-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ExXQ7/XV1dYccypQx0ndT7uqf6/lZ5rmbumgSDcip4XapWGD5Hze2eHsKPBT29pv UGPO40xrnwUrYAmwj+OjJA== 0000873799-99-000010.txt : 19990813 0000873799-99-000010.hdr.sgml : 19990813 ACCESSION NUMBER: 0000873799-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY DEAN WITTER SPECTRUM SELECT LP CENTRAL INDEX KEY: 0000873799 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133619290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19511 FILM NUMBER: 99685634 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CNTR - 62ND FLR STREET 2: C/O DEMETER MANAGEMENT CORP CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2123928899 MAIL ADDRESS: STREET 1: C/O DEMETER MANAGEMENT CORP STREET 2: TWO WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER SPECTRUM SELECT LP DATE OF NAME CHANGE: 19980507 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN SELECT FUTURES FUND LP DATE OF NAME CHANGE: 19930328 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 0-19511 MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. (Exact name of registrant as specified in its charter) Delaware 13-3619290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) c/o Demeter Management Corporation Two World Trade Center, 62 Fl., New York, NY 10048 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 392-5454 (Former name, former address, and former fiscal year, if changed since last report) 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 MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. INDEX TO QUARTERLY REPORT ON FORM 10-Q June 30, 1999
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Financial Condition June 30, 1999 (Unaudited) and December 31, 1998..........2 Statements of Operations for the Quarters Ended June 30, 1999 and 1998 (Unaudited).......................3 Statements of Operations for the Six Months Ended June 30, 1999 and 1998 (Unaudited)...................... 4 Statements of Changes in Partners' Capital for the Six Months Ended June 30, 1999 and 1998 (Unaudited)............................................. 5 Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 (Unaudited).......................6 Notes to Financial Statements (Unaudited).............7- 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....12-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................21-33 Part II. OTHER INFORMATION Item 1. Legal Proceedings....................................34 Item 2. Changes in Securities and Use of Proceeds.........34-36 Item 6. Exhibits and Reports on Form 8-K.....................36
PART I. FINANCIAL INFORMATION Item 1. Financial Statements MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. STATEMENTS OF FINANCIAL CONDITION
June 30, December 31, 1999 1998 $ $ (Unaudited) ASSETS Equity in futures interests trading accounts: Cash 201,633,502 187,619,419 Net unrealized gain on open contracts10,625,031 8,435,054 Net option premiums 406,376 - Total Trading Equity 212,664,909 196,054,473 Subscriptions receivable 4,172,561 6,021,707 Interest receivable (DWR) 614,725 591,858 Total Assets 217,452,195 202,668,038 LIABILITIES AND PARTNERS' CAPITAL Liabilities Accrued brokerage fees (DWR) 1,273,562 1,164,344 Redemptions payable 996,957 939,381 Accrued management fees 526,991 481,797 Total Liabilities 2,797,510 2,585,522 Partners' Capital Limited Partners (8,946,936.109 and 8,274,690.051 Units, respectively) 211,508,705 196,915,644 General Partner (133,076.700 Units) 3,145,980 3,166,872 Total Partners' Capital 214,654,685 200,082,516 Total Liabilities and Partners' Capital 217,452,195 202,6 68,038 NET ASSET VALUE PER UNIT 23.64 23.80 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Quarters Ended June 30, 1999 1998 $ $ REVENUES Trading profit (loss): Realized (2,404,548) (5,464,460) Net change in unrealized 4,846,371 481,970 Total Trading Results 2,441,823 (4,982,490) Interest Income (DWR) 1,854,465 1,658,741 Total Revenues 4,296,288 (3,323,749) EXPENSES Brokerage fees (DWR) 3,834,038 2,345,736 Management fees 1,586,497 1,173,394 Transaction fees and costs - 219,256 Administrative expenses - 25,000 Total Expenses 5,420,535 3,763,386 NET LOSS (1,124,247) (7,087,135) NET LOSS ALLOCATION Limited Partners (1,108,526) (6,967,561) General Partner (15,721) (119,574) NET LOSS PER UNIT Limited Partners (.12) (.90) General Partner (.12) (.90) The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 1999 1998 $ $ REVENUES Trading profit (loss): Realized 3,393,720 6,761,724 Net change in unrealized 2,189,977 (3,968,065) Total Trading Results 5,583,697 2,793,659 Interest Income (DWR) 3,581,033 3,402,988 Total Revenues 9,164,730 6,196,647 EXPENSES Brokerage fees (DWR) 7,497,645 4,707,505 Management fees 3,102,472 2,447,663 Transaction fees and costs - 625,328 Administrative expenses - 64,000 Total Expenses 10,600,117 7,844,496 NET LOSS (1,435,387) (1,647,849) NET LOSS ALLOCATION Limited Partners (1,414,495) (1,619,335) General Partner (20,892) (28,514) NET LOSS PER UNIT Limited Partners (.16) (.22) General Partner (.16) (.22) The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Six Months Ended June 30, 1999 and 1998 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total Partners' Capital, December 31, 1997 8,000,551.600 $163,999,307 $2,774,014 $166,773,321 Subscriptions 181,984.824 3,751,903 - 3,751,903 Net Loss - (1,619,335) (28,514) (1,647,849) Redemptions (526,845.708) (10,933,118) - (10,933,118) Partners' Capital, June 30, 1998 7,655,690.716 $155,198,757 $2,745,500 $157,944,257 Partners' Capital, December 31, 1998 8,407,766.751 $196,915,644 $3,166,872 $200,082,516 Subscriptions 1,055,346.328 25,160,601 - 25,160,601 Net Loss - (1,414,495) (20,892) (1,435,387) Redemptions (383,100.270) (9,153,045) - (9,153,045) Partners' Capital, June 30, 1999 9,080,012.809 $211,508,705 $3,145,980 $214,654,685 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 1999 1998 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net loss (1,435,387) (1,647,849) Noncash item included