UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units Of Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Acts).
Yes No X
Limited Partnership Units with an aggregate value of $29,757,510 were
outstanding and held by non-affiliates as of the last business day of the
registrants most recently completed second fiscal quarter.
As of February 28, 2003, 14,828.3397 Limited Partnership Units were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
(a) General development of business. Smith Barney Mid-West Futures Fund
L.P. II, (the "Partnership") is a limited partnership organized on June 3, 1994
under the partnership laws of the State of New York. The Partnership commenced
trading operations on September 1, 1994. The Partnership engages in the
speculative trading of a diversified portfolio of commodity interests including
futures contracts, options and forward contracts. Between July 7, 1994 and
August 31, 1994, 9,421 Units of Limited Partnership Interest ("Units") were sold
at $1,000 per Unit. The proceeds of the initial offering were held in an escrow
account until September 1, 1994, at which time they were turned over to the
Partnership for trading. Sales and redemptions of Units and general partner
contributions and redemptions for the years ending December 31, 2002, 2001 and
2000 are reported in the Statement of Partners' Capital on page F-7 under "Item
8. Financial Statements and Supplementary Data."
The Partnership will be liquidated upon the first to occur of the
following: December 31, 2014; if the Net Asset Value per Unit falls below $350
as of the end of business on any business day or upon the earlier occurrence of
certain other circumstances set forth in the Limited Partnership Agreement of
the Partnership (the "Limited Partnership Agreement"). Partnership Units were
being continuously offered monthly during the continuous offering period through
April 1997. The Partnership was authorized to sell 75,000 Units. As of June 7,
1999, the Partnership was authorized to sell an additional 25,000 Units.
2
Effective January 26, 2001, the Partnership transferred substantially all
of its assets in exchange for 42,510.5077 Units of the Master and a fair value
of $42,510,508 as a tax-free transfer to JWH Strategic Allocation Master Fund
LLC, a New York limited liability company (the "Master"). 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. Smith Barney Futures Management LLC (the "General Partner") is the
general partner of the Partnership and the managing member of the Master.
Expenses to investors as a result of investment in the Master are approximately
the same and redemption rights are not affected.
At December 31, 2002, the Partnership owns 31.19% 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.
Prior to January 26, 2001, the Partnership's commodity broker was 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.
The Master's trading of futures, forwards and options contracts, if
3
applicable, on commodities is done primarily on United States of America
commodity exchanges and foreign commodity exchanges. It engages in such trading
through a commodity brokerage account maintained with SSB.
Under the Limited Partnership Agreement, the General Partner has sole
responsibility for the administration of the business and affairs of the
Partnership, but may delegate trading discretion to one or more trading
advisors. The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading decisions
for the Partnership. The Partnership pays the General Partner a monthly
administrative fee in return for its services to the Partnership equal to 1/12
of 1% (1% per year) of month-end Net Assets of the Partnership. This fee may be
increased or decreased at the discretion of the General Partner.
The General Partner has entered into a Management Agreement (the
"Management Agreement") with the Advisor, John W. Henry & Company Inc., who will
make all commodity trading decisions for the Partnership. The Advisor is not
affiliated with the General Partner or SSB. The Advisor is not responsible for
the organization or operation of the Partnership.
Pursuant to the terms of the Management Agreement, for the period January
1, 2000 through September 30, 2000, the Partnership was obligated to pay the
Advisor a monthly management fee equal to 1/3 of 1% (4% per year) of Net Assets
4
allocated to the Advisor as of the end of the month and an incentive fee payable
quarterly of 15% of New Trading Profits (as defined in the Management Agreement)
of the Partnership. Effective October 1, 2000 to January 25, 2001, the
Partnership was obligated to pay the Advisor a monthly management fee 1/6 of 1%
(2% per year) of month-end Net Assets managed by the Advisor and an incentive
fee, payable quarterly, equal to 20% of the New Trading Profits. Effective
January 26, 2001, the Partnership is obligated to pay the Advisor a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets
allocated pro-rata by the Master and an incentive fee, payable quarterly, equal
to 20% of the New Trading Profits allocated pro-rata by the Master.
Prior to January 26, 2001, the Customer Agreement between the Partnership
and SSB (the "Customer Agreement") provided that the Partnership pay SSB a
monthly brokerage fee equal to 1/2 of 1% of month-end Net Assets (6% per year)
in lieu of brokerage commissions on a per trade basis (the "Brokerage Fee"). SSB
pays a portion of its brokerage fees to its financial consultants who have sold
Units. This fee did not include National Futures Association ("NFA") fees,
exchange and clearing fees, give-up and user fees and floor brokerage fees which
were borne by the Partnership. Effective January 26, 2001, the Partnership is
obligated to pay the Brokerage Fee based on month-end Net Assets allocated
pro-rata from the Master. Effective January 26, 2001, all exchange, clearing,
user, give-up, floor brokerage and NFA fees will be borne by the Master and
allocated to the Partnership through its investment in the Master.
5
The Customer Agreement between the Partnership and SSB gives the
Partnership the legal right to net unrealized gains and losses. Brokerage fees
will be paid for the life of the Partnership, although the rate at which such
fees are paid may be changed.
Prior to January 26, 2001, SSB pays the Partnership interest on 80% of the
average daily equity maintained in cash in its account during each month at a 30
day U.S. Treasury bill rate determined weekly by SSB based on the
non-competitive yield on 3 month U.S. Treasury bills maturing in 30 days from
the date in which such weekly rate is determined. Effective January 26, 2001,
SSB will pay the Partnership interest on 80% of the average daily equity
allocated pro-rata to the Partnership by the Master during each month at the
rate of the average non-competitive yield of 13-week T-Bills as determined at
the weekly auctions thereof during the month. The Customer Agreement may be
terminated upon notice by either party.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income from operations for the years ended December 31, 2002,
2001, 2000, 1999 and 1998 are set forth under "Item 6. Selected Financial Data."
The Partnership's capital as of December 31, 2002 was $27,821,670.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (xii) - Not applicable.
6
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does not
engage in sales of goods or services or own any long lived assets, and therefore
this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, SSB. Item 3. Legal
Proceedings.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which Salomon Smith
Barney Holdings Inc. ("SSBH") or its subsidiaries is a party or to which any of
their property is subject. There are no material legal proceedings pending
against the Partnership or the General Partner.
Salomon Smith Barney Inc. ("SSB") is a New York corporation with its
principal place of business at 388 Greenwich St., New York, New York 10013. SSB
is registered as a broker-dealer and futures commission merchant ("FCM"), and
provides futures brokerage and clearing services for institutional and retail
participants in the futures markets. SSB and its affiliates also provide
investment banking and other financial services for clients worldwide.
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against SSB or any of its individual principals within the
past five years that management believes may have a material impact on SSB's
7
ability to act as an FCM. In the ordinary course of its business, SSB is a party
to various claims and regulatory inquiries. Proceedings deemed to be material
for purposes of Commodity Futures Trading Commission ("CFTC") disclosure
requirements are:
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California (County
of Orange et al. v. Bear Stearns & Co. Inc. et al.). The complaint alleged,
among other things, that the brokerage firms recommended and sold unsuitable
securities to Orange County. SSB and the remaining brokerage firms settled with
Orange County in mid 1999. SSB paid $1,333,333 to settle this matter.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the Internal Revenue
Service denies tax exempt status to the City's General Obligation Refunding
Bonds Series 1991. The complaints were subsequently amended. SSB has asked the
court to dismiss the amended complaints. The court denied the motion but stayed
the case. Subsequently, the City withdrew its lawsuit.
8
In November 1998, a class action complaint was filed in the U.S. District
Court for the Middle District of Florida (Dwight Brock as Clerk for Collier
County v. Merrill Lynch, et al.). The complaint alleged that, pursuant to a
nationwide conspiracy, 17 broker-dealer defendants, including SSB, charged
excessive mark-ups in connection with advanced refunding transactions. Among
other relief, plaintiffs sought compensatory and punitive damages, restitution
and/or rescission of the transactions and disgorgement of alleged excessive
profits. In October 1999, the plaintiff filed a second amended complaint. In
November 1999, SSB moved to dismiss the amended complaint. In May 2001, the
parties reached and the court preliminarily approved a tentative settlement. SSB
paid $1,063,457 to settle this matter and in September 2001, the court approved
the settlement.
In connection with the Louisiana and Florida matters, the IRS and SEC
conducted an industry-wide investigation into the pricing of Treasury securities
in advanced refunding transactions. In April 2000, SSB and several other
broker-dealers entered into a settlement with the IRS and the SEC. Thereafter,
the plaintiffs filed voluntary discontinuances.
