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 June 30, 2002
-------------
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 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
----- ----
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statement of Financial Condition at
June 30, 2002 and December 31,
2001 (unaudited). 3
Statement of Income and Expenses
and Partners' Capital for the three
and six months ended June 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
PART II - Other Information 22
2
PART I
Item 1. Financial Statements
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
(Unaudited)
June 30, December 31,
2002 2001
------------ -----------
Assets:
Investment in Master , at fair value $34,791,300 $37,231,806
Cash, in commodity futures trading account 29,900 42,242
----------- -----------
34,821,200 37,274,048
Interest receivable 29,871 42,247
----------- -----------
$34,851,071 $37,316,295
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 174,255 $ 186,581
Management fees 57,740 61,844
Administrative fees 28,870 30,922
Other 32,765 23,557
Redemptions payable 3,802,801 1,234,421
----------- -----------
4,096,431 1,537,325
----------- -----------
Partners' Capital:
General Partner, 608.9156 Unit equivalents
outstanding in 2002 and 2001 997,130 829,173
Limited Partners, 18,171.9091 and 25,665.9357
Units of Limited Partnership Interest
outstanding in 2002 and 2001, respectively 29,757,510 34,949,797
----------- -----------
30,754,640 35,778,970
----------- -----------
$34,851,071 $37,316,295
=========== ===========
See Notes to Financial Statements.
3
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2002 2001 2002 2001
--------------- ------------ ------------- ---------------
Income:
Realized gains (losses) on closed
positions from Master $ 4,237,324 $ (1,802,168) $ 2,890,288 $ 4,323,895
Change in unrealized gains (losses) on
open positions from Master 5,425,319 (3,138,413) 3,754,920 2,195,620
Net gains (losses) on trading of commodity
interests (See Note 1):
Realized gains on closed positions - - - 1,517,732
Change in unrealized losses on
open positions - - - (7,601,505)
------------ ------------ ------------ ------------
9,662,643 (4,940,581) 6,645,208 435,742
Interest income 92,995 297,617 203,623 714,258
------------ ------------ ------------ ------------
9,755,638 (4,642,964) 6,848,831 1,150,000
------------ ------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $11,041, $13,105, $21,623 and
$24,769, respectively (Allocated from the Master) 497,766 648,642 * 1,021,417 1,350,802 *
Management fees 157,212 204,866 322,935 428,552
Administrative fees 78,606 102,433 161,467 214,275
Other expenses 12,446 16,669 25,268 33,507
------------ ------------ ------------ ------------
746,030 972,610 1,531,087 2,027,136
------------ ------------ ------------ ------------
Net income (loss) 9,009,608 (5,615,574) 5,317,744 (877,136)
Redemptions (8,205,917) (825,390) (10,342,074) (3,727,304)
------------ ------------ ------------ ------------
Net increase (decrease) in Partners' capital 803,691 (6,440,964) (5,024,330) (4,604,440)
Partners' capital, beginning of period 29,950,949 45,617,748 35,778,970 43,781,224
------------ ------------ ------------ ------------
Partners' capital, end of period $ 30,754,640 $ 39,176,784 $ 30,754,640 $ 39,176,784
------------ ------------ ------------ ------------
Net asset value per Unit
(18,780.8247 and 28,653.3345 Units outstanding
at June 30, 2002 and 2001, respectively) $ 1,637.55 $ 1,367.27 $ 1,637.55 $ 1,367.27
------------ ------------ ------------ ------------
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ 420.73 $ (192.88) $ 275.83 $ (38.22)
------------ ------------ ------------ ------------
* Amount reclassified for comparative purposes
See Notes to Financial Statements.
4
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(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"), in exchange for
42,510.5077 Units of the Master and a fair value of $42,510,508. The Master was
formed in order to permit commodity pools managed now or in the future by John
W. Henry & Company, Inc. (the "Advisor") using the Strategic Allocation Program,
the Advisor's proprietary trading program, to invest together in one trading
vehicle. The commodity interests that are traded by the Master are volatile and
involve a high degree of market risk. 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 June 30, 2002, the Partnership owns approximately 34% 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, Condensed Schedule of
Investments and Financial Highlights 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 June
30, 2002, all trading decisions for the Partnership are made by the Advisor.
