Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with DWR as non-
clearing broker and MS & Co. and MSIL as clearing brokers in
separate futures, forwards, and options trading accounts
established for the Trading Manager, which assets are used as
margin to engage in trading. The assets are held in either non-
interest-bearing bank accounts or in securities and instruments
permitted by the Commodity Futures Trading Commission ("CFTC")
for investment of customer segregated or secured funds. The
Partnership's assets held by the commodity brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures, forwards, and
options, it is expected that the Partnership will continue to own
such liquid assets for margin purposes.
The Partnership's investment in futures, forwards, and options
may, from time to time, be illiquid. Most U.S. futures exchanges
limit fluctuations in prices during a single day by regulations
referred to as "daily price fluctuations limits" or "daily
limits". Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures or options contract
has increased or decreased by an amount equal to the daily limit,
positions in that futures or options contract can neither be
taken nor liquidated unless traders are willing to effect trades
at or within the limit. Futures prices have occasionally moved
the daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. 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 prevent the Partnership from promptly liquidating
unfavorable positions in such markets and subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, or expect to
have, any capital assets. Redemptions of Units in the future
will affect the amount of funds available for investments in
futures, forwards, and options in subsequent periods. It is not
possible to estimate the amount and therefore, the impact of
future redemptions of Units.
Results of Operations.
General. The Partnership's results depend on its Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements or other profit opportunities in the
futures, forwards, and options markets. The following presents a
summary of the Partnership's operations for the three years ended
December 31, 2000 and a general discussion of its trading
activities during each period. It is important to note, however,
that the Trading Manager trades in various markets at different
times and that prior activity in a particular market does not
mean that such market will be actively traded by the Trading
Manager or will be profitable in the future. Consequently, the
results of operations of the Partnership are difficult to discuss
other than in the context of its Trading Manager's trading
activities on behalf of the Partnership and how the Partnership
has performed in the past.
At December 31, 2000, the Partnership's total capital was
$39,470,347, a decrease of $4,442,369 from the Partnership's
total capital of $43,912,716 at December 31, 1999. For the year
ended December 31, 2000, the Partnership generated net income of
$3,386,012, and total redemptions aggregated $7,828,381.
For the year ended December 31, 2000, the Partnership recorded
total trading revenues, including interest income, of $3,942,875
and posted an increase in net asset value per Unit. Unrealized
gains recorded on the Yield Pool totaled $1,703,855. The
Partnership's exposure to Australian, European, Japanese and
North American fixed income markets added value to the global
interest rate futures markets sector with gains of approximately
5.9%. The currency sector also recorded gains of approximately
0.9% aided by a strengthening euro and a weakening Japanese yen.
The Partnership's exposure to the energy sector also performed
well with profits of approximately 1.2%, taking advantage of
falling crude oil inventories during the early part of the year
and reactionary supply boosts later in 2000. Conversely, equity
markets declined in all G4 economies, creating a subsequent
flight-to-quality and driving nominal interest rates lower in
most major money markets. The G4 economies are U.S., Japan,
Germany and Britain. As a result, losses of approximately 3.2%
were recorded in these markets. Exposure to agricultural
commodities markets under-performed slightly reflecting non-
directional price movement within the sector. The Partnership
experienced a profitable first quarter, despite tremendous
volatility in the U.S. stock market. The S&P 500 Index declined
through February but rallied to post a positive quarter and
enabled the hedged equity strategy to salvage a modest gain. The
Federal Reserve Bank raised the overnight borrowing rate by 50
basis points during the quarter responding to a perceived
inflationary threat. U.S. interest rates, however, continued to
decline benefiting the hedged fixed income component. The global
macro component also added value, enjoying most of its gains from
long futures positions in Sweden's OMX Index as the market
advanced throughout the quarter. The second quarter was a
sluggish one for the Partnership. The Federal Reserve Bank
decided to raise short-term rates by another 50 basis points at
its May meeting, which proved to be the last proactive move made
by the U.S. central bank in 2000. The hedged equity component
underperformed as U.S. stocks endured a modest decline. Treasury
bonds continued to strengthen and the hedged fixed income
strategy helped to buffer the Partnership. The global macro
component under-performed due to unexpected weakness in the U.S.
dollar and simultaneous strength in the euro. Conversely, long
futures positions in the crude oil complex performed well after
OPEC failed to raise output in a timely fashion. The
Partnership's performance was relatively flat for the third
quarter. U.S. interest rates fell by an average of 15 basis
points along the yield curve benefiting the hedged fixed income
strategy. Rising energy prices prompted the Clinton
Administration to release 30 million barrels of crude oil from
the Strategic Petroleum Reserve prior to the winter months. Long
futures positions in the energy sector were adversely affected by
this decision as crude oil prices fell. Short positions in
Australian financial futures also under-performed as the Reserve
Bank of Australia failed to make good on an expected interest
rate hike. The global macro component did enjoy gains from long
positions in copper futures along with short positions in New
Zealand dollar, South African rand and Australian dollar. The
Partnership posted a profitable fourth quarter due primarily to
performance in the global macro component. Interest rates fell
throughout the world, supporting the Partnership's long positions
in U.S., European and Australian financial futures. Long
positions in the Swiss franc and euro versus most major
currencies also added value. Long positions in natural gas
futures were profitable as prices rose due to a severe inventory
shortage, which was first noted in California and continued
spreading throughout the country. The S&P 500, DAX 30, FTSE 100
and Nikkei 225 Index all posted losses for the fourth quarter and
the year 2000. Total expenses for the year were $2,271,429,
resulting in income before minority interest of $3,375,301. The
minority interest in trading losses experienced outside the Yield
Pool was $10,711, resulting in net income of $3,386,012 for the
Partnership. The net asset value of a Unit increased from
$1,815.50 at December 31, 1999 to $1,941.87 at December 31, 2000.
At December 31, 1999, the Partnership's total capital was
$43,912,716, a decrease of $8,351,449 from the Partnership's
total capital of $52,264,165 at December 31, 1998. For the year
ended December 31, 1999, the Partnership generated a net loss of
$3,799,938, and total redemptions aggregated $4,551,511.
