10-K 1 sel.txt SPECTRUM SELECT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the year ended December 31, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from ________________ to ___________________ Commission File Number 0-19511 MORGAN STANLEY SPECTRUM SELECT L.P. (Exact name of registrant as specified in its Limited Partnership Agreement) DELAWARE 13-3619290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Demeter Management Corporation 825 Third Avenue, 9th Floor New York, NY 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 310-6444 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest (Title of Class) Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check-mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] State the aggregate market value of the Units of Limited Partnership Interest held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which units were sold as of a specified date within 60 days prior to the date of filing: $305,934,637 at January 31, 2003. DOCUMENTS INCORPORATED BY REFERENCE (See Page 1) MORGAN STANLEY SPECTRUM SELECT L.P. INDEX TO ANNUAL REPORT ON FORM 10-K DECEMBER 31, 2002
Page No. DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . . 1 Part I . Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . .. 2-6 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 6 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 6 Item 4. Submission of Matters to a Vote of Security Holders. . . .6 Part II. Item 5. Market for the Registrant's Partnership Units and Related Security Holder Matters . . . . . . . . . . .7-9 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 11-24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .24-38 Item 8. Financial Statements and Supplementary Data. . . . . .. . 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . .39 Part III. Item 10. Directors and Executive Officers of the Registrant. . .40-45 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . .45 Item 12. Security Ownership of Certain Beneficial Owners and Management. .. . . . . . . . . . . . . . . . . . . . 45 Item 13. Certain Relationships and Related Transactions. . . . . . 46 Item 14. Controls and Procedures. . . . . . . . . . . . . . . . . .46 Part IV. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 47-48
DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference as follows: Documents Incorporated Part of Form 10-K Partnership's Prospectus dated April 30, 2002 I Partnership's Supplement to the Prospectus dated January 24, 2003 I Annual Report to Morgan Stanley Spectrum Series Limited Partners for the year ended December 31, 2002 II, III and IV ` PART I Item 1. BUSINESS (a) General Development of Business. Morgan Stanley Spectrum Se- lect L.P. (the "Partnership") is a Delaware limited partnership organized to engage primarily in the speculative trading of futures contracts, options on futures contracts, and forward contracts on physical commodities and other commodity interests, including but not limited to, foreign currencies, financial instruments, metals, energy and agricultural products. The Partnership commenced operations on August 1, 1991. The Partnership is one of the Morgan Stanley Spectrum series of funds, comprised (at December 31, 2002) of the Partnership, Morgan Stanley Spectrum Commodity L.P. ("Spectrum Commodity"), Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. (collectively, the "Spectrum Series"). Spectrum Commodity terminated trading on December 31, 2002 and commenced its dissolution in January 2003 pursuant to its Limited Partnership Agreement. The Partnership's general partner is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc. ("Morgan Stanley DW"). The clearing commodity brokers are Morgan Stanley & Co. Incorporated ("MS & Co.") and Morgan Stanley & Co. International Limited ("MSIL"). Demeter, Morgan Stanley DW, MS & Co. and MSIL are wholly-owned subsidiaries of Morgan Stanley. The trading advisors to the Partnership are EMC Capital Management, Inc., Northfield Trading L.P., Rabar Market Research, Inc., and Sunrise Capital Management, Inc. (collectively, the "Trading Advisors"). Effective June 20, 2002, Morgan Stanley Dean Witter & Co. changed its name to Morgan Stanley. Units of limited partnership interest ("Unit(s)") are offered for sale at monthly closings at a purchase price equal to 100% of the net asset value per Unit at the close of business on the last day of each month. The managing underwriter for the Spectrum Series is Morgan Stanley DW. The Partnership's net asset value per Unit at December 31, 2002 was $27.65, representing an increase of 15.40 percent from the net asset value per Unit of $23.96 at December 31, 2001. For a more detailed description of the Partnership's business, see subparagraph (c). (b) Financial Information about Segments. For financial infor- mation reporting purposes, the Partnership is deemed to engage in one industry segment, the speculative trading of futures, forwards, and options. The relevant financial information is presented in Items 6 and 8. (c) Narrative Description of Business. The Partnership is in the business of speculative trading of futures, forwards, and options, pursuant to trading instructions provided by the Trading Advisors. For a detailed description of the different facets of the Partnership's business, see those portions of the Partnership's prospectus, dated April 30, 2002 (the "Prospectus"), and the Partnership's supplement to the Prospectus dated January 24, 2003 (the "Supplement"), incorporated by reference in this Form 10-K, set forth below. Facets of Business 1. Summary 1. "Summary" (Pages 1-8 of the Prospectus and Page S-1 of the Supplement). 2. Futures, Options, and 2. "The Futures, Options, and Forwards Markets Forwards Markets" (Pages 137-141 of the Prospectus). 3. Partnership's Trading 3. "Use of Proceeds" (Page 26-28 Arrangements and of the Prospectus and Page Policies S-4 of the Supplement), "The Trading Advisors" (Pages 72- 119 of the Prospectus and Pages S-28 - S-38 of the Supplement). 4. Management of the 4. "The Trading Advisors - The Partnership Management Agreements" (Page 72 of the Prospectus), "The General Partner" (Pages 67- 71 of the Prospectus and Pages S-25 - S-28 of the Supplement), "The Commodity Brokers" (Pages 121-122 of the Prospectus) and "The Limited Partnership Agreements" (Pages 123-125 of the Prospectus). 5. Taxation of the Partner- 5. "Material Federal Income Tax ship's Limited Partners Considerations" and "State and Local Income Tax Aspects" (Pages 130-135 of the Prospectus). (d) Financial Information about Geographic Areas. The Partnership has not engaged in any operations in foreign countries; however, the Partnership (through the commodity brokers) enters into forward contract transactions where foreign banks are the contracting party and trades futures, forwards, and options on foreign exchanges. (e) Available Information. The Partnership files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports with the Securities and Exchange Commission ("SEC"). You may read and copy any document filed by the Partnership at the SEC's public reference room at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The Partnership does not maintain an internet website, however, the SEC maintains a website that contains annual, quarterly, and current reports, proxy statements and other information that issuers (including the Partnership) file electronically with the SEC. The SEC's website address is http://www.sec.gov. Item 2. PROPERTIES The Partnership's executive and administrative offices are located within the offices of Morgan Stanley DW. The Morgan Stanley DW offices utilized by the Partnership are located at 825 Third Avenue, 9th Floor, New York, NY 10022. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS (a) Market Information. There is no established public trading market for Units of the Partnership. (b) Holders. The number of holders of Units at December 31, 2002 was approximately 23,256. (c) Distributions. No distributions have been made by the Partnership since it commenced trading operations on August 1, 1991. Demeter has sole discretion to decide what distributions, if any, shall be made to investors in the Partnership. Demeter currently does not intend to make any distributions of Partnership profits. (d) 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 Number 33-42380). The Partnership registered an additional 75,000 Units (pre- conversion) pursuant to a new Registration Statement on Form S-1, which became effective on August 31, 1993 (SEC File Number 33- 65072). The Partnership registered an additional 60,000 Units (pre- conversion) pursuant to another Registration Statement on Form S- 1, which became effective on October 17, 1997 (SEC File Number 333-1918), (the "Third Offering"). Through the Third Offering 58,860.329 Units (pre-conversion) were left unsold and ultimately de-registered. 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). The Partnership registered an additional 5,000,000 Units pursuant to another Registration Statement on Form S-1, which became effective on January 21, 1999 (File Number 333-68773). The Partnership registered an additional 4,500,000 Units pursuant to another Registration Statement on Form S-1, which became effective on February 28, 2000 (SEC File Number 333-90467). The Partnership registered an additional 1,000,000 Units pursuant to a registration statement on Form S-1, which became effective on April 30, 2002 (SEC File Number 333-84656). Units of the Partnership are being sold at monthly closings as of the close of business on the last day of each month at a purchase price equal to 100% of the net asset value per Unit as of the date of such monthly closing. Through December 31, 2002, 23,633,015.209 Units were sold, leaving 2,980,951.891 Units unsold at December 31, 2002. The aggregate price of the Units sold through December 31, 2002 was $413,607,408. The managing underwriter for the Partnership is Morgan Stanley DW. 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 "Use of Proceeds" section of the Prospectus and the Supplement.
Item 6. SELECTED FINANCIAL DATA (in dollars) For the Years Ended December 31, 2002 2001 2000 1999 1998 . Revenues (including interest) 67,605,728 30,468,895 35,083,619 4,778,950 41,778,732 Net Income (Loss) 40,823,199 3,165,349 14,291,045 (16,694,414) 22,695,060 Net Income (Loss) Per Unit (Limited & General Partners) 3.69 .39 1.57 (1.80) 2.95* Total Assets 299,604,379 246,043,382 224,581,554 219,366,812 202,668,038 Total Limited Partners' Capital 292,226,000 238,821,840 218,182,118 210,877,519 196,915,644 Net Asset Value Per Unit 27.65 23.96 23.57 22.00 23.80* * The Partnership became one of the Spectrum Series of Funds on June 1, 1998 and each outstanding Unit of Dean Witter Select Futures Fund L.P. on that date was converted to 100 Units of the Partnership. Per Unit amounts prior to the conversion are restated to reflect this 100 for 1 split.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity - The Partnership deposits its assets with Morgan Stanley DW as non-clearing broker, and MS & Co. and MSIL as clearing brokers in separate futures, forwards, and options trading accounts established for each Trading Advisor, 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 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 option 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, 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. Furthermore, there are no material trends, demands, commitments, events or uncertainties known at the present time that will result in or that are reasonably likely to result in the Partnership's liquidity increasing or decreasing in any material way. Capital Resources. The Partnership does not have, nor expect to have, any capital assets. Redemptions, exchanges and sales of additional Units in the future will affect the amount of funds available for investment 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. There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership's capital resource arrangements at the present time. The Partnership has no off-balance sheet arrangements, nor contractual obligations or commercial commitments to make future payments that would affect the Partnership's liquidity or capital resources. The contracts traded by the Partnership are accounted for on a trade-date basis and marked to market on a daily basis. The value of futures contracts is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of foreign currency forward contracts is based on the spot rate as of the close of business, New York City time, on a given day. Results of Operations. General. The Partnership's results depend on the Trading Advisors and the ability of each Trading Advisor's trading program 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, 2002 and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisors trade 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 Advisors 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 the Trading Advisors' trading activities on behalf of the Partnership and how the Partnership has performed in the past. The Partnership's results of operations are set forth in financial statements prepared in accordance with United States generally accepted accounting principles, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: The contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their cost and market value is recorded on the Statements of Operations as "Net change in unrealized profit/loss" for open (unrealized) contracts, and recorded as "Realized profit/loss" when open positions are closed out, and the sum of these amounts constitutes the Partnership's trading revenues. Interest income revenue as well as management fees, incentive fees and brokerage fees of the Partnership are recorded on an accrual basis. Demeter believes that, based on the nature of the operations of the Partnership, no assumptions other than those presently used relating to the application of critical accounting policies are reasonably plausible that could affect reported amounts. At December 31, 2002, the Partnership's total capital was $295,377,799, an increase of $53,966,214 from the Partnership's total capital of $241,411,585 at December 31, 