5
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
June 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 June 30, 2002 and December 31, 2001 and the results of its
operations for the three and six months ended June 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
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(Unaudited)
(Continued)
The Master's Statement of Financial Condition at June 30, 2002 and December
31, 2001, Condensed Schedule of Investments at June 30, 2002 and December 31,
2001, and its Statement of Income and Expenses and Members' Capital for the
three and six months ended June 30, 2002, the three months ended June 30, 2001
and the period from January 26, 2001 (commencement of trading operations) to
June 30, 2001 were:
JWH Strategic Allocation Master Fund LLC
Statement of Financial Condition
(unaudited)
June 30, December 31,
2002 2001
------------ -------------
ASSETS:
Equity in commodity futures
trading account:
Cash $ 86,248,799 $ 88,330,292
Net unrealized appreciation on
open futures positions 16,411,630 5,392,646
------------ ------------
$102,660,429 $ 93,722,938
============ ============
LIABILITIES AND MEMBERS' CAPITAL:
Liabilities:
Accrued expenses:
Professional fees $ 67,500 $ 45,000
------------ ------------
67,500 45,000
------------ ------------
Members' Capital:
Members' capital 78,425.1126 and
89,573.7730 Units outstanding in
2002 and 2001, respectively 102,592,929 93,677,938
------------ ------------
$102,660,429 $ 93,722,938
============ ============
See Notes to Financial Statements
7
JWH Strategic Allocation
Master Fund LLC
Condensed Schedule of Investments
June 30, 2002
(Unaudited)
Number of
Sector Contracts Contract Fair Value
- ----------------------------------------------------------------------------------------------- -------------------
Currencies
Over the counter contracts purchased - 15.50%
JPY 10,230,700,000 JPY/USD - 3.12%, September 2002 $ 3,205,462
GBP 52,400,000 GBP/USD - 2.96%, September 2002 3,034,772
EUR 67,125,000 EUR/USD - 4.64%, September 2002 4,760,708
CHF 78,450,000 CHF/USD - 2.47%, September 2002 2,535,469
Other - 2.31% 2,368,230
-------------------
15,904,641
Over the counter contracts sold - (3.23)% (3,311,084)
-------------------
Total Currencies - 12.27% 12,593,557
-------------------
Energy
Futures contracts purchased - 0.01% 15,299
Futures contracts sold - (0.21)% (220,151)
-------------------
Total Energy - (0.20)% (204,852)
-------------------
Total Grains - 0.25% Futures contracts purchased - 0.25% 260,836
-------------------
Total Interest Rates U.S. - 1.41% Futures contracts purchased - 1.41% 1,448,135
-------------------
Total Interest Rates Non-U.S. - 2.56% Futures contracts purchased - 2.56% 2,623,637
-------------------
Total Livestock - 0.00%* Futures contracts purchased - 0.00%* (3,670)
-------------------
Metals
Futures contracts purchased - (0.33)% (343,586)
Futures contracts sold - (0.31)% (322,120)
-------------------
Total Metals - (0.64)% (665,706)
-------------------
Softs
Futures contracts purchased - 0.46% 471,320
Futures contracts sold - (0.03)% (28,707)
-------------------
Total Softs - 0.43% 442,613
-------------------
Total Indices - (0.08)% Futures contracts sold - (0.08)% (82,920)
-------------------
Total Fair Value - 16.00% $ 16,411,630
===================
Country Composition % of Investments
Investments at Fair Value at Fair Value
- ----------------------------------- --------------------------------------- -------------------
Australia $ (51,319) (0.31)%
Canada 24,997 0.15%
Germany 1,143,516 6.97%
Japan 870,067 5.30%
United Kingdom (163,581) (1.00)%
United States 14,587,950 88.89%
--------------------------------------- -------------------
$ 16,411,630 100.00%
======================================= ===================
Percentages are based on Masters' capital unless otherwise indicated
*Due to rounding
See Notes to Financial Statements
8
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
See notes to financial statements.
9
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
(CONTINUED)
JWH STRATEGIC ALLOCATION MASTER FUND LLC
STATEMENT OF INCOME AND EXPENSES AND MEMBERS' CAPITAL
(UNAUDITED)
FOR THE PERIOD FROM
THREE MONTHS ENDED SIX MONTHS ENDED JANUARY 26, 2001 TO
JUNE 30, JUNE 30, JUNE 30,
---------------------------------- ------------- -------------
2002 2001 2002 2001
----------------- -------------- ------------- -------------
Income:
Net gains (losses)
on trading of commodity
interests:
Realized gains (losses) on closed positions $ 12,697,083 $ (4,113,157) $ 9,189,128 $ 9,727,290
Change in unrealized gains (losses) on open
positions 15,535,173 (7,183,566) 11,018,984 (6,552,402)
------------- ------------- ------------- -------------
Net realized and unrealized gains (losses) 28,232,256 (11,296,723) 20,208,112 3,174,888
------------- ------------- ------------- -------------
Expenses:
Clearing fees 66,160 69,035 127,405 107,863
Other expenses 11,250 - 22,500 -
------------- ------------- ------------- -------------
77,410 69,035 149,905 107,863
------------- ------------- ------------- -------------
Net income (loss) 28,154,846 (11,365,758) 20,058,207 3,067,025
Additions 100,000 100,000 1,637,008 20,850,000
Redemptions (8,051,349) (5,391,528) (12,780,224) (6,955,068)
------------- ------------- ------------- -------------
Net increase (decrease) in Members' capital 20,203,497 (16,657,286) 8,914,991 16,961,957
Members' capital, beginning of period 82,389,432 107,639,636 93,677,938 74,020,393
------------- ------------- ------------- -------------
Members' capital, end of period $ 102,592,929 $ 90,982,350 $ 102,592,929 $ 90,982,350
------------- ------------- ------------- -------------
See Notes to Financial Statements
10
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in net asset value per Unit for the three and six months ended June
30, 2002 and 2001 were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- --------- --------- ----------
Net realized and unrealized
gains(losses) * $ 427.68 $ (191.97) $ 288.64 $ (39.39)
Interest income 4.13 10.23 8.43 23.69
Expenses** (11.08) (11.14) (21.24) (22.52)
---------- ---------- ---------- ----------
Increase(decrease) for period 420.73 (192.88) 275.83 (38.22)
Net Asset Value per Unit,
beginning of period 1,216.82 1,560.15 1,361.72 1,405.49
---------- ---------- ---------- -----------
Net Asset Value per Unit
end of period $1,637.55 $1,367.27 $1,637.55 $1,367.27
========== ========== ========== ==========
* Net realized and unrealized gains (losses) is net of commission expense.