For the year ended December 31, 1999, the Partnership recorded
total trading revenues, including interest income, of $1,638,358
and posted a decrease in net asset value per Unit. Losses
recorded on the Yield Pool totaled $2,971,134. Extreme price
volatility in U.S. and Australian fixed income markets created
losses, while the Partnership's exposure to the U.S. equity and
energy markets and its net short exposure to European interest
rate sector helped steady performance. The most significant
losses of approximately 5.00% were experienced primarily during
February, April and May in the fixed income component of the
balanced portfolio from long U.S. interest rate futures positions
as prices dropped in reaction to Federal Reserve Chairman Alan
Greenspan's warnings in Congressional testimony in late February
that a strong economy could reignite inflation. Fears that the
Federal Reserve eventually could boost target interest rates
continued to push down domestic bond prices and forced yields
higher. Losses were also experienced in this market complex
during July and August after Federal Reserve Chairman Alan
Greenspan commented that central bankers must consider stock
prices when setting monetary policy and as reports on labor
costs, home sales, manufacturing and personal income added to
concern that the U.S. Federal Reserve will raise interest rates
soon. Mitigating gains of approximately 1.12% were recorded in
the energy markets primarily during March from long positions in
crude and gas oil futures as prices moved significantly higher
due largely to the news that both OPEC and non-OPEC countries had
reached an agreement to cut total output beginning April 1st.
Gains were also recorded in this market complex during the third
quarter after OPEC ministers confirmed that they would uphold
their global cutbacks until April of 2000. Reports of declining
crude oil and gasoline inventories also boosted oil prices during
the third quarter. Total expenses for the year were $2,589,673,
resulting in a net loss before minority interest of $3,922,449.
The minority interest in such losses was $122,511, resulting in a
net loss of $3,799,938 for the Partnership. The net asset value
of a Unit decreased from $1,887.62 at December 31, 1998 to
$1,815.50 at December 31, 1999.
At December 31, 1998, the Partnership's total capital was
$52,264,165, a decrease of $681,697 from the Partnership's total
capital of $52,945,862 at December 31, 1997. For the year ended
December 31, 1998, the Partnership generated net income of
$7,203,198, and total redemptions aggregated $7,884,895.
For the year ended December 31, 1998, the Partnership recorded
total trading revenues, including interest income, of $8,079,935
and posted an increase in net asset value per Unit. Gains
recorded on the Yield Pool totaled $2,163,176. The Partnership
profited during 1998, primarily from gains of approximately 6.27%
recorded in the global stock index futures markets. Long S&P 500
Index futures positions were profitable in the equity portion of
the portfolio as stock prices reached record levels during the
first half of the year, as well as closing the year with a move
higher. The global interest rate futures markets were also key
contributors to overall gains, recording gains of approximately
3.45% primarily from long global bond futures positions,
especially U.S., European and Japanese bond futures. Bond prices
benefited from a "flight-to-quality" during the third quarter
amid the world's shaky financial system and global economic
deterioration. Total expenses for the year were $2,958,490,
resulting in income before minority interest of $7,284,621. The
minority interest in such gains was $81,423, resulting in net
income of $7,203,198 for the Partnership. The net asset value of
a Unit in the Partnership increased from $1,707.59 at December
31, 1997 to $1,887.62 at December 31, 1998.
The Partnership's overall performance record represents varied
results of trading in different futures, forwards, and options
markets. For a further description of 2000 trading results,
refer to the letter to the Limited Partners in the accompanying
Annual Report to Limited Partners for the year ended December 31,
2000, which is incorporated by reference to Exhibit 13.01 of this
Form 10-K. The Partnership's gains and losses are allocated
among its partners for income tax purposes.
Credit Risk.
Financial Instruments. The Partnership is a party to financial
instruments with elements of off-balance sheet market and credit
risk. The Partnership may trade futures, forwards, and options
to gain long biased exposure to global stock markets and global
bond markets, as well as long and short exposure to a component
of managed futures contracts in agricultural commodities, energy
products, foreign currencies, precious and base metals, and soft
commodities. In entering into these contracts, the Partnership
is subject to the market risk that such contracts may be
significantly influenced by market conditions, such as interest
rate volatility, resulting in such contracts being less valuable.
If the markets should move against all of the positions held by
the Partnership at the same time, and if the Trading Manager was
unable to offset positions of the Partnership, the Partnership
could lose all of its assets and investors would realize a 100%
loss.
In addition to the Trading Manager's internal controls, the
Trading Manager must comply with the trading policies of the
Partnership. These trading policies include standards for
liquidity and leverage with which the Partnership must comply.
The Trading Manager and Demeter monitor the Partnership's trading
activities to ensure compliance with the trading policies.
Demeter may require the Trading Manager to modify positions of
the Partnership if Demeter believes they violate the
Partnership's trading policies.
In addition to market risk, in entering into futures, forwards,
and options contracts there is a credit risk to the Partnership
that the counterparty on a contract will not be able to meet its
obligations to the Partnership. The ultimate counterparty or
guarantor of the Partnership for futures contracts traded in the
United States and the foreign exchanges on which the Partnership
trades is the clearinghouse associated with such exchange. In
general, a clearinghouse is backed by the membership of the
exchange and will act in the event of non-performance by one of
its members or one of its member's customers, which should
significantly reduce this credit risk. For example, a
clearinghouse may cover a default by drawing upon a defaulting
member's mandatory contributions and/or non-defaulting members'
contributions to a clearinghouse guarantee fund, established
lines or letters of credit with banks, and/or the clearinghouse's
surplus capital and other available assets of the exchange and
clearinghouse, or assessing its members. In cases where the
Partnership trades off-exchange forward contracts with a
counterparty, the sole recourse of the Partnership will be the
forward contracts counterparty.
There is no assurance that a clearinghouse or exchange will meet
its obligations to the Partnership, and Demeter and the commodity
brokers will not indemnify the Partnership against a default by
such parties. Further, the law is unclear as to whether a
commodity broker has any obligation to protect its customers from
loss in the event of an exchange or clearinghouse defaulting on
trades effected for the broker's customers. Any such obligation
on the part of a broker appears even less clear where the default
occurs in a non-U.S. jurisdiction.
