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 September 30, 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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Citigroup Managed Futures LLC
399 Park Avenue - 7th Fl.
New York, New York 10022
(Address and Zip Code of principal executive offices)
(212) 559-2011
(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
September 30, 2003 and December 31,
2002 (unaudited). 3
Statements of Income and Expenses
and Partners' Capital for the three
and nine months ended September 30, 2003
and 2002 (unaudited). 4
Notes to Financial Statements
including the Financial Statements
of JWH Strategic Allocation Master
Fund LLC (unaudited). 5 - 17
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18 - 21
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 22 - 23
Item 4. Controls and Procedures 24
PART II - Other Information 25
2
PART I
Item 1. Financial Statements
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
September 30, December 31,
2003 2002
--------------------------
ASSETS:
Investment in Master, at fair value $26,129,145 $28,234,107
Cash 12,041 19,882
----------- -----------
$26,141,186 $28,253,989
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 130,706 $ 141,270
Management fees 43,323 46,812
Administrative fees 21,661 23,406
Other 16,932 25,498
Redemptions payable -- 195,333
----------- -----------
212,622 432,319
----------- -----------
Partners' Capital:
General Partner, 401.3070 and 451.3070 Unit
equivalents outstanding in 2002 and 2003, respectively 731,956 809,275
Limited Partners, 13,814.4887 and 15,063.9866
Redeemable Units of Limited partnership Interest
outstanding in 2003 and 2002, respectively
25,196,608 27,012,395
----------- -----------
25,928,564 27,821,670
----------- -----------
$26,141,186 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------
2003 2002 2003 2002
------------------------- -----------------------
Income:
Realized gains (losses) on closed positions from Master $ (5,092,062) $ 9,341,811 $ 3,871,377 $ 12,235,099
Change in unrealized gains (losses) on open positions
from Master 3,422,146 (2,781,743) (876,639) 973,177
Expenses allocated from Master (30,655) (10,476) (60,602) (40,309)
Interest income allocated from Master 51,623 94,053 189,872 297,676
------------ ------------ ------------ ------------
(1,648,948) 6,643,645 3,124,008 13,465,643
------------ ------------ ------------ ------------
Expenses:
Brokerage commissions 419,506 484,687 1,409,653 1,484,481
Management fees 138,995 158,167 459,429 481,102
Administrative fees 69,497 79,083 229,714 240,550
Incentive fees -- -- 178,139 --
Other expenses 11,432 8,598 31,058 25,656
------------ ------------ ------------ ------------
639,430 730,535 2,307,993 2,231,789
------------ ------------ ------------ ------------
Net income (loss) (2,288,378) 5,913,110 816,015 11,233,854
Redemptions - Limited Partners (229,744) (4,858,075) (2,606,300) (15,200,149)
- General Partners -- (279,773) (102,821) (279,773)
------------ ------------ ------------ ------------
Net increase (decrease) in Partners' capital (2,518,122) 775,262 (1,893,106) (4,246,068)
Partners' capital, beginning of period 28,446,686 30,754,640 27,821,670 35,778,970
------------ ------------ ------------ ------------
Partners' capital, end of period $ 25,928,564 $ 31,532,902 $ 25,928,564 $ 31,532,902
------------ ------------ ------------ ------------
Net asset value per Redeemable Unit
(14,215.7957 and 15,897.9570 Redeemable Units outstanding
at September 30, 2003 and 2002, respectively) $ 1,823.93 $ 1,983.46 $ 1,823.93 $ 1,983.46
------------ ------------ ------------ ------------
Net income (loss) per Redeemable Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (161.12) $ 345.91 $ 30.75 $ 621.74
------------ ------------ ------------ ------------
See Accompanying Notes to Unaudited Financial Statements.
4
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 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,
2001, the Partnership engaged directly in the trading of commodity interests.