** Expenses exclude commission expense.
11
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(Unaudited)
(Continued)
Financial Highlights continued:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- ------- ------- --------
Total return 34.58% (12.36)% 20.26% (2.72)%
Ratio of expense, including
brokerage commissions, to
average net assets: *** 10.33% 9.30% 9.88% 9.65%
Ratio of net income(loss) to
Average net assets 124.79% (53.80)% 34.32% (4.20)%
Financial Highlights of the
Master:
Total return 37.28% (10.60)% 25.08% 2.90% ****
Ratio of expense, including
brokerage commissions, to
average net assets *** 0.35% 0.30% 0.34% 0.20% ****
Ratio of net income(loss) to
Average net assets *** 128.06% (46.80)% 45.11% 4.90% ****
*** Annualized
**** For the period from January 26, 2001 (commencement of trading operations)
to June 30, 2001.
12
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
June 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 here 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 six months ended June 30, 2002 and
for the period from January 26, 2001 to December 31, 2001, based on a monthly
calculation, were $8,082,493 and $5,146,554, respectively. The fair value of
these commodity interests, including options thereon, if applicable, at June 30,
2002 and December 31, 2001, was $16,411,630 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 upon
an underlying asset, index, or reference rate, and generally represent future
13
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
June 30, 2002
(Unaudited)
(Continued)
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 amount 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
monitoring systems allow the General Partner to statistically analyze actual
trading results with risk adjusted performance indicators and correlation
14
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 June 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 second
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 six months ended June 30, 2002, Partnership capital decreased 14.0%
from $35,778,970 to $30,754,640. This decrease was attributable to the
redemption of 7,494.0266 Units resulting in an outflow of $10,342,074, which was
partially offset by the net income from operations of $5,317,744. 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 gains or losses on commodity futures trading,
expenses, interest income, redemptions of Units and distributions of profits, if
any.
For the six months ended June 30, 2002 the Master's capital increased 9.5%
from $93,677,938 to $102,592,929. This increase was attributable to net income
from operations of $20,058,207 coupled with additional sales of 1,564.0475 Units
totaling $1,637,008, which was partially offset by the redemptions of
12,712.7080 Units resulting in an outflow of $12,780,224. 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 requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities in
the financial statements and accompanying notes.
16
All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The commodity
interests are recorded on trade date and open contracts are recorded in the
statement of financial condition at fair value on the last business day of the
period, which represents market value for those commodity interests for which
market quotations are readily available. Investments in commodity interests
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates prevailing on the last business day of the period. Realized gains
(losses) and changes in unrealized values on 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 second quarter of 2002, the Partnership's net asset value per
unit increased 34.6% from $1,216.82 to $1,637.55 as compared to a decrease of
12.4% in the second quarter of 2001. The Partnership experienced a net trading
gain before brokerage commissions and related fees in the second quarter of 2002
of $9,662,643. Gains were primarily attributable to the Master's trading of
commodity futures in currencies, grains, non-U.S. interest rates, indices and
livestock and were partially offset by losses in energy, U.S. interest rates,
softs and metals. The Partnership experienced a net trading loss before
commissions and related fees in the second quarter of 2001 of $4,940,581. Losses
were primarily attributable to the Master's trading of commodity futures in
currencies, livestock, U.S. and non-U.S. interest rates, energy, softs, metals
and indices and were partially offset by gains in grains.
