FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 2003
Commission File Number 0-28336
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
---------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3772374
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Citigroup Managed Futures LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
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(Address and Zip Code of principal executive offices)
(212) 723-5424
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
Yes No X
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition at
March 31, 2003 and December 31,
2002 (unaudited). 3
Statements of Income and Expenses
and Partners' Capital for the three
months ended March 31, 2003 and 2002
(unaudited). 4
Notes to Financial Statements
including the Financial Statements
of JWH Strategic Allocation Master
Fund LLC (unaudited). 5 - 15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 16 - 19
Item 3. Quantitative and Qualitative
Disclosures of Market Risk 20 - 21
Item 4. Controls and Procedures 22
PART II - Other Information 23
2
PART I
Item 1. Financial Statements
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
March 31, December 31,
2003 2002
-----------------------
ASSETS:
Investment in Master, at fair value $31,816,139 $28,212,288
Cash 32,040 19,882
----------- -----------
31,848,179 28,232,170
Interest receivable 25,133 21,819
----------- -----------
$31,873,312 $28,253,989
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 159,367 $ 141,270
Management fees 52,798 46,812
Administrative fees 26,399 23,406
Incentive fees 178,139 --
Other 35,311 25,498
Redemptions payable 1,012,385 195,333
----------- -----------
1,464,399 432,319
----------- -----------
Partners' Capital:
General Partner, 401.3070 and 451.3070
Unit equivalents outstanding in 2003
and 2002 825,256 809,275
Limited Partners, 14,436.0349 and 15,063.9866
Units of Limited Partnership Interest
outstanding in 2003 and 2002, respectively 29,583,657 27,012,395
----------- -----------
30,408,913 27,821,670
----------- -----------
$31,873,312 $28,253,989
=========== ===========
See Accompanying Notes to Unaudited Financial Statements.
3
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENTS OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
----------------------
Income:
Realized gains (losses) on closed positions and $ 8,909,117 $ (1,347,036)
foreign currencies from Master
Change in unrealized losses on open positions
from Master (3,906,731) (1,670,399)
Expenses allocated from Master (14,285) (27,422)
------------ ------------
4,988,101 (3,044,857)
Interest income 68,578 110,628
------------ ------------
5,056,679 (2,934,229)
------------ ------------
Expenses:
Brokerage commissions 507,461 500,487
Management fees 164,996 165,723
Administrative fees 82,498 82,861
Incentive fees 178,139 --
Other expenses 9,812 8,564
------------ ------------
942,906 757,635
------------ ------------
Net income (loss) 4,113,773 (3,691,864)
Redemptions (1,526,530) (2,136,157)
------------ ------------
Net increase (decrease) in Partners' capital 2,587,243 (5,828,021)
Partners' capital, beginning of period 27,821,670 35,778,970
------------ ------------
Partners' capital, end of period $ 30,408,913 $ 29,950,949
------------ ------------
Net asset value per Unit
(14,837.3419 and 24,614.0483 Units outstanding
at March 31, 2003 and 2002, respectively) $ 2,056.42 $ 1,216.82
------------ ------------
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 263.24 $ (144.90)
------------ ------------
See Accompanying Notes to Unaudited Financial Statements
4
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
1. General:
Smith Barney Mid-West Futures Fund L.P. II (the "Partnership") is a limited
partnership which was organized on June 3, 1994 under the partnership laws of
the State of New York to engage directly or indirectly in the speculative
trading of a diversified portfolio of commodity interests including futures
contracts, options and forward contracts. The Partnership commenced trading
operations on September 1, 1994. From September 1, 1994 through January 25,
2002, the Partnership engaged directly in the trading of commodity interests.
Effective January 26, 2002, the Partnership transferred substantially all
of its assets as a tax-free transfer to the JWH Strategic Allocation Master Fund
LLC, a New York limited liability company (the "Master"), as a non-managing
member for 42,510.5077 Units of the Master and a fair value of $42,510,508. The
Master was formed in order to permit commodity pools managed now or in the
future by John W. Henry & Company, Inc. (the "Advisor") using the Strategic
Allocation Program, the Advisor's proprietary trading program, to invest
together in one trading vehicle. The commodity interests that are traded by the
Master are volatile and involve a high degree of market risk. Citigroup Managed
Futures LLC, formerly Smith Barney Futures Management LLC (the "General
Partner"), is the general partner of the Partnership and the managing member of
the Master. The Partnership is a non-managing member of the Master. Expenses to
investors as a result of the investment in the Master are approximately the same
and redemption rights are not affected.