Demeter deals with these credit risks of the Partnership in
several ways. First, it monitors the Partnership's credit
exposure to each exchange on a daily basis, calculating not only
the amount of margin required for it but also the amount of its
unrealized gains at each exchange, if any. The commodity brokers
inform the Partnership, as with all their customers, of its net
margin requirements for all its existing open positions, but do
not break that net figure down, exchange by exchange. Demeter,
however, has installed a system which permits it to monitor the
Partnership's potential margin liability, exchange by exchange.
As a result, Demeter is able to monitor the Partnership's
potential net credit exposure to each exchange by adding the
unrealized trading gains on that exchange, if any, to the
Partnership's margin liability thereon.
Second, the Partnership's trading policies limit the amount of
its net assets that can be committed at any given time to futures
contracts and require, in addition, a minimum amount of
diversification in the Partnership's trading, usually over
several different products. One of the aims of such trading
policies has been to reduce the credit exposure of the
Partnership to a single exchange and, historically, the
Partnership's exposure to any one exchange has typically amounted
to only a small percentage of its total net assets. On those
relatively few occasions where the Partnership's credit exposure
may climb above that level, Demeter deals with the situation on a
case by case basis, carefully weighing whether the increased
level of credit exposure remains appropriate. Material changes
to the trading policies may be made only with the prior written
approval of the limited partners owning more than 50% of Units
then outstanding.
Third, with respect to forward contract trading, the Partnership
trades with only those counterparties which Demeter, together
with DWR, have determined to be creditworthy. The Partnership
presently deals with MS & Co. as the sole counterparty on forward
contracts.
See "Financial Instruments" under Notes to Financial Statements
in the Partnership's Annual Report to Limited Partners for the
year ended December 31, 2000, which is incorporated by reference
to Exhibit 13.01 of this Form 10-K.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures, forwards, and options. The market-sensitive
instruments held by the Partnership are acquired for speculative
trading purposes only and, as a result, all or substantially all
of the Partnership's assets are at risk of trading loss. Unlike
an operating company, the risk of market-sensitive instruments is
central, not incidental, to the Partnership's main business
activities.
The futures, forwards, and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities. Fluctuations in market risk based
upon these 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 among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
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 using mark-to-market
accounting principles. Any loss in the market value of the
Partnership's open positions is directly reflected in the
Partnership's earnings, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of exchange-
traded futures, forwards, and options are settled daily through
variation margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Manager is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model 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, and correlation among these variables.
The hypothetical changes in portfolio value are based on daily
percentage changes observed in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. The historical observation period of the
Partnership's VaR is approximately four years. The one-day 99%
confidence level of the Partnership's VaR corresponds to the
negative change in portfolio value that, based on observed market
risk factors, would have been exceeded once in 100 trading days.
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Manager 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 primary market risk category at December 31, 2000 and 1999.
At December 31, 2000 and 1999, the Partnership's total
capitalization was approximately $39 million and $44 million,
respectively.
Primary Market December 31, 2000 December 31, 1999 Risk Category Value at Risk Value at Risk
Interest Rate (0.87)% (0.14)%
Currency (0.35) (0.12)
Commodity (0.15) (0.12)
Equity (0.05) (0.33)
Aggregate Value at Risk (0.91)% (0.43)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual market 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 December 31, 2000 and 1999 only and is not
necessarily representative of either the historic or future risk
of an investment in the Partnership. Because the Partnership's
only business is the speculative trading of futures, forwards,
and options, the composition of its trading portfolio can change
significantly over any given time period, or even within a single
trading day. Any changes in open positions could positively or
negatively materially impact market risk as measured by VaR.
The table below supplements the December 31, 2000 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 January 1, 2000 through December 31, 2000.
Primary Market Risk Category High Low Average
Interest Rate (0.87)% (0.68)% (0.77)%
Currency (0.35) (0.19) (0.27)
Commodity (0.21) (0.15) (0.17)
Equity (0.59) (0.05) (0.30)
Aggregate Value at Risk (1.02)% (0.77)% (0.91)%
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. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
usually found in other investments. The relative size of the
positions held may cause the Partnership to incur losses greatly
in excess of VaR within a short period of time, given the effects
of the leverage employed and market volatility. The VaR tables
above, as well as the past performance of the Partnership, give
no indication of such "risk of ruin". In addition, VaR risk
measures should be viewed in light of the methodology's
limitations, which include the following:
past changes in market risk factors will not always result
in accurate predictions of the distributions and correlations of
future market movements;
changes in portfolio value in response to market movements
may differ from those of the VaR model;
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 VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at December 31, 2000 and for the end of the four
quarterly reporting periods during calendar year 2000. 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 or monitor risk. There can be no assurance
that the Partnership's actual losses on a particular day will not
exceed the VaR amounts indicated above 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. These balances and any market
risk they may represent are immaterial. At December 31, 2000, the
Partnership's cash balance at DWR was approximately 8% of its
total net asset value. 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 to be material.
The Partnership also has non-trading risk on the zero-coupon U.S.
Treasury Securities it holds to support the guaranteed net asset
value per Unit at the Guaranteed Redemption Date of August 31,
2003. The fair value of these securities is subject to interest
rate risk.
For non-trading securities, the Partnership measures its market
risk using sensitivity analysis. The sensitivity analysis
estimates the potential change in fair value based on a
hypothetical 10% change in interest rates. Based on the current
valuation of the Zero-Coupon U.S. Treasury Securities, such a
change in interest rates will cause an approximately (5.68)%
decline in their fair value. Such a change will not have a
material effect on the net asset value per Unit.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses 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 (A) those disclosures that are
statements of historical fact and (B) 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 Manager 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 expropri-
ations, 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 December 31, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Interest Rate. The largest market exposure at December 31, 2000
was in the global interest rate complex. Exposure was primarily
spread across the U.S. and European 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. Demeter
anticipates that G-7 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 Partnership's currency exposure at December 31,
2000 was 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 fourth quarter of
2000, the Partnership's major exposures were to 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 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.
Commodity.
Energy. On December 31, 2000, the Partnership's energy exposure
was shared primarily by futures contracts in the crude oil and
natural gas markets. Price movements in these markets result
from political developments in the Middle East, weather patterns,
and other economic fundamentals. It is possible that volatility
will remain high. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in this market. Natural gas has exhibited volatility
in prices resulting from weather patterns and supply and demand
factors and may continue in this choppy pattern.
Soft Commodities and Agriculturals . On December 31, 2000, the
Partnership had exposure in the corn, cattle, and cotton markets.
