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, 2002
------------------
Commission File Number 0-24280
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SHEARSON MID-WEST FUTURES FUND
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3634370
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th Fl.
New York, New York 10013
- --------------------------------------------------------------------------------
(Address and Zip Code of principal executive offices)
(212) 723-5424
- --------------------------------------------------------------------------------
(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
----- ----
SHEARSON MID-WEST FUTURES FUND
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition at
September 30, 2002 and December 31,
2001 (unaudited). 3
Statements of Income and Expenses and Partners'
Capital for the three and nine months ended
September 30, 2002 and
2001 (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
SHEARSON MID-WEST FUTURES FUND
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
Assets:
Investment in Master , at fair value $30,079,247 $28,212,698
Cash, in commodity futures trading account 25,297 39,834
----------- -----------
30,104,544 28,252,532
Interest receivable 29,799 32,393
----------- -----------
$30,134,343 $28,284,925
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 150,672 $ 141,425
Management fees 49,929 46,867
Administrative fees 24,964 23,433
Other 26,467 23,532
Redemptions payable 219,880 272,110
----------- ------------
471,912 507,367
----------- -----------
Partners' Capital:
General Partner, 40.4850 and 322.1307 Unit equivalents
outstanding in 2002 and 2001 121,966 666,366
Limited Partners, 9,805.5475 and 13,105.9599 Units of Limited
Partnership Interest outstanding in 2002 and 2001, respectively 29,540,465 27,111,192
----------- -----------
29,662,431 27,777,558
----------- -----------
$30,134,343 $28,284,925
=========== ===========
See Notes to Unaudited Financial Statements.
3
SHEARSON MID-WEST FUTURES FUND
STATEMENTS OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------ -----------
Income:
Realized gains on closed positions from Master $ 8,844,157 $ 634,575 $ 11,589,683 $ 3,817,748
Change in unrealized gains (losses) on open
positions from Master (2,601,379) 1,132,352 718,890 2,696,753
Net gains (losses) on trading of commodity
interests (See Note 1):
Realized gains on closed positions - - - 1,042,488
Change in unrealized losses on
open positions - - - (5,516,316)
------------ ------------ ------------ ------------
6,242,778 1,766,927 12,308,573 2,040,673
Interest income 89,341 195,477 258,729 731,049
------------ ------------ ------------ ------------
6,332,119 1,962,404 12,567,302 2,771,722
------------ ------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $6,216, $9,289, $23,894 and $27,871, respectively
(Allocated from the Master) 467,132 469,447* 1,304,111 1,485,715*
Management fees 150,395 147,898 415,085 443,506
Administrative fees 75,198 73,949 207,544 261,925
Other expenses 15,066 15,622 40,613 46,159
------------ ------------ ------------ ------------
707,791 706,916 1,967,353 2,237,305
------------ ------------ ------------ ------------
Net income 5,624,328 1,255,488 10,599,949 534,417
Redemptions - Limited Partners (4,640,967) (1,129,499) (7,955,678) (2,875,304)
- General Partner (759,398) - (759,398) -
------------ ------------ ------------ ------------
Net increase (decrease) in Partners' capital 223,963 125,989 1,884,873 (2,340,887)
Partners' capital, beginning of period 29,438,468 29,917,013 27,777,558 32,383,889
------------ ------------ ------------ ------------
Partners' capital, end of period $ 29,662,431 $ 30,043,002 $ 29,662,431 $ 30,043,002
------------ ------------ ------------ ------------
Net asset value per Unit
(9,846.0325 and 13,852.9443 Units outstanding
at September 30, 2002 and 2001, respectively) $ 3,012.63 $ 2,168.71 $ 3,012.63 $ 2,168.71
------------ ------------ ------------ ------------
Net income per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 525.11 $ 91.32 $ 944.01 $ 35.35
------------ ------------ ------------ ------------
*Amount reclassified for comparative purposes
See Notes to Unaudited Financial Statements
4
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
1. General:
Shearson Mid-West Futures Fund (the "Partnership") is a limited partnership
which was organized on August 21, 1991 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 on December 2,
1991. From December 2, 1991 to January 25, 2001, the Partnership engaged
directly in the speculative trading of a diversified portfolio 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"), in exchange for
31,509.8853 Units of the Master and a fair value of $31,509,885. 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. 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, 2002, the Partnership owns 30.0% 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 Statement of Financial Condition,
Statement of Income and Expenses and Members' Capital and Condensed Schedule of
Investments are included herein.