As of March 31, 2003, the Partnership owns approximately 30% of the Master.
It is the Partnership's intention to continue to invest substantially all of its
assets in the Master. The performance of the Partnership is directly affected by
the performance of the Master. The Master's Statements of Financial Condition,
Statements of Income and Expenses and Members' Capital and Condensed Schedules
of Investments are included herein.
The Partnership's and the Master's commodity broker is Citigroup Managed
Futures LLC. On April 7, 2003, Smith Barney Futures Management LLC changed its
name to Citigroup Managed Futures LLC. Citigroup Managed Futures LLC acts as the
general partner (the "General Partner") of the Partnership. The Partnership's
commodity broker is Citigroup Global Markets Inc. ("CGM"), formerly Salomon
Smith Barney Inc. CGM is an affiliate of the General Partner. The General
Partner is wholly owned by Citigroup Global Markets Holdings Inc. ("CGMHI"),
5
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
(Continued)
formerly Salomon Smith Barney Holdings Inc., which is the sole owner of CGM.
CGMHI is a wholly owned subsidiary of Citigroup Inc.
As of March 31, 2003, all trading decisions for the Partnership are made by
the Advisor.
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Partnership's financial
condition at March 31, 2003 and December 31, 2002 and the results of its
operations for the three months ended March 31, 2003 and 2002. These financial
statements present the results of interim periods and do not include all
disclosures normally provided in annual financial statements. You should read
these financial statements together with the financial statements and notes
included in the Partnership's annual report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2002.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
6
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
The Master's Statement of Financial Condition at March 31, 2003 and
December 31, 2002, Condensed Schedule of Investments at March 31, 2003 and
December 31, 2002, and its Statement of Income and Expenses and Members' Capital
for the three months ended March 31, 2003 and 2002 were:
JWH Strategic Allocation Master Fund LLC
Statements of Financial Condition
(unaudited)
March 31, December 31,
2003 2002
ASSETS:
Equity in commodity futures
trading account:
Cash (restricted $9,942,044 and
$15,044,312 in 2003 and 2002,
respectively) $ 109,176,581 $ 81,112,283
Net unrealized (depreciation)
appreciation on open positions * (3,779,589) 9,394,955
--------------- -------------
$ 105,396,992 $ 90,507,238
=============== ===============
LIABILITIES AND MEMBERS' CAPITAL:
Liabilities:
Accrued expenses:
Professional fees $ 62,823 $ 47,823
--------------- -------------
62,823 47,823
--------------- -------------
Members' Capital:
Members' capital 60,007.7063 and
60,664.1530 Units outstanding in
2003 and 2002, respectively 105,334,169 90,459,415
--------------- -------------
$ 105,396,992 $ 90,507,238
=============== ===============
* Forward contracts included in this balance are presented gross in the
accompanying Condensed Schedule of Investments.
7
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
JWH Strategic Allocation
Master Fund LLC
Condensed Schedule of Investments
March 31, 2003
(Unaudited)
Sector Contract Fair Value
- ---------------------------------------- ------------------------------ ------------
Currencies
Unrealized depreciation on forward contracts (4.30)% $ (4,538,865)
Unrealized appreciation on forward contracts 1.71% 1,809,321
----------
Total Currencies - (2.59)% (2,729,544)
----------
Energy
Futures contracts sold (0.17)% (180,840)
Futures contracts purchased (0.66)% (695,498)
----------
Total Energy - (0.83)% (876,338)
----------
Grains
Futures contracts sold (0.02)% (19,607)
Futures contracts purchased (0.06)% (59,712)
---------
Total Grains - (0.08)% (79,319)
--------
Interest Rates Non-U.S.