In December 1998, SSB was one of 28 market making firms that reached a
settlement with the SEC in the matter titled In the Matter of Certain Market
Making Activities on NASDAQ. As part of the settlement of that matter, SSB,
without admitting or denying the factual allegations, agreed to an order which
required that it: (i) cease and desist from committing or causing any violations
9
of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934 and SEC
Rules 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000 and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed by a
hedge fund and its investment advisor against SSB in the Supreme Court of the
State of New York, County of New York (MKP Master Fund, LDC et al. v. Salomon
Smith Barney Inc.). The complaint included allegations that, while acting as
prime broker for the hedge fund, SSB breached its contracts with plaintiffs,
misused their monies and engaged in tortious conduct, including breaching its
fiduciary duties. SSB asked the court to dismiss the complaint in full. In
October 1999, the court dismissed the tort claims, including the breach of
fiduciary duty claims. The court allowed the breach of contract and conversion
claims to stand. In December 1999, SSB filed an answer and asserted
counterclaims against the investment advisor. In response to plaintiff's motion
to strike out the counterclaims, in January 2000, SSB amended its counterclaims
against the investment advisor to seek indemnification and contribution.
Plaintiffs moved to strike SSB's amended counterclaims in February 2000. In
September 2000, the court denied plaintiffs' motion to dismiss SSB's
counterclaims based on indemnification and contribution. In August 2002, SSB
filed a motion for summary judgment.
In April 2002, numerous class action complaints were filed against Salomon
Smith Barney and other investment banks in the U.S. District Court for the
10
Southern District of New York alleging violations of certain federal securities
laws (including Section 11 of the Securities Act of 1933 and Section 10(b) of
the Securities Exchange Act of 1934) with respect to the allocation of shares
for certain initial public offerings and related aftermarket transactions and
damage to investors caused by allegedly biased research analyst reports. On
February 19, 2003, the court issued an opinion denying the defendants' motion to
dismiss. Also pending in the Southern District of New York against SSB and other
investment banks are several alleged 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 underwritten by such parties. The defendants in these actions have
moved to dismiss the consolidated amended complaint but the court has not yet
rendered a decision on those motions.
In April 2002, 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 alleged
consolidated class action complaints that were filed in the U.S. 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 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and the other action, brought on behalf of current and former Enron
11
employees (Tittle, et al. v. Enron Corp., et al.), alleges violations of ERISA
and RICO, as well as negligence and civil conspiracy. On May 8, 2002, Citigroup
and SSB filed motions to dismiss the complaints. On December 19, 2002, the
motions to dismiss the Newby complaint were denied. The motion to dismiss the
complaint in Tittle remains pending.
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 NASD Inc.
which has raised issues about SSB's internal e-mail retention practices and
research on Winstar Communications, Inc. With respect to Winstar, SSB has
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, on December 20, 2002, Citigroup and a number of other broker/dealers
reached a settlement-in-principle with the SEC, the NASD Inc., the New York
Stock Exchange (the "NYSE") and the Attorney General of New York of all issues
raised in their research, initial public offerings allocation and
spinning-related inquiries. In addition, with respect to issues raised by the
NASD, the NYSE and the SEC about SSB's and other firms' e-mail retention
practices, SSB and several other broker/dealers and the NASD, the NYSE and the
SEC entered into a settlement agreement in December 2002. SSB agreed to pay a
penalty in the amount of $1.65 million and did not admit to any allegation of
wrongdoing.
12
Since May 2002, Citigroup, SSB and certain principals, executive officers
and current and former employees have been named as defendants in a number of
alleged class action complaints filed in the U.S. District Court for the
Southern District of New York by purchasers of various securities alleging they
violated federal securities law, including Sections 10 and 20 of the Securities
Exchange Act of 1934 by issuing research reports without reasonable basis and
failing to disclose conflicts of interest 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. Nearly all of these
actions are pending before a single judge in the U.S. District Court for the
Southern District of New York for coordinated proceedings. The court has
consolidated these actions into nine separate categories corresponding to the
companies named above.
Additional actions have been filed against Citigroup and certain of its
affiliates, including SSB, and certain of their current and former directors,
officers and employees, along with other parties, including: (1) three putative
class actions filed in state courts and federal courts on behalf of persons who
maintained accounts with SSB asserting, among other things, common law claims,
claims under state statutes, and claims under the Investment Advisers Act of
1940, for allegedly failing to provide objective and unbiased investment
research and investment management, seeking, among other things, return of fees
and commissions; (2) approximately fifteen actions filed in different state
13
courts by individuals asserting, among other claims, common law claims and
claims under state securities laws, for allegedly issuing research reports
without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with companies in connection with published investment
research, including Global Crossing and WorldCom, Inc.; (3) approximately five
actions filed in different state courts by pension and other funds asserting
common law claims and statutory claims under, among other things, state and
federal securities laws, for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with companies in connection with published investment research,
including WorldCom, Inc. and Qwest Communications International Inc.; and (4)
more than two hundred arbitrations asserting common law claims and statutory
claims under, among other things, state and federal securities laws, for
allegedly issuing research reports without a reasonable basis in fact and for
allegedly failing to disclose conflicts of interest with companies in connection
with published investment research.
In July 2002, Citigroup, SSB and various of its 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 an alleged class action filed
in the U.S. District Court for the Southern District of New York on behalf of
14
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 complaint alleges violations of RICO and of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and seeks unspecified damages.
Additional actions have been filed against Citigroup and certain of its
affiliates, including SSB, along with other parties, including (i) three actions
brought in state courts by state pension plans for alleged violations of state
securities law and 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 law, including
Section 11 of the Securities Act of 1933, and claims for fraud and
misrepresentation; (iv) a series of alleged class actions by purchasers of
NewPower Holdings common stock alleging violations of federal securities law,
including Section 11 of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934; (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
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
15
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; (viii)
an action brought by the Attorney General of Connecticut in connection with
various commercial and investment banking services provided to Enron; (ix) a
putative class action brought by clients of SSB in connection with research
reports concerning Enron, alleging breach of contract; (x) actions brought by
several investment funds in connection with the purchase of notes and/or
certificates of the Osprey Trusts, the Marlin Trust, and the Marlin Water trust,
as well as the purchase of other Enron or Enron-related securities, alleging
violation of state and federal securities laws, and common law civil conspiracy
and fraud; (xi) an action brought by a retirement and health benefits plan in
connection with the purchase of certain Enron notes, alleging violation of
federal securities law, including Section 11 of the Securities Act of 1933, as
amended, violations of state securities and unfair competition law, and common
law fraud and breach of fiduciary duty; and (xii) an action brought by two
broker/dealers in connection with the purchase of certain notes, alleging
violation of federal and state securities laws. Several of these cases have been
consolidated with the Newby action and stayed pending the Court's decision on
the pending motions of certain defendants to dismiss Newby.
16
Additionally, Citigroup and certain of its affiliates, including SSB, have
provided substantial information to, and have entered into substantive
discussions with, the Securities and Exchange Commission regarding certain of
their transactions with Enron and a transaction with Dynegy Inc. Citigroup and
certain of its affiliates, including SSB, also have received subpoenas and
requests for information from various other 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 and such affiliates, including SSB, are
cooperating fully with all such requests.
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.
17
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 the
federal securities law, 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 several putative class actions that have been 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 approximately 18
pension funds and other institutional investors 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
18
state securities laws and common law fraud. Most of these actions have been
removed to federal court and have been 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. In December 2002, the claims
against SSB and the other underwriters were dismissed without prejudice.
On or about January 27, 2003, lead plaintiff in a consolidated putative
class action in the United States District Court for the District of New Jersey
(In Re AT&T Corporation Securities Litgation) sought leave to amend its
complaint on behalf of purchasers of AT&T common stock asserting claims against,
among others, AT&T Corporation, to add as named defendants Citigroup, SSB and
certain executive officers and current and former employees, asserting claims
under federal securities laws for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with AT&T in connection with published investment research.
19
On or about January 28, 2003, lead plaintiff in a consolidated putative
class action in the United States District Court for the Southern District of
New York (In Re Global Crossing, Ltd. Securities Litigation) filed a
consolidated complaint on behalf of purchasers of the securities of Global
Crossing and its subsidiaries, which names as defendants, among others,
Citigroup, SSB and certain executive officers and current and former employees,
asserting claims under federal securities laws for allegedly issuing research
reports without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with Global Crossing in connection with published
investment research.
SSBHI and various subsidiaries have also been named as defendants in
various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which SSBHI's broker-dealer subsidiaries have been named, arising in
the normal course of business out of activities as a broker and dealer in
securities, as an underwriter of securities, as an investment banker or
otherwise. In the opinion of SSBHI's management, none of these actions is
expected to have a material adverse effect on the results of operations,
consolidated financial condition or liquidity of SSBHI and its subsidiaries.
20
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote during
the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information. The Partnership has issued no stock. There is
no public market for the Units of Limited Partnership Interest.