Effective January 26, 2001, 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 Redeemable Units of the Master with 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 September 30, 2003, the Partnership owns approximately 18.6% 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
(Continued)
5
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
the General Partner. The General Partner is wholly owned by Citigroup Global
Markets Holdings Inc. ("CGMHI"), formerly Salomon Smith Barney Holdings Inc.,
which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup
Inc. As of September 30, 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 September 30, 2003 and December 31, 2002 and the results of its
operations for the three and nine months ended September 30, 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.
Certain prior period amounts have been reclassified to conform to current
year presentation.
6
Smith Barney Mid-West Futures Fund L.P.II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
The Master's Statements of Financial Condition as of September 30, 2003 and
December 31, 2002, Condensed Schedules of Investments at September 30, 2003 and
December 31, 2002, and its Statements of Income and Expenses and Members'
Capital for the three and nine months ended September 30, 2003 and 2002 were:
JWH Strategic Allocation Master Fund LLC
Statements of Financial Condition
(Unaudited)
September 30, December 31,
----------- -----------
2003 2002
ASSETS:
Equity in commodity futures
trading account:
Cash (restricted $28,863,395 and
$15,044,312 in 2003 and 2002,
respectively) $ 134,964,930 $ 81,112,283
Net unrealized appreciation
(depreciation) on open futures
positions (299,900) 4,544,545
Unrealized appreciation on open
forward contracts 19,650,578 7,528,350
Interest receivable 112,345 110,522_
------------ -----------
$ 154,427,953 $ 93,295,700
LIABILITIES AND MEMBERS' CAPITAL:
Liabilities:
Unrealized depreciation on open
forward contracts $ 13,494,209 $ 2,677,940
Accrued expenses:
Professional fees 64,623 47,823
Distribution payable 112,345 110,522_
----------- -----------
13,671,177 2,836,285_
------------ -----------
Members' Capital:
Members' capital 86,727,6842 and
60,664.1530 Redeemable Units
outstanding in 2003 and 2002,
respectively 140,756,776 90,459,415
------------ -----------
$ 154,427,953 $ 93,295,700
============ ===========
7
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
JWH Strategic Allocation
Master Fund LLC
Condensed Schedule of Investments
September 30, 2003
(Unaudited)
Number of
Sector Contracts Contract Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Currencies
Unrealized depreciation on forward contracts (8.80)%
114,874,975 CHF/USD - 3.20% Dec, 2003 $ (4,500,575)
47,308,831 GBP/USD - 2.42% Dec. 2003 (3,402,480)
93,302,000 EUR/USD - 2.44% Dec. 2003 (3,435,679)
Other - 0.74% (1,047,816)
--------------
Total Unrealized Depreciation on forward contracts (12,386,550)
Unrealized appreciation on forward contracts 13.25%
25,733,355,765 JPY/USD - 6.94% Dec. 2003 9,771,594
200,481,975 CHF/USD - 2.40% Dec. 2003 3,383,384
Other - 3.91% 5,502,167
--------------
Total Unrealized appreciation on forward contracts 18,657,145
--------------
Total Currencies 4.45% 6,270,595
--------------
Total Energy (1.13)% Futures contracts sold (1.13)% (1,592,549)
--------------
Total Grains 0.67% Futures contracts purchased 0.67% 936,837
--------------
Interest Rates Non-U.S.