17
Commodity futures markets are highly volatile. The potential for broad and
rapid price fluctuations increases the risks involved in commodity trading, but
also increases the possibility of profit. The profitability of the Partnership
(and Master) depends on the existence of major price trends and the ability of
the Advisor to correctly identify those price trends. Price trends are
influenced by, among other things, changing supply and demand relationships,
weather, governmental, agricultural, commercial and trade programs and policies,
national and international political and economic events and changes in interest
rates. To the extent that market trends exist and the Advisor is able to
identify them, the Partnership (and Master) expect to increase capital through
operations.
Interest income on 80% of the Partnership's average daily equity, allocated
to it by the Master, was earned at the monthly average 30 day U.S. Treasury bill
rate. Salomon Smith Barney may continue to maintain the Partnership assets in
cash and/or to place all of the Fund assets in 90-day Treasury bills and pay the
Partnership 80% of the interest earned on the Treasury bills purchased. Salomon
Smith Barney will retain 20% of any interest earned on Treasury bills. Interest
income for the three and six months ended June 30, 2002 decreased by $204,622
and $510,635, respectively, as compared to the corresponding periods in 2001.
The decrease in interest income is primarily due to a decrease in interest rates
during the period ended June 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,
additions and redemptions. Accordingly, they must be analyzed in relation to the
fluctuations in the monthly net asset values. Commissions and fees for the three
and six months ended June 30, 2002 decreased by $150,876 and $329,385,
respectively, as compared to the corresponding periods in 2001. The decrease in
brokerage commissions is due to a decrease in assets during the three and six
months ended June 30, 2002.
Management fees are calculated as a percentage of the Partnership's net
asset value as of the end of each month and are affected by trading performance,
additions and redemptions. Management fees for the three and six months ended
June 30, 2002 decreased by $47,654 and $105,617, respectively, as compared to
the corresponding periods in 2001. The decrease in management fees is due to a
decrease in net assets during the three and six months ended June 30, 2002 as
compared 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, additions and redemptions. Administrative
fees for the three and six months ended June 30, 2002 decreased by $23,827 and
$52,808, respectively, as compared to the corresponding periods in 2001. The
decrease in administrative fees is due to a decrease in net assets during the
three and six months ended June 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 six months ended June 30, 2002 or 2001.
19
Item 3. Quantitative and Qualitative Disclosures of Market Risk
All of the Partnership's assets are subject to the risk of trading loss
through its investment in the Master.
The Master is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Master's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Master's main line of business.
Market movements result in frequent changes in the fair value of the
Master's open positions and, consequently, in its earnings and cash flow. The
Master's market risk is influenced by a wide variety of factors, including the
level and volatility of interest rates, exchange rates, equity price levels, the
value of financial instruments and contracts, the diversification effects of the
Master's open positions and the liquidity of the markets in which it trades.
The Master rapidly acquires and liquidates both long and short positions in
a wide range of different markets. Consequently, it is not possible to predict
how a particular future market scenario will affect performance, and the
Master's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Master could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Master's speculative trading and the recurrence in the
markets traded by the Master of market movements far exceeding expectations
could result in actual trading or non-trading losses far beyond the indicated
Value at Risk or the Master's experience to date (i.e., "risk of ruin"). In
light of the foregoing as well as the risks and uncertainties intrinsic to all
future projections, the inclusion of the quantification in this section should
not be considered to constitute any assurance or representation that the
Master's losses in any market sector will be limited to Value at Risk or by the
Master's attempts to manage its market risk.
Exchange maintenance margin requirements have been used by the Master as
the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk
component, which is not relevant to Value at Risk.
20
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of June 30, 2002. All open
position trading risk exposures of the Master have been included in calculating
the figures set forth below. As of June 30, 2002, the Master's total
capitalization was $102,592,929. 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,
June 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 $ 5,858,186 5.71% $7,032,293 $1,570,104
Energy 907,800 0.89% 2,197,900 557,000
Grains 353,550 0.35% 369,400 86,150
Interest Rates U.S. 1,138,500 1.11% 1,302,100 180,800
Interest Rates Non-U.S. 3,164,020 3.08% 3,337,584 979,315
Livestock 18,600 0.01% 24,750 14,400
Metals:
- Exchange Traded Contracts 418,000 0.41% 464,000 271,000
- OTC Contracts 430,625 0.42% 484,875 48,000
Softs 445,410 0.43% 693,603 119,740
Indices 1,829,551 1.78% 1,931,347 869,172
----------- ------
Total $14,564,242 14.19%
=========== ======
21
PART II OTHER INFORMATION
Item 1. Legal Proceedings -
In April 2002, consolidated amended complaints were filed against
Salomon Smith Barney 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. Also pending in the Southern District of New York against
Salomon Smith Barney 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.
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 - None with respect to the second quarter of
2002. 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.
22
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: Smith Barney Futures Management LLC
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 8/14/02
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: 8/14/02
By: /s/ Daniel R. McAuliffe, Jr.
-----------------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
Date: 8/14/02
23