2001. For the year ended December 31, 2002, the Partnership generated net income of $40,823,199, total subscriptions aggregated $62,812,840 and total redemptions aggregated $49,669,825. For the year ended December 31, 2002, the Partnership recorded total trading revenues, including interest income, of $67,605,728 and posted an increase in net asset value per Unit. The most significant gains of approximately 12.1% were recorded in the currency markets from long positions in the euro and Swiss franc versus the U.S. dollar during May, June and December, as the dollar's value weakened amid investors' fears concerning global political tensions, specifically the threat of war between India and Pakistan, the looming threat of a military strike against Iraq, and the resumption of North Korea's nuclear program. Additional gains of approximately 9.5% were recorded from June through September, as well as in December, from long positions in European and U.S. interest rate futures as prices trended higher amid a shift of assets from stocks into bonds as investors sought the "safe haven" of fixed income investments. In the agricultural futures markets, gains of approximately 1.2% were recorded from long positions in soybean and wheat futures as prices rallied during the second and third quarter amid fears that hot and dry weather would adversely affect crops in the U.S. midwest. In the energy futures markets, gains of approximately 1.0% were experienced from long positions in natural gas futures during March, August, September, and December, as prices moved higher amid supply concerns. A portion of the Partnership's overall gains was offset by losses of approximately 1.8% recorded in the metals markets early in the year from long positions in copper futures as prices fell amid weak industrial demand. Additional losses were recorded in October from short positions in copper futures as prices reversed higher in response to a temporary rally in global equity prices in October. Total expenses for the year were $26,782,529, resulting in net income of $40,823,199. The net asset value of a Unit increased from $23.96 at December 31, 2001 to $27.65 at December 31, 2002. At December 31, 2001, the Partnership's total capital was $241,411,585, an increase of $20,681,616 from the Partnership's total capital of $220,729,969 at December 31, 2000. For the year ended December 31, 2001, the Partnership generated net income of $3,165,349, total subscriptions aggregated $41,261,535 and total redemptions aggregated $23,745,268. For the year ended December 31, 2001, the Partnership recorded total trading revenues, including interest income, of $30,468,895 and posted an increase in net asset value per Unit. The most significant gains of approximately 8.2% were recorded in the global interest rate futures markets primarily during August, September and October from previously established long positions in short and intermediate term U.S. interest rate futures as prices continued trending higher following interest rate cuts by the U.S. and European central banks and as investors sought a "safe haven" from the decline in stock prices. Additional gains were recorded throughout the majority of the first quarter from previously established long positions in Japanese government bond futures as prices moved higher on concerns regarding that country's economy. In the global stock index futures markets, profits of approximately 5.1% were recorded throughout a majority of the third quarter from previously established short positions in DAX, Hang Seng, Nikkei and S&P 500 index futures as the trend in equity prices continued sharply lower amid worries regarding global economic uncertainty. A portion of the Partnership's overall gains was partially offset by losses of approximately 2.6% recorded in the energy markets throughout a majority of the fourth quarter from volatile price movement in natural gas futures as a result of a continually changing outlook for supply, production and demand. In the currency markets, losses of approximately 0.1% were recorded throughout a majority of the fourth quarter from transactions involving the euro and Swiss franc. Total expenses for the year were $27,303,546, resulting in net income of $3,165,349. The net asset value of a Unit increased from $23.57 at December 31, 2000 to $23.96 at December 31, 2001. At December 31, 2000, the Partnership's total capital was $220,729,969, an increase of $6,924,295 from the Partnership's total capital of $213,805,674 at December 31, 1999. For the year ended December 31, 2000, the Partnership generated net income of $14,291,045, total subscriptions aggregated $28,581,403 and total redemptions aggregated $35,948,153. For the year ended December 31, 2000, the Partnership recorded total trading revenues, including interest income, of $35,083,619 and posted an increase in net asset value per Unit. The most significant gains of approximately 9.3% were recorded in the global interest rate futures markets primarily during August, November and December from long positions in U.S. interest rate futures as prices climbed higher amid a drop in stock prices and as fears of an economic slowdown drew investors to the perceived safety of government securities. Additional gains were recorded during December from long positions in European and Australian interest rate futures as prices in these markets rose amid the speculation that the U.S. Federal Reserve would lower interest rates in the near future following their decision to switch to an easing policy bias. In the currency markets, gains of approximately 8.2% were recorded primarily during January, March, April and October from short positions in the euro and the Swiss franc as the value of these European currencies weakened relative to the U.S. dollar amid skepticism about Europe's economic outlook. In the energy markets, gains of approximately 4.0% were recorded primarily during May, August, September, November and December from long positions in natural gas futures as prices trended upward, amid supply and storage concerns. A portion of the Partnership's overall gains was partially offset by losses of approximately 4.9% recorded in the global stock index futures markets primarily during mid-April from long positions in U.S. stock index futures as domestic equity prices declined following the release of an unexpected jump in the Consumer Price Index. During the first half of September, additional losses were recorded from long positions in U.S. stock index futures as prices declined due to jitters in the technology sector and a worrisome spike in oil prices. In the metals markets, losses of approximately 3.5% were experienced from long positions in copper and aluminum futures as prices moved lower during February, May, October and December, after concerns mounted that demand would weaken amid a cooling of the U.S. economy. Total expenses for the year were $20,792,574, resulting in net income of $14,291,045. The net asset value of a Unit increased from $22.00 at December 31, 1999 to $23.57 at December 31, 2000. The Partnership's overall performance record represents varied results of trading in different futures, forwards, and options markets. For an analysis of unrealized gains and (losses) by contract type and a further description of 2002 trading results, refer to the "Letter to the Limited Partners" in the Partnership's Annual Report to Limited Partners for the year ended December 31, 2002, 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 in interest rates, stock indices, commodities, currencies, petroleum, precious metals and other commodity interests. 