Futures contracts sold (1.73)% (2,433,074)
Futures contracts purchased 0.60% 843,084
--------------
Total Interest Rates Non-U.S. 1.13)% (1,589,990)
--------------
Total Interest Rates1.09% Futures contracts purchased 1.09% 1,540,874
--------------
Total Livestock (0.01)% Futures contracts purchased (0.01)% (10,130)
--------------
Metals
Futures contracts purchased 1.08% 1,516,558
Unrealized depreciation on forward contracts (0.79)% (1,107,659)
Unrealized appreciation on forward contracts 0.71% 993,433
--------------
Total forward contracts (0.08)% (114,226)
--------------
Total Metals 1.00% 1,402,332
--------------
Softs Futures contracts sold (0.05)% (74,248)
Futures contracts purchased 0.02% 24,700
--------------
Total Softs (0.03)% (49,548)
--------------
Indices
Futures contracts sold 0.09% 124,758
Futures contracts purchased (0.84)% (1,176,710)
--------------
Total Indices (0.75)% (1,051,952)
--------------
Total Fair Value 4.16% $ 5,856,469
==============
Country Composition Investments at Fair Value % of Investments at Fair Value
- --------------------- ----------------------------------- ------------------------
Australia $ (140,711) (2.40)
Canada 62,099 1.06
Germany 755,109 12.89
Japan (3,225,184) (55.07)
United Kingdom (732,466) (12.51)
United States 9,137,622 156.03
----------------------------------- ------------------------
$ 5,856,469 100.00
=================================== ========================
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
December 31, 2002
(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)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
2003 2002 2003 2002
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions
and foreign currencies $ (27,286,229) $ 29,165,921 $ 3,915,850 $ 38,355,049
Change in unrealized gains (losses) on open
positions 18,232,797 (8,652,597) (3,538,486) 2,366,387
------------- ------------- ------------- -------------
Net realized and unrealized gains (losses) (9,053,432) 20,513,324 377,364 40,721,436
Interest Income 323,025 329,754 898,864 935,725
------------- ------------- ------------- -------------
(8,730,407) 20,843,078 1,276,228 41,657,161
------------- ------------- ------------- -------------
Expenses:
Clearing fees 149,099 43,198 322,005 170,603
Other expenses 15,000 12,500 45,000 35,000
------------- ------------- ------------- -------------
164,099 55,698 367,005 205,603
------------- ------------- ------------- -------------
Net income (loss) (8,894,506) 20,787,380 909,223 41,451,558
Additions 6,425,000 401,919 61,407,545 2,038,927
Redemptions (3,390,670) (24,454,971) (11,120,543) (37,235,195)
Distribution of Interest to Feeder Funds (323,025) (329,754) (898,864) (935,725)
------------- ------------- ------------- -------------
Net increase (decrease) in Members' capital (6,183,201) (3,595,426) 50,297,361 5,319,565
Members' capital, beginning of period 146,939,977 102,592,929 90,459,415 93,677,938
------------- ------------- ------------- -------------
Members' capital, end of period $ 140,756,776 $ 98,997,503 $ 140,756,776 $ 98,997,503
------------- ------------- ------------- -------------
Net asset value per Redeemable Unit
( 86,727.6842 and 61,249.8402 Redeemable Units outstanding
in September 30, 2003 and 2002, respectively) $ 1,622.97 $ 1,616.29 $ 1,622.97 $ 1,616.29
------------- ------------- ------------- -------------
Net income (loss) per Redeemable Unit of Member Interest $ (102.73) $ 313.15 $ 144.20 $ 582.65
------------- ------------- ------------- -------------
10
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in net asset value per Unit for the three and nine months ended
September 30, 2003 and 2002 were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------- ------- -------- --------
2003 2002 2003 2002
Net realized and unrealized
gains(losses) * $ (149.14)$ 355.13 $ 77.85 $ 643.77
Interest income 3.62 5.57 12.80 14.00
Expenses ** (15.60) (14.79) (59.90) (36.03)
-------- ------- -------- --------
Increase(decrease) for period (161.12) 345.91 30.75 621.74
Net Asset Value per Redeemable
Unit, beginning of period 1,985.05 1,673.55 1,793.18 1,361.72
-------- ------- -------- --------
Net Asset Value per Redeemable
Unit, end of period $ 1,823.93 $ 1,983.46 $ 1,823.93 $ 1,983.46
=========== ========= ========== ==========
* Includes expenses allocated from Master.