Futures contracts sold 0.23% 240,187
Futures contracts purchased (0.62)% (651,697)
---------
Total Interest Rates Non - U.S. - (0.39)% (411,510)
----------
Total Interest Rates - 0.15% Futures contracts purchased 0.15% 158,640
---------
Total Livestock - (0.00)%* Futures contracts purchased (0.00)%* (2,720)
--------
Metals
Futures contracts sold 0.12% 125,735
Unrealized depreciation on forward contracts (1.41)% (1,483,343)
Unrealized appreciation on forward contracts 1.11% 1,169,270
---------
Total forward contracts (0.30)% (314,073)
---------
Total Metals - (0.18)% (188,338)
---------
Softs Futures contracts sold 0.03% 36,841
Futures contracts purchased (0.04)% (41,277)
---------
Total Softs - (0.01)% (4,436)
--------
Indices
Futures contracts sold (0.05)% (58,960)
Futures contracts purchased 0.39% 412,936
---------
Total Indices - 0.34% 353,976
---------
Total Fair Value - (3.59)% $ (3,779,589)
=============
Country Composition Investments at % of Investments at
Fair Value Fair Value
- ---------------------------------------- ------------------------------ ---------------------------
Australia $ (224,036) (5.93)%
Canada (14,246) (0.38)
Germany (430,884) (11.40)
Japan 699,560 18.51
United Kingdom (468,301) (12.39)
United States (3,341,682) (88.41)
------------------------------ ------------------
$ (3,779,589) (100.00)%
============================== ==================
Percentages are based on Masters' capital unless otherwise indicated
*Due to rounding
8
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
JWH Strategic Allocation
Master Fund LLC
Condensed Schedule of Investments
December 31, 2002
Notional
Sector Amount Contract Fair Value
Currencies Unrealized appreciation on forward contracts 8.23%
EUR (116,850,000) EUR/USD 3.52%, March 19, 2003 $3,188,260
CHF (60,550,000) CHF/USD 1.82%, March 19, 2003 1,644,000
JPY (9,565,600,000) JPY/USD 1.51%, March 19, 2003 1,364,829
Other 1.38% 1,251,826
Unrealized depreciation on forward contracts (2.61)%(2,364,747)
----------
Total Currencies 5.62% Total forward contracts 5.62% 5,084,168
---------
Total Energy 1.22% Futures contracts purchased 1.22% 1,104,121
---------
Grains Futures contracts purchased (0.01)% (10,640)
Futures contracts sold 0.36% 329,388
---------
Total Grains 0.35% 318,748
---------
Interest Rates U.S. Futures contracts purchased 0.55% 497,228
Futures contracts sold (0.96)% (872,094)
---------
Total Interest Rates U.S. (0.41)% (374,866)
---------
Total Interest Rates Non-U.S.2.78% Futures contracts purchased 2.78% 2,515,874
---------
Total Livestock 0.03% Futures contracts purchased 0.03% 23,980
---------
Metals Futures contracts purchased 1.01% 916,440
Unrealized appreciation on forward contracts 0.09% 79,435
Unrealized depreciation on forward contracts (0.35)% (313,193)
---------
Total forward contracts (0.26)% (233,758)
---------
Total Metals 0.75% 682,682
---------
Softs Futures contracts purchased 0.27% 246,814
Futures contracts sold (0.00)%* (2,844)
---------
Total Softs 0.27% 243,970
---------
Indices Futures contracts purchased (0.24)% (222,005)
Futures contracts sold 0.02% 18,283
---------
Total Indices (0.22)% (203,722)
---------
Total Fair Value 10.39% $9,394,955
==========
Investments % of Investments
Country Composition at Fair Value at Fair Value
Australia $220,191 2.34%
Canada 51,439 0.55
Germany 879,354 9.36
Japan 771,920 8.22
United Kingdom 195,396 2.08
United States 7,276,655 77.45
-------------------------- ------------------------
$9,394,955 100.00%
========================== ========================
Percentages are based on Members' capital unless otherwise indicated.
* Due to rounding.