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 Advisors were unable to offset positions of the Partnership, the Partnership could lose all of its assets and the Limited Partners would realize a 100% loss. In addition to the Trading Advisors' internal controls, the Trading Advisors 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 Advisors and Demeter monitor the Partnership's trading activities to ensure compliance with the trading policies. Demeter may require the Trading Advisors 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, forward, 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, exchange or other exchange member 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 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 such 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 Morgan Stanley DW, 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, 2002, which is incorporated by reference to Exhibit 13.01 of this Form 10-K. Inflation has not been a major factor in the Partnership's operations. Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction The Partnership is a commodity pool engaged primarily 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 on the basis of 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 Advisors 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. In other words, one-day VaR for a portfolio is a number such that losses in this portfolio are estimated to exceed the VaR only one day in 100. VaR typically does not represent the worst case outcome. VaR is calculated using historical simulation. Demeter uses approximately four years of daily market data (1,000 observations) and revalues its portfolio (using delta-gamma approximations) for each of the historical market moves that occurred over this time period. This generates a probability distribution of daily "simulated profit and loss" outcomes. The VaR is the appropriate percentile of this distribution. For example, the 99% one-day VaR would represent the 10th worst outcome from Demeter's simulated profit and loss series. The Partnership's VaR computations are based on the risk representation of the underlying benchmark for each instrument or contract and does not distinguish between exchange and non- exchange-traded instruments and is also not based on exchange and/or dealer-based margin requirements. 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 Advisors in their daily risk management activities. Please further note that VaR as described above may not be comparable to similarly titled measures used by other entities. 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, 2002 and 2001. At December 31, 2002 and 2001, the Partnership's total capitalization was approximately $295 million and $241 million, respectively. Primary Market December 31, 2002 December 31, 2001 Risk Category Value at Risk Value at Risk Currency (2.17)% (2.02)% Interest Rate (1.25) (0.49) Equity (0.44) (0.30) Commodity (1.22) (0.40) Aggregate Value at Risk (2.84)% (2.30)% The VaR for a market category represents the one-day downside risk for the aggregate exposures associated with this market category. The aggregate VaR, listed above for the Partnership, represents the aggregate VaR of the Partnership's open positions across all the market categories, and is less than the sum of the VaRs for all such market categories due to the diversification benefit across asset classes. The table above represents the VaR of the Partnership's open positions at December 31, 2002 and 2001 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, 2002 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, 2002 through December 31, 2002. Primary Market Risk Category High Low Average Currency (2.17)% (0.58)% (1.61)% Interest Rate (1.41) (1.03) (1.26) Equity (0.71) (0.38) (0.52) Commodity (1.62) (0.78) (1.23) Aggregate Value at Risk (2.85)% (2.44)% (2.67)% 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 typically 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 caused by 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, 2002, and 2001, and for the end of the four quarterly reporting periods during calendar year 2002. 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 once 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, 2002, the Partnership's cash balance at Morgan Stanley DW was approximately 86% 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 material. 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, in relation to the Partnership's net assets. 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 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 expro- priations, 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 at December 31, 2002, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Currency. The primary market exposure of the Partnership at December 31, 2002 was to the currency sector. The Partnership's currency exposure 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 a large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. At December 31, 2002, the Partnership's major exposures were to Japanese yen and euro currency crosses, and to 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 U.S.-based Partnership in expressing VaR in a functional currency other than U.S. dollars. Interest Rate. The second largest market exposure at December 31, 2002 was to the global interest rate complex. The Partnership's exposure in the interest rate market complex was primarily spread across the U.S., European 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 U.S. and the other G-7 countries. The G-7 countries consist of France, the U.S., Britain, Germany, Japan, Italy and Canada. However, the Partnership also takes futures positions in the government debt of smaller nations - e.g., Australia. Demeter anticipates that G-7 countries and Australian interest rates will remain the primary interest rate exposure of the Partnership for the foreseeable future. The speculative futures positions held by the Partnership may range from short to long-term instruments. Consequently, changes in short, medium or long-term interest rates may have an effect on the Partnership. Equity. The primary equity exposure at December 31, 2002 was to 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. At December 31, 2002, the Partnership's primary exposures were to the NASDAQ (U.S.), Hang Seng (Hong Kong) and Nikkei (Japan) stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the U.S., Japanese, European and Hong Kong stock 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. Energy. At December 31, 2002, the Partnership's energy exposure was shared