FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1998
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 Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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SMITH BARNEY MID-WEST FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statement of Financial Condition at
March 31, 1998 and December 31,
1997. 3
Statement of Income and Expenses
and Partners' Capital for the Three
Months ended March 31, 1998 and 1997. 4
Notes to Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 - 10
PART II - Other Information 11 - 12
2
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PART I
Item 1. Financial Statements
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
March 31, December 31,
1998 1997
Assets:
------------- ------------
(Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $ 90,099,835 $ 98,812,037
Net unrealized appreciation
on open futures contracts 953,339 4,837,350
------------ ------------
91,053,174 103,649,387
Interest receivable 328,259 349,777
------------ ------------
$ 91,381,433 $103,999,164
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions $ 456,907 $ 519,996
Management fees 302,923 344,931
Administrative fees 75,731 86,233
Incentive fees 0 1,062,363
Other 47,752 47,822
Redemptions payable 377,383 620,745
------------ ------------
1,260,696 2,682,090
------------ ------------
Partners' Capital:
General Partner, 608.9156 Unit
equivalents outstanding in
1998 and 1997 951,376 1,055,939
Limited Partners, 57,071.8642 and
57,816.3107 Units of Limited Partnership
Interest outstanding in 1998
and 1997, respectively 89,169,361 100,261,135
------------ ------------
90,120,737 101,317,074
------------ ------------
$ 91,381,433 $103,999,164
============ ============
See Notes to Financial Statements.
3
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SMITH BARNEY MID-WEST FUTURES FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
------------- ---------------
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains (losses) on closed positions $ (4,389,284) $ 2,486,253
Change in unrealized gains/losses on open
positions (3,884,011) (857,727)
_____________ _____________
(8,273,295) 1,628,526
Less, brokerage commissions and clearing fees
($24,866 and $12,545, respectively) (1,521,296) (1,207,245)
_____________ _____________
Net realized and unrealized gains (losses) (9,794,591) 421,281
Interest income 983,323 755,273
_____________ _____________
(8,811,268) 1,176,554
_____________ _____________
Expenses:
Management fees 939,049 782,578
Administrative fees 234,762 195,400
Other 21,055 26,507
_____________ _____________
1,194,866 1,004,485
_____________ _____________
Net income (loss) (10,006,134) 172,069
Additions - 13,286,400
Redemptions (1,190,203) (1,325,833)
_____________ _____________
Net increase (decrease) in Partners' capital (11,196,337) 12,132,636
Partners' capital, beginning of period 101,317,074 68,451,469
_____________ _____________
Partners' capital, end of period $ 90,120,737 $ 80,584,105
------------- -------------
Net asset value per Unit
(57,680.7798 and 52,121.6361 Units
outstanding at March 31, 1997 and 1996,
respectively) $ 1,562.41 $ 1,546.08
------------- -------------
Net income (loss) per Unit of Limited
Partnership Interest and General Partner
Unit equivalent $ (171.72) $ 8.15
------------- -------------
4
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Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
March 31, 1998
(Unaudited)
1. General:
Smith Barney Mid-West Futures Fund L.P. II,(the "Partnership") is a
limited partnership which was organized on June 3, 1994 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by the
Partnership are volatile and involve a high degree of market risk. The
Partnership commenced trading operations on September 1, 1994.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. Smith Barney Inc. ("SB"), an affiliate of
the General Partner, acts as commodity broker for the Partnership. All trading
decisions for the Partnership are being made by John W. Henry & Company, Inc.
(the "Advisor").
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Partnership's financial
condition at March 31, 1998 and the results of its operations for the three
months ended March 31, 1998 and 1997. These financial statements present the
results of interim periods and do not include all disclosures normally provided
in annual financial statements. It is suggested that these financial statements
be read in conjunction with the financial statements and notes included in the
Partnership's annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
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Smith Barney Mid-West Futures Fund L.P. II
Notes to Financial Statements
(Continued)
2. Net Asset Value Per Unit:
Changes in net asset value per Unit for the three months ended March 31,
1998 and 1997 were as follows:
THREE-MONTHS ENDED
March 31,
1998 1997
Net realized and unrealized
gains (losses) $ (168.09) $ 13.92
Interest income 16.90 15.29
Expenses (20.53) (21.06)
---------- ----------
Increase (decrease) for period (171.72) 8.15
Net Asset Value per Unit,
beginning of period 1,734.13 1,537.93
---------- ----------
Net Asset Value per Unit,
end of period $1,562.41 $1,546.08
========== ==========
3. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
The Customer Agreement between the Partnership and SB gives the
Partnership the legal right to net unrealized gains and losses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The fair value of these commodity interests, including options
thereon, at March 31, 1998 and 1997 was $953,339 and $496,138, respectively, and
the average fair value during the three months then ended, based on monthly
calculation, was $1,519,920 and $2,806,591, respectively.