Supply and demand inequalities, severe weather disruption and
market expectations affect price movements in these markets.
Metals. The Partnership's metals market exposure at December 31,
2000 was to fluctuations in the price of base metals. During
period of volatility, base metals will affect performance
dramatically. Demeter anticipates that the base metals will
remain the primary metals market exposure of the Partnership.
Equity. The primary equity exposure at December 31, 2000 was to
equity price risk in the G-7 countries. The G-7 countries
consist of France, U.S., Britain, Germany, Japan, Italy and
Canada. The stock index futures traded by the Partnership are by
law limited to futures on broadly based indices. As of December
31, 2000, the Partnership's primary exposures were in the S&P 500
(U.S.) and Nikkei (Japan) stock indices. The Partnership is
primarily exposed to the risk of adverse price trends or static
markets in the U.S. 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.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership at December 31, 2000:
Foreign Currency Balances. The Partnership's primary
foreign currency balances at December 31, 2000 were in
Australian dollars, euros, Japanese yen and South African
rands. The Partnership controls the non-trading risk of
these balances by regularly converting these balances back
into dollars upon liquidation of the respective position.
Zero-Coupon U.S. Treasury Securities. It is the
Partnership's intention to hold the Zero-Coupon U.S.
Treasury Securities until their August 15, 2003 maturity
date except as needed to fund quarterly redemptions.
Consequently, the period to period interest rate risk these
securities are subject to is not considered material.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Manager, separately, attempt to
manage the risk of the Partnership's open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership's assets among different market sectors and trading
approaches, and monitoring the performance of the Trading Manager
daily. In addition, the Trading Manager establishes
diversification guidelines, often set in terms of the maximum
margin to be committed to positions in any one market sector or
market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership's non-
trading instruments, cash and Zero-Coupon U.S. Treasury
Securities. Cash and Zero-Coupon U.S. Treasury Securities are
the only Partnership investments directed by Demeter, rather than
the Trading Manager.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the
Partnership's Annual Report, which is filed as Exhibit 13.01
hereto.
Supplementary data specified by Item 302 of Regulation S-K:
Summary of Quarterly Results (Unaudited)
Net Income/ (Loss) Per Quarter Net Unit of Limited Ended Revenue Income/(Loss) Partnership Interest
March 31 $ 1,328,247 $ 717,732 $ 29.67 June 30 (90,854) (599,538) (26.33) September 30 690,073 168,111 7.60 December 31 3,719,264 3,099,707 115.43
Total $ 5,646,730 $3,386,012 $126.37
March 31 $ (805,275) $(1,451,344) $(12.72) June 30 (273,785) (916,411) (2.89) September 30 (58,457) (655,817) (25.37) December 31 (195,259) (776,366) (31.14)
Total $(1,332,776) $(3,799,938) $(72.12)
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no directors or executive officers of the Partnership.
The Partnership is managed by Demeter.
Directors and Officers of the General Partner
The directors and officers of Demeter are as follows:
Robert E. Murray, age 40, is Chairman of the Board, President and
a Director of Demeter. Mr. Murray is also Chairman of the Board,
President and a Director of Dean Witter Futures & Currency
Management Inc. ("DWFCM"). Mr. Murray is currently a Senior Vice
President of DWR's Managed Futures Department. Mr. Murray began
his career at DWR in 1984 and is currently the Director of the
Managed Futures Department. In this capacity, Mr. Murray is
responsible for overseeing all aspects of the firm's Managed
Futures Department. Mr. Murray previously served as Vice
Chairman and a Director of the Managed Funds Association, an
industry association for investment professionals in futures,
hedge funds and other alternative investments. Mr. Murray
graduated from Geneseo State University in May 1983 with a B.A.
degree in Finance.
Mitchell M. Merin, age 47, is a Director of Demeter. Mr. Merin
is also a Director of DWFCM. Mr. Merin was appointed the Chief
Operating Officer of Individual Asset Management for MSDW in
December 1998 and the President and Chief Executive Officer of
Morgan Stanley Dean Witter Advisors in February 1998. He has
been an Executive Vice President of DWR since 1990, during which
time he has been Director of DWR's Taxable Fixed Income and
Futures divisions, Managing Director in Corporate Finance and
Corporate Treasurer. Mr. Merin received his Bachelor's degree
from Trinity College in Connecticut and his M.B.A. degree in
Finance and Accounting from the Kellogg Graduate School of
Management of Northwestern University in 1977.
Joseph G. Siniscalchi, age 55, is a Director of Demeter. Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President,
Director of General Accounting and served as a Senior Vice
President and Controller for DWR's Securities Division through
1997. He is currently Executive Vice President and Director of
the Operations Division of DWR. From February 1980 to July 1984,
Mr. Siniscalchi was Director of Internal Audit at Lehman Brothers
Kuhn Loeb, Inc.
Edward C. Oelsner, III, age 59, is a Director of Demeter. Mr.
Oelsner is currently an Executive Vice President and head of the
Product Development Group at Morgan Stanley Dean Witter Advisors.
Mr. Oelsner joined DWR in 1981 as a Managing Director in DWR's
Investment Banking Department specializing in coverage of
regulated industries and, subsequently, served as head of the DWR
Retail Products Group. Prior to joining DWR, Mr. Oelsner held
positions at The First Boston Corporation as a member of the
Research and Investment Banking Departments from 1967 to 1981.
Mr. Oelsner received his M.B.A. in Finance from the Columbia
University Graduate School of Business in 1966 and an A.B. in
Politics from Princeton University in 1964.
Richard A. Beech, age 49, is a Director of Demeter. Mr. Beech
has been associated with the futures industry for over 23 years.
He has been at DWR since August 1984, where he is presently
Senior Vice President and head of Branch Futures. Mr. Beech
began his career at the Chicago Mercantile Exchange, where he
became the Chief Agricultural Economist doing market analysis,
marketing and compliance. Prior to joining DWR, Mr. Beech also
had worked at two investment banking firms in operations,
research, managed futures and sales management.
