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 0-24280
SHEARSON MID-WEST FUTURES FUND
(Exact name of registrant as specified in its charter)
New York 13-3634370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management 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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SHEARSON MID-WEST FUTURES FUND
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
Shearson Mid - West Futures Fund
Statement of Financial Condition
March 31, December 31,
1998 1997
----------- -----------
Assets: (Unaudited)
Equity in commodity futures trading account:
Cash and cash equivalents $57,783,950 $62,456,814
Net unrealized appreciation
on open futures contracts 611,973 3,053,604
----------- -----------
58,395,923 65,510,418
Interest receivable 205,285 223,149
=========== ===========
$58,601,208 $65,733,567
=========== ===========
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 293,006 $ 328,668
Management fees 194,230 218,016
Administrative fees 48,558 54,504
Incentive fees - 658,743
Other fees 39,109 41,906
Redemptions payable 286,286 136,695
----------- -----------
861,189 1,438,532
----------- -----------
Partners' Capital:
General Partner, 322.1307 Unit equivalents
outstanding in 1998 and 1997 759,323 840,500
Limited Partners, 24,173.1545 and 24,319.6068
Units of Limited Partnership Interest
outstanding in 1998 and 1997, respectively 56,980,696 63,454,535
----------- -----------
57,740,019 64,295,035
----------- -----------
$58,601,208 $65,733,567
=========== ===========
See Notes to Financial Statements.
3
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SHERASON MID-WEST FUTURES FUND
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 $ (2,663,124) $ 2,515,723
Change in unrealized gains/losses on open
positions (2,441,631) (870,312)
____________ ____________
(5,104,755) 1,645,411
Less, brokerage commissions and clearing fees
($15,787 and $10,254, respectively) (971,045) (983,945)
____________ ____________
Net realized and unrealized gains (losses) (6,075,800) 661,466
Interest income 634,377 628,329
____________ ____________
(5,441,423) 1,289,795
____________ ____________
Expenses:
Management fees 599,477 636,972
Administrative fees 149,869 159,243
Other 17,339 19,159
____________ ____________
766,685 815,374
____________ ____________
Net income (loss) (6,208,108) 474,421
Redemptions (346,908) (508,995)
____________ ____________
Net decrease in Partners' capital (6,555,016) (34,574)
Partners' capital, beginning of period 64,295,035 62,075,305
____________ ____________
Partners' capital, end of period $ 57,740,019 $ 62,040,731
------------ ------------
Net asset value per Unit
(24,495.2852 and 26,662.1607 Units outstanding
at March 31, 1998 and 1997, respectively) $ 2,357.19 $ 2,326.92
------------ ------------
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (252.00) $ 17.08
------------ ------------
4
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Shearson Mid-West Futures Fund
Notes to Financial Statements
March 31, 1998
(Unaudited)
1. General:
Shearson Mid-West Futures Fund (the "Partnership") is a limited
partnership which was organized on August 21, 1991 under the partnership laws of
the State of New York to engage 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.
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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Shearson Mid-West Futures Fund
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) $ (246.63) $ 23.96
Interest income 25.75 23.49
Expenses (31.12) (30.37)
---------- ----------
Increase (decrease) for period (252.00) 17.08
Net Asset Value per Unit,
beginning of period 2,609.19 2,309.84
---------- ---------
Net Asset Value per Unit,
end of period $2,357.19 $2,326.92
========== =========
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 $611,973 and $362,261, respectively, and
the average fair value during the three months then ended, based on monthly
calculation, was $988,388 and $2,388,840, 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 and options, whose value is based upon an underlying
asset, index, or reference rate, and generally represent future commitments to
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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 31, 1998, the notional or contractual
amounts of the Partnership's commitment to purchase and sell these instruments
was $444,621,778
7
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and $439,404,405, 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 $611,973 as detailed below.
MARCH 31, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies * $ 41,694,992 $ 84,963,457 $ 962,369
Interest Rates Non-U.S. 402,926,786 183,968,842 (10,403)
Interest Rates U.S. - 170,472,106 (339,994)
------------ ------------ ----------
Totals $444,621,778 $439,404,405 $ 611,973
============ ============ =========
At March 31, 1997, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $72,101,339
and $404,042,119, respectively, and the fair value of the Partnership's
derivatives, including options thereon, was $362,261, as detailed below.
MARCH 31, 1997
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies * $ 35,497,762 $ 66,798,843 $(465,635)
Interest Rates Non-U.S. 30,464,402 253,375,620 141,571
Interest Rates U.S. - 83,867,656 781,000
Metals 6,139,175 - (94,675)
------------ ------------ ----------
Total $ 72,101,339 $404,042,119 $ 362,261
============ ============ =========
* 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 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 1997.
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
10.2% from $64,295,035 to $57,740,019. This decrease was attributable to the
redemption of 146.4523 limited partnership Units resulting in an outflow of
$346,908 together with a net loss from operations of $6,208,108 for the three
months ended March 31, 1998. Future 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 9.7% from $2,609.19 to $2,357.19 as compared to the first quarter
of 1997 in which the net asset value per Unit increased by 0.7%. The Partnership
experienced a net trading loss before commissions and expenses in the first
quarter of 1998 of $5,104,755. Losses were experienced in the trading of
commodity futures in currencies, indices, U.S. interest rates and metals which
were partially offset by gains 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 $1,645,411. 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 price trends and the ability of the Advisor to
identify correctly those price trends. These price trends are influenced by,
among other things, changing supply and demand relationships, weather,
governmental, agricultural, commercial and trade programs and
9
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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 on the monthly average 13-week U.S. Treasury Bill yield. Interest income
for the three months ended March 31, 1998, increased by $6,048, as compared to
the corresponding period in 1998. This increase is primarily due to the effect
of an increase in interest rates during the three months ended March 31, 1998 as
compared to 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
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 decreased by $12,900 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
and redemptions. Management fees for the three months ended March 31, 1998
decreased by $37,495, 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 and redemptions. Administrative fees for the
three months ended March 31, 1998 decreased by $9,374, 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. No incentive fees were 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 NASDAQ stocks artificially wide. Contemporaneous with
the
11
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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.
SHEARSON MID-WEST FUTURES FUND
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> SHEARSON MID-WEST FUTURES FUND
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 57,783,950
<SECURITIES> 611,973
<RECEIVABLES> 205,285
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