in net loss: Net change in unrealized (2,189,977) 3 ,968,065 Net option premiums (406,376) - (Increase) decrease in operating assets: Interest receivable (DWR) (22,867) 76,478 Due from DWR - 1 ,097,517 Increase (decrease) in operating liabilities: Accrued brokerage fees (DWR) 109,218 938,360 Accrued management fees 45,194 (35,386) Accrued administrative expenses - (72,499) Net cash provided by (used for) operating activities (3 ,900,195) 4,324,686 CASH FLOWS FROM FINANCING ACTIVITIES Offering of units 25,160,601 3 ,751,903 (Increase) decrease in subscriptions receivable1,849,146 (3,488,888) Increase in redemptions payable 57,576 50,773 Redemptions of units (9,153,045) (10,933,118) Net cash provided by (used for) financing activities 17,914,278 (10,619,330) Net increase (decrease) in cash 14,014,083 ( 6,294,644) Balance at beginning of period 187,619,419 158,178,925 Balance at end of period 201,633,502 151,884,281 The accompanying notes are an integral part of these financial statements.
MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) The financial statements include, in the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial condition of Morgan Stanley Dean Witter Spectrum Select L.P. (the "Partnership"). The financial statements and condensed notes herein should be read in conjunction with the Partnership's December 31, 1998 Annual Report on Form 10-K. 1. Organization Morgan Stanley Dean Witter Spectrum Select L.P. is a limited partnership organized to engage primarily in the speculative trading of futures and forward contracts, options on futures contracts, physical commodities and other commodity interests, including, but not limited to foreign currencies, financial instruments, metals, energy and agricultural products (collectively, "futures interests"). The Partnership is one of the Morgan Stanley Dean Witter Spectrum Series of funds, comprised of the Partnership, Morgan Stanley Dean Witter Spectrum Global Balanced L.P., Morgan Stanley Dean Witter Spectrum Strategic L.P. and Morgan Stanley Dean Witter Spectrum Technical L.P. On June 1, 1998, the Partnership became one of the Spectrum Series of funds. At that time, each outstanding Unit of the Partnership was converted into 100 Units and its name changed from Select Futures Fund L.P. The number of Units outstanding and the Net Asset Value per Unit in the accompanying financial statements have been MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) adjusted to reflect this conversion. The general partner is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Dean Witter Reynolds, Inc. ("DWR") and an unaffiliated clearing commodity broker, Carr Futures Inc. ("Carr"), provides clearing and execution services. Both Demeter and DWR are wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW"). The trading advisors to the Partnership are EMC Capital Management, Inc., Rabar Market Research, Inc. and Sunrise Capital Management, Inc. (collectively, the "Trading Advisors"). 2. Related Party Transactions The Partnership's cash is on deposit with DWR and Carr in futures interests trading accounts to meet margin requirements as needed. DWR pays interest on these funds based on a prevailing rate on U.S. Treasury bills. Brokerage expenses incurred by the Partnership are paid to DWR. The Partnership pays brokerage fees to DWR. 3. Financial Instruments The Partnership trades futures and forward contracts, options on futures contracts, physical commodities and other commodity interests, including, but not limited to foreign currencies, financial instruments, metals, energy and agricultural products. MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the market value of these contracts, including interest rate volatility. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. The Partnership elected to adopt the provisions of SFAS No. 133 beginning with the fiscal year that ended December 31, 1998. SFAS No. 133 supersedes SFAS No. 119 and No. 105, which required the disclosure of average aggregate fair values and contract/notional values, respectively, of derivative financial instruments for an entity which carries its assets at fair value. The application of SFAS No. 133 does not have a significant effect on the Partnership's financial statements. The net unrealized gain on open contracts is reported as a component of "Equity in futures interests trading accounts" on the Statements of Financial Condition and totaled $10,625,031 and $8,435,054 at June 30, 1999 and December 31, 1998, respectively. MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Of the $10,625,031 net unrealized gain on open contracts at June 30, 1999, $10,388,605 related to exchange-traded futures and futures-styled option contracts and $236,426 related to off- exchange-traded forward currency contracts. Of the $8,435,054 net unrealized gain on open contracts at December 31, 1998, $8,982,276 related to exchange-traded futures and futures-styled options contracts and $(547,222) related to off-exchange-traded forward currency contracts. Exchange-traded futures and futures-styled options contracts held by the Partnership at June 30, 1999 and December 31, 1998 mature through June 2000 and December 1999, respectively. Off-exchange- traded forward currency contracts held by the Partnership at June 30, 1999 and December 31, 1998 mature through September 1999 and March 1999, respectively. The Partnership is subject to the credit risk associated with counterparty non-performance. The credit risk associated with the instruments in which the Partnership is involved is limited to the amounts reflected in the Partnership's Statements of Financial Condition. DWR and Carr act as the futures commission merchants or the counterparties with respect to most of the Partnership's assets. Exchange-traded futures and futures-styled options MORGAN STANLEY DEAN WITTER SPECTRUM SELECT L.P. NOTES TO FINANCIAL STATEMENTS - (CONCLUDED) contracts are marked to market on a daily basis, with variations in value settled on a daily