** Excludes expenses allocated from Master.
11
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
Financial Highlights continued:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------- ------- -------- --------
2003 2002 2003 2002
Ratio to average net assets: ***
Net investment loss before
incentive fees **** (8.8)% (8.5)% (8.9)% (8.6)%
======= ====== ====== ======
Operating expenses 9.1% 9.8% 9.5% 9.9%
Incentive fees 0.0% 0.0% 0.8% 0.0%
-------- ------- ------ -------
Total expenses 9.1% 9.8% 10.3% 9.9%
======= ====== ====== ======
Total return:
Total return before incentive fees (8.1)% 20.7% 2.4% 45.7%
Incentive fees 0.0% 0.0% (0.7)% 0.0%
------ ----- ------ ------
Total return after incentive fees (8.1)% 20.7% 1.7% 45.7%
======= ====== ====== ======
*** 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.
12
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(continued)
Financial Highlights of the Master:
Changes in net asset value per Unit for the three and nine months ended
September 30, 2003 and 2002 were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
2003 2002 2003 2002
Net realized and unrealized
gains(losses) * $ (106.28)$ 308.32 $ 132.48 $ 570.93
Interest income 3.72 5.02 12.38 12.18
Expenses ** (0.17) (0.19) (0.66) (0.46)
------ ------ ------ ------
Increase(decrease) for period (102.73) 313.15 144.20 582.65
Distributions (3.72) (5.02) (12.38) (12.18)
Net Asset Value per
Unit, beginning of period 1,729.42 1,308.16 1,491.15 1,045.82
------ ------ ------ ------
Net Asset Value per
Unit, end of period $ 1,622.97 $ 1,616.29 $ 1,622.97 $ 1,616.29
====== ====== ====== ======
* Includes brokerage commissions.
** Excludes brokerage commissions.
13
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
Financial Highlights of the Master:
THREE-MONTHS ENDED NINE-MONTH ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
Ratio to average net assets: *
Net investment income 0.4% 1.3% 0.6% 1.3%
Operating expenses ** 0.0% 0.2% 0.0% 0.3%
Total return (5.9)% 23.9% 9.7% 55.7%
* Annualized
** Excludes clearing fees
The above ratios may vary for individual investors based on the timing of
capital transactions during the year.
14
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 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 on open futures positions.
All of the commodity interests owned by the Master are held for trading
purposes. The average fair values during the nine months ended September 30,
2003 and December 31, 2002, based on a monthly calculation, were assets of
$4,767,715 and $9,163,093, respectively. The fair value of these commodity
interests, including options thereon, if applicable, at September 30, 2003 and
December 31, 2002, were assets of $5,856,469 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 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
15
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
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.
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.
16
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
September 30, 2003
(Unaudited)
(Continued)
The majority of these instruments mature within one year of September 30,
2003. However, due to the nature of the Master's business, these instruments may
not be held to maturity.
17
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 third
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 Redeemable Units and distributions of profits,
if any.
For the nine months ended September 30, 2003, Partnership capital decreased
6.8% from $27,821,670 to $25,928,564. This decrease was attributable to the
redemption of 1,249.4979 Redeemable Units of Limited Partnership Interest
resulting in an outflow of $2,606,300 and 50.0000 General Partner Unit
equivalents totaling $102,821 which was partially offset by net income from
operations of $816,015. 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 it's members
as increased or decreased by realized and/or unrealized gains or losses on
commodity futures trading, expenses, interest income, redemptions of Redeemable
Units and distributions of profits, if any.
For the nine months ended September 30, 2003 the Master's capital increased
55.6% from $90,459,415 to $140,756,776. This increase was attributable to net
income from operations of $909,223, coupled with additional sales of 32,316.4752
Units totaling $61,407,545, which was partially offset by the redemption of
6,252.9442 Units resulting in an outflow of $11,120,543 and a distribution of
interest of $898,864 paid to the feeders. 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
18
assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements and 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.
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 statements of income and expenses and partners'
capital.
Results of Operations
During the Partnership's third quarter of 2003, the net asset value per
Redeemable Unit decreased 8.1% from $1,985.05 to $1,823.93 as compared to an
increase of 20.7% in the third quarter of 2002. The Partnership experienced a
net trading loss before brokerage commissions and related fees in the third
quarter of 2003 of $1,669,916. Losses were primarily attributable to the
Master's trading of commodity futures in currencies, energy, U.S. and non-U.S.
interest rates, and softs and were partially offset by gains in grains
livestock, metals and indices. The Partnership experienced a net trading gain
before brokerage commissions and related fees in the third quarter of 2002 of
$6,560,068. Gains were primarily attributable to the Master's trading of
commodity futures in currencies, grains, energy, U.S. and non-U.S. interest
rates, indices and livestock and were partially offset by losses in softs and
metals.