Raymond A. Harris, age 44, is a Director of Demeter. Mr. Harris
is currently Executive Vice President, Planning and
Administration for Morgan Stanley Dean Witter Asset Management
and has worked at DWR or its affiliates since July 1982, serving
in both financial and administrative capacities. From August
1994 to January 1999, he worked in two separate DWR affiliates,
Discover Financial Services and Novus Financial Corp.,
culminating as Senior Vice President. Mr. Harris received his
B.A. degree from Boston College and his M.B.A. in finance from
the University of Chicago.
Anthony J. DeLuca, age 38, became a Director of Demeter on
September 14, 2000. Mr. DeLuca is also a Director of DWFCM. Mr.
DeLuca was appointed the Controller of Asset Management for MSDW
in June 1999. Prior to that, Mr. DeLuca was a partner at the
accounting firm of Ernst & Young LLP, where he had MSDW as a
major client. Mr. DeLuca had worked continuously at Ernst &
Young LLP ever since 1984, after he graduated from Pace
University with a B.B.A. degree in Accounting.
Raymond E. Koch, age 45, is Chief Financial Officer of Demeter.
Effective July 10, 2000, Mr. Koch replaced Mr. Raibley as Chief
Financial Officer of Demeter. Mr. Koch began his career at MSDW
in 1988, has overseen the Managed Futures Accounting function
since 1992, and is currently First Vice President, Director of
Managed Futures and Realty Accounting. From November 1979 to
June 1988, Mr. Koch held various positions at Thomson McKinnon
Securities, Inc. culminating as Manager, Special Projects in the
Capital Markets Division. From August 1977 to November 1979 he
was an auditor, specializing in financial services at Deloitte
Haskins and Sells. Mr. Koch received his B.B.A. in accounting
from Iona College in 1977, an M.B.A. in finance from Pace
University in 1984 and is a Certified Public Accountant.
Lewis A. Raibley, III, age 38, served as Vice President, Chief
Financial Officer, and a Director of Demeter and DWFCM until his
resignation from MSDW on July 1, 2000.
All of the foregoing directors have indefinite terms.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers. As a
limited partnership, the business of the Partnership is managed
by Demeter, which is responsible for the administration of the
business affairs of the Partnership but receives no compensation
for such services.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - At
December 31, 2000, there were no persons known to be beneficial
owners of more than 5 percent of the Units.
(b) Security Ownership of Management - At December 31, 2000,
Demeter owned 308 Units of General Partnership Interest
representing a 1.54 percent interest in the Partnership.
(c) Changes in Control - None
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of "Notes to
Consolidated Financial Statements", in the accompanying Annual
Report to Limited Partners for the year ended December 31, 2000,
which is incorporated by reference to Exhibit 13.01 of this Form
10-K. In its capacity as the Partnership's retail commodity
broker, DWR received commodity brokerage fees (paid and accrued
by the Partnership) of $1,683,956 for the year ended December 31,
2000.
PART IV
Item 14.
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of independent
auditors, all appearing in the accompanying Annual Report to
Limited Partners for the year ended December 31, 2000, are
incorporated by reference to Exhibit 13.01 of this Form 10-K:
- Report of Deloitte & Touche LLP, independent auditors, for the years ended December 31, 2000, 1999 and 1998.
- Consolidated Statements of Financial Condition as of December 31, 2000 and 1999.
- Consolidated Statements of Operations, Changes in Partners' Capital, and Cash Flows for the years ended December 31, 2000, 1999 and 1998.
- Notes to Consolidated Financial Statements.
With the exception of the aforementioned information and the
information incorporated in Items 7, 8 and 13, the Annual Report
to Limited Partners for the year ended December 31, 2000 is not
deemed to be filed with this report.
2. Listing of Financial Statement Schedules
No financial statement schedules are required to be filed with
this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Partnership during
the last quarter of the period covered by this report.
(c) Exhibits
Refer to Exhibit Index on Page E-1.
SIGNATURES
Pursuant to the requirements of Sections 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.
DEAN WITTER PRINCIPAL PLUS FUND L.P. (Registrant)
BY: Demeter Management Corporation, General Partner
March 30, 2001 BY: /s/ Robert E. Murray . Robert E. Murray, Director, Chairman of the Board and President
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.
Demeter Management Corporation.
BY: /s/ Robert E. Murray March 30, 2001 Robert E. Murray, Director, Chairman of the Board and President
/s/ Mitchell M. Merin March 30, 2001 Mitchell M. Merin, Director
/s/ Joseph G. Siniscalchi March 30, 2001 Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 30, 2001 Edward C. Oelsner III, Director
/s/ Richard A. Beech March 30, 2001 Richard A. Beech, Director
/s/ Raymond A. Harris March 30, 2001 Raymond A. Harris, Director
/s/ Anthony J. DeLuca March 30, 2001 Anthony J. DeLuca, Director
/s/ Raymond E. Koch March 30, 2001 Raymond E. Koch, Chief Financial Officer and Principal Accounting Officer
EXHIBIT INDEX
ITEM
3.01 Amended and Restated Limited Partnership Agreement of the Partnership, dated as of August 29, 1995 is incorporated by reference to Exhibit 3.01 and Exhibit 3.02 of the Partnership's Registration Statement (File No. 33-95414) on Form S-1.
10.01 Amended and Restated Management Agreement among the Partnership, Demeter and RXR, Inc. dated as of December 29, 1995 is incorporated by reference to Exhibit 10.02 of the Partnership's Registration Statement (File No. 33-95414) on Form S-1.
10.02 Amended and Restated Management Agreement between the Partnership and Dean Witter Reynolds Inc., dated as of December 29, 1995 is incorporated by reference to Exhibit 10.01 of the Partnership's Registration Statement (File No. 33-95414) on Form S-1.
10.03 Amended and Restated Customer Agreement, dated as of December 1, 1997, between the Partnership and Dean Witter Reynolds Inc. is incorporated by reference to Exhibit 10.03 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, (File No. 0-18314).
10.04 Customer Agreement, dated as of December 1, 1997, among the Partnership, Carr Futures, Inc., and Dean Witter Reynolds Inc. is incorporated by reference to Exhibit 10.04 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, (File No. 0-18314).
10.05 International Foreign Exchange Master Agreement, dated as of August 1, 1997, between the Partnership and Carr Futures Inc. is incorporated by reference to Exhibit 10.05 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, (File No. 0-18314).
10.06 Customer Agreement dated as of May 1, 2000 between Morgan Stanley & Co. Incorporated, the Partnership and Dean Witter Reynolds Inc. is incorporated by reference to Exhibit 10.06 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, (File No. 0- 18314).