basis. Each of DWR and Carr, as a futures commission merchant for all of the Partnership's exchange- traded futures and futures-styled options contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission ("CFTC") to segregate from their own assets, and for the sole benefit of their commodity customers, all funds held by them with respect to exchange-traded futures and futures- styled options contracts, including an amount equal to the net unrealized gain on all open futures and futures-styled options contracts, which funds, in the aggregate, totaled $212,022,107 and $196,601,695 at June 30, 1999 and December 31, 1998, respectively. With respect to the Partnership's off-exchange-traded forward currency contracts, there are no daily settlements of variations in value nor is there any requirement that an amount equal to the net unrealized gain on open forward contracts be segregated. With respect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the ability of Carr, the sole counterparty on all of such contracts, to perform. Carr's parent, Credit Agricole Indosuez, has guaranteed to the Partnership payment of the net liquidating value of the transactions in the Partnership's account with Carr (including foreign currency contracts). Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity - Assets of the Partnership are deposited with DWR as non-clearing broker and Carr as clearing broker in separate futures interest trading accounts. Such assets are held in either non-interest bearing bank accounts or in securities approved by the CFTC for investment of customer funds. The Partnership's assets held by DWR and Carr may be used as margin solely for the Partnership's trading. Since the Partnership's sole purpose is to trade in futures interests, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership's investment in futures interests may, from time to time, be illiquid. Most United States futures exchanges limit fluctuations in certain futures interest prices during a single day by regulations referred to as "daily price fluctuations limits" or "daily limits". Pursuant to such regulations, during a single trading day no trades may be executed at prices beyond the daily limit. If the price for a particular futures interest has increased or decreased by an amount equal to the daily limit, positions in such futures interest can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures interests prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Partnership from promptly liquidating its futures interests and result in restrictions on redemptions. There is no limitation on daily price moves in trading forward contracts on foreign currency. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or from promptly liquidating unfavorable positions, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. Capital Resources. The Partnership does not have, nor does it expect to have, any capital assets. Future redemptions, exchanges and sales of additional Units of Limited Partnership Interest ("Unit(s)") will affect the amount of funds available for investment in futures interests in subsequent periods. Since they are at the discretion of Limited Partners, it is not possible to estimate the amount and therefore, the impact of future redemptions, exchanges or sales of additional Units. Results of Operations For the Quarter and Six Months Ended June 30, 1999 For the quarter ended June 30, 1999, the Partnership recorded total trading revenues including interest income of $4,296,288 and, after expenses, posted a decrease in Net Asset Value per Unit. The most significant net trading losses were recorded in the metals markets from long silver futures positions during May as prices moved lower on the Silver Institute's report which indicated a drop in fabrication demand last year and a jump in government sales. Losses were also experienced from long positions in copper futures during May as the prices of most base metals fell significantly amid large supply, low demand and the unlikely possibility of a production cut. In the currency markets, losses were experienced from trading the British pound as its value moved in a choppy pattern versus the U.S. dollar as positive economic data that supported recovery hopes in the U.K. drove the pound higher, only for it to retreat when the Bank of England stated that it might cut interest rates to stem any undesirable appreciation of the pound. Smaller losses were also recorded in the agricultural markets from trading corn and soybean meal futures as prices in these markets moved in a trendless manner throughout the quarter on inconsistencies in reports of supply levels, global demand and weather conditions in key growing regions. A majority of the Partnership's overall losses for the quarter was offset by gains in the global interest rate futures markets from short positions in European interest rate futures during April and June as prices declined due to dampened sentiment regarding the European Monetary Union and fears of an interest rate hike in the U.S. Additional profits were recorded from short positions in U.S. interest rate futures as domestic bond prices moved lower during May and June amid fears of a tighter Federal Reserve monetary policy and a higher- than-expected rise in the Consumer Price Index. Total expenses for the three months ended June 30, 1999 were $5,420,535, resulting in a net loss of $1,124,247. The value of a Unit decreased from $23.76 at March 31, 1999 to $23.64 at June 30, 1999. For the six months ended June 30, 1999, the Partnership recorded total trading revenues including interest income of $9,164,730 and, after expenses, posted a decrease in Net Asset Value per Unit. The most significant net trading losses were experienced in the metals markets particularly during the month of March from long silver futures positions as prices declined during mid-month after Berkshire Hathaway's annual report failed to provide any new information on the company's silver positions. In the global