During the Partnership's nine months ended September 30 2003, the net asset
value per Redeemable Unit increased 1.7% from $1,793.18 to $1,823.93 as compared
to an increase of 45.7% for the nine months ended September 30, 2002. The
Partnership experienced a net trading gain before brokerage commissions and
related fees for the nine months ended September 30, 2003 of $2,994,738. Gains
were primarily attributable to the trading of commodity futures in energy, U.S.
and non-U.S. interest rates, livestock and indices and were partially offset by
losses in currencies, grains, metals, and softs. The Partnership experienced a
net trading gain before commissions and related fees for the nine months ended
September 30, 2002 of $13,208,276. Gains were primarily attributable to the
trading of commodity futures in currencies, energy, grains, U.S. and non-U.S.
interest rates, indices and livestock and were partially offset by losses in
19
metals and softs.
Commodity futures markets are highly volatile. The potential for broad and
rapid price fluctuations increases the risks involved in commodity trading, but
also increases the possibility of profit. The profitability of the Partnership
(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 and nine months
ended September 30, 2003 decreased by $42,430 and $107,804, respectively, as
compared to the corresponding periods in 2002. The decrease in interest income
is primarily due to a decrease in interest rates during the three and nine
months ended September 30, 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 and redemptions. Accordingly, they must be analyzed in relation to
the fluctuations in the monthly net asset values. Commissions and fees for the
three and nine months ended September 30, 2003 decreased by $65,181 and $74,828,
20
respectively, as compared to the corresponding periods in 2002. The decrease in
brokerage commissions is due to average lower net assets during the three and
nine months ended September 30, 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
and redemptions. Management fees for the three and nine months ended September
30, 2003 decreased by $19,172 and $21,673, respectively, as compared to the
corresponding periods in 2002. The decrease in management fees is due to average
lower net assets during the three and nine months ended September 30, 2003 as
compared to 2002.
Administrative fees are paid to the General Partner for administering the
business and affairs of the Partnership. These fees are calculated as a
percentage of the Partnership's net asset value as of the end of each month and
are affected by trading performance and redemptions. Administrative fees for the
three and nine months ended September 30, 2003 decreased by $9,586 and $10,836,
respectively, as compared to the corresponding periods in 2002. The decrease in
administrative fees is due to average lower net assets during the three and nine
months ended September 30, 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 and nine
months ended September 30, 2003 resulted in incentive fees of 0, and $178,139,
respectively. There were no incentive fees earned for the three and nine months
ended September 30, 2002.
21
Item 3. Quantitative and Qualitative Disclosures about 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
interval. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk
component, which is not relevant to Value at Risk.
22
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of September 30, 2003 and the
highest and lowest value at any point during the three and nine months ended
September 30, 2003. All open position trading risk exposures of the Master have
been included in calculating the figures set forth below. As of September 30,
2003, the Master's total capitalization was $140,756,776. 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.
September 30, 2003
(Unaudited)
Year to Date
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Value at Risk
- ---------------------------------------------------------------------------------------------------
Currencies:
- - OTC Contracts $ 8,985,950 6.39% $ 9,118,238 $ 1,910,405 $ 5,934,591
Energy 5,276,950 3.75% 6,633,674 1,837,000 4,428,361
Grains 387,150 0.28% 760,425 152,175 467,075
Interest Rates U.S. 1,876,150 1.33% 2,557,100 419,700 1,489,823
Interest Rates Non-U.S 3,983,533 2.83% 6,106,625 1,228,573 3,912,374
Livestock 118,400 0.08% 121,400 9,350 53,038
Metals:
--Exchange Traded
Contracts 1,321,000 0.94% 2,120,000 198,000 816,389
- OTC Contracts 496,000 0.35% 734,175 175,800 517,256
Softs 1,047,218 0.74% 954,065 295,046 658,153
Indices 2,091,680 1.49% 3,108,627 709,998 2,148,446
---------- ------
Total $25,584,031 18.18%
========== ======
23
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of September 30, 2003, the President and Chief Financial Officer
of the General Partner have concluded that such controls and procedures are
effective.