The Partnership's and the Master's commodity broker is Salomon Smith Barney
Inc. ("SSB"). SSB is an affiliate of the General Partner. The General Partner is
wholly owned by Salomon Smith Barney Holdings Inc. ("SSBHI"), which is the sole
owner of SSB. SSBHI is a wholly owned subsidiary of Citigroup Inc. As of
September 30, 2002, all trading decisions for the Partnership are being made by
the Advisor.
5
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(Continued)
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, 2002 and December 31, 2001 and the results of its
operations for the three and nine months ended September 30, 2002 and 2001.
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, 2001.
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
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(Continued)
The Master's Statement of Financial Condition as of September 30, 2002 and
December 31, 2001, Condensed Schedule of Investments at September 30, 2002 and
December 31, 2001, and its Statement of Income and Expenses and Members' Capital
for the three and nine months ended September 30, 2002 the three months ended
September 30, 2001 and the period from January 26, 2001 (commencement of trading
operations) to September 30, 2001 were:
JWH Strategic Allocation Master Fund LLC
Statements of Financial Condition
(Unaudited)
September 30, December 31,
2002 2001
----------- -------------
ASSETS:
Equity in commodity futures
trading account:
Cash $91,286,302 $88,330,292
Net unrealized appreciation
on open positions 7,759,033 5,392,646
----------- -----------
$99,045,335 $93,722,938
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL:
Liabilities:
Accrued expenses:
Professional fees $ 47,832 $ 45,000
----------- -----------
47,832 45,000
----------- -----------
Members' Capital:
Members' capital 61,249.8402 and
89,573.7730 Units outstanding in
2002 and 2001, respectively 98,997,503 93,677,938
----------- -----------
$99,045,335 $93,722,938
=========== ===========
7
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(Continued)
JWH Strategic Allocation
Master Fund LLC
Condensed Schedule of Investments
September 30, 2002
(Unaudited)
Sector Contract Fair Value
- ------------------------------ --------------------------------------------- ---------------
Currencies
Over the counter contracts purchased - 0.28% $ 274,395
Over the counter contracts sold - (1.18)% (1,167,639)
--------------
Total Currencies - (0.90)% (893,244)
--------------
Total Energy - 0.48% Futures contracts purchased - 0.48% 471,002
--------------
Total Grains - 0.34% Futures contracts purchased - 0.34% 340,414
--------------
Total Interest Rates U.S. - 3.08% Futures contracts purchased - 3.08% 3,047,406
--------------
Total Interest Rates Non-U.S. - 3.30% Futures contracts purchased - 3.30% 3,268,983
--------------
Total Livestock - (0.00)%* Futures contracts purchased - (0.00)%* (770)
--------------
Metals
Futures contracts purchased - (0.46)% (458,144)
Futures contracts sold - 0.65% 646,276
--------------
Total Metals - 0.19% 188,132
--------------
Softs
Futures contracts purchased - 0.10% 97,667
Futures contracts sold - 0.02% 18,800
--------------
Total Softs - 0.12% 116,467
--------------
Total Indices - 1.23% Futures contracts sold - 1.23% 1,220,643
--------------
Total Fair Value - 7.84% $ 7,759,033
==============
Ivestments % of Investments
Country Composition at Fair Value at Fair Value
- -------------------- --------------- --------------
Australia $ 364,476 4.70%
Canada 49,949 0.64%
Germany 2,854,907 36.79%
Japan (128,465) (1.66)%
United Kingdom 1,518,803 19.58%
United States 3,099,363 39.95%
------------ --------
$ 7,759,033 100.00%
============= ========
Percentages are based on Masters' capital unless otherwise indicated
*Due to rounding
8
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(continued)
JWH Strategic Allocation
Master Fund LLC
Condensed Schedule of Investments
December 31, 2001
Notional
Sector Amount Contract Fair Value
- ----------- ------------------ --------- ----------
Currencies
Over the counter contracts sold - 5.89%
JPY (16,890,265,200) JPY/USD - 5.98%, March 20, 2002 $5,601,926
Other - (0.09)% (84,884)
Over the counter contracts purchased - 0.11% 105,908
---------
Total Currencies - 6.00% 5,622,950
---------
Total Energy - (0.35)% Futures contracts purchased - (0.35)% (327,598)
---------
Total Grains - 0.29% Futures contracts sold - 0.29% 274,911
---------
Total Interest Rates U.S. - (0.01)% Futures contracts sold - (0.01)% (14,360)
---------
Interest Rates Non-U.S.
