Report of the Partnership
Exhibit 99.2- Annual Report of the General Partner
49
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 POTOMAC FUTURES FUND L.P.
(Registrant)
Date: April 30, 2004
By: Citigroup Managed Futures LLC
(General Partner)
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.,
Chief Financial Officer and Director
50