9
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
JWH STRATEGIC ALLOCATION MASTER FUND LLC
STATEMENTS OF INCOME AND EXPENSES AND MEMBERS' CAPITAL
(UNAUDITED)
FOR THE FOR THE
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
-----------------------------------
2003 2002
-----------------------------------
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions
and foreign currencies $ 29,338,717 $ (3,507,955)
Change in unrealized losses on open
positions (13,174,544) (4,516,189)
------------- -------------
16,164,173 (8,024,144)
------------- -------------
Expenses:
Clearing fees 63,149 61,245
Other expenses 15,000 11,250
------------- -------------
78,149 72,495
------------- -------------
Net income (loss) 16,086,024 (8,096,639)
Additions 1,700,000 1,537,008
Redemptions (2,911,270) (4,728,875)
------------- -------------
Net increase (decrease) in Members' capital 14,874,754 (11,288,506)
Members' capital, beginning of period 90,459,415 93,677,938
------------- -------------
Members' capital, end of period $ 105,334,169 $ 82,389,432
------------- -------------
10
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
2. Financial Highlights:
Changes in the Partnership's net asset value per Unit for the three months
ended March 31, 2003 and 2002 were as follows:
THREE-MONTHS ENDED
MARCH 31,
2003 2002
Net realized and unrealized
gains(losses) * $ 286.76 $ (139.04)
Interest income 4.44 4.30
Expenses ** (27.96) (10.16)
---------- ---------
Increase(decrease) for period 263.24 (144.90)
Net Asset Value per Unit,
beginning of period 1,793.18 1,361.72
---------- ---------
Net Asset Value per Unit,
end of period $ 2,056.42 $ 1,216.82
========== ==========
* Includes brokerage commissions
** Excludes brokerage commissions
Ratios to average net assets: ***
Net investment loss before incentive
fees **** (9.3)% (8.2)%
========== ==========
Operating expenses 10.2% 9.6%
Incentive fees 2.3% 0.0%
---------- ---------
Total expenses 12.5% 9.6%
========== ==========
Total return:
Total return before incentive fees 15.3% (10.6)%
Incentive fees (0.6)% 0.0%
---------- ---------
Total return after incentive fees 14.7% (10.6)%
========== ==========
*** Annualized
**** Interest income less total expenses (exclusive of incentive fees)
The above ratios may vary for individual investors based on the timing of
capital transactions during the period.
11
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
Financial Highlights of the Master:
THREE-MONTHS ENDED
MARCH 31,
2003 2002
Ratio to average net assets:
Net investment loss (0.3)% (0.3)%
Operating expenses* 0.3% 0.3%
Total return 17.7% (8.9)%
*Excludes clearing fees
The above ratios may vary for individual investors based on the timing of
capital transactions during the year.
12
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
(Continued)
3. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity instruments. The Partnership invests the majority of its
assets through a "master fund/feeder fund" structure. The results of the
Partnership's investment in the Master are shown in the Statement of Income and
Expenses and Members' Capital and are discussed in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The respective Customer Agreements between the Partnership and CGM and the
Master and CGM give the Partnership and the Master, respectively, the legal
right to net unrealized gains and losses.
All of the commodity interests owned by the Master are held for trading
purposes. The average fair values during the three months ended March 31, 2003
and December 31, 2002, based on a monthly calculation, were $13,091,372 and
$9,163,093, respectively. The fair value of these commodity interests, including
options thereon, if applicable, at March 31, 2003 and December 31, 2002, was
$(3,779,589) and $9,394,955, respectively.
4. Financial Instrument Risk:
The Partnership, through the Partnership's investment in the Master, is
party to financial instruments with off-balance sheet risk, including derivative
financial instruments and derivative commodity instruments, in the normal course
of its business.
In the normal course of its business the Master is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments
may include forwards, futures and options (but not currently) whose values are
based upon an underlying asset, index, or reference rate, and generally
represent future commitments to exchange currencies or cash flows, to purchase
or sell other financial instruments at specific terms at specified future dates,
or, in the case of derivative commodity instruments, to have a reasonable
possibility to be settled in cash, through physical delivery or with another
13
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
(Continued)
financial instrument. These instruments may be traded on an exchange or
over-the-counter ("OTC"). Exchange traded instruments are standardized and
include futures and certain option contracts. OTC contracts are negotiated
between contracting parties and include forwards and certain options. Each of
these instruments is subject to various risks similar to those related to the
underlying financial instruments including market and credit risk. In general,
the risks associated with OTC contracts are greater than those associated with
exchange traded instruments because of the greater risk of default by the
counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Master due to market changes, including interest and
foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Master's risk of loss in the event of counterparty default is typically limited
to the amounts recognized as unrealized appreciation in the statement of
financial condition and not represented by the contract or notional amount of
the instruments. The Master has credit risk and concentration risk because the
sole counterparty or broker with respect to the Master's assets is CGM.