13.01 December 31, 2000 Annual Report to Limited Partners is filed herewith.
Principal Plus Fund
December 31, 2000 Annual Report
MORGAN STANLEY DEAN WITTER
Dean Witter Principal Plus Fund L.P. Historical Fund Performance
Presented below is the percentage change in Net Asset Value per Unit from the start of each calendar year the Fund has traded. Also provided is the incep- tion-to-date return and the annualized return since inception for the Fund. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Demeter Management Corporation Two World Trade Center 62nd Floor New York, NY 10048 Telephone (212) 392-8899
Principal Plus Fund L.P. Annual Report
Dear Limited Partner:
This marks the eleventh annual report for the Dean Witter Principal Plus Fund L.P. (the "Fund"). The Fund began the year at a Net Asset Value per Unit of $1,815.50 and increased by 7.0% to $1,941.87 on December 31, 2000. A review of trading results for the year is provided in the Annual Report of the Trading Manager located on the next page of this report.
Should you have any questions concerning this report, please feel free to con- tact Demeter Management Corporation at Two World Trade Center, 62nd Floor, New York, N.Y. 10048 or your Morgan Stanley Dean Witter Financial Advisor.
I hereby affirm, that to the best of my knowledge and belief, the information contained in this report is accurate and complete. Past performance is not a guarantee of future results.
Sincerely,
/s/ Robert E. Murray
Robert E. Murray Chairman Demeter Management Corporation General Partner
Dean Witter Principal Plus Fund L.P. Annual Report of the Trading Manager
Principal Plus Fund's Net Asset Value gained in the year 2000. The Fund's ex- posure to Australian, European, Japanese and North American fixed income mar- kets added value, as did the currency sector aided by a strengthening euro and a weakening Japanese yen late in the year. The Fund's exposure to the energy sector also performed well, taking advantage of falling crude oil inventories during the early part of the year and reactionary supply boosts later in 2000. Conversely, equity markets declined in all G4 economies, creating a subsequent flight-to-quality and driving nominal interest rates lower in most major money markets. The G4 economies are U.S., Japan, Germany and Britain. Exposure to agricultural commodities markets under-performed, reflecting non-directional price movement within the sector.
The Fund experienced a profitable first quarter, despite tremendous volatility in the U.S. stock market. The S&P 500 Index declined through February but ral- lied to post a positive quarter and enabled the hedged equity strategy to sal- vage a modest gain. The Federal Reserve Bank raised the overnight borrowing rate by 50 basis points during the quarter responding to a perceived infla- tionary threat. U.S. interest rates, however, continued to decline benefiting the hedged fixed income component. The global macro component also added val- ue, enjoying most of its gains from long futures positions in Sweden's OMX In- dex as the market advanced throughout the quarter.
The second quarter was a sluggish one for the Fund. The Federal Reserve Bank decided to raise short-term rates by another 50 basis points at its May meet- ing, which proved to be the last proactive move made by the U.S. central bank in 2000. The hedged equity component under-performed as U.S. stocks endured a modest decline. Treasury bonds continued to strengthen and the hedged fixed income strategy helped to buffer the Fund. The global macro component under performed due to unexpected weakness in the U.S. dollar and simultaneous strength in the euro. Conversely, long futures positions in the crude oil com- plex performed well after OPEC failed to raise output in a timely fashion.
The Fund's performance was relatively flat for the third quarter. U.S. inter- est rates fell by an average of 15 basis points along the yield curve benefit- ing the hedged fixed
Dean Witter Principal Plus Fund L.P. Annual Report of the Trading Manager--(Concluded)
income strategy. Rising energy prices prompted the Clinton Administration to release 30 million barrels of crude oil from the Strategic Petroleum Reserve prior to the winter months. Long futures positions in the energy sector were adversely affected by this decision as crude oil prices fell. Short positions in Australian financial futures also under-performed as the Reserve Bank of Australia failed to make good on an expected interest rate hike. The global macro component did enjoy gains from long positions in copper futures along with short positions in New Zealand dollar, South African rand and Australian dollar.
The Fund posted a profitable fourth quarter due primarily to performance in the global macro component. Interest rates fell throughout the world, support- ing the Fund's long positions in U.S., European and Australian financial futures. Long positions in the Swiss franc and euro versus most major curren- cies also added value. Long positions in natural gas futures were profitable as prices rose due to a severe inventory shortage, which was first noted in California and continued spreading throughout the country. The S&P 500, DAX 30, FTSE 100 and Nikkei 225 Index all posted losses for the fourth quarter and the year 2000.
We thank you for your continued support and look forward to serving your in- vestment needs in 2001.
RXR, Inc.
Dean Witter Principal Plus Fund L.P. Independent Auditors' Report
The Limited Partners and the General Partner:
We have audited the accompanying consolidated statements of financial condi- tion of Dean Witter Principal Plus Fund L.P. and subsidiary (the "Partner- ship") as of December 31, 2000 and 1999 and the related consolidated state- ments of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated fi- nancial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial state- ments based on our audits.
We conducted our audits in accordance with auditing standards generally ac- cepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the finan- cial statements are free of material misstatement. An audit includes examin- ing, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting princi- ples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits pro- vide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Dean Witter Princi- pal Plus Fund L.P. and subsidiary at December 31, 2000 and 1999 and the con- solidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with account- ing principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York February 16, 2001
Dean Witter Principal Plus Fund L.P. Consolidated Statements of Financial Condition
Dean Witter Principal Plus Fund L.P. Consolidated Statements of Operations
Dean Witter Principal Plus Fund L.P. Consolidated Statements of Changes in Partners' Capital For the Years Ended December 31, 2000, 1999 and 1998
Dean Witter Principal Plus Fund L.P. Consolidated Statements of Cash Flows
Dean Witter Principal Plus Fund L.P. Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization--Dean Witter Principal Plus Fund L.P. (the "Partnership") is a limited partnership organized to engage primarily in the speculative trading of futures contracts, options on futures contracts and physical commodities, forward contracts, and other commodity interests (collectively, "futures in- terests").