Futures contracts sold 1.04% 970,405
Futures contracts purchased - (0.20)% (188,580)
---------
Total Interest Rates Non-U.S.- 0.84% 781,825
---------
Total Livestock - (0.02)% Futures contracts sold - (0.02)% (17,180)
---------
Metals
Futures contracts sold - (0.74)% (696,167)
Futures contracts purchased - (0.37)% (348,785)
---------
Total Metals - (1.11)% (1,044,952)
----------
Total Softs - 0.01% Futures contracts purchased - 0.01% 11,267
---------
Total Indices - 0.11% Futures contracts purchased - 0.11% 105,783
---------
Total Fair Value - 5.76% $5,392,646
==========
Investments % of Investments
Country Composition at Fair Value at Fair Value
-------------------- ------------ --------------
Australia $151,788 2.82%
Canada 49,705 0.92%
Germany 1,084,146 20.10%
Japan (355,642) (6.59)%
Switzerland (2,304) (0.04)%
United Kingdom 176,518 3.27%
United States 4,288,435 79.52%
--------- ------
$5,392,646 100.00%
========= ======
Percentages are based on Members' capital unless otherwise indicated
9
SHEARSON MID-WEST FUTURES FUND
NOTE TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(CONTINUED)
JWH STRATEGIC ALLOCATION MASTER FUND LLC
STATEMENTS OF INCOME AND EXPENSES AND MEMBERS' CAPITAL
(UNAUDITED)
FOR THE
FOR THE FOR THE FOR THE PERIOD FROM
THREE THREE NINE JANUARY 26, 2001
MONTHS ENDED MONTHS ENDED MONTHS ENDED TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------- ------------- ------------ ---------------
2002 2001 2002 2001
-------------- ------------- ------------ -------------
Income:
Net gains on trading of commodity
interests:
Realized gains on closed positions $ 29,165,921 $ 2,204,612 $ 38,355,049 $ 11,944,318
Change in unrealized gains (losses) on open
positions (8,652,597) 3,425,143 2,366,387 (4,021,098)
------------- ------------- ------------- -------------
20,513,324 5,629,755 40,721,436 7,923,220
------------- ------------- ------------- -------------
Expenses:
Clearing fees 43,198 68,305 170,603 175,578
Operating expenses 12,500 - 35,000
------------- ------------- ------------- -------------
55,698 68,305 205,603 175,578
------------- ------------- ------------- -------------
Net Income 20,457,626 5,561,450 40,515,833 7,747,642
Additions 401,919 4,490,310 2,038,927 25,340,310
Redemptions (24,454,971) (3,584,931) (37,235,195) (10,539,999)
------------- ------------- ------------- -------------
Net increase (decrease) in Members' capital (3,595,426) 6,466,829 5,319,565 22,547,953
Members' capital, beginning of period 102,592,929 90,982,350 93,677,938 74,901,226
------------- ------------- ------------- -------------
Members' capital, end of period $ 98,997,503 $ 97,449,179 $ 98,997,503 $ 97,449,179
============= ============= ============= =============
10
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in net asset value per Unit for the three and nine months ended
September 30, 2002 and 2001 were as follows:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net realized and unrealized gains * $ 539.40 $ 94.30 $ 977.91 $ 36.97
Interest income 8.44 13.79 21.49 49.73
Expenses ** (22.73) (16.77) (55.39) (51.35)
---------- ---------- ---------- ----------
Increase for the period 525.11 91.32 944.01 35.35
Net Asset Value per Unit,
beginning of period 2,487.52 2,077.39 2,068.62 2,133.36
----------- ---------- ---------- -----------
Net Asset Value per Unit,
end of period $3,012.63 $2,168.71 $3,012.63 $2,168.71
========== ========== ========== ==========
* Net realized and unrealized gains is net of commission expense.