stock index futures market, losses were recorded from long positions in European stock index futures as prices moved lower during January and early February amid skepticism regarding the stability of emerging market economies. Prices in these markets continued to decline during May and June amid fears of higher interest rates in the U.S. A majority of the Partnership's overall losses for the year was offset by gains recorded in the global interest rate futures markets from short positions in European bond futures during April and June as prices declined due to dampened sentiment regarding the European Monetary Union and fears of an interest rate hike in the U.S. Additional profits were recorded during the first half of the year from short positions in U.S. interest rate futures as domestic bond prices moved lower during February on strong economic data, as well as during May and June amid fears of a tighter Federal Reserve monetary policy and a higher-than-expected rise in the Consumer Price Index. In the energy markets, gains were recorded from long positions in crude oil futures as prices moved considerably higher during March, April and June. The substantial recovery in oil prices during the first half of the year was largely attributed to the news of a decline in inventory levels that resulted from an agreement reached by both OPEC and non-OPEC countries to cut total output. Additional profits were recorded in the currency markets from short positions in the Swiss franc and the European common currency as the value of the franc and euro declined versus the U.S. dollar throughout most of the year. The weakness in these European currencies relative to the U.S. dollar was largely attributed to concerns regarding European economic growth and potentially widening interest rate differentials between Europe and the U.S. Investors also sold francs and euros for dollars during the first half of the year in response to the crisis in Yugoslavia on the rationale that the United States was the safest place to invest during the crisis in Kosovo. Smaller gains were recorded in the agricultural markets during January, February, May and June from short futures positions in soybean oil and soybeans as prices trended steadily lower amid a healthy South American crop, fears that Brazil will flood the market in an effort to aid their ailing economy and on a bearish USDA supply- demand report. Total expenses for the six months ended June 30, 1999 were $10,600,117, resulting in a net loss of $1,435,387. The value of a Unit decreased from $23.80 at December 31, 1998 to $23.64 at June 30, 1999. For the Quarter and Six Months Ended June 30, 1998 For the quarter ended June 30, 1998, the Partnership recorded total trading losses net of interest income of $3,323,749 and posted a decrease in Net Asset Value per Unit. The most significant losses were recorded in the financial futures markets from long positions in Australian interest rate futures as prices in this market moved lower during April and June. Additional losses were recorded from trading U.S. interest rate futures during April as domestic bond prices moved in a choppy pattern. In agricultural futures, losses were experienced during June from short positions in soybean futures as prices moved higher. Losses were also recorded from trading soybean oil futures throughout the quarter. Currencies losses were experienced during April from short positions in the Swiss franc and German mark as the value of these currencies reversed higher relative to the U.S. dollar. These losses were partially offset by gains from short positions in the South African rand, Canadian dollar and Japanese yen as the value of these currencies weakened relative to the U.S. dollar and other currencies during May and June. Smaller losses were recorded from trading copper futures during April and May. A portion of the Partnership's overall losses for the quarter was offset by gains recorded in the energy markets in June from short positions in crude oil and unleaded gas futures as prices declined due to increased supply early in the month. Smaller gains were recorded in soft commodities during June from long positions in cotton futures and short positions in coffee futures. Total expenses for the three months ended June 30, 1998 were $3,763,386, resulting in a net loss of $7,087,135. The value of a Unit decreased from $21.53 at March 31, 1998 to $20.63 at June 30, 1998. For the six months ended June 30, 1998, the Partnership recorded total trading revenues including interest income of $6,196,647 and, after expenses, posted a decrease in Net Asset Value per Unit. The most significant net trading losses were recorded in metals primarily from trendless price movement in copper futures during a majority of the first half of the year. Additional losses were recorded in precious metals from choppy price movement in silver and gold futures during the first quarter. In currencies, losses were recorded from transactions involving the British pound as its value moved without consistent direction for the first six months of the year. Additional currency losses were recorded during April from short Swiss franc positions as its value moved higher versus the U.S. dollar after moving lower previously. A portion of these losses was offset by gains recorded during May and June from short positions in the South African rand and Canadian dollar as the value of these currencies weakened relative to the U.S. dollar. In agricultural futures, losses recorded during June from trading soybean and soybean oil futures more than offset gains recorded from short soybean meal futures positions during February and March. Smaller losses recorded in financial futures from long Australian bond futures positions during April and June offset gains recorded during January, February and March from long positions in European interest rate futures and global stock index futures as prices in these markets trended higher. A portion of the Partnership's overall losses