The General Partner monitors and controls the Master's risk exposure on a
daily basis through financial, credit and risk management monitoring systems,
and accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Master is subject. These
monitoring systems allow the General Partner 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.
14
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 2003
(Unaudited)
(Continued)
The majority of these instruments mature within one year of March 31, 2003.
However, due to the nature of the Master's business, these instruments may not
be held to maturity.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its investment in the Master, cash and interest receivable. The
Master does not engage in the sale of goods or services. Its only assets are its
investments in commodity futures and cash. Because of the low margin deposits
normally required in commodity futures trading, relatively small price movements
may result in substantial losses to the Partnership. While substantial losses
could lead to a decrease in liquidity, no such losses occurred in the first
quarter of 2003.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by its investment in the Master, expenses,
interest income, redemptions of Units and distributions of profits, if any.
For the three months ended March 31, 2003, Partnership capital increased
9.3% from $27,821,670 to $30,408,913. This increase was attributable to net
income from operations of $4,113,773 which was partially offset by the
redemption of 627.9517 Units of Limited Partnership Interest resulting in an
outflow of $1,423,709 and 50.0000 General Partner Unit equivalents totaling
$102,821. Future redemptions can impact the amount of funds available for
investment in the Master in subsequent periods.
The Master's capital consists of the capital contributions of the members
as increased or decreased by realized and/or unrealized gains or losses on
commodity futures trading, expenses, interest income, redemptions of Units and
distributions of profits, if any.
For the three months ended March 31, 2003 the Master's capital increased
16.4% from $90,459,415 to $105,334,169. This increase was attributable to net
income from operations of $16,086,024, coupled with additional sales of
1,000.7090 Units totaling $1,700,000, which was partially offset by the
redemption of 1,657.1559 Units resulting in an outflow of $2,911,270. 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 estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities in the financial statements and accompanying notes.
16
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. 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 open positions are recognized in
the period in which the contract is closed or the changes occur and are included
in net gains (losses) on trading of commodity interests.
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
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statement of income and expenses and partners'
capital.
Results of Operations
During the Partnership's first quarter of 2003, the net asset value per
unit increased 14.7% from $1,793.18 to $2,056.42 as compared to a decrease of
10.6% in the first quarter of 2002. The Partnership experienced a net trading
gain before brokerage commissions and related fees in the first quarter of 2003
of $5,002,386. Gains were primarily attributable to the Master's trading of
commodity futures in currencies, energy, U.S. and non-U.S. interest rates,
indices and softs and were partially offset by losses in grains, livestock and
metals. The Partnership experienced a net trading loss before brokerage
commissions and related fees in the first quarter of 2002 of $3,017,435. Losses
were primarily attributable to the Master's trading of commodity futures in
currencies, grains, U.S. interest rates, indices and softs and were partially
offset by gains in energy, non-U.S. interest rates, livestock and metals.
17
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
(and Master) depends on the existence of major price trends and the ability of
the Advisor to correctly identify those price trends. Price trends are
influenced by, among other things, changing supply and demand relationships,
weather, governmental, agricultural, commercial and trade programs and policies,
national and international political and economic events and changes in interest
rates. To the extent that market trends exist and the Advisor is able to
identify them, the Partnership (and Master) expect to increase capital through
operations.
Interest income on 80% of the Partnership's average daily equity, allocated
to it by the Master, was earned at the monthly average 30 day U.S. Treasury bill
rate. CGM may continue to maintain the Master's assets in cash and/or place all
of the Master's assets in 90-day Treasury bills and pay the Partnership 80% of
the interest earned on the Treasury bills purchased. CGM will retain 20% of any
interest earned on Treasury bills. Interest income for the three months ended
March 31, 2003 decreased by $42,050 as compared to the corresponding period in
2002. The decrease in interest income is primarily due to a decrease in interest
rates during the three months ended March 31, 2003 as compared to 2002.