4. Financial Instrument Risk:
The Partnership is party to financial instruments with off- balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures
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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, 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 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 Partnership 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 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 has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is SB.
The General Partner monitors and controls 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 Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At March
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31, 1998, the notional or contractual amounts of the Partnership's commitment to
purchase and sell these instruments was $695,804,170 and $687,790,250,
respectively, as detailed below. All of these instruments mature within one year
of March 31, 1998. However, due to the nature of the Partnership's business,
these instruments may not be held to maturity. At March 31, 1998, the fair value
of the Partnership's derivatives, including options thereon, was $953,339 as
detailed below.
MARCH 31, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies * $ 65,102,622 $133,235,231 $1,502,203
Interest Rates Non-U.S. 630,701,548 287,766,025 (17,057)
Interest Rates U.S. - 266,788,994 (531,807)
------------ ------------ -----------
Total $695,804,170 $687,790,250 $ 953,339
============ ============ ==========
At March 31, 1997, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $96,513,954
and $560,474,569, respectively, and the fair value of the Partnership's
derivatives, including options thereon, was $496,138, as detailed below.
MARCH 31, 1997
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies * $46,817,746 $ 90,524,442 $ (574,467)
Interest Rates Non-U.S. 41,641,633 353,288,872 203,136
Interest Rates U.S. - 116,661,255 1,019,669
Metals 8,054,575 - (152,200)
----------- ------------ -----------
Total $96,513,954 $560,474,569 $ 496,138
=========== ============ =========
* The notional or contractual commitment amounts and the net unrealized gain
amount listed for the currency sector represent OTC contracts. All other sectors
listed represent exchange traded contracts.
8
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its equity in its commodity futures trading account, net unrealized
appreciation (depreciation) on open futures and forward contracts and interest
receivable. Because of the low margin deposits normally required in commodity
futures trading, relatively small price movements may result in substantial
losses to the Partnership. While substantial losses could lead to a decrease in
liquidity, no such losses occurred in the first quarter of 1998.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity futures
trading, expenses, interest income, redemptions of Units and distributions of
profits, if any.
For the three months ended March 31, 1998, Partnership capital decreased
11.1% from $101,317,074 to $90,120,737. This decrease was primarily attributable
to net loss from operations of $10,006,134 coupled with the redemption of
744.4465 Units resulting in an outflow of $1,190,203 for the three months ended
March 31, 1998. Future additions and redemptions can impact the amount of funds
available for investments in commodity contract positions in subsequent periods.
Results of Operations
During the Partnership's first quarter of 1998, the net asset value per
Unit decreased 9.9% from $1,734.13 to $1,562.41 as compared to the first quarter
of 1997 in which the net asset value per Unit increased 0.5%. The Partnership
experienced a net trading loss before commission and expenses in the first
quarter of 1998 of $8,273,295. Losses were recognized in the trading of
commodity futures in currencies, U.S. interest rates, metals and indices and was
offset by gains recognized in the trading of non-U.S. interest rates. The
Partnership experienced a net trading gain before commissions and expenses in
the first quarter of 1997 of $1,628,526. Gains were recognized in the trading of
commodity futures in currencies, metals and indices which were partially offset
by losses recognized in the trading of interest rate products.
Commodity futures 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 depends
on the existence of major
9
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price trends and the ability of the Advisor to identify correctly those price
trends. Price trends are influenced by, among other things, changing supply and
demand relationships, weather, governmental, agricultural, commercial and trade
programs and policies, national and international political and economic events
and changes in interest rates. To the extent that market trends exist and the
Advisor is able to identify them, the Partnership expects to increase capital
through operations.
Interest income on 80% of the Partnership's average daily equity was
earned at the monthly average 30 day U.S. Treasury bill rate. Interest income
for the three months ended March 31, 1998 increased by $228,050 as compared to
the corresponding period in 1997. The increase in interest income is primarily
the result of the effect of net additions on the Partnership's equity maintained
in cash during 1997.
Brokerage commissions are calculated on the adjusted net asset value on
the last day of each month and, therefore, vary according to trading
performance, additions and redemptions. Accordingly, they must be compared in
relation to the fluctuations in the monthly net asset values. Commissions and
clearing fees for the three months ended March 31, 1998 increased by $314,051 as
compared to the corresponding period in 1997.
All trading decisions for the Partnership are currently being made by the
Advisor. Management fees are calculated as a percentage of the Partnership's net
asset value as of the end of each month and are affected by trading performance,
additions and redemptions. Management fees for the three months ended March 31,
1998 increased by $156,471 as compared to the corresponding period in 1997.