primarily by futures contracts in crude oil and its related products, and natural gas. Price movements in the energy markets result from political developments in the Middle East, weather patterns and other economic fundamentals. Significant profits and losses, which have been experienced in the past, are expected to continue to be experienced in the future. Natural gas has exhibited volatility in prices resulting from weather patterns and supply and demand factors and will likely continue in this choppy pattern. Metals. The Partnership's metals exposure at December 31, 2002 was to fluctuations in the price of precious metals, such as gold and silver, and base metals, such as copper, aluminum and lead. Economic forces, supply and demand inequalities, geopolitical factors and market expectations influence price movements in these markets. The Trading Advisors, from time to time, take positions when market opportunities develop and Demeter anticipates that the Partnership will continue to do so. Soft Commodities and Agriculturals. At December 31, 2002, the Partnership had exposure to the markets that comprise these sectors. Most of the exposure was to cotton, soybeans and its related products, and sugar. Supply and demand inequalities, severe weather disruption and market expectations affect price movements in these markets. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership at December 31, 2002: Foreign Currency Balances. The Partnership's primary foreign currency balances at December 31, 2002 were in Hong Kong dollars, Japanese yen and euros. The Partnership controls the non-trading risk of these balances by regularly converting them back into U.S. dollars upon liquidation of their respective positions. Qualitative Disclosures Regarding Means of Managing Risk Exposure The Partnership and the Trading Advisors, 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 Trading Advisors, each of whose strategies focus on different market sectors and trading approaches, and monitoring the performance of the Trading Advisors daily. In addition, the Trading Advisors establish 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 instrument, cash. Cash is the only Partnership investment directed by Demeter, rather than the Trading Advisors. 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) Quarter Revenues/ Net Net Income/ Ended (Net Losses) Income/(Loss) (Loss) Per Unit 2002 March 31 $ (4,965,948) $(11,031,500) $ (1.10) June 30 35,775,689 29,684,989 2.81 September 30 45,366,560 38,074,946 3.56 December 31 (8,570,573) (15,905,236) (1.58) Total $ 67,605,728 $ 40,823,199 $ 3.69 2001 March 31 $ 30,525,016 $ 24,046,834 $ 2.55 June 30 (16,536,822) (22,611,942) (2.37) September 30 28,022,232 21,354,388 2.20 December 31 (11,541,531) (19,623,931) (1.99) Total $ 30,468,895 $ 3,165,349 $ 0.39 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACOUNTING AND FINANCIAL DISCLOSURE None. PART III 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 executive officers of Demeter are as follows: Robert E. Murray, age 42, is the Managing Director of the Strategic Products Group at Morgan Stanley and Chairman of the Board of Directors of Demeter Management Corporation, a leading commodity pool operator with approximately $1.7 billion in assets across a variety of U.S. and international public and private managed futures funds. Mr. Murray began at Dean Witter in 1984 and has been closely involved in the growth of managed futures at the firm over the last 18 years. He is also the Chairman of the Board of Directors of Morgan Stanley Futures & Currency Management Inc., Morgan Stanley's internal commodity trading advisor. Mr. Murray served as the Vice Chairman and a Director of the Board of the Managed Futures Association and is currently a member of the Board of Directors of the National Futures Association. Mr. Murray received a Bachelors Degree in Finance from Geneseo State University in 1983. Jeffrey A. Rothman, age 41, is the President and a Director of Demeter. Mr. Rothman is the Executive Director of Morgan Stanley Managed Futures, responsible for overseeing all aspects of the firm's managed futures department. He is also President and a Director of Morgan Stanley Futures & Currency Management Inc. Mr. Rothman has been with the managed futures department for sixteen years and most recently held the position of National Sales Manager, assisting Branch Managers and Financial Advisors with their managed futures education, marketing, and asset retention efforts. Throughout his career, Mr. Rothman has helped with the development, marketing and administration of approximately 35 commodity pools. Mr. Rothman is an active member of the Managed Funds Association and serves on its Board of Directors. Mitchell M. Merin resigned his position as a Director of Demeter. Joseph G. Siniscalchi, age 57, is a Director of Demeter. Mr. Siniscalchi joined Morgan Stanley DW in July 1984 as a First Vice President, Director of General Accounting and served as a Senior Vice President and Controller for Morgan Stanley DW's Securities Division through 1997. He is currently Managing Director responsible for the Client Support Service Division of Morgan Stanley DW. From February 1980 to July 1984, Mr. Siniscalchi was Director of Internal Audit at Lehman Brothers Kuhn Loeb, Inc. Edward C. Oelsner, III, age 61, is a Director of Demeter. Mr. Oelsner is currently an Executive Vice President and head of the Product Development Group at Morgan Stanley Investment Advisors Inc., an affiliate of Morgan Stanley DW. Mr. Oelsner joined Morgan Stanley DW in 1981 as a Managing Director in Morgan Stanley DW's Investment Banking Department specializing in coverage of regulated industries and subsequently served as head of the Morgan Stanley DW Retail Products Group. Prior to joining Morgan Stanley DW, 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 an 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 51, is a Director of Demeter. Mr. Beech has been associated with the futures industry for over 25 years. He has been at Morgan Stanley DW since August 1984 where he is presently an Executive Director 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 Morgan Stanley DW, Mr. Beech worked at two investment banking firms in operations, research, managed futures and sales management. Raymond A. Harris, age 46, is a Director of Demeter and of Morgan Stanley Futures & Currency Management Inc. Mr. Harris is currently Managing Director of Global Products & Services at Morgan Stanley. He previously served as Chief Accounting Officer of Morgan Stanley Dean Witter Asset Management. From July 1982 to July 1994, Mr. Harris served in financial, administrative and other assignments at Dean Witter Reynolds, Inc. and Dean Witter, Discover & Co. From August 1994 to January 1999, he worked in Discover Financial Services and the firm's Credit Service business units. Mr. Harris has been with Morgan Stanley and its affiliates since July 1982. He has a B.A. degree from Boston College and an M.B.A. in Finance from the University of Chicago. Anthony J. DeLuca, age 40, is a Director of Demeter. Mr. DeLuca is also a