During the Partnership's last fiscal quarter, no changes occurred in the
Partnership's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Partnership's
internal control over financial reporting.
24
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 Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002, as updated by our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003 and
our Current Report on Form 8-K dated April 28, 2003.
ENRON
TITTLE, ET AL. v. ENRON CORP., ET AL.
On September 30, 2003, all of the claims against Citigroup in this
litigation were dismissed.
Additional Actions
Several additional actions, previously identified, have been consolidated
or coordinated with the Newby action and are stayed, except with respect to
certain discovery, until after the court's decision on class certification. In
addition, on August 15, 2003, a purported class action was brought by purchasers
of Enron stock alleging state law claims of negligent misrepresentation, fraud,
breach of fiduciary duty and aiding and abetting a breach of fiduciary duty. On
August 29, 2003, an investment company filed a lawsuit alleging that Citigroup,
CGM and several other defendants (including, among others, Enron's auditor,
financial institutions, outside law firms and rating agencies) engaged in a
conspiracy, which purportedly caused plaintiff to lose credit (in the form of a
commodity sales contract) it extended to an Enron subsidiary in purported
reliance on Enron's financial statements. On September 24, 2003, Enron filed an
adversary proceeding in its chapter 11 bankruptcy proceedings to recover alleged
preferential payments and fraudulent transfers involving Citigroup, CGM and
other entities, and to disallow or to subordinate bankruptcy claims that
Citigroup, CGM and other entities have filed against Enron.
Research
In connection with the global research settlement, on October 31, 2003,
final judgment was entered against CGM and nine other investment banks. In
addition, CGM has entered into separate settlement agreements with numerous
states and certain U.S. territories.
25
WORLDCOM
Citigroup and/or CGM are now named in approximately 35 individual state
court actions brought by pension funds and other institutional investors based
on underwriting of debt securities of WorldCom. Most of these actions have been
removed to federal court and transferred to the United States District Court for
the Southern District of New York for centralized pretrial hearings with other
WorldCom actions. On October 24, 2003, the court granted plaintiffs' motion to
have this matter certified as a class action.
OTHER
On November 3, 2003, the United States District Court for the Southern
District of New York granted the Company's motion to dismiss the consolidated
amended complaint asserting violations of certain federal and state antitrust
laws by CGM and other investment banks in connection with the allocation of
shares in initial public offerings underwritten by such parties.
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 - 31.1 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of President and Director)
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certifications
(Certifications of Chief financial Officer and Director)
Exhibit - 32.1 - Section 1350 Certifications
(Certification of President and Director).
Exhibit - 32.2 - Section 1350 Certifications
(Certification of Chief Financial Officer and Director).
(b) Reports on Form 8-K - None
26
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: 11/13/03
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: 11/13/03
By: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 11/13/03
27
Exhibit 31.1
CERTIFICATIONS
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 (the "registrant");
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition and results of operations of the
registrant as of, and for, the periods presented in this 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
28
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 13, 2003
By: /s/ David J. Vogel
--------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
29
Exhibit 31.2
CERTIFICATIONS
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 (the "registrant");
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition and results of operations of the
registrant as of, and for, the periods presented in this 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-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
30
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: November 13, 2003
By: /s/ Daniel R. McAuliffe, Jr.
--------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
31
Exhibit 32.1
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 September 30,
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.
By: /s/ David J. Vogel
- --------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
November 13, 2003
32
Exhibit 32.2
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 September 30,
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.
By: /s/ Daniel R. McAuliffe, Jr.
- --------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
November 13, 2003
33