Administrative fees are paid to the General Partner for administering the
business and affairs of the Partnership. These fees are calculated as a
percentage of the Partnership's net asset value as of the end of each month and
are affected by trading performance, additions and redemptions. Administrative
fees for the three months ended March 31, 1998 increased by $39,362 as compared
to the corresponding period in 1997.
Incentive fees are based on the new trading profits generated by the
Advisor as defined in the advisory agreement between the Partnership, the
General Partner and the Advisor. There were no incentive fees earned for the
three months ended March 31, 1998 or 1997.
10
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Between May 1994 and the present, Salomon Brothers Inc. ("SBI"), SB and The
Robinson Humphrey Company, Inc. ("R- H"), all currently subsidiaries of
Salomon Smith Barney Holdings Inc. ("SSBHI"), along with a number of other
broker-dealers, were named as defendants in approximately 25 federal court
lawsuits and two state court lawsuits, principally alleging that companies
that make markets in securities traded on NASDAQ violated the federal
antitrust laws by conspiring to maintain a minimum spread of $.25 between
the bid and asked price for certain securities. The federal lawsuits and one
state court case were consolidated for pre-trial purposes in the Southern
District of New York in the fall of 1994 under the caption In re NASDAQ
Market-Makers Antitrust Litigation, United States District Court, Southern
District of New York No. 94-CIV-3996 (RWS); M.D.L. No. 1023. The other state
court suit, Lawrence A. Abel v. Merrill Lynch & Co., Inc. et al.; Superior
Court of San Diego, Case No. 677313, has been dismissed without prejudice in
conjunction with a tolling agreement.
In consolidated action, the plaintiffs purport to represent a class of
persons who bought one or more of what they currently estimate to be
approximately 1,650 securities on NASDAQ between May 1, 1989 and May 27,
1994. They seek unspecified monetary damages, which would be trebled under
the antitrust laws. The plaintiffs also seek injunctive relief, as well as
attorney's fees and the costs of the action. (The state cases seek similar
relief.) Plaintiffs in the consolidated action filed an amended consolidated
complaint that defendants answered in December 1995. On November 26, 1996,
the Court certified a class composed of retail purchasers. A motion to
include institutional investors in the class and to add class
representatives was granted. In December 1997, SBI, SB and R-H, along with
several other broker-dealer defendants, executed a settlement agreement with
the plaintiffs. This agreement has been preliminarily approved by the U.S.
District Court for the Southern District of New York but is subject to final
approval.
On July 17, 1996, the Antitrust Division of the Department of Justice filed
a complaint against a number of firms that act as market makers in NASDAQ
stocks. The complaint basically alleged that a common understanding arose
among NASDAQ market makers which worked to keep quote spreads in
11
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NASDAQ stocks artificially wide. Contemporaneous with the filing of the
complaint, SBI, SB and other defendants entered into a stipulated settlement
agreement, pursuant to which the defendants would agree not to engage in
certain practices relating to the quoting of NASDAQ securities and would
further agree to implement a program to ensure compliance with federal
antitrust laws and with the terms of the settlement. In entering into the
stipulated settlement, SBI and SB did not admit any liability. There are no
fines, penalties, or other payments of monies in connection with the
settlement. In April 1997, the U.S. District Court for the Southern District
of New York approved the settlement. In May 1997, plaintiffs in the related
civil action (who were permitted to intervene for limited purposes) appealed
the district court's approval of the settlement. The appeal is pending.
The Securities and Exchange Commission ("SEC") is also conducting a review
of the NASDAQ marketplace, during which it has subpoenaed documents and
taken the testimony of various individuals including SBI and SB personnel.
In July 1996, the SEC reached a settlement with the National Association of
Securities Dealers and issued a report detailing certain conclusions with
respect to the NASD and the NASDAQ market.
In December 1996, a complaint seeking unspecified monetary damages was filed
by Orange County, California against numerous brokerage firms, including SB,
in the U.S. Bankruptcy Court for the Central District of California.
Plaintiff alleged, among other things, that the defendants recommended and
sold to plaintiff unsuitable securities. The case (County of Orange et al.
v. Bear Sterns & Co. Inc. et al.) Has been stayed by agreement of the
parties.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - None
Item 6. (a) Exhibits - None
(b) Reports on Form 8-K - None
12
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY MID-WEST FUTURES FUND L.P. II
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 5/15/98
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 5/15/98
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and
Director
Date: 5/15/98
13
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<NAME> SMITH BARNEY MID-WEST FUTURES FUND L.P.II
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 90,099,835
<SECURITIES> 953,339
<RECEIVABLES> 328,259
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