(b) Holders. The number of holders of Units of Partnership Interest
as of December 31, 2002 was 378. (c) Distribution. The
Partnership did not declare a distribution in 2002 or 2001.
(d) Use of Proceeds. There were no additional sales of Units in the
years ended December 31, 2002 and 2001. For the twelve months
ended December 31, 2000, there were additional sales of 591.5651
Units totaling $835,000.
Proceeds from the sale of additional Units are used in the
trading of commodity interests including futures contracts,
options and forward contracts.
21
Item 6. Selected Financial Data. Realized and unrealized trading gains (losses),
interest income, net income (loss) and increase (decrease) in Net Asset Value
per Unit for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 and
total assets at December 31, 2002, 2001, 2000, 1999 and 1998 were as follows:
2002 2001 2000 1999 1998
Realized and unrealized
trading gains (losses)
net of brokerage
commissions and clearing
fees of $1,874,426,
$2,506,228, $3,096,407,
$5,296,707 and $5,793,730,
respectively $ 8,791,282 $ (889,142) $ (4,945,018) $(18,354,842) $ 4,233,828
Interest income 377,817 1,122,566 2,193,751 2,923,960 3,300,032
$ 9,169,099 $ 233,424 $ (2,751,267) $(15,430,882) $ 7,533,860
Net income (loss) $ 8,196,531 $ (1,014,999) $ (5,075,829) $(19,681,820) $ 2,107,683
Increase (decrease) in
Net Asset Value per Unit $ 431.46 $ (43.77) $ (6.02) $ (376.78) $ 54.16
Total assets $ 28,253,989 $ 37,316,295 $ 45,323,728 $ 74,994,627 $ 96,893,196
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or ser
vices. Its only assets are its investment in the Master, and interest
receivable. The Master does not engage in the sale of goods or services. Because
of the low margin deposits normally required in commodity trading, relatively
small price movements may result in substantial losses to the Partnership,
through its investment in the Master. Such substantial losses could lead to a
material decrease in liquidity. To minimize this risk, the Master follows
certain policies including:
(1) Master funds are invested only in commodity interests which are traded
in sufficient volume to permit, in the opinion of the Advisor, ease of taking
and liquidating positions.
(2) The Master diversifies its positions among various commodities. The
Advisor does not initiate additional positions in any commodity for the Master
if such additional positions would result in aggregate positions for all
commodities requiring a margin of more than 66-2/3% of net assets of the Master
managed by the Advisor.
(3) The Master may occasionally accept delivery of a commodity. Unless such
delivery is disposed of promptly by retendering the warehouse receipt
representing the delivery to the appropriate clearinghouse, the physical
commodity position is fully hedged.
(4) The Master does not employ the trading technique commonly known as
"pyramiding," in which the speculator uses unrealized profits on existing
23
positions as margin for the purchase or sale of additional positions in the same
or related commodities.
(5) The Master does not utilize borrowings except short-term borrowings if
the Master takes delivery of any cash commodities.
(6) The Advisor may, from time to time, employ trading strategies such as
spreads or straddles on behalf of the Master. The term "spread" or "straddle"
describes a commodity futures trading strategy involving the simultaneous buying
and selling of futures contracts on the same commodity but involving different
delivery dates or markets and in which the trader expects to earn a profit from
a widening or narrowing of the difference between the prices of the two
contracts.
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, through its investment in the Master. The Master is party to
financial instruments with off-balance sheet risk, including derivative
financial instruments and derivative commodity instruments, in the normal couse
of its business. These financial instruments may include forwards, futures and
options, whose value is based upon an underlying asset, index, or reference
rate, and generally represent future commitments to exchange currencies or cash
flows, or to purchase or sell other financial instruments at specified terms at
specified future dates. Each of these instruments is subject to various risks
similar to those relating to the underlying financial instruments including
market and credit risk. The General Partner monitors and controls the Master's
24
and the Partnership's risk exposure on a daily basis through financial, credit
and risk management monitoring systems and accordingly believes that it has
effective procedures for evaluating and limiting the credit and market risks to
which the Master is subject. (See also "Item 8. Financial Statements and
Supplementary Data" for further information on financial instrument risk
included in the notes to financial statements). Other than the risks inherent in
commodity trading, the Partnership knows of no trends, demands, commitments,
events or uncertainties which will result in or which are reasonably likely to
result in the Partnership's liquidity increasing or decreasing in any material
way. The Limited Partnership Agreement provides that the Partnership will cease
trading operations and liquidate all open positions under certain circumstances
including a decrease in Net Asset Value per Unit to less than $350 as of the
close of business on any business day.
(b) Capital resources. (i) The Partnership has made no material commitments
for capital expenditures as of the latest fiscal period.
(ii) The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity futures
trading and by expenses, interest income, redemptions of Units and distributions
of profits, if any. Gains or losses on commodity trading cannot be predicted.
Market moves in commodities are dependent upon fundamental and technical factors
which the Partnership, through its investment in the Master, may or may not be
able to identify. Partnership expenses will consist of, among other things,
25
commissions, management fees, administrative fees and incentive fees. The level
of these expenses is dependent upon the level of trading gains or losses and the
ability of the Advisor to identify and take advantage of price movements in the
commodity markets, in addition to the level of Net Assets maintained. The amount
of interest income payable by SSB is dependent upon interest rates over which
the Partnership has no control.
For the year ended December 31, 2000, there were additional sales of
591.5651 Units totaling $835,000. The Partnership ceased to offer Units between
April 1997 and June 1999.
No forecast can be made as to the level of redemptions in any given period.
A limited partner may redeem all or some of his Units at the Net Asset Value
thereof as of the last day of any month on fifteen days' written notice to the
General Partner. For the year ended December 31, 2002, 10,759.5577 Units were
redeemed totaling $16,153,831. For the year ended December 31, 2001, 4,875.3133
Units were redeemed totaling $6,987,255. For the year ended December 31, 2000,
20,951.5320 Units were redeemed totaling $24,685,129.
Units of Limited Partnership Interest were sold to persons and entities who
are accredited investors as that term is defined in rule 501(a) of Regulation D
under the Securities Act of 1933 as well as to those persons who are not
accredited investors but who have either a net worth (exclusive of home,
furnishings and automobile) either individually or jointly with the investor's
spouse of at least three times his investment in the Partnership (the minimum
26
investment for which was $25,000) or gross income for the two previous years and
projected gross income for the current fiscal year of not less than three times
his investment in the Partnership for each year.
(c) Results of Operations. For the year ended December 31, 2002, the Net
Asset Value Per Unit increased 31.6% from $1,361.72 to $1,793.18. For the year
ended December 31, 2001, the Net Asset Value Per Unit decreased 3.1% from
$1,405.49 to $1,361.72. For the year ended December 31, 2000, the Net Asset per
Unit decreased 0.4% from $1,411.51 to $1,405.49.
The Partnership, through its investment in the Master experienced net
trading gains of $10,758,693 before commissions and expenses for the year ended
December 31, 2002. Gains were primarily attributable to the trading of
currencies, energy, grains, livestock, U.S. and non-U.S. interest rates and
indices and were partially offset by losses incurred in the trading of metals
and softs.
The Partnership, through its investment in the Master, experienced net
trading gains of $1,617,086 before commissions and expenses for the year ended
December 31, 2001. Gains were primarily attributable to the trading of U.S. and
non-U.S. interest rates, currencies, softs and indices and were partially offset
by losses recognised in the trading of metals, energy and grains.
The Partnership experienced net trading losses of $1,848,611 before
commissions and expenses in 2000. Losses were primarily attributable to the
trading of non-U.S. interest rates, metals, softs and indices and were partially
offset by gains recognized in the trading of currencies, energy products,
27
grains, U.S. interest rates and livestock.
Commodity markets are highly volatile. Broad price fluctuations and rapid
inflation increase the risks involved in commodity trading, but also increase
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
identify those price trends correctly. 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.
(d) Operational Risk
The Partnership, through its investment in the Master, is directly exposed
to market risk and credit risk, which arise in the normal course of its business
activities. Slightly less direct, but of critical importance, are risks
pertaining to operational and back office support. This is particularly the case
in a rapidly changing and increasingly global environment with increasing
transaction volumes and an expansion in the number and complexity of products in
the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss and
legal liability attributable to operational problems, such as inaccurate pricing
28
of transactions, untimely trade execution, clearance and/or settlement, or the
inability to process large volumes of transactions. The Partnership, through its
investment in the Master, is subject to increased risks with respect to its
trading activities in emerging market securities, where clearance, settlement,
and custodial risks are often greater than in more established markets.
Technological Risk - the risk of loss attributable to technological limitations
or hardware failure that constrain the Partnership's and the Master's ability to
gather, process, and communicate information efficiently and securely, without
interruption, with customers, among Units within the Partnership and the Master,
and in the markets where the Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Partnership's
unitholders, creditors, and regulators, is free of material errors.