for the first half of the year was offset by profits from short crude and heating oil futures positions as oil prices moved lower during January, February and June. Additional profits recorded from short sugar futures positions, as prices declined during January and February, contributed in offsetting a portion of the overall Partnership losses for the first half of the year. Total expenses for the six months ended June 30, 1998 were $7,844,496, resulting in a net loss of $1,647,849. The value of a Unit decreased from $20.85 at December 31, 1997 to $20.63 at June 30, 1998. Year 2000 Problem. Commodity pools, like financial and business organizations and individuals around the world, depend on the smooth functioning of computer systems. Many computer systems in use today cannot recognize the computer code for the year 2000, but revert to 1900 or some other date. This is commonly known as the "Year 2000 Problem". The Partnership could be adversely affected if computer systems used by it or any third party with whom it has a material relationship do not properly process and calculate date-related information and data concerning dates on or after January 1, 2000. Such a failure could adversely affect the handling or determination of futures trades and prices and other services. MSDW began its planning for the Year 2000 Problem in 1995, and currently has several hundred employees working on the matter. It has developed its own Year 2000 compliance plan to deal with the problem and had the plan approved by the company's executive management, Board of Directors and Information Technology Department. Demeter is coordinating with MSDW to address the Year 2000 Problem with respect to Demeter's computer systems that affect the Partnership. This includes hardware and software upgrades, systems consulting and computer maintenance. Beyond the challenge facing internal computer systems, the systems failure of any of the third parties with whom the Partnership has a material relationship - the futures exchanges and clearing organizations through which it trades, Carr, or the Trading Advisors - could result in a material financial risk to the Partnership. All U.S. futures exchanges are subject to monitoring by the CFTC of their Year 2000 preparedness and the major foreign futures exchanges are also expected to be subject to market-wide testing of their Year 2000 compliance during 1999. Demeter intends to monitor the progress of Carr and the Trading Advisors throughout 1999 in their Year 2000 compliance and, where applicable, to test its external interface with Carr and the Trading Advisors. A worst case scenario would be one in which trading of contracts on behalf of the Partnership becomes impossible as a result of the Year 2000 problem encountered by any third parties. A less catastrophic but more likely scenario would be one in which trading opportunities diminish as a result of technical problems resulting in illiquidity and fewer opportunities to make profitable trades. MSDW has begun developing various "contingency plans" in the event that the systems of such third parties fail. Demeter intends to consult closely with MSDW in implementing those plans. Despite the best efforts of both Demeter and MSDW, however, it is possible that these steps will not be sufficient to avoid any adverse impact to the Partnership. Risks Associated With the Euro. On January 1, 1999, eleven countries in the European Union established fixed conversion rates on their existing sovereign currencies and converted to a common single currency (the "euro"). During a three-year transition period, the sovereign currencies will continue to exist but only as a fixed denomination of the euro. Conversion to the euro prevents the Trading Advisors from trading in certain currencies and thereby limits their ability to take advantage of potential market opportunities that might otherwise have existed had separate currencies been available to trade. This could adversely affect the performance results of the Partnership. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction The Partnership is a commodity pool engaged primarily in the speculative trading of futures interests. The market sensitive instruments held by the Partnership are acquired solely for speculative trading purposes and, as a result, all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's primary business activities. The futures interests traded by the Partnership involve varying degrees of related market risk. Such market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and/or market values of financial instruments and commodities. Fluctuations in related market risk based upon the aforementioned factors result in frequent changes in the fair value of the Partnership's open positions, and, consequently, in its earnings and cash flow. The Partnership's total market risk is influenced by a wide variety of factors, including the diversification effects among the Partnership's existing open positions, the volatility present within the market(s), and the liquidity of the market(s). At varying times, each of these factors may act to exacerbate or mute the market risk associated with the Partnership. The Partnership's past performance is not necessarily indicative of its future results. Any attempt at quantifying the Partner- ship's market risk must be qualified by the inherent uncertainty of its speculative trading, which may cause future losses and volatility (i.e. "risk of ruin") far in excess of the Partnership's experience to date and/or any reasonable expectation premised upon historical changes in the fair value of its market sensitive instruments. Quantifying the Partnership's Trading Value at Risk The following quantitative disclosures regarding 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 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. The Partnership accounts for open positions on the basis of mark- to-market accounting principles. As such, any loss in the fair value of the