Director of Morgan Stanley Futures & Currency Management Inc. Mr. DeLuca was appointed the Controller of Asset Management for Morgan Stanley in June 1999. Prior to that, Mr. DeLuca was a partner at the accounting firm of Ernst & Young LLP, where he had Morgan Stanley 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. Frank Zafran, age 47, is a Director of Demeter and of Morgan Stanley Futures & Currency Management Inc. Mr. Zafran is an Executive Director of Morgan Stanley and, in September 2002, was named Chief Administrative Officer of Morgan Stanley's Global Products & Services Division. Mr. Zafran joined the firm in 1979 and has held various positions in Corporate Accounting and the Insurance Department, including Senior Operations Officer - Insurance Division, until his appointment in 2000 as Director of 401(k) Plan Services, responsible for all aspects of 401(k) Plan Services including marketing, sales and operations. Mr. Zafran received a B.S. degree in Accounting from Brooklyn College, New York. Raymond E. Koch resigned his position as Chief Financial Officer of Demeter. Jeffrey D. Hahn, age 45, is the Chief Financial Officer of Demeter. Mr. Hahn began his career at Morgan Stanley in 1992 and is currently an Executive Director responsible for the management and supervision of the accounting, reporting, tax and finance functions for the firm's private equity, managed futures, and certain legacy real estate investing activities. He is also Chief Financial Officer of Morgan Stanley Futures & Currency Management Inc. From August 1984 through May 1992, Mr. Hahn held various positions as an auditor at Coopers & Lybrand, specializing in manufacturing businesses and venture capital organizations. Mr. Hahn received his B.A. in Economics from St. Lawrence University in 1979, an M.B.A. from Pace University in 1984, and is a Certified Public Accountant. All of the foregoing directors have indefinite terms. 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners - At December 31, 2002, 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, 2002, Demeter owned 113,977.644 Units of general partnership interest, representing a 1.07 percent interest in the Partnership. Robert E. Murray, Chairman of the Board of Demeter, owns 81.169 Units of limited partnership interest, which is less than 1% of the outstanding Units of the Partnership. (c) Changes in Control - None. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Refer to Note 2 - "Related Party Transactions" of "Notes to Financial Statements", in the accompanying Annual Report to Limited Partners for the year ended December 31, 2002, which is incorporated by reference to Exhibit 13.01 of this Form 10-K. In its capacity as the Partnership's retail commodity broker, Morgan Stanley DW received commodity brokerage fees (paid and accrued by the Partnership) of $18,943,743 for the year ended December 31, 2002. Item 14. CONTROLS AND PROCEDURES (a) As of a date within 90 days of the filing date of this annual report, the President and Chief Financial Officer of the general partner, Demeter, have evaluated the effectiveness of the Partnership's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act), and have judged such controls and procedures to be effective. (b) There have been no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART IV Item 15. 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, 2002 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, 2002, 2001 and 2000. - Statements of Financial Condition, including the Schedules of Investments, as of December 31, 2002 and 2001. - Statements of Operations, Changes in Partners' Capital, and Cash Flows for the years ended December 31, 2002, 2001 and 2000. - Notes to 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, 2002 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 to E-3. 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. MORGAN STANLEY SPECTRUM SELECT L.P. (Registrant) BY: Demeter Management Corporation, General Partner March 31, 2003 BY: /s/ Jeffrey A. Rothman Jeffrey A. Rothman, Director 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 31, 2003 Robert E. Murray, Director and Chairman /s/ Jeffrey A. Rothman March 31, 2003 Jeffrey A. Rothman, Director and President /s/ Joseph G. Siniscalchi March 31, 2003 Joseph G. Siniscalchi, Director /s/ Edward C. Oelsner III March 31, 2003 Edward C. Oelsner III, Director /s/ Richard A. Beech March 31, 2003 Richard A. Beech, Director /s/ Raymond A. Harris March 31, 2003 Raymond A. Harris, Director /s/ Anthony J. DeLuca March 31, 2003 Anthony J. DeLuca, Director /s/ Frank Zafran March 31, 2003 Frank Zafran, Director /s/ Jeffrey D. Hahn March 31, 2003 Jeffrey D. Hahn, Chief Financial Officer CERTIFICATIONS I, Jeffrey A. Rothman, President of Demeter Management Corporation, the general partner of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K of the registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of Demeter's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Jeffrey A. Rothman Jeffrey A. Rothman President, Demeter Management Corporation, general partner of the registrant CERTIFICATIONS I, Jeffrey D. Hahn, Chief Financial Officer of Demeter Management Corporation, the general partner of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K of the registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of Demeter's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Jeffrey D. Hahn Jeffrey D. Hahn Chief Financial Officer, Demeter Management Corporation, general partner of the registrant EXHIBIT INDEX ITEM 3.01 Form of Amended and Restated Limited Partnership Agreement of the Partnership, is incorporated by reference to Exhibit A of the Partnership's Prospectus, dated April 30, 2002, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 8, 2002. 3.02 Certificate of Limited Partnership, dated March 19, 1991, is incorporated by reference to Exhibit 3.02 of the Partnership's Registration Statement on Form S-1 (File No. 333-47829) filed with the Securities and Exchange Commission on March 12, 1998. 3.03 Certificate of Amendment Certificate of Limited Partnership, dated April 6, 1999, is incorporated by reference to Exhibit 3.03 of the Partnership's Registration Statement on Form S-1 (File No. 333-68773) filed with the Securities and Exchange Commission on April 12, 1999. 3.04 Certificate of Amendment of Certificate of Limited Partnership, dated November 1, 2001 (changing its name from Morgan Stanley Dean Witter Spectrum Select L.P.), is incorporated by reference to Exhibit 3.01 of the Partnership's Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.01 Amended and Restated Management Agreement, dated as of June 1, 1998, among the Partnership, Demeter, and Rabar Market Research, Inc. is incorporated by reference to Exhibit 10.01 of the Partnership's Form 10-K (File No. 0-19511) for fiscal year ended December 31, 1998 filed on June 30, 1999. 10.02 Amended and Restated Management Agreement, dated as of June 1, 1998, among the Partnership, Demeter, and EMC Capital Management, Inc. is incorporated by reference to Exhibit 10.02 of the Partnership's Form 10-K (File No. 0- 19511) for fiscal year ended December 31, 1998 filed on June 30, 1999. 