29
(e) Critical Accounting Policies
The General Partner believes that the accounting policies that will be most
critical to the Partnership's financial condition and results of operations
relate to the valuation of the Partnership's positions. The majority of the
Partnership's positions will be exchange-traded futures contracts, which will be
valued daily at settlement prices published by the exchanges. If applicable, the
Partnership's spot and forward foreign currency contracts will also be valued at
published daily settlement prices or at dealers' quotes. The General Partner
expects that under normal circumstances substantially all of the Partnership's
assets will be valued by objective measures and without difficulty.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 Partnership's assets are subject to the risk of trading
loss, through its investment in the Master. Unlike an operating company, the
risk of market sensitive instruments is integral, not incidental, to the
Partnership's and the Master's main line of business.
Market movements result in frequent changes in the fair market value of the
Master's open positions and, consequently, in its earnings and cash flow. The
Master's and the Partnership's market risk is influenced by a wide variety of
factors, including the level and volatility of interest rates, exchange rates,
equity price levels, the market value of financial instruments and contracts,
30
the diversification results among 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.
Quantifying the Master's Trading Value at Risk
The following quantitative disclosures regarding the Master's and the
Partnership's market risk exposures contain "forward-looking statements" within
the meaning of the safe harbor from civil liability provided for such statements
by the Private Securities Litigation Reform Act of 1995 (set forth in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
31
of 1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor except for statements
of historical fact (such as the terms of particular contracts and the number of
market risk sensitive instruments held during or at the end of the reporting
period).
The Master's and the Partnership's risk exposure in the various market
sectors traded by the Advisor is quantified below in terms of Value at Risk. Due
to the Master's mark-to-market accounting, any loss in the fair value of the
Master's open positions is directly reflected in the Master's earnings (realized
or unrealized) and cash flow.
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. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange traded
32
(almost exclusively currencies in the case of the Master), the margin
requirements for the equivalent futures positions have been used as Value at
Risk. In those rare cases in which a futures-equivalent margin is not available,
dealers' margins have been used.
The fair value of the Master's futures and forward positions does not have
any optionality component. However, the Advisor trades commodity options. The
Value at Risk associated with options is reflected in the following table as the
margin requirement attributable to the instrument underlying each option. Where
this instrument is a futures contract, the futures margin, and where this
instrument is a physical commodity, the futures-equivalent maintenance margin
has been used. This calculation is conservative in that it assumes that the fair
value of an option will decline by the same amount as the fair value of the
underlying instrument, whereas, in fact, the fair values of the options traded
by the Master in almost all cases fluctuate to a lesser extent than those of the
underlying instruments.
In quantifying the Master's Value at Risk, 100% positive correlation in the
different positions held in each market risk category has been assumed.
Consequently, the margin requirements applicable to the open contracts have
simply been added to determine each trading category's aggregate Value at Risk.
The diversification effects resulting from the fact that the Master's positions
are rarely, if ever, 100% positively correlated have not been reflected.
33
The Master's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with the
Master's open positions by market category as of December 31, 2002 and the
highest and lowest value at any point during the year. All open position trading
risk exposures of the Master have been included in calculating the figures set
forth below. As of December 31, 2002, the Master's total capitalization was
$90,459,415.
December 31, 2001
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
Currencies
- - OTC Contract $ 4,189,488 4.63% $7,032,293 $962,872
Energy 3,346,400 3.70% 3,346,400 557,000
Grains 245,903 0.27% 450,900 86,150
Interest Rates U.S. 590,280 0.65% 1,302,100 180,800
Interest Rates Non-U.S. 3,100,649 3.43% 3,493,265 979,315
Livestock 13,500 0.02% 24,750 13,500
Metals
- - Exchange Traded Contracts 418,000 0.46% 464,000 76,500
- - OTC Contracts 434,425 0.48% 550,250 48,000
Softs 385,842 0.43% 694,904 119,740
Indices 752,257 0.83% 1,931,347 641,735
---------- ----
Total $13,476,744 14.90%
---------- ------
34
As of December 31, 2001, the Mater's total capitalization was $93,677,938.
December 31, 2001
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
Currencies
- - OTC Contract $ 5,033,147 5.37% $5,602,634 $ 27,500
Energy 1,883,100 2.01% 2,347,700 475,900
Grains 255,000 0.27% 426,150 135,000
Interest Rates U.S. 1,017,700 1.09% 1,505,450 406,740
Interest Rates Non-U.S. 2,418,605 2.58% 4,042,034 1,021,936
Livestock 14,400 0.02% 14,400 7,000
Metals
- - Exchange Traded Contracts 394,000 0.42% 479,000 122,000
- - OTC Contracts 78,000 0.08% 292,900 77,500
Softs 318,264 0.34% 469,764 137,945
Indices 1,077,669 1.15% 1,883,559 943,944
---------- ----
Total $12,489,885 13.33%
---------- -----
35
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Master is
typically many times the applicable maintenance margin requirement (margin
requirements generally range between 2% and 15% of contract face value) as well
as many times the capitalization of the Master. The magnitude of the Master's
open positions creates a "risk of ruin" not typically found in most other
investment vehicles. Because of the size of its positions, certain market
conditions -- unusual, but historically recurring from time to time -- could
cause the Master to incur severe losses over a short period of time. The
foregoing Value at Risk table -- as well as the past performance of the Master
- -- give no indication of this "risk of ruin."
Non-Trading Risk
The Master has non-trading market risk on its foreign cash balances not
needed for margin. However, these balances (as well as any market risk they
represent) are immaterial.
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Master's market
sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Master's market risk
36
exposures - except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Partnership manages its primary market
risk exposures - constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Master's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Master's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased regulation and
many other factors could result in material losses as well as in material
changes to the risk exposures and the management strategies of the Master. There
can be no assurance that the Master's current market exposure and/or risk
management strategies will not change materially or that any such strategies
will be effective in either the short- or long - term. Investors must be
prepared to lose all or substantially all of their investment in the
Partnership.
The following were the primary trading risk exposures of the Master as of
December 31, 2002, by market sector.
37
Interest Rates. Interest rate movements directly affect the price of the
futures positions held by the Master and indirectly the value of its stock index
and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Master's profitability. The Master's primary interest rate exposure is to
interest rate fluctuations in the United States and the other G-7 countries.
However, the Master also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Master for the
foreseeable future.
Currencies. The Master's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Master's currency sector will change significantly in the
future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Master in expressing Value
at Risk in a functional currency other than dollars.
Stock Indices. The Master's primary equity exposure is to equity price risk
in the G-7 countries. The stock index futures traded by the Master are limited
to futures on broadly based indices. As of December 31, 2002, the Master's
38
primary exposures were in the Eurex (Germany) and Chicago Mercantile Exchange
(United States) stock indices. The General Partner anticipates little, if any,
trading in non-G-7 stock indices. The Master is primarily exposed to the risk of
adverse price trends or static markets in the major U.S., European and Japanese
indices. (Static markets would not cause major market changes but would make it
difficult for the Master to avoid being "whipsawed" into numerous small losses.)
Metals. The Master's primary metal market exposure is to fluctuations in
the price of gold and silver. Although the Advisor will from time to time trade
base metals such as aluminum and copper, the principal market exposures of the
Master have consistently been in the precious metals, gold and silver. The
General Partner anticipates that gold and silver will remain the primary metals
market exposure for the Master.
Softs. The Master's primary commodities exposure is to agricultural price
movements which are often directly affected by severe or unexpected weather
conditions. Coffee, cotton and sugar accounted for the substantial bulk of the
Master's commodity exposure as of December 31, 2002.
Energy. The Master's primary energy market exposure is to gas and oil price
movements, often resulting from political developments in the Middle East. Oil
prices can be volatile and substantial profits and losses have been and are
expected to continue to be experienced in this market.
39
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Master as of
December 31, 2002.
Foreign Currency Balances. The Master's primary foreign currency balances
are in Japanese yen, Euro dollar and Swiss francs. The Advisor regularly
converts foreign currency balances to dollars in an attempt to control the
Master's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and controls the Master's and the
Partnership's risk exposure on a daily basis through financial, credit and risk
management monitoring systems and accordingly believes that it has effective
procedures for evaluating and limiting the credit and market risks to which the
Master and the Partnership are subject.
The General Partner monitors the Master's performance and the concentration
of its open positions, and consults with the Advisor concerning the Master's
overall risk profile. If the General Partner felt it necessary to do so, the
General Partner could require the Advisor to close out individual positions as
well as enter certain positions traded on behalf of the Master. However, any
such intervention would be a highly unusual event. The General Partner primarily
relies on the Advisor's own risk control policies while maintaining a general
supervisory overview of the Master's market risk exposures.