** Expenses exclude commission expense.
11
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(Continued)
Financial Highlights continued:
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ---------------------
2002 2001 2002 2001
------ ----- ------ --------
Financial Highlights of the
Partnership:
Total return 21.1% 4.4% 45.6% 1.7%
Ratio of expense, including
brokerage commissions, to
average net assets *** 8.6% 9.6% 9.8% 9.6%
Ratio of net income to
average net assets *** 78.2% 17.0% 52.9% 2.3%
Financial Highlights of the Master:
Total return 23.6% 6.1% 54.6% 10.3% ****
Ratio of expense including
brokerage commissions, to
average net assets *** 0.2% 0.3% 0.3% 0.3% ****
Ratio of net income to
average net assets *** 81.0% 24.1% 58.5% 11.4%
*** Annualized
**** For the period from January 26, 2001 (commencement of trading
operations of the Master) to September 30, 2001.
12
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(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 SSB and the
Master and SSB 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 nine months ended September 30,
2002 and for the period from January 26, 2001 to December 31, 2001, based on a
monthly calculation were $11,315,258 and $5,146,554, respectively. The fair
value of these commodity interests, including options thereon, if applicable, at
September 30, 2002 and December 31, 2001 was $7,759,033 and $5,392,646,
respectively. Fair values for exchange traded commodity futures and options are
based on quoted market prices for those futures and options. Fair values for all
other financial instruments for which market quotations are not readily
available are based on calculations approved by the General Partner.
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.
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. These financial instruments may include
forwards, futures and options (but not currently), whose values are based
13
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(Continued)
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 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 amounts of
the instruments. The Master has concentration risk because the sole counterparty
or broker with respect to the Master's assets is SSB.
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
14
Shearson Mid-West Futures Fund
Notes to Financial Statements
September 30, 2002
(Unaudited)
(Continued)
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.
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Master's
involvement in these instruments. The majority of these instruments mature
within one year of September 30, 2002. 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 third
quarter of 2002.
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 nine months ended September 30, 2002, Partnership capital increased
6.8% from $27,777,558 to $29,662,431. This increase was attributable to net
income from operations of $10,599,949, which was partially offset by the
redemption of 3,300.4124 Units of Limited Partnership Interest resulting in an
outflow of $7,955,678 and 281.6457 General Partner Unit equivalents totaling of
$759,398. 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 nine months ended September 30, 2002, the Master's capital
increased 5.7% from $93,677,938 to $98,997,503. This increase was attributable
to net income from operations of $40,515,833, coupled with additional sales of
1,836.3714 Units totaling $2,038,927 which was partially offset by the
redemptions of 30,160.3042 Units resulting in an outflow of $37,235,195. Future
redemptions can impact the amount of funds available for investments in
commodity contract positions in subsequent periods.
16
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.
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 commodity interests and foreign
currencies are recognized in the period in which the contract is closed or the
changes occur and are included in net gains (losses) on trading of commodity
interests.
Foreign currency contracts are those contracts where the Partnership agrees
to receive or deliver a fixed quantity of foreign currency for an agreed-upon
price on an agreed future date. Foreign currency contracts are valued daily, and
the Partnership's net equity therein, representing unrealized gain or loss on
the contracts as measured by the difference between the forward foreign exchange
rates at the date of entry into the contracts and the forward rates at the
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 third quarter of 2002, the net asset value per
Unit increased 21.1% from $2,487.52 to $3,012.63 as compared to an increase of
4.4% in the third quarter of 2001. The Partnership experienced a net trading
gain before brokerage commissions and related fees in the third quarter of 2002
of $6,242,778. Gains were primarily attributable to the Master's 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 softs and
metals. The Partnership experienced a net trading gain before commissions and
related fees in the third quarter of 2001 of $1,766,927. Gains were primarily
17
attributable to the Master's trading of commodity futures in livestock, U.S.
interest rates, softs, metals and indices and were partially offset by losses in
non-U.S. interest rates, currencies, energy and grains.
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 13-week U.S. Treasury
Bill yield. SSB 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. SSB will
retain 20% of any interest earned on Treasury bills. Interest income for the
three and nine months ended September 30, 2002, decreased by $106,136 and
$472,320, respectively, as compared to the corresponding periods in 2001. This
decrease is primarily the result of a decrease in interest rates during the
three and nine months ended September 30, 2002 as compared to 2001.