Partnership's open positions is directly reflected in the Partnership's earnings, whether realized or unrealized, and the Partnership's cash flow, as profits and losses on open positions of exchange-traded futures interests are settled daily through variation margin. The Partnership's risk exposure in the various market sectors traded by the Trading Advisors is estimated below in terms of Value at Risk ("VaR"). The VaR model employed by the Partnership incorporates numerous variables that could impact the fair value of the Partnership's trading portfolio. The Partnership estimates VaR using a model based on historical simulation with a confidence level of 99%. Historical simulation involves constructing a distribution of hypothetical daily changes in trading portfolio value. The VaR model generally takes into account linear exposures to price and interest rate risk. Market risks that are incorporated in the VaR model include equity and commodity prices, interest rates, foreign exchange rates, as well as correlation that exists among these variables. The hypothetical changes in portfolio value are based on daily observed percentage changes in key market indices or other market factors ("market risk factors") to which the portfolio is sensitive. In the case of the Partnership's VaR, the historical observation period is approximately four years. The Partnership's one-day 99% VaR corresponds to the negative change in portfolio value that, based on observed market risk factor moves, would have been exceeded once in 100 trading days. VaR models such as the Partnership's are continually evolving as trading portfolios become more diverse and modeling techniques and systems capabilities improve. It must also be noted that the VaR model is used to quantify market risk for historic reporting purposes only and is not utilized by either Demeter or the Trading Advisors in their daily risk management activities. The Partnership's Value at Risk in Different Market Sectors The following table indicates the VaR associated with the Partnership's open positions as a percentage of total Net Assets by market category as of June 30, 1999. As of June 30, 1999, the Partnership's total capitalization was approximately $214 million. Primary Market June 30, 1999 Risk Category Value at Risk Interest Rate (1.61)% Currency (1.52) Equity (0.82) Commodity (0.86) Aggregate Value at Risk (2.83)% Aggregate value at risk represents the aggregate VaR of the Partnership's open positions and not the sum of the VaR of the individual categories listed above. Aggregate VaR will be lower as it takes into account correlation among different positions and categories. The table above represents the VaR of the Partnership's open positions at June 30, 1999 only and is not necessarily representative of either the historic or future risk of an investment in the Partnership. As the Partnership's sole business is the speculative trading of primarily futures interests, the composition of its portfolio of open positions can change significantly over any given time period or even within a single trading day. Such changes in open positions could materially impact market risk as measured by VaR either positively or negatively. The table below supplements the quarter-end VaR by presenting the Partnership's high, low and average VaR as a percentage of total Net Assets for the four quarterly reporting periods from July 1, 1998 through June 30, 1999. Primary Market Risk Category High Low Average Interest Rate (2.17)% (0.46)% (1.33)% Currency (1.52) (0.51) (0.98) Equity (0.82) (0.21) (0.49) Commodity (0.91) (0.51) (0.76) Aggregate Value at Risk (2.83)% (1.28)% (2.03)% Limitations on Value at Risk as an Assessment of Market Risk The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements, as such margin requirements generally range between 2% and 15% of contract face value. Additionally, due to the use of leverage, the face value of the market sector instruments held by the Partnership is typically many times the total capitalization of the Partnership. The financial magnitude of the Partnership's open positions thus creates a "risk of ruin" not typically found in other investment vehicles. Due to the relative size of the positions held, certain market conditions may cause the Partnership to incur losses greatly in excess of VaR within a short period of time. The foregoing VaR tables, as well as the past performance of the Partnership, gives no indication of such "risk of ruin". In addition, VaR risk measures should be interpreted in light of the methodology's limitations, which include the following: past changes in market risk factors will not always yield accurate predictions of the distributions and correlations of future market movements; changes in portfolio value in response to market movements may differ from the responses implicit in a VaR model; published VaR results reflect past trading positions while future risk depends on future positions; VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements. The foregoing VaR tables present the results of the Partnership's VaR for each of the Partnership's market risk exposures and on an aggregate basis at June 30, 1999 and for the end of the four quarterly reporting periods from July 1, 1998 through June 30, 1999. Since VaR is based on historical data, VaR should not be viewed as predictive of the Partnership's future financial performance or its ability to manage and monitor risk and there can be no assurance that the Partnership's actual losses on a particular day will not exceed the VaR amounts indicated or that such losses will not occur more than 1 in 100 trading days. Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances not needed for margin. However, such balances, as well as any market risk they may represent, are immaterial. The Partnership also maintains a substantial portion (approximately 84%) of its available assets in cash at DWR. A decline in short- term interest rates will result in a decline in the Partnership's cash management income. This cash flow risk is not considered material. Materiality, as used throughout this section, 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 Partnership's market sensitive instruments. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership's market risk 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 and Section 21E of the Securities Exchange Act. The Partnership's primary market risk exposures as well as the strategies used and to be used by Demeter and the Trading Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership's risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropria- tions, 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 risk management strategies of the Partnership. 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 Partnership as of June 30, 1999, by market sector. It may be anticipated however, that these market exposures will vary materially over time. Interest Rate. The primary trading risk market exposure in the Partnership is in the interest rate sector. Exposure at June 30, 1999 was spread across the U.S., European, Australian, German, and Japanese interest rate sectors. Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly affect 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 Partnership's profitability. The Partnership's primary interest rate exposure is generally to interest rate fluctuations in the United States and the other G-7 countries. However, the Partnership also takes futures positions in the government debt of smaller nations - e.g. Australia and Spain. Demeter anticipates that G-7 and Australian interest rates will remain the primary interest rate exposure of the Partnership for the foreseeable future. The changes in interest rates, which have the most effect on the Partnership, are changes in long-term, as opposed to short-term, rates. Most of the speculative futures positions held by the Partnership are in medium-to-long term instruments. Consequently, even a material change in short-term rates would have little effect on the Partnership, were the medium-to-long term rates to remain steady. Currency. The second largest market exposure at June 30, 1999 was in the currency complex. The Partnership's currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. Interest rate changes as well as political and general economic conditions influence these fluctuations. The Partnership trades in a large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. For the second quarter of 1999, the Partnership's major exposures were in the euro currency crosses and outright U.S. dollar positions. (Outright positions consist of the U.S. dollar vs. other currencies. These other currencies include the major and minor currencies). Demeter does not anticipate that the risk profile of the Partnership's currency sector will change significantly in the future. The currency trading VaR 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 Partnership in expressing VaR in a functional currency other than dollars. Equity. The primary equity exposure is to equity price risk in the G-7 countries. The stock index futures traded by the Partnership are by law limited to futures on broadly based indices. As of June 30, 1999, the Partnership's primary exposures were in the S&P 500 (U.S.), Nikkei (Japan) and Hang Seng (China) stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the U.S., European and Japanese indices. (Static markets would not cause major market changes but would make it difficult for the Partnership to avoid being "whipsawed" into numerous small losses). Commodity. Metals. The Partnership's primary metals market exposure is to fluctuations in the price of gold and silver. Although certain Trading Advisors will, from time to time, trade base metals such as copper, aluminum, zinc, nickel and tin, the principal market exposures of the Partnership have consistently been in precious metals, gold and silver. The Trading Advisors' gold trading has been increasingly limited due to the long- lasting and mainly non-volatile decline in the price of gold over the last 10-15 years. However, silver prices have remained volatile over this period, and the Trading Advisors have, from time to time, taken substantial positions as they have perceived market opportunities to develop. Demeter anticipates that gold and silver will remain the primary metals market exposure for the Partnership. Soft Commodities and Agriculturals. On June 30, 1999, the Partnership had a reasonable amount of exposure in the markets that comprise these sectors. Most of the exposure, however, was in the soybean, cotton and coffee markets. Supply and demand inequalities, severe weather disruption and market expectations affect price movements in these markets. Energy. On June 30, 1999, the Partnership's energy exposure was shared by futures contracts in the oil and natural gas markets. Price movements in these markets result from political developments in the Middle East, weather patterns, and other economic fundamentals. As oil prices have broken out of low price ranges achieved in 1998, it is possible that volatility will increase as well. Significant profits and losses have been and are expected to continue to be experienced in this market. Natural gas, also a primary energy market exposure, has exhibited more volatility than the oil markets on an intra-day and daily basis and is expected to continue in this choppy pattern. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership as of June 30, 1999: Foreign Currency Balances. The Partnership's primary foreign currency balances are in euros, Swiss francs, South African rands, British pounds and Japanese yen. The Partnership controls the non-trading risk of these balances by regularly converting these balances back into dollars upon liquidation of the respective position. Qualitative Disclosures Regarding Means of Managing Risk Exposure The means by which the Partnership and the Trading Advisors, severally, attempt to manage the risk of the Partnership's open positions are essentially the same in all market categories traded. Demeter attempts to manage the Partnership's market exposure by (i) diversifying the Partnership's assets among different Trading Advisors, each of whose strategies focus on different market sectors and trading approaches, and (ii), monitoring the performance of the Trading Advisors on a daily basis. In addition, the Trading Advisors establish diversifi- cation guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market sensitive instrument. One should be aware that certain Trading Advisors treat their risk control policies as strict rules, whereas others treat such policies as general guidelines. Demeter monitors and controls the risk of the Partnership's non- trading instrument, cash, which is the only Partnership investment directed by Demeter, rather than the Trading Advisors. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The following supplements Legal Proceedings previously disclosed in the Partnership's 1998 Form 10-K: With respect to the plaintiff's consolidated action in California, on July 1, 1999, the Superior Court of the State of California, ruling from the bench, denied the plaintiffs' motion to have their lawsuit certified as a class action, stating, among other things, that plaintiffs' lawsuit did not present common questions of fact. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Partnership initially registered 60,000 Units (prior to the 100 for one Unit conversion on April 30, 1998) pursuant to a Registration Statement on Form S-1, which became effective on May 17, 1991 (SEC File Number 33-39667), and 10,000 (pre-conversion) Units at a supplemental closing pursuant to a new Registration Statement on Form S-1, which became effective on August 23, 1991 (SEC File No. 33-42380). The offering commenced on May 17, 1991 and terminated as of August 31, 1991, with 60,853.334 Units sold. The aggregate price of the offering amount registered was $69,380,300, based upon the initial offering price of $1,000 per Unit and $938.03 per Unit at the supplemental closing (the initial closing and supplemental closing, hereinafter, the "Initial Offering"). The aggregate offering price of the Units sold during the Initial Offering was $60,268,482. The Partnership registered an additional 75,000 Units (pre- conversion) pursuant to a new Registration Statement of Form S-1, which became effective on August 31, 1993 (SEC File Number 33- 65072) (the "Second Offering"). The Second Offering commenced on August 31, 1993 and terminated as of September 30, 1993, with 74,408.337 Units sold. The aggregate price of the Second Offering amount registered was $102,744,000, based upon an initial offering price of $1,369.92. The aggregate price of the Units sold during the Second Offering was $116,617,866. The Partnership registered an additional 60,000 Units (pre-con- version) pursuant to another Registration Statement on Form S-1, which became effective on October 17, 1996 (SEC File Number 333- 1918), (the "Third Offering"). The Third Offering commenced on October 17, 1996 and terminated as of March 3, 1997, with 10,878.000 Units sold. The aggregate price of the Third Offering amount registered was $98,247,000, based upon an initial offering price of $1,637.45. The aggregate price of the Units sold during the Third Offering was $22,308,326. The Partnership registered an additional 1,500,000 Units pursuant to another Registration Statement on Form S-1, which became effective on May 11, 1998 (SEC File Number 333-47829). Commencing with the April 30, 1998 monthly closing, each previously outstanding Unit was converted into 100 Units. 5,000,000 additional Units were registered pursuant to a Registration Statement on Form S-1 (File No. 333-68773) effective January 21, 1999. The managing underwriter for the Partnership is DWR. Units are being sold at monthly closings as of the last day of each month at a price equal to 100% of the Net Asset Value of a Unit as of the date of such monthly closing. Through June 30, 1999, 16,979,667.157 Units of the Partnership were sold, leaving 4,134,299.943 Units unsold as of June 30, 1999. The aggregate price of the Units sold through June 30, 1999 is $254,652,865. Since no expenses are chargeable against proceeds, 100% of the proceeds of the offering have been applied to the working capital of the Partnership for use in accordance with the "Investment Programs, Use of Proceeds and Trading Policies" section of the Prospectus. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits - None. (B) Reports on Form 8-K. - None. SIGNATURE Pursuant to the requirements 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. Morgan Stanley Dean Witter Spectrum Select L.P. (Registrant) By: Demeter Management Corporation (General Partner) August 13, 1999 By: /s/ Lewis A. Raibley, III Lewis A. Raibley, III Director and Chief Financial Officer The General Partner which signed the above is the only party authorized to act for the Registrant. The Registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors. EX-27 2
5 The schedule contains summary financial information extracted from Morgan Stanley Dean Witter Spectrum Select L.P. and is qualified in its entirety by reference to such financial statements 6-MOS DEC-31-1999 JUN-30-1999 201,633,502 0 4,787,286 0 0 0 0 0 217,452,195 0 0 0 0 0 0 217,452,195 0 9,164,730 0 0 10,600,117 0 0 (1,435,387) 0 (1,435,387) 0 0 0 (1,435,387) 0 0 Receivables include interest receivable of $614,725 and subscriptions receivable of $4,172,561. In addition to cash and receivables, total assets include net unrealized gain on open contracts of $10,625,031 and net option premiums of $406,376. Liabilities include redemptions payable of $996,957, accrued brokerage fees of $1,273,562 and accrued management fees of $526,991. Total revenue includes realized trading revenue of $3,393,720, net change in unrealized of $2,189,977 and interest income of $3,581,033.
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