10.03 Amended and Restated Management Agreement, dated as of June 1, 1998, among the Partnership, Demeter, and Sunrise Capital Management, Inc. is incorporated by reference to Exhibit 10.03 of the Partnership's Form 10-K (File No. 0-19511) for fiscal year ended December 31, 1998 filed on June 30, 1999. 10.04 Management Agreement, dated as of May 1, 2001, among the Partnership, Demeter, and Northfield Trading L.P., is incorporated by reference to Exhibit 10.01 of the Partnership's Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on April 25, 2001. 10.07 Form of Subscription and Exchange Agreement and Power of Attorney to be executed by each purchaser of Units is incorporated by reference to Exhibit B of the Partnership's Prospectus, dated April 30, 2002, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 8, 2002. 10.10 Amended and Restated Escrow Agreement, dated as of March 10, 2000, among the Partnership, Morgan Stanley Spectrum Strategic L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Technical L.P., Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Commodity L.P., Morgan Stanley DW, and The Chase Manhattan Bank is incorporated by reference to Exhibit 10.10 of the Partnership's Registration Statement on Form S-1 (File No. 333-90467) filed with the Securities and Exchange Commission on November 2, 2001. 10.11 Form of Subscription Agreement Update Form to be executed by purchasers of Units is incorporated by reference to Exhibit C of the Partnership's Prospectus, dated April 30, 2002, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 8, 2002. 10.12 Amended and Restated Customer Agreement between the Partnership and Morgan Stanley DW, dated as of October 16, 2000, is incorporated by reference to Exhibit 10.01 of the Partnership's Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.13 Commodity Futures Customer Agreement between MS & Co. and the Partnership, and acknowledged and agreed to by Morgan Stanley DW, dated as of June 6, 2000, is incorporated by reference to Exhibit 10.02 of the Partnership's Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.14 Customer Agreement between the Partnership and MSIL, dated as of June 6, 2000, is incorporated by reference to Exhibit 10.04 of the Partnership's Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.15 Foreign Exchange and Options Master Agreement between MS & Co. and the Partnership, dated as of April 30, 2000, is incorporated by reference to Exhibit 10.05 of the Partnership's Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 10.16 Securities Account Control Agreement among the Partnership, MS & Co., and Morgan Stanley DW, dated as of May 1, 2000, is incorporated by reference to Exhibit 10.03 of the Partnership's Form 8-K (File No. 0-19511) filed with the Securities and Exchange Commission on November 1, 2001. 13.01 December 31, 2002 Annual Report to Limited Partners is filed herewith. 99.01 Certification of President of Demeter Management Corporation, general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.02 Certification of Chief Financial Officer of Demeter Management Corporation, general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EXHIBIT 99.01 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Morgan Stanley Spectrum Select L.P. (the "Partnership") on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey A. Rothman, President, Demeter Management Corporation, general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. By: /s/ Jeffrey A. Rothman Name: Jeffrey A. Rothman Title: President Date: March 31, 2003 EXHIBIT 99.02 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Morgan Stanley Spectrum Select L.P. (the "Partnership") on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey D. Hahn, Chief Financial Officer, Demeter Management Corporation, general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. By: /s/ Jeffrey D. Hahn Name: Jeffrey D. Hahn Title: Chief Financial Officer Date: March 31, 2003 Morgan Stanley Spectrum Series December 31, 2002 Annual Report [LOGO] Morgan Stanley MORGAN STANLEY SPECTRUM SERIES HISTORICAL FUND PERFORMANCE Presented below is the percentage change in Net Asset Value per Unit from the start of every calendar year each Fund has traded. Also provided is the inception-to-date return and the annualized return since inception for each Fund. Past performance is not necessarily indicative of future results.
INCEPTION- TO-DATE ANNUALIZED 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 RETURN RETURN FUND % % % % % % % % % % % % % % -------------------------------------------------------------------------------------------------------------------------------- Spectrum Commodity...... -- -- -- -- -- -- -- (34.3) 15.8 3.2 (25.6) 16.6 (31.9) (7.4) -------------------------------------------------------------------------------------------------------------------------------- Spectrum Currency....... -- -- -- -- -- -- -- -- -- 11.7 11.1 12.2 39.3 14.2 (6 mos.) -------------------------------------------------------------------------------------------------------------------------------- Spectrum Global Balanced -- -- -- (1.7) 22.8 (3.6) 18.2 16.4 0.7 0.9 (0.3) (10.1) 45.7 4.7 (2 mos.) -------------------------------------------------------------------------------------------------------------------------------- Spectrum Select......... 31.2 (14.4) 41.6 (5.1) 23.6 5.3 6.2 14.2 (7.6) 7.1 1.7 15.4 176.5 9.3 (5 mos.) -------------------------------------------------------------------------------------------------------------------------------- Spectrum Strategic...... -- -- -- 0.1 10.5 (3.5) 0.4 7.8 37.2 (33.1) (0.6) 9.4 15.4 1.8 (2 mos.) -------------------------------------------------------------------------------------------------------------------------------- Spectrum Technical...... -- -- -- (2.2) 17.6 18.3 7.5 10.2 (7.5) 7.8 (7.2) 23.3 84.1 7.8 (2 mos.) --------------------------------------------------------------------------------------------------------------------------------
DEMETER MANAGEMENT CORPORATION 825 Third Avenue, 9th Floor New York, NY 10022 (212) 310-6444 MORGAN STANLEY SPECTRUM SERIES ANNUAL REPORT 2002 Dear Limited Partner: This marks the ninth annual report for Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Strategic L.P. and Morgan Stanley Spectrum Technical L.P., the twelfth annual report for Morgan Stanley Spectrum Select L.P., the fifth annual report for Morgan Stanley Spectrum Commodity L.P. and the third annual report for Morgan Stanley Spectrum Currency L.P. The Net Asset Value per Unit for each of the six Morgan Stanley Spectrum Funds as of December 31, 2002 was as follows:
% CHANGE FUNDS N.A.V. FOR YEAR ----------------------------------------- Spectrum Commodity $ 6.81 16.6% ----------------------------------------- Spectrum Currency $13.93 12.2% ----------------------------------------- Spectrum Global Balanced $14.57 -10.1% ----------------------------------------- Spectrum Select $27.65 15.4% ----------------------------------------- Spectrum Strategic $11.54 9.4% ----------------------------------------- Spectrum Technical $18.41 23.3% -----------------------------------------