Brokerage commissions are calculated on the adjusted net asset value on the
last day of each month and, therefore, vary according to trading performance and
redemptions. Accordingly, they must be analyzed in relation to the fluctuations
in monthly net asset values. Commissions and fees for the three and nine months
ended September 30, 2002 decreased by $2,315 and $181,604, respectively, as
compared to the corresponding periods in 2001. The decrease in brokerage
commissions is due to lower net assets during the three and nine months ended
September 30, 2002 as compared to 2001.
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 months ended September 30, 2002
increased by $2,497 as compared to the corresponding period in 2001. The
increase in management fees is due to higher net assets during the three months
ended September 30, 2002 as compared to 2001. Management fees for the nine
months ended September 30, 2002 decreased by $28,421, as compared to the
corresponding period in 2001. The decrease in management fees is due to lower
net assets during the nine months ended September 30, 2002 as comprared to 2001.
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 and redemptions. Administrative fees for the
three months ended September 30, 2002 increased by $1,249, as compared to the
corresponding period in 2001. The increase in administrative fees is due to
higher net assets during the three months ended September 30, 2002 as compared
to 2001. Administrative fees for the nine months ended September 30, 2002
decreased by $54,381 as compared to the corresponding period in 2001. The
decrease in administrative fees is due to lower net assets during the nine
months ended September 30, 2002 as compared to 2001.
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. There were no incentive fees earned for the
three and nine months ended September 30, 2002 or 2001 due to a loss carry
forward from precious periods.
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, 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 September 30, 2002. All open
position trading risk exposures of the Master have been included in calculating
the figures set forth below. As of September 30, 2002, the Master's total
capitalization was $98,997,503. 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, 2001.
September 30, 2002
(Unaudited)
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ----------------------------------------------------------------------------------------
Currencies:
- - OTC Contracts $2,017,557 2.03% $7,032,293 $ 962,872
Energy 1,957,900 1.98% 2,197,900 557,000
Grains 185,750 0.19% 450,900 86,150
Interest Rates U.S. 1,058,200 1.07% 1,302,100 180,800
Interest Rates Non-U.S. 2,689,206 2.71% 3,493,265 979,315
Livestock 15,000 0.02% 24,750 14,400
Metals:
- Exchange Traded Contracts 279,500 0.28% 464,000 76,500
- OTC Contracts 505,325 0.51% 550,250 48,000
Softs 481,237 0.49% 693,603 119,740
Indices 1,465,522 1.48% 1,931,347 869,172
------------ ------
Total $10,655,197 10.76%
============ ======
21
Item 4. Control 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 -
Enron Corp.
In April 2002, Citigroup Inc. ("Citigroup") and, in one case, SSB,
were named as defendants along with, among others, commercial and/or
investment banks, certain current and former Enron officers and directors,
lawyers and accountants in two putative consolidated class action
complaints that were filed in the United States District Court for the
Southern District of Texas seeking unspecified damages. One action, brought
on behalf of individuals who purchased Enron securities (Newby, et al. v.
Enron Corp., et al.), alleges violations of Sections 11 and 15 of the
Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and the other action, brought
on behalf of current and former Enron employees (Tittle, et al. v. Enron
Corp., et al.), alleges violations of the Employment Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), as well as claims for negligence
and civil conspiracy. On May 8, 2002, Citigroup and SSB filed motions to
dismiss the complaints, which are pending.
In July 2002, Citigroup, SSB, a number of their affiliates and certain
of their officers and other employees were named as defendants, along with,
among others, commercial and/or investment banks, certain current and
former Enron officers and directors, lawyers and accountants in a putative
class action filed in the United States District Court for the Southern
District of New York on behalf of purchasers of the Yosemite Notes and
Enron Credit-Linked Notes, among other securities (Hudson Soft Co., Ltd. v.
Credit Suisse First Boston Corporation, et al.). The amended complaint
alleges violations of RICO and of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and seeks unspecified damages.