The Partnership's objective is to achieve long-term appreciation while assur- ing investors at least a 3% compound annual rate of return over approximately seven and one-half years from February 1, 1996 to August 31, 2003. At August 31, 2003, which is the Partnership's "Guaranteed Redemption Date," the Net As- set Value is guaranteed to be at least $1,961.00 per Unit. The Partnership in- itially invested approximately 80% of the Partnership's assets in Zero-Coupon U.S. Treasury Securities (the "Yield Pool") to accomplish this objective. The Partnership's remaining assets have been contributed to its subsidiary, Dean Witter Principal Plus Fund Management L.P. (the "Trading Company"), which was established solely to trade in futures interests on behalf of the Partnership.
The general partner for the Partnership is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Dean Witter Reynolds Inc. ("DWR"). Morgan Stanley & Co., Inc. ("MS&Co.") and Morgan Stanley & Co. Inter- national Limited ("MSIL") provide clearing and execution services. Prior to May 2000, Carr Futures Inc. ("Carr") provided clearing and execution services to the Partnership. Demeter, DWR, MS&Co. and MSIL are wholly-owned subsidiar- ies of Morgan Stanley Dean Witter & Co. ("MSDW"). The trading manager to the Partnership is RXR Inc. (the "Trading Manager").
Effective February 19, 1998, Morgan Stanley, Dean Witter, Discover & Co. changed its corporate name to Morgan Stanley Dean Witter & Co.
Demeter is required to maintain a 1% minimum interest in the equity of the Partnership and income (losses) are shared by Demeter and the Limited Partners based upon their proportional ownership interests.
Use of Estimates--The financial statements are prepared in accordance with ac- counting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts in the financial statements and related disclosures. Management be- lieves that the estimates utilized in the preparation of the financial state- ments are prudent and reasonable. Actual results could differ from those esti- mates.
Dean Witter Principal Plus Fund L.P. Notes to Consolidated Financial Statements-- (Continued)
Principles of Consolidation--The consolidated financial statements include the accounts of the Partnership and the Trading Company. All intercompany balances have been eliminated.
The ownership by Demeter in the Trading Company represents a minority interest in the Partnership. Demeter's share of the Trading Company's profits and loss- es is deducted from consolidated results of operations.
Revenue Recognition--The yield pool is valued at cost plus accreted interest with the accumulated unrealized gain (loss) on the zero-coupon U.S. Treasury Securities separately disclosed. The annual change in the yield pool's market value is reflected in the consolidated statements of operations. The consoli- dated statements of financial condition and the consolidated statements of op- erations have been reconciled to reflect Net Assets, Net Asset Value per Unit and Net Income (Loss) in accordance with the terms of the Limited Partnership Agreement.
The following information pertains to the Yield Pool at December 31, 2000 and 1999:
Futures interests are open commitments until settlement date. They are valued at market on a daily basis and the resulting net change in unrealized gains and losses is reflected in the change in unrealized profit (loss) on open con- tracts from one period to the next in the consolidated statements of opera- tions.
Monthly, DWR pays interest income on 90% of the Trading Company's average dai- ly Net Assets as defined in the Limited Partnership Agreement for the month at a prevailing rate on U.S. Treasury bills. For purposes of such interest pay- ments, Net Assets do not include monies due the Trading Company on futures in- terests, but not actually received.
Net Income (Loss) per Unit--Net income (loss) per unit of limited partnership interest ("Unit(s)") is computed using the weighted average number of Units outstanding during the period.
Equity in Futures Interests Trading Accounts--The Partnership's asset "Equity in futures interests trading accounts," reflected in the consolidated state- ments of financial condition,
Dean Witter Principal Plus Fund L.P. Notes to Consolidated Financial Statements-- (Continued)
consists of (A) cash on deposit with DWR, MS&Co. and MSIL to be used as margin for trading; (B) net unrealized gains or losses on open contracts which are valued at market, and calculated as the difference between original contract value and market value, and (C) net option premiums, which represent the net of all monies paid and/or received for such option premiums.
The Partnership, in the normal course of business, enters into various con- tracts with MS&Co. and MSIL acting as its commodity brokers. Pursuant to bro- kerage agreements with MS&Co. and MSIL, to the extent that such trading re- sults in unrealized gains or losses, the amounts are offset and reported on a net basis on the Partnership's consolidated statements of financial condition.
The Partnership has offset the fair value amounts recognized for forward con- tracts executed with the same counterparty as allowable under terms of the master netting agreement with MS&Co., the sole counterparty on such contracts. The Partnership has consistently applied its right to offset.
Brokerage Fees and Related Transaction Fees and Costs--The monthly brokerage fee is equal to 1/3 of 1% per month (a 4% annual rate) of the Partnership's adjusted month-end Net Assets. Transaction fees and costs are accrued on a half-turn basis. In 2000, the brokerage fee charged was the equivalent of a roundturn commission charge of approximately $157 per contract traded.
Operating Expenses--The Partnership bears all operating expenses related to its trading activities. These include filing fees, clerical, administrative, auditing, accounting, mailing, printing and other incidental operating ex- penses as permitted by the Limited Partnership Agreement. In addition, the Partnership incurs a monthly management fee and may incur an incentive fee. Demeter bears all other operating expenses.
Redemptions--As of the last day of any calendar quarter, Limited Partners may redeem some or all of their Units at 100% of the Net Asset Value per Unit upon five business days advance notice by redemption form to Demeter.
During 2000 and 1999, the Partnership sold securities in the Yield Pool in or- der to fund redemptions as detailed below:
Dean Witter Principal Plus Fund L.P. Notes to Consolidated Financial Statements-- (Continued)
Distributions--The Partnership will not make any distributions until after the Guarantee Period, and thereafter will only make distributions on a pro-rata basis at the sole discretion of Demeter.
Income Taxes--No provision for income taxes has been made in the accompanying consolidated financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of the Partner- ship's revenues and expenses for income tax purposes.
Dissolution of the Partnership--The Partnership will terminate on December 31, 2025, or at an earlier date if certain conditions set forth in the Limited Partnership Agreement occur.
The Trading Company may terminate operations if its Net Assets decline to 5% or less of consolidated Partnership Net Assets, and will terminate operations if its Net Assets decline to less than 3% of consolidated Partnership Net As- sets. At December 31, 2000 and 1999, the Trading Company had Net Assets of $4,941,558 and $4,761,650 respectively, which represented 12% and 11% respec- tively, of the consolidated Partnership's Net Assets at the respective dates. If the operations of the Trading Company ceased, the remaining Net Assets would be returned to the Partnership and held until the end of the Guarantee Period, when they would be distributed to the Limited Partners.