The Advisor applies its own risk management policies to its trading. The
Advisor often follows diversification guidelines, margin limits and stop loss
40
points to exit a position. The Advisor's research of risk management often
suggests ongoing modifications to its trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisor to discuss its risk management and to look
for any material changes to the Advisor's portfolio balance and trading
techniques. The Advisor is required to notify the General Partner of any
material changes to its programs.
41
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation. F-2
Reports of Independent Accountants. F-3 - F4
Financial Statements:
Statements of Financial Condition at
December 31, 2002 and 2001. F-5
Statements of Income and Expenses for
the years ended December 31, 2002, 2001
and 2000. F-6
Statements of Partners' Capital for the
years ended December 31, 2002, 2001 and
2000. F-7
Notes to Financial Statements. F-8 - F-11
Selected unaudited quarterly financial
data. F-12
Financial Statements of the JWH Strategic
Allocation Master Fund LLC.
Oath or Affirmation. F-13
Reports of Independent Accountants. F-14 - F-15
Statements of Financial Condition at
December 31, 2002 and 2001. F-16
Condensed Schedules of Investments at
December 31, 2002 and 2001. F-17 - F-18
Statements of Income and Expenses for the
year ended December 31, 2002 and for the
period January 26, 2001 (commencement of
trading operations) to December 31, 2001. F-19
Statements of Members' Capital for the
year ended December 31, 2002 and for the
period January 26, 2001 (commencement of
trading operations) to December 31, 2001. F-20
Notes to Financial Statements. F-21 - F-24
Selected unaudited quarterly financial
data. F-25
F-1
To The Limited Partners of
Smith Barney Mid-West Futures Fund L.P. II
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: /s/Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Smith Barney Futures Management LLC
General Partner, Smith Barney Mid-West
Futures Fund L.P. II
Smith Barney Futures Management LLC
388 Greenwich Street
7th Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Auditors
To the Partners of
Smith Barney Mid-West Futures Fund L.P. II:
We have audited the accompanying statement of financial condition of Smith
Barney Mid-West Futures Fund L.P. II (the Partnership), as of December 31, 2002,
and the related statements of income and expenses, and partners' capital for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the
Partnership as of December 31, 2001 and for the years ended December 31, 2001
and 2000 were audited by other auditors whose report dated February 28, 2002
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smith Barney Mid-West Futures
Fund L.P. II as of December 31, 2002, and the results of its operations and
changes in its partners' capital for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
New York, New York
March 7, 2003
F-3
Report of Independent Accountants
To the Partners of
Smith Barney Mid-West Futures Fund L.P. II:
In our opinion, the accompanying statement of financial condition, and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Smith Barney
Mid-West Futures Fund L.P. II at December 31, 2001, and the results of its
operations for each of the two years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the management of
the General Partner; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by the management
of the General Partner, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-4
Smith Barney Mid-West Futures Fund L.P. II
Statements of Financial Condition
December 31, 2002 and 2001
2002 2001
Assets:
Investment in Master, at fair value $28,212,288 $37,231,806
Cash 19,882 42,242
------------ ------------
28,232,170 37,274,048
Interest receivable 21,819 42,247
------------ ------------
$28,253,989 $37,316,295
------------ ------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions (Note 3c) $141,270 $186,581
Management fees (Note 3b) 46,812 61,844
Administrative fees (Note 3a) 23,406 30,922
Professional fees 21,578 19,605
Other 3,920 3,952
Redemptions payable (Note 5) 195,333 1,234,421
------------ ------------
432,319 1,537,325
------------ ------------
Partners' capital (Notes 1 and 5):
General Partner, 451.3070 and 608.9156 Units equivalents
outstanding in 2002 and 2001, respectively 809,275 829,173
Limited Partners, 15,063.9866 and 25,665.9357 Units of Limited
Partnership Interest outstanding in 2002 and 2001, respectively 27,012,395 34,949,797
------------ ------------
27,821,670 35,778,970
------------ ------------
$28,253,989 $37,316,295
------------ ------------
See accompanying notes to financial statements.
F-5
Smith Barney Mid-West Futures Fund L.P. II
Statements of Income and Expenses
for the years ended
December 31, 2002, 2001 and 2000
2002 2001 2000
Income:
Realized gains on closed positions and foreign
currencies from Master $9,359,691 $3,950,697 $ --
Change in unrealized gains (losses) on open
positions from Master 1,399,002 (1,000,510) --
Expenses allocated from Master (92,985) (64,302)
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions -- 1,696,703* (9,558,900)
Change in unrealized gains (losses) on
open positions -- (2,965,502)* 7,710,289
------------ ------------ ------------
10,665,708 1,617,086 (1,848,611)
Interest income (Note 3c) 377,817 1,122,566 2,193,751
------------ ------------ ------------
11,043,525 2,739,652 345,140
------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $53,530 in 2000 (Note 3c) 1,874,426 2,506,228 3,096,407
Management fees (Note 3b) 620,986 809,363 1,764,892
Administrative fees (Note 3a) 310,492 404,680 491,529
Professional fees 36,313 27,287 54,693
Other expenses 4,777 7,093 13,448
------------ ------------ ------------
2,846,994 3,754,651 5,420,969
------------ ------------ ------------
Net income (loss) $8,196,531 $(1,014,999) $(5,075,829)
------------ ------------ ------------
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent
(Notes 1 and 6) $431.46 $(43.77) $(6.02)
----------- ----------- -----------
* For the period from January 1, 2001 to January 25, 2001 (Note 1)
See accompanying notes to financial statements.
F-6
Smith Barney Mid-West Futures Fund L.P. II
Statements of Partners' Capital
for the years ended
December 31, 2002, 2001 and 2000
Limited General
Partners Partner Total
Partners' capital at December 31, 1999 $71,847,692 $859,490 $72,707,182
Net loss (5,072,164) (3,665) (5,075,829)
Sale of 591.5651 Units of Limited
Partnership Interest 835,000 -- 835,000
Redemption of 20,951.5320 Units of Limited
Partnership Interest (24,685,129) -- (24,685,129)
-------------- ----------- --------------
Partners' capital at December 31, 2000 42,925,399 855,825 43,781,224
Net loss (988,347) (26,652) (1,014,999)
Redemption of 4,875.3133 Units of Limited
Partnership Interest (6,987,255) -- (6,987,255)
-------------- ----------- --------------
Partners' capital at December 31, 2001 34,949,797 829,173 35,778,970
Net income 7,936,656 259,875 8,196,531
Redemption of 10,601.9491 Units of Limited
Partnership Interest and 157.6086 Units of
General Partnership Interest (15,874,058) (279,773) (16,153,831)
-------------- ----------- --------------
Partners' capital at December 31, 2002 $27,012,395 $809,275 $27,821,670
------------- ----------- -------------
See accompanying notes to financial statements.
F-7
Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
1. Partnership Organization:
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 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. The commodity interests that
are traded by the Partnership are volatile and involve a high degree of
market risk. The Partnership was authorized to sell 75,000 Units during its
initial offering period. As of June 7, 1999, the Partnership was authorized
to sell an additional 25,000 Units.
Effective January 26, 2001, the Partnership transferred substantially all
of its assets as a tax-free transfer to the JWH Strategic Allocation Master
Fund LLC, a New York limited liability company (the "Master"), as a
non-managing member for 42,510.5077 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.
Smith Barney Futures Management LLC (the "General Partner") is the general
partner of the Partnership and the 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.
The financial statements of the Master, including the condensed schedule of
investments, are contained elsewhere in this report and should be read
together with the Partnership's financial statements.
At December 31, 2002 and 2001, the Partnership owns 31.19% and 39.74%,
respectively 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.
Prior to January 26, 2001, the Partnership's commodity broker was 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.
The General Partner and each limited partner share in the profits and
losses of the Partnership in proportion to the amount of partnership
interest owned by each except that no limited partner shall be liable for
obligations of the Partnership in excess of their initial capital
contribution and profits, if any, net of distributions.
The Partnership will be liquidated upon the first to occur of the
following: December 31, 2014; when the net asset value of a Unit decreases
to less than $350 as of the close of business on any business day; or under
certain other circumstances as defined in the Limited Partnership
Agreement.
2. Accounting Policies:
a. The value of the Partnership's investment in the Master reflects the
Partnership's proportional interest in the members' capital of the
Master. All of the income and expenses and unrealized and realized
gains and losses from the commodity transactions of the Master are
allocated pro rata among the investors at the time of such
determination. All commodity interests (including derivative financial
instruments and derivative commodity instruments) held by the Master
and prior to January 26, 2001 by the Partnership 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 year, 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 year. Realized gains
(losses) and changes in unrealized gains (losses) on open positions
are recognized in the period in which the contract is closed or the
changes occur and are included in net gains (losses) on trading of
commodity interests.