Additional actions have been filed against Citigroup and certain of
its affiliates, along with other parties, including (i) two actions brought
in different state courts by state pension plans alleging violations of
state securities law and claims for common law fraud and unjust enrichment;
(ii) an action by banks that participated in two Enron revolving credit
facilities, alleging fraud, gross negligence, and breach of implied duties
in connection with defendants' administration of a credit facility with
Enron; (iii) an action brought by several funds in connection with
secondary market purchases of Enron Corp. debt securities alleging
violations of federal securities laws, including Section 11 of the
Securities Act of 1933, as amended, and claims for fraud and
misrepresentation; (iv) a series of putative class actions by purchasers of
NewPower Holdings common stock alleging violations of the federal
securities law, including Section 11 of the Securities Act of 1933, as
amended, and Section 10(b) of the Securities Exchange Act of 1934, as
amended; (v) an action brought by two investment funds in connection with
purchases of Enron-related securities for alleged violations of state
securities and unfair competition statutes; (vi) an action brought by
23
several investment funds and fund owners in connection with purchases of
notes of the Osprey I and Osprey II Trusts for alleged violation of state
and federal securities laws and claims for common law fraud,
misrepresentation and conspiracy; (vii) an action brought by several
investment funds and fund owners in connection with purchases of notes of
the Osprey I and Osprey II Trusts for alleged violation of state and
federal securities laws and state unfair competition laws and claims for
common law fraud and misrepresentation; and (viii) an action brought by the
Attorney General of Connecticut in connection with various commercial and
investment banking services provided to Enron. Several of these cases have
been consolidated with the Newby action and stayed pending the Court's
decision on the pending motions to dismiss Newby.
Additionally, Citigroup and certain of its affiliates have received
inquiries and requests for information from various regulatory and
governmental agencies and Congressional committees, as well as from the
Special Examiner in the Enron bankruptcy, regarding certain transactions
and business relationships with Enron and its affiliates. Citigroup is
cooperating fully with all such requests.
Research
Since May 2002, SSB and Jack Grubman have been named as defendants in
approximately 62 putative class action complaints by purchasers of various
securities alleging they violated federal securities law, including
Sections 10 and 20 of the Securities Exchange Act of 1934, as amended, for
allegedly issuing research reports without a reasonable basis in fact and
for allegedly failing to disclose conflicts of interest with companies in
connection with published investment research, including Global Crossing,
WorldCom, Inc., AT&T, Winstar, Rhythm Net Connections, Level 3
Communications, MetroMedia Fiber Network, XO Communications and Williams
Communications Group Inc. Similar claims with respect to research have also
been included in approximately 100 cases pending against SSB and other
broker dealers in the IPO Allocation Securities Litigation and the IPO
Allocation Antitrust Litigation, disclosed below under the caption "Other."
Nearly all of these actions are pending in the United States District Court
for the Southern District of New York.
Since April 2002, SSB and several other broker dealers have received
subpoenas and/or requests for information from various governmental and
self-regulatory agencies and Congressional committees, including the
National Association of Securities Dealers (the "NASD"), which has raised
issues about SSB's internal e-mail retention practices and research on
Winstar Communications, Inc. With respect to Winstar, SSB and the NASD have
entered into a settlement agreement. SSB agreed to pay a penalty in the
amount of $5 million and did not admit to any wrongdoing. With respect to
other such matters, these agencies have been engaged in discussions with a
number of broker dealers, including SSB, about resolving potential
enforcement proceedings relating to research. SSB is cooperating fully with
all such requests.
24
WorldCom, Inc.
Citigroup and SSB are involved in a number of lawsuits arising out of
the underwriting of debt securities of WorldCom, Inc. These lawsuits
include putative class actions filed in July 2002 by alleged purchasers of
WorldCom debt securities in the United States District Court for the
Southern District of New York (Above Paradise Investments Ltd. v. WorldCom,
Inc., et al.; Municipal Police Employees Retirement System of Louisiana v.
WorldCom, Inc., et al.), and in the United States District Court for the
Southern District of Mississippi (Longacre Master Fund v. WorldCom, Inc.,
et al.). These putative class action complaints assert violations of
federal securities law, including Sections 11 and 12 of the Securities Act
of 1933, as amended, and seek unspecified damages from the underwriters.
On October 11, 2002, the Above Paradise and Municipal Police Employees
lawsuits filed in the United States District Court for the Southern
District of New York were superseded by the filing of a consolidated
putative class action complaint in the United States District Court for the
Southern District of New York (In re WorldCom, Inc. Securities Litigation).