Brokerage commissions are calculated on the Partnership's adjusted net
asset value on the last day of each month and are affected by trading
performance, additions and redemptions. Accordingly, they must be analyzed in
relation to the fluctuations in the monthly net asset values. Commissions and
fees for the three months ended March 31, 2003 decreased by $6,481 as compared
to the corresponding period in 2002. The decrease in brokerage commissions is
due to average lower net assets during the three months ended March 31, 2003 as
compared to 2002.
Management fees are calculated as a percentage of the Partnership's net
asset value as of the end of each month and are affected by trading performance,
additions and redemptions. Management fees for the three months ended March 31,
2003 decreased by $727 as compared to the corresponding period in 2002. The
decrease in management fees is due to average lower net assets during the three
months ended March 31, 2003 as compared to 2002.
18
Administrative fees are paid to the General Partner for administering the
business and affairs of the Partnership. These fees are calculated as a
percentage of the Partnership's net asset value as of the end of each month and
are affected by trading performance, additions and redemptions. Administrative
fees for the three months ended March 31, 2003 decreased by $363 as compared to
the corresponding period in 2002. The decrease in administrative fees is due to
average lower net assets during the three months ended March 31, 2003 as
compared to 2002.
Incentive fees are based on the new trading profits generated by the
Advisor as defined in the advisory agreement between the Partnership, the
General Partner and the Advisor. Trading performance for the three months ended
March 31, 2003 and 2002 resulted in incentive fees of $178,139 and $0,
respectively.
19
Item 3. Quantitative and Qualitative Disclosures of Market Risk
All of the Partnership's assets are subject to the risk of trading loss
through its investment in the Master.
The Master 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 Master'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 Master's main line of business.
Market movements result in frequent changes in the fair value of the
Master's open positions and, consequently, in its earnings and cash flow. The
Master's market risk is influenced by a wide variety of factors, including the
level and volatility of interest rates, exchange rates, equity price levels, the
value of financial instruments and contracts, the diversification effects of the
Master's open positions and the liquidity of the markets in which it trades.
The Master rapidly acquires and liquidates both long and short positions in
a wide range of different markets. Consequently, it is not possible to predict
how a particular future market scenario will affect performance, and the
Master's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Master could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Master's speculative trading and the recurrence in the
markets traded by the Master of market movements far exceeding expectations
could result in actual trading or non-trading losses far beyond the indicated
Value at Risk or the Master's experience to date (i.e., "risk of ruin"). In
light of the foregoing as well as the risks and uncertainties intrinsic to all
future projections, the inclusion of the quantification in this section should
not be considered to constitute any assurance or representation that the
Master's losses in any market sector will be limited to Value at Risk or by the
Master's attempts to manage its market risk.
Exchange maintenance margin requirements have been used by the Master as the
measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. 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.
20
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of March 31, 2003 and the highest
and lowest value at any point during the three months ended March 31, 2003. All
open position trading risk exposures of the Master have been included in
calculating the figures set forth below. As of March 31, 2003, the Master's
total capitalization was $105,334,169. There has been no material change in the
trading Value at Risk information previously disclosed in the Form 10-K for the
year ended December 31, 2002,
March 31, 2003
(Unaudited)
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- -----------------------------------------------------------------------------------------------
Currencies:
- - OTC Contracts $2,217,018 2.10% $6,539,137 $1,910,405
Energy 2,271,200 2.16% 5,657,200 1,837,000
Grains 229,400 0.22% 400,525 152,175
Interest Rates U.S. 435,300 0.41% 1,513,250 432,150
Interest Rates Non-U.S. 1,772,809 1.68% 4,106,508 1,228,573
Livestock 10,200 0.01% 18,700 9,350
Metals:
- Exchange Traded Contracts 330,000 0.31% 696,500 261,500
- OTC Contracts 311,475 0.30% 559,875 176,400
Softs 304,746 0.29% 711,078 295,046
Indices 1,032,346 0.98% 1,807,039 804,240
---------- ---------
Total $8,914,494 8.46%
========== ==========
21
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of a date within 90 days of the filing of this report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
22
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
The following information supplements and amends our discussion set forth
under Part I, Item 3 "Legal Proceedings" in the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.