F-8
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on their share of the Partnership's
income and expenses.
c. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
d. Certain prior period amounts have been reclassified to conform to
current year presentation.
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the Partnership
including selecting one or more advisors to make trading decisions for the
Partnership. The Partnership will pay the General Partner a monthly
administrative fee in return for its services to the Partnership equal to
1/12 of 1% (1% per year) of month-end Net Assets of the Partnership. This
fee may be increased or decreased at the discretion of the General Partner.
Month-end Net Assets, for the purpose of calculating administrative fees
are Net Assets, as defined in the Limited Partnership Agreement, prior to
the reduction of redemptions and incentive fees.
b. Management Agreement:
The Management Agreement that the General Partner, on behalf of the
Partnership, entered into with the Advisor, provides that the Advisor has
sole discretion in determining the allocation of the assets of the
Partnership by the General Partner. For the period January 1, 2000 through
September 30, 2000, the Partnership was obligated to pay the Advisor a
monthly management fee of 1/3 of 1% (4% per year) of month-end Net Assets
allocated to the Advisor and an incentive fee payable quarterly, equal to
15% of the New Trading Profits, as defined in the Management Agreement. For
the period October 1, 2000 to January 25, 2001, the Partnership was
obligated to pay the Advisor a monthly management fee equal to 1/6 of 1%
(2% per year) of month-end Net Assets managed by the Advisor. Month-end Net
Assets, for the purpose of calculating management fees are Net Assets, as
defined in the Limited Partnership Agreement, prior to the reduction of
redemptions and incentive fees. In addition, the Partnership will pay an
incentive fee, payable quarterly, equal to 20% of the New Trading Profits,
as defined in the Management Agreement, of the Partnership.
Effective January 26, 2001, the Partnership is obligated to pay the Advisor
a monthly management fee equal to 1/6 of 1% (2% per year) of month-end Net
Assets allocated pro-rata by the Master and an incentive fee, payable
quarterly, equal to 20% of the New Trading Profits allocated pro-rata by
the Master, as defined in the Management Agreement.
c. Customer Agreement
Prior to January 26, 2001, the Partnership had a Customer Agreement with
SSB whereby SSB provided services which included, among other things, the
execution of transactions for the Partnership's account in accordance with
orders placed by the Advisor. The Partnership was obligated to pay a
monthly brokerage fee to SSB equal to 1/2 of 1 % of month-end Net Assets
(6% per year) in lieu of brokerage commissions on a per trade basis (the
"Brokerage Fee"). Month-end Net Assets, for the purpose of calculating
commissions are Net Assets, as defined in the Limited Partnership
Agreement, prior to the reduction of all liabilities of the Partnership. A
portion of this fee is paid to employees of SSB who have sold Units of the
Partnership. This fee did not include exchange, clearing, floor brokerage,
user, give-up and National Futures Association fees which were borne by the
F-9
Partnership. Effective January 26, 2001, the Partnership is obligated to
pay the Brokerage Fee based on month-end Net Assets allocated pro-rata from
the Master. Effective January 26, 2001, all exchange, clearing, user,
give-up, floor brokerage and National Futures Association fees will be
borne by the Master and allocated to the Partnership through its investment
in Master. Effective January 26, 2001, cash margin requirements are
maintained by the Master. For the period from January 1, 2001 to January
25, 2001, SSB paid the Partnership interest on 80% of the average daily
equity maintained in cash in its account during each month at a 30-day
Treasury bill rate determined weekly by SSB based on the non-competitive
yield on 3-month U.S. Treasury bills maturing in 30 days from the date on
which such weekly rate is determined. Effective January 26, 2001, SSB will
pay the Partnership interest on 80% of the average daily equity allocated
pro-rata to the Partnership by the Master during each month at the rate of
the average non-competitive yield of 13-week U.S. Treasury bills as
determined at the weekly auctions thereof during the month. The Customer
Agreement between the Partnership and SSB gives the Partnership the legal
right to net unrealized gains and losses. The Customer Agreement may be
terminated upon notice by either party.
4. Trading Activities:
The results of the Master's and prior to January 26, 2001, the
Partnership's trading activities are shown in the statement of income and
expenses.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of
the General Partner; however, a limited partner may redeem all or some of
their Units at the Net Asset Value thereof as of the last day of any month
beginning with the first full month ending at least three months after
trading commenced on fifteen days written notice to the General Partner.
The Partnership is permitted to withdraw all or a portion of its interest
in the Master as of each month-end in order to meet its obligations with
respect to the redemption rights of limited partners.
6. Financial Highlights:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
Net realized and unrealized gains (losses)* $463.00 $(38.33) $(4.51)
Interest income 19.08 38.33 53.49
Expenses** (50.62) (43.77) (55.00)
---------- ---------- ----------
Increase (decrease) for year 431.46 (43.77) (6.02)
Net asset value per Unit, beginning of year 1,361.72 1,405.49 1,411.51
---------- ---------- ----------
Net asset value per Unit, end of year $1,793.18 $1,361.72 $1,405.49
----------- ----------- -----------
Ratio of net investment loss, to average net assets*** (8.5)% (6.1)%
Ratio of expenses, including brokerage commissions, to
average net assets 9.8% 8.8%
Ratio of net income (loss) to average net assets **** 27.2% (2.3)%
Total return 31.9% (3.1)%
* Includes brokerage commissions
** Excludes brokerage commissions *** Interest income less total expenses
**** Supplemental information not required
The above ratios may vary for individual investors based on the timing of
capital transactions during the year.
F-10
7. Financial Instrument Risks:
In the normal course of its business 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. These financial instruments may include
forwards, futures and options, whose values are based upon an underlying
asset, index, or reference rate, and generally represent future commitments
to exchange currencies or cash flows, to purchase or sell other financial
instruments at specific terms at specified future dates, or, in the case of
derivative commodity instruments, to have a reasonable possibility to be
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 Partnership's/Master's risk of loss in the event of
counterparty default is typically limited to the amounts recognized in the
statement of financial condition and not represented by the contract or
notional amounts of the instruments. The Partnership, through the
Partnership's investment in 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 Partnership's/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 Partnership/Master are subject. These monitoring systems allow the
General Partner to statistically analyze actual trading results with risk
adjusted performance indicators and correlation statistics. In addition,
on-line monitoring systems provide account analysis of futures, forwards
and options positions by sector, margin requirements, gain and loss
transactions and collateral positions.
The majority of these instruments mature within one year of December 31,
2002. However, due to the nature of the Partnership's/Master's business,
these instruments may not be held to maturity.
F-11
Selected unaudited quarterly financial data for the years ended December
31, 2002 and December 31, 2001 is summarized below:
For the period For the period For the period For the period
from from from from
October 1, 2002 July 1, 2002 April 1, 2002 January 1, 2002
to to to to
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $ (2,807,315) $ 6,165,953 $ 9,257,872 $ (3,430,458)
Net Income (loss) $ (3,037,323) $ 5,916,110 $ 9,009,608 $ (3,691,864)
Increase (decrease) in Net Asset
Value per Unit $ (190.28) $ 345.91 $ 420.73 $ (144.90)
For the period For the period For the period For the period
from from from from
October 1, 2001 July 1, 2001 April 1, 2001 January 1, 2001
to to to to
December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income ($1,511,073) $1,963,592 ($5,291,606) $5,090,804
Net Income (loss) ($1,793,716) $1,655,853 ($5,615,574) $4,738,438
Increase (decrease) in Net Asset
Value per Unit ($65.79) $60.24 ($192.88) $154.66
F-12
To The Members of
JWH Strategic Allocation Master Fund LLC
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: /s/Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Smith Barney Futures Management LLC
Managing Member, JWH Strategic Allocation
Master Fund LLC
Smith Barney Futures Management LLC
388 Greenwich Street
7th Floor
New York, N.Y. 10013
212-723-5424
F-13
Report of Independent Auditors
To the Members of
JWH Strategic Allocation Master Fund LLC:
We have audited the accompanying statement of financial condition of JWH
Strategic Allocation Master Fund LLC (the Company), including the condensed
schedule of investments as of December 31, 2002, and the related statements of
income and expenses, and members' capital for the year then ended. These
financial statements are the responsibility of the Managing Member. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company as of December 31, 2001 and
for the period from January 26, 2001 (commencement of operations) to December 31
2001 were audited by other auditors whose report dated February 28, 2002
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JWH Strategic Allocation Master
Fund LLC as of December 31, 2002, and the results of its operations and changes
in its members' capital for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
New York, New York
March 7, 2003
F-14
Report of Independent Accountants
To the Members of
JWH Strategic Allocation Master Fund LLC:
In our opinion, the accompanying statement of financial condition, including the
condensed schedule of investments, and the related statements of income and
expenses and of members' capital present fairly, in all material respects, the
financial position of JWH Strategic Allocation Master Fund LLC at December 31,
2001 and the results of its operations for the period from January 26, 2001
(commencement of trading operations) to December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the management of the Managing
Member; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by the management
of the Managing Member, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-15
JWH Strategic Allocation Master Fund LLC
Statements of Financial Condition
December 31, 2002 and 2001
2002 2001
Assets:
Equity in commodity futures trading account:
Cash (restricted $15,044,312 and $13,748,339 in 2002 and 2001, $81,112,283 $88,330,292
respectively)
Net unrealized appreciation on open positions* 9,394,955 5,392,646
------------ ------------
$90,507,238 $93,722,938
------------ ------------
Liabilities and Members' Capital:
Liabilities:
Accrued expenses:
Professional fees $47,823 $45,000
------------ ------------
47,823 45,000
------------ ------------
Members' capital:
Members' capital, 60,664.1530 and 89,573.7730 Units outstanding
in 2002 and 2001, respectively 90,459,415 93,677,938
------------ ------------
$90,507,238 $93,722,938
------------ ------------
* Forward contracts included in this balance are presented gross in the
accompanying Condensed Schedule of Investments.