In the consolidated complaint, in addition to the claims of violations by
the underwriters of federal securities laws, including Sections 11 and 12
of the Securities Act of 1933, as amended, the plaintiffs allege violations
of Section 10(b) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5 promulgated thereunder, by SSB, arising out of alleged conflicts
of interest of SSB and Jack Grubman. The plaintiffs continue to seek
unspecified compensatory damages. In addition to the consolidated class
action complaint, the Southern District of Mississippi class action has
been transferred by the Judicial Panel on MultiDistrict Litigation to the
Southern District of New York for centralized pre-trial proceedings with
other WorldCom-related actions.
In addition to the putative class actions that have commenced, certain
individual actions have been filed in various federal and state courts
against Citigroup and SSB, along with other parties, concerning WorldCom
debt securities, including individual state court actions brought by
various pension funds in connection with the underwriting of debt
securities of WorldCom alleging violations of Section 11 of the Securities
Act of 1933, as amended, and, in one case, violations of various state
securities laws and common law fraud. Most of these actions have been
removed to federal court and an application has been made to have them
transferred to the Southern District of New York for centralized pre-trial
proceedings with other WorldCom-related actions.
A putative class action on behalf of participants in WorldCom's 401(k)
salary savings plan and those WorldCom benefit plans covered by ERISA
alleging violations of ERISA and common law fraud (Emanuele v. WorldCom,
Inc., et al.), which was commenced in the United States District Court for
the District of Columbia, also has been transferred by the Judicial Panel
on MultiDistrict Litigation to the Southern District of New York for
centralized pre-trial proceedings with other WorldCom-related actions.
Additional lawsuits containing similar claims to those described above
may be filed in the future.
25
Other
In April 2002, consolidated amended complaints were filed against
Salomon Smith Barney Holdings Inc. and other investment banks named in
numerous putative class actions filed in the United States District
Court for the Southern District of New York alleging violations of
certain federal securities laws (including Section 11 of the
Securities Act of 1933, as amended, and Section 10(b) of the
Securities Exchange Act of 1934, as amended) with respect to the
allocation of shares for certain initial public offerings and related
aftermarket transactions and damage to investors caused by allegedly
biased research analyst reports. The defendants in these actions have
moved to dismiss the consolidated amended complaints but the Court has
not yet rendered a decision on those motions. Also pending in the
Southern District of New York against Salomon Smith Barney Holdings
Inc. and other investment banks are several putative class actions
which have been consolidated into a single class action alleging
violations of certain federal and state antitrust laws in connection
with the allocation of shares in initial public offerings when acting
as underwriters. The defendants in this action have moved to dismiss
the consolidated amended complaint but the Court has not yet rendered
a decision on those motions.
For information concerning a suit filed by a hedge fund and its
investment advisor against SSB, see the description that appears in
the eleventh paragraph under the caption "Legal Proceedings" of the
Annual Report on Form 10-K of the Partnership for the year ended
December 31, 2001, which is incorporated by reference herein. In
August 2002, SSB filed a motion for summary judgment.
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. (a) Exhibit - 99.1 Certificate of Chief Executive Officer.
Exhibit - 99.2 Certificate of Chief Financial Officer.
(b) Reports on Form 8-K - On July 17, 2002 the Partnership
filed a notice on Form 8-K to report a change in
accountants from PricewaterhouseCoopers LLP to KPMG LLP.
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.
SHEARSON MID-WEST FUTURES FUND
By: Smith Barney Futures Management LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 11/14/02
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: Smith Barney Futures Management LLC
(General Partner)
By: /s/ David J. Vogel, President
-------------------------------
David J. Vogel, President
Date: 11/14/02
By: /s/ Daniel R. McAuliffe, Jr.
-----------------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 11/14/02
27
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10Q of Shearson Mid-West
Futures Fund;
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 and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
28
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 officers 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: November 14, 2002
/s/ David J. Vogel
-----------------------
David J. Vogel
Chief Executive Officer
29
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10Q of Shearson Mid-West
Futures Fund;
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 and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers 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 officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
30
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 officers 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: November 14, 2002
/s/ Daniel R. McAuliffe, Jr.
---------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer
31