Settlement Of Certain Regulatory Matters:
On April 28, 2003, Salomon Smith Barney Inc. (SSB), now named
Citigroup Global Markets Inc., announced final agreements with the
Securities and Exchange Commission, the National Association of Securities
Dealers, the New York Stock Exchange and the New York Attorney General (as
lead state among the 50 states, the District of Columbia and Puerto Rico)
to resolve on a civil basis all of their outstanding investigations into
its research and IPO allocation and distribution practices. As part of the
settlements, SSB has consented to the entry of (1) an injunction under the
federal securities laws to be entered in the United States District Court
for the Southern District of New York, barring SSB from violating
provisions of the federal securities laws and related NASD and NYSE rules
relating to research, certain IPO allocation practices, the safeguarding of
material nonpublic information and the maintenance of required books and
records, and requiring SSB to adopt and enforce new restrictions on the
operation of research; (2) an NASD Acceptance Waiver and Consent requiring
SSB to cease and desist from violations of corresponding NASD rules and
requiring SSB to adopt and enforce the same new restrictions; (3) an NYSE
Stipulation and Consent requiring SSB to cease and desist from violations
of corresponding NYSE rules and requiring SSB to adopt and enforce the same
new restrictions; and (4) an Assurance of Discontinuance with the New York
Attorney General containing substantially the same or similar restrictions.
As required by the settlements, SSB expects to enter into related
settlements with each of the other states, the District of Columbia and
Puerto Rico. Consistent with the settlement-in-principle announced in
December 2002, these settlements require SSB 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. SSB reached these final settlement agreements without
admitting or denying any wrongdoing or liability. The settlements do not
establish wrongdoing or liability for purposes of any other proceeding. The
$300 million was accrued during the fourth quarter of 2002.
23
Enron:
New Power Holdings Actions
On April 17, 2003, the motion to dismiss the complaints in the
putative class actions relating to the New Power Holdings common stock was
denied.
Additional Actions
On March 5, 2003, an action was brought on behalf of the purchasers of
the Yosemite Notes and Enron Credit Linked Notes, alleging violations of
federal securities laws.
On April 9, 2003, an action was brought by a group of related mutual
funds that purchased certain Yosemite Notes, alleging violations of state
securities law and common law claims.
Research:
In Re At&T Corporation Securities Litigation
By order dated March 27, 2003, the court denied plaintiffs' leave to
amend their complaint to add as defendants Citigroup, SSB, and certain of
their executive officers and current and former employees.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. The exhibits required to be filed by Item 601 of Regulation S-K are
incorporated herein by reference to the exhibit index of the Partnership's
Report on Form 10-K for the period ended December 31, 2002.
(a) Exhibit - 99.1 Certificate of President and Director.
Exhibit - 99.2 Certificate of Chief Financial Officer and Director.
(b) Reports on Form 8-K - None
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
By: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel
President and Director
Date: 5/14/03
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
David J. Vogel
President and Director
Date: 5/14/03
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 5/14/03
25
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney Mid-West
Futures Fund L.P. II;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ David J. Vogel
- --------------------
David J. Vogel
President and Director
26
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney Mid-West Futures Fund
L.P. II (the "Partnership") on Form 10-Q for the period ending March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David J. Vogel, President and Director of Citigroup Managed
Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Partnership.
Date: May 14 , 2003
/s/ David J. Vogel
- --------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
27
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Barney Mid-West
Futures Fund L.P. II;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Daniel R. McAuliffe Jr.
- --------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
28
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Smith Barney Mid-West Futures
Fund L.P. II (the "Partnership") on Form 10-Q for the period ending March 31,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Daniel R. McAuliffe, Jr., Chief Financial Officer and
Director of Citigroup Managed Futures LLC, certify, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Partnership.
Date: May 14, 2003
/s/ Daniel R. McAuliffe Jr.
- --------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
29