See accompanying notes to financial statements.
F-16
JWH Strategic Allocation
Master Fund LLC
Condensed Schedule of Investments
December 31, 2002
Notional
Sector Amount Contract Fair Value
Currencies Unrealized appreciation on forward contracts 8.23%
EUR (116,850,000) EUR/USD 3.52%, March 19, 2003 $3,188,260
CHF (60,550,000) CHF/USD 1.82%, March 19, 2003 1,644,000
JPY (9,565,600,000) JPY/USD 1.51%, March 19, 2003 1,364,829
Other 1.38% 1,251,826
Unrealized depreciation on forward contracts (2.61)%(2,364,747)
----------
Total Currencies 5.62% Total forward contracts 5.62% 5,084,168
---------
Total Energy 1.22% Futures contracts purchased 1.22% 1,104,121
---------
Grains Futures contracts purchased (0.01)% (10,640)
Futures contracts sold 0.36% 329,388
---------
Total Grains 0.35% 318,748
---------
Interest Rates U.S. Futures contracts purchased 0.55% 497,228
Futures contracts sold (0.96)% (872,094)
---------
Total Interest Rates U.S. (0.41)% (374,866)
---------
Total Interest Rates Non-U.S.2.78% Futures contracts purchased 2.78% 2,515,874
---------
Total Livestock 0.03% Futures contracts purchased 0.03% 23,980
---------
Metals Futures contracts purchased 1.01% 916,440
Unrealized appreciation on forward contracts 0.09% 79,435
Unrealized depreciation on forward contracts (0.35)% (313,193)
---------
Total forward contracts (0.26)% (233,758)
---------
Total Metals 0.75% 682,682
---------
Softs Futures contracts purchased 0.27% 246,814
Futures contracts sold (0.00)%* (2,844)
---------
Total Softs 0.27% 243,970
---------
Indices Futures contracts purchased (0.24)% (222,005)
Futures contracts sold 0.02% 18,283
---------
Total Indices (0.22)% (203,722)
---------
Total Fair Value 10.39% $9,394,955
==========
Investments % of Investments
Country Composition at Fair Value at Fair Value
Australia $220,191 2.34%
Canada 51,439 0.55
Germany 879,354 9.36
Japan 771,920 8.22
United Kingdom 195,396 2.08
United States 7,276,655 77.45
-------------------------- ------------------------
$9,394,955 100.00%
========================== ========================
Percentages are based on Members' capital unless otherwise indicated.
* Due to rounding.
See accompanying notes to financial statements.
F-17
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 accompanying notes to financial statements.
F-18
JWH Strategic Allocation Master Fund LLC
Statements of Income and Expenses
for the year ended December 31, 2002 and
for the period from January 26, 2001
(commencement of trading operations)
to December 31, 2001
2002 2001
Income:
Net gains on trading of commodity interests:
Realized gains on closed positions and
foreign currencies $29,185,102 $9,307,481
Change in unrealized gains (losses)
on open positions 4,002,309 (2,710,941)
------------ ------------
33,187,411 6,596,540
------------ ------------
Expenses:
Clearing fees 220,446 230,343
Professional fees 50,000 45,000
------------ ------------
270,446 275,343
------------ ------------
Net income $32,916,965 $6,321,197
------------- ------------
Net income per Unit of Member Interest $445.33 $45.82
------------- ------------
See accompanying notes to financial statements.
F-19
JWH Strategic Allocation Master Fund LLC
Statement of Members' Capital
for the year ended December 31, 2002 and
for the period from January 26, 2001
(commencement of trading operations)
to December 31, 2001
Members'
Capital
Initial capital contribution from the Members
representing 74,020.3930 Units $74,020,393
Net Income 6,321,197
Sale of 29,596.7052 Units of
Members' Interest 28,929,324
Redemption of 14,043.3252 Units of
Members' Interest (15,592,976)
--------------
Members' capital at December 31, 2001 93,677,938
Net Income 32,916,965
Sale of 3,545.8883 Units of Members' Interest 4,638,927
Redemption of 32,455.5083 Units of
Members' Interests (40,774,415)
-------------
Members' capital at December 31, 2002 $90,459,415
-------------
See accompanying notes to financial statements.
F-20
JWH Strategic Allocation Master Fund LLC
Notes to Financial Statements
1. General:
JWH Strategic Allocation Master Fund LLC (the "Master") is a limited
liability company formed under the New York Limited Liability Company Law.
The Master's purpose is to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The Master is authorized to sell an
unlimited number of member interests.
On January 26, 2001 (date Master commenced trading), Shearson Mid-West
Futures Fund ("Mid-West") and Smith Barney Mid-West Futures Fund L.P. II
("Mid-West II") transferred substantially all of their assets as a tax-free
transfer to the Master as non-managing members for 74,020.3930 Units of the
Master at a fair value of $74,020,393. The Master was formed 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 vehicle.
The Master operates under a "master/feeder fund" structure where its
investors consist of Mid-West, Mid-West II, The Aspetuck Fund L.P., The
Saugatuck Fund L.P. and JWH Global Strategies Limited (collectively the
"Feeder Funds") with 29.68%, 31.19%, 6.17%, 30.76% and 2.20% investments in
the Master, for 2002 respectively.
Smith Barney Futures Management LLC is the managing member (the "Managing
Member") of the Master. The Master's commodity broker is Salomon Smith
Barney Inc. ("SSB"). SSB is an affiliate of the Managing Member. The
Managing Member 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 December 31, 2002, all trading decisions
for the Master are made by the Advisor.
2. Accounting Policies:
a. 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 year, 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 year. Realized gains
(losses) and changes in unrealized values on open positions are
recognized in the period in which the contract is closed or the
changes occur and are included in net gains (losses) on trading of
commodity interests.
b. All of the income and expenses and realized and unrealized gains and
losses on trading of commodity interests are determined on each
valuation day and are allocated pro rata among the Feeder Funds at the
time of such determination. Income taxes have not been provided as
each member is individually liable for the taxes, if any, on their
share of the Master's income and expenses.
F-21
c. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
3. a. Managing Member Agreement:
The Managing Member administers the business affairs of the Master
including selecting one or more advisors to make trading decisions for the
Master.
b. Management Agreement:
The Managing Member, on behalf of the Master, has entered into a Management
Agreement with the Advisor, a registered commodity trading advisor. The
Advisor is not affiliated with the General Partner or SSB and is not
responsible for the organization or operation of the Master. The Management
Agreement provides that the Advisor has sole discretion in determining the
investment of the assets of the Master allocated to it by the Managing
Member. All management fees in connection with the Management Agreement are
borne by the Feeder Funds.
c. Customer Agreement:
The Master has entered into a Customer Agreement with SSB whereby SSB
provides services which include, among the other things, the execution of
transactions for the Master's account in accordance with orders placed by
the Advisor. All exchange, clearing, user, give-up, floor brokerage and
National Futures Association fees are borne by the Master. All other fees
including SSB's direct brokerage commission shall be borne by the Feeder
Funds. All of the Master's assets are deposited in the Master's account at
SSB. The Master's cash is deposited by SSB in segregated bank accounts to
the extent required by Commodity Futures Trading Commission regulations. At
December 31, 2002 and 2001, the amount of cash held by the Master for
margin requirements was $15,044,312 and $13,748,339, respectively. The
Customer Agreement between the Master and SSB gives the Master the legal
right to net unrealized gains and losses. The Customer Agreement may be
terminated upon notice by either party.
4. Trading Activities:
The Master was formed for the purpose of trading contracts in a variety of
commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Master's trading
activities are shown in the statement of income and expenses.