2. Related Party Transactions
The Trading Company pays a monthly brokerage fee to DWR as described in Note 1. The Partnership's and Trading Company's cash is on deposit with DWR, MS&Co., and MSIL in futures interests trading accounts to meet margin require- ments as needed. DWR pays interest on these funds as described in Note 1. The Yield Pool is on deposit with DWR in a customer security account. Pursuant to the Limited Partnership Agreement, Demeter initially invested $200,000 of General Partnership Interest in the Trading Company.
3. Trading Manager
Compensation to RXR as trading manager consists of a management fee and an in- centive fee as follows:
Management Fee--The Partnership pays a monthly management fee equal to 1/12 of 1% per month (a 1% annual rate) of the Partnership's adjusted Net Assets, as defined in the Limited Partnership Agreement, as of the last day of each month.
Dean Witter Principal Plus Fund L.P. Notes to Consolidated Financial Statements-- (Continued)
Incentive Fee--The Partnership will pay an annual incentive fee to RXR equal to 15% of the "New Appreciation", as defined in the Limited Partnership Agree- ment, of the Trading Company's Net Assets as of the end of each annual incen- tive period ending December 31. Such incentive fee is accrued in each month in which New Appreciation occurs. In those months in which New Appreciation is negative, previous accruals, if any, during the incentive period will be re- duced.
4. Financial Instruments
The Partnership trades futures contracts, options on futures contracts and physical commodities, forward contracts, and other commodity interests. 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 in- fluence the market value of these contracts, including interest rate volatili- ty.
In June 1998, the Financial Accounting Standards Board ("FASB") issued State- ment of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Deriv- ative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. The Partnership adopted the provisions of SFAS No. 133 beginning with the fiscal year ended December 31, 1998. SFAS No. 133 superceded SFAS Nos. 119 and 105, which required the dis- closure of average aggregate fair values and contract/notional values, respec- tively, of derivative financial instruments for an entity that carries its as- sets at fair value. SFAS No. 133 was further amended by SFAS No. 138, which clarifies issues surrounding interest rate risk, foreign currency denomina- tions, normal purchases and sales and net hedging. The application of SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, did not have a significant effect on the Partnership's financial statements.
SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics:
(1) One or more underlying notional amounts or payment provisions; (2) Requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors; (3) Terms require or permit net settlement.
Dean Witter Principal Plus Fund L.P. Notes to Consolidated Financial Statements-- (Continued)
Generally derivatives include futures, forwards, swaps or option contracts, or other financial instruments with similar characteristics such as caps, floors and collars.
The net unrealized gains on open contracts are reported as a component of "Eq- uity in futures interests trading accounts" on the statements of financial condition and totaled $1,629,964 and $380,736 at December 31, 2000 and 1999, respectively.
Of the $1,629,964 net unrealized gain on open contracts at December 31, 2000, $1,650,388 related to exchange-traded futures contracts and $(20,424) related to off-exchange-traded forward currency contracts.
Of the $380,736 net unrealized gain on open contracts at December 31, 1999, $325,528 related to exchange-traded futures contracts and $55,208 related to off-exchange-traded forward currency contracts.
Exchange-traded futures contracts held by the Partnership at December 31, 2000 and 1999 mature through June 2001 and June 2000, respectively. Off-exchange- traded forward currency contracts held by the Partnership at December 31, 2000 and 1999 mature through March 2001 and March 2000, respectively.
The Partnership has credit risk associated with counterparty nonperformance. The credit risk associated with the instruments in which the Partnership is involved is limited to the amounts reflected in the Partnership's consolidated statements of financial condition.
The Partnership also has credit risk because DWR, MS&Co., and MSIL 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 con- tracts are marked to market on a daily basis, with variations in value settled on a daily basis. DWR, MS&Co. and MSIL, each as a futures commission merchant for all of the Partnership's exchange-traded futures and futures-styled op- tions contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission, 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 option contracts including an amount equal to the net unrealized gain on all open futures and futures-styled option contracts, which funds, in the aggregate, totaled $5,068,219 and $6,339,551 at December 31, 2000 and 1999, respectively. With respect to the Partnership's off-exchange-traded forward currency contracts, there are no daily settle-
Dean Witter Principal Plus Fund L.P. Notes to Consolidated Financial Statements-- (Concluded)
ments 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 re- spect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the ability of MS&Co., the sole counterparty on all of such con- tracts, to perform. The Partnership has a netting agreement with MS&Co. This agreement, which seeks to reduce both the Partnership's and MS&Co.'s exposure on off-exchange-traded forward currency contracts, should materially decrease the Partnership's credit risk in the event of MS&Co.'s bankruptcy or insolven- cy.
5. Legal Matters
Similar class actions were filed in 1996 in California and New York State courts. Each of the actions were dismissed in 1999. However, the New York State class action discussed below is still pending because plaintiffs ap- pealed the trial court's dismissal of their case on March 3, 2000.
On September 18 and 20, 1996, purported class actions were filed in the Su- preme Court of the State of New York, New York County, on behalf of all pur- chasers of interests in limited partnership commodity pools sold by DWR. Named defendants include DWR, Demeter, Dean Witter Futures & Currency Management Inc., MSDW, certain limited partnership commodity pools of which Demeter is the general partner and certain trading managers to those pools. A consolidat- ed and amended complaint in the action pending in the Supreme Court of the State of New York was filed on August 13, 1997, alleging that the defendants committed fraud, breach of fiduciary duty, and negligent misrepresentation in the sale and operation of the various limited partnership commodity pools. The complaints sought unspecified amounts of compensatory and punitive damages and other relief. The New York Supreme Court dismissed the New York action in No- vember 1998, but granted plaintiffs leave to file an amended complaint, which they did in early December 1998. The defendants filed a motion to dismiss the amended complaint with prejudice on February 1, 1999. By decision dated Decem- ber 21, 1999, the New York Supreme Court dismissed the case with prejudice. However, on March 3, 2000 plaintiffs appealed the trial courts dismissal of their case.
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