All of the commodity interests owned by the Master are held for trading
purposes. The average fair value for the year ended December 31, 2002 and
for the period from January 26, 2001 (commencement of trading operations)
to December 31, 2001, based on a monthly calculation, was $9,163,093 and
$5,146,554, respectively.
F-22
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of
the Managing Member and at such time as the Managing Member may decide. A
member may require the Master to redeem their Units at their Net Asset
Value as of the last day of each month. The Managing Member, in its sole
discretion, may permit redemptions more frequently than monthly.
6. Financial Highlights:
Changes in the net asset value per Unit of Member interest for the year
ended December 31, 2002 and for the period from January 26, 2001
(commencement of trading operations) to December 31, 2001 were as follows:
2002 2001
Net realized and unrealized gains** $446.04 $46.32
Expenses*** (0.71) (0.50)
---------- ----------
Increase for period 445.33 45.82
Net asset value per Unit, beginning of period 1,045.82 1,000.00
---------- ----------
Net asset value per Unit, end of period $1,491.15 $1,045.82
----------- -----------
Ratio of expenses to average net assets *(***) 0.3% 0.3%
Ratio of net income to average net assets *(***)(****) 35.9% 7.4%
Ratio of net investment income to average
net assets *(***) (0.3)% (0.3)%
Total return 42.6% 4.6%
* Annualized in 2001.
** Includes clearing fees. *** Excludes clearing fees.
**** Supplemental information not required.
The above ratios may vary for individual investors based on the
timing of capital transactions during the year.
7. Financial Instrument Risks:
In the normal course of its business, the Master is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial
instruments may include forwards, futures and options, whose values are
based upon an underlying asset, index, or reference rate, and generally
represent future commitments to exchange currencies or cash flows, to
purchase or sell other financial instruments at specific terms at specified
future dates, or, in the case of derivative commodity instruments, to have
a reasonable possibility to be 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
F-23
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 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 Managing Member 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 Managing Member 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 majority of these instruments mature within one year of December 31,
2002. However, due to the nature of the Master's business, these
instruments may not be held to maturity.
F-24
Selected unaudited quarterly financial data for the years ended December
31, 2002 and December 31, 2001 is summarized below:
For the period For the period For the period For the period
from from from from
October 1, 2002 July 1, 2002 April 1, 2002 January 1, 2002
to to to to
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $ (7,583,868) $20,470,126 $28,166,096 $ (8,085,389)
Net Income (loss) $ (7,598,868) $20,457,626 $28,154,846 $ (8,096,639)
Increase (decrease) in Net Asset
Value per Unit $ (125.14) $ 308.13 $ 355.22 $ ( 92.88)
For the period For the period For the period For the period
from from from from
October 1, 2001 July 1, 2001 April 1, 2001 January 26, 2001
to to to to
December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $ (2,262,278) $ 5,561,450 $ (11,365,758) $ 14,432,783
Net Income (loss) $ (2,307,278) $ 5,561,450 $ (11,365,758) $ 14,432,783
Increase (decrease) in Net Asset
Value per Unit $ (49.16) $ 62.24 $ (125.04) $ 157.78
F-25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the principal accountant for the
Partnership. On July 9, 2002, that firm was dismissed as principal accountant
and KPMG LLP was engaged as principal accountant. The decision to change
accountants was approved by the general partner of the Partnership.
In connection with the audits of the two fiscal years ended December 31,
2001, and through July 9, 2002, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference thereto in their reports on the financial statements for such
years.
The audit reports of PricewaterhouseCoopers LLP on the financial statements
of the Partnership as of and for the years ended December 31, 2001 and 2000 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principle.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed by
its General Partner, Smith Barney Futures Management LLC. Investment decisions
are made by John W. Henry & Company, Inc. (the "Advisor").
42
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by
Smith Barney Futures Management LLC, its General Partner, which receives
compensation for its services, as set forth under "Item 1. Business." SSB, an
affiliate of the General Partner, is the commodity broker for the Partnership
and receives brokerage commissions for such services, as described under "Item
1. Business." During the year ended December 31, 2002, SSB earned $1,874,426 in
brokerage commissions and clearing fees. The Advisor earned $620,986 in
management fees during 2002. During the year ended December 31, 2002, the
General Partner earned $310,492 in administrative fees. The Advisor did not earn
an incentive fee in the year ended December 31, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. The Partnership knows
of no person who beneficially owns more than 5% of the Units outstanding.
(b). Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner. The General Partner owns Units of general partnership interest
equivalent to 451.3070 (2.9%) Units of partnership interest as of December 31,
2002.
(c). Changes in control. None.
43
Item 13. Certain Relationships and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management LLC would be
considered promoters for purposes of item 404(d) of Regulation S-K. The nature
and the amounts of compensation that each promoter will receive from the
Partnership are set forth under "Item 1. Business.", "Item 8. Financial
Statements and Supplementary Data." and "Item 11. Executive Compensation."
Item 14. 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.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements: Statement of Financial Condition at
December 31, 2002 and 2001.
Statement of Income and Expenses for the years ended
December 31, 2002, 2001 and 2000.
Statement of Partners' Capital for the years ended December
31, 2002, 2001 and 2000.
44
(2) Financial Statement Schedules: Financial Data Schedule
for year ended December 31, 2002.
(3) Exhibits:
3.1 - Certificate of Limited Partnership (previously
filed).
3.2 - Limited Partnership Agreement (previously filed).
10.1 - Management Agreement among the Partnership, the
General Partner and John W. Henry & Company, Inc.
(previously filed).
10.2 - Customer Agreement between Registrant and Smith
Barney Shearson Inc. (previously filed).
10.3 - Form of Subscription Agreement (previously filed).
10.4 - Letter dated February 16, 1995 from the General
Partner to John W. Henry & Co., Inc. extending
Management Agreement (previously filed).
10.5 - Letter dated January 25, 1996 from the General
Partner to John W. Henry & Co., Inc. extending
Management Agreement to June 30, 1996 (previously
filed).
10.6 - Letters extending Management Agreements with John W.
Henry & Company, Inc. for 1996 and 1997 (filed as
Exhibit 10.6 to the Form 10-K for the fiscal year ended
December 31, 1997 and incorporated herein by
reference).
45
10.7 - Letter from the General Partner to John W. Henry &
Company, Inc. extending Management Agreement for 1998
(previously filed).
10.8 - Letter from the General Partner to John W. Henry &
Company, Inc. extending Management Agreement for 1999
(previously filed).
10.9 - Letter from the General Partner to John W. Henry &
Company, Inc. extending Management Agreement for 2000
(previously filed).
10.10- Letter from the General Partner to John W. Henry &
Company, Inc. extending Management Agreement for 2001
(previously filed).
10.11- Letter from the General Partner to John W. Henry &
Company, Inc. extending Management Agreement for 2002
(filed herein).
99.1 Certificate of Chief Executive Officer.
99.2 Certificate of Chief Financial Officer.
(b) Report on Form 8-K: None filed.
46
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
No proxy material has been sent to Limited Partners.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 28th day of March 2003.
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
By: Smith Barney Futures Management LLC
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report on Form 10-K has been signed
below by the following persons in the capacities and on the date indicated.
/s/ David J. Vogel /s/ Shelley Ullman
David J. Vogel Director
Director, Principal Executive
Officer and President
/s/ Maureen O'Toole /s/ Steve J. Keltz
Maureen O'Toole Secretary and Director
Director
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
48
TYPE> EX-27
DESCRIPTION> FINANCIAL DATA SCHEDULE
TEXT>
ARTICLE> 5
CIK> 0001013167
NAME> Smith Barney Mid-West Futures Fund L.P. II
PERIOD-TYPE> 12-MONTHS
FISCAL-YEAR-END> DEC-31-2002
PERIOD-START> JAN-01-2002
PERIOD-END> DEC-31-2002
CASH> 28,212,288
SECURITIES> 19,882
RECEIVABLES> 21,819
ALLOWANCES> 0
INVENTORY> 0
CURRENT-ASSETS> 28,253,989
PP&E> 0
DEPRECIATION> 0
TOTAL-ASSETS> 28,253,989
CURRENT-LIABILITIES> 432,319
BONDS> 0
PREFERRED-MANDATORY> 0
PREFERRED> 0
COMMON> 0
OTHER-SE> 27,821,670
TOTAL-LIABILITY-AND-EQUITY> 28,253,989
SALES> 0
TOTAL-REVENUES> 11,043,525
CGS> 0
TOTAL-COSTS> 0
OTHER-EXPENSES> 2,846,994
LOSS-PROVISION> 0
INTEREST-EXPENSE> 0
INCOME-PRETAX> 8,196,531
INCOME-TAX> 0
INCOME-CONTINUING> 0
DISCONTINUED> 0
EXTRAORDINARY> 0
CHANGES> 0
NET-INCOME> 8,196,531
EPS-PRIMARY> 431.46
EPS-DILUTED> 0