Since their inception in November 1994, Spectrum Global Balanced has increased by 45.7% (a compound annualized return of 4.7%), Spectrum Strategic has increased by 15.4% (a compound annualized return of 1.8%), and Spectrum Technical has increased by 84.1% (a compound annualized return of 7.8%). Since its inception in August 1991, Spectrum Select has increased by 176.5% (a compound annualized return of 9.3%). Since its inception in January 1998, Spectrum Commodity has decreased by 31.9% (a compound annualized return of -7.4%). Since its inception in July 2000, Spectrum Currency has increased by 39.3% (a compound annualized return of 14.2%). Detailed performance information for each Fund is located in the body of the financial report. For each Fund, we provide a trading results by sector chart that portrays trading gains and trading losses for the year in each sector in which the Fund participates. In the case of Spectrum Currency, we provide the trading gains and trading losses for the five major currencies in which the Fund participates, and composite information for all other "minor" currencies traded within the Fund. The trading results by sector charts indicate the year's composite percentage returns generated by the specific assets dedicated to trading within each market sector in which each Fund participates. Please note that there is not an equal amount of assets in each market sector, and the specific allocations of assets by a Fund to each sector will vary over time within a predetermined range. Below each chart is a description of the factors that influenced trading gains and trading losses within each Fund during the year. Special Notice to Limited Partners of Morgan Stanley Spectrum Commodity L.P. As notified under separate cover dated December 16, 2002, Limited Partners of Morgan Stanley Spectrum Commodity L.P. are advised that Demeter Management Corporation, the general partner of Spectrum Commodity, has determined to terminate trading within the Fund effective December 31, 2002, and commence dissolution pursuant to the Fund's Limited Partnership Agreement. Limited Partners are advised of recent changes to the Board of Directors and Officers of Demeter Management Corporation (the "General Partner"): Mr. Robert E. Murray resigned the position of President of the General Partner. Mr. Murray will, however, retain his position as Chairman of the Board of Directors. Mr. Jeffrey A. Rothman, age 41, is the President and a Director of the General Partner. Mr. Rothman is the Executive Director of Morgan Stanley Managed Futures, responsible for overseeing all aspects of the firm's Managed Futures Department. He is also President and a Director of Morgan Stanley Futures & Currency Management Inc., Morgan Stanley's internal commodity trading advisor. Mr. Rothman has been with the Managed Futures Department for sixteen years and most recently held the position of National Sales Manager, assisting Branch Managers and Financial Advisors with their managed futures education, marketing, and asset retention efforts. Throughout his career, Mr. Rothman has helped with the development, marketing, and administration of approximately 35 commodity pool investments. Mr. Rothman is an active member of the Managed Funds Association and serves on its Board of Directors. Mr. Frank Zafran, age 47, is a Director of the General Partner and of Morgan Stanley Futures & Currency Management Inc. Mr. Zafran is an Executive Director of Morgan Stanley and, in September 2002, was named Chief Administrative Officer of Morgan Stanley's Global Products & Services Division. Mr. Zafran joined the firm in 1979 and held various positions in Corporate Accounting and the Insurance Department, including Senior Operations Officer--Insurance Division, until his appointment in 2000 as Director of 401(k) Plan Services, responsible for all aspects of 401(k) Plan Services including marketing, sales and operations. Mr. Zafran received a B.S. degree in Accounting from Brooklyn College, New York. Mr. Raymond E. Koch resigned the position of Chief Financial Officer of the General Partner. Mr. Jeffrey D. Hahn, age 45, was named Chief Financial Officer of the General Partner. Mr. Hahn began his career at Morgan Stanley in 1992 and is currently an Executive Director responsible for the management and supervision of the accounting, reporting, tax and finance functions for the firm's private equity, managed futures, and certain legacy real estate investing activities. He is also Chief Financial Officer of Morgan Stanley Futures & Currency Management Inc. From August 1984 through May 1992, Mr. Hahn held various positions as an auditor at Coopers & Lybrand, specializing in manufacturing businesses and venture capital organizations. Mr. Hahn received his B.A. in Economics from St. Lawrence University in 1979, an M.B.A. from Pace University in 1984, and is a Certified Public Accountant. Should you have any questions concerning this report, please feel free to contact Demeter Management Corporation, 825 Third Avenue, 9th Floor, New York, NY 10022 or your Morgan Stanley 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/ Jeffrey A. Rothman Jeffrey A. Rothman President Demeter Management Corporation General Partner SPECTRUM COMMODITY [CHART] Year ended December 31, 2002 ----------------- Energies 10.34% Metals 1.70% Agriculturals 9.77% Note:Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . In the energy futures markets, gains were experienced throughout a majority of the year from long positions in natural gas futures as prices drew strength primarily from colder weather in the Northeastern U.S. and a disruption of output from the Gulf of Mexico caused by Hurricane Isidore. Additional gains were recorded from long positions in crude oil futures and related products as growing tensions between the U.S. and Iraq pushed prices higher in late February and early March, as well as during the second half of the year. . In the agricultural markets, gains were provided from long positions in cocoa futures as political unrest in the Ivory Coast threatened supplies throughout a majority of the year. Additional gains were recorded from long positions in sugar futures during December and long positions in a variety of grain futures during May, June, and July. . In the metals futures markets, gains were recorded from long futures positions in gold as prices initially climbed higher early in the year amid investors' fears concerning weaker global equity prices. Additional gains resulted later in the year, as gold prices resumed their upward move amid the looming threat of military action against Iraq and North Korea. SPECTRUM CURRENCY [CHART] Year ended December 31, 2002 ----------------- Australian dollar 4.12% British Pound -8.99% Euro 16.42% Japanese yen -7.28% Swiss franc 5.07% Minor Currencies 12.95% Note:Reflects trading results only and does not include fees or interest income. Minor currencies may include, but are not limited to, the South African rand, Thai baht, Greek drachma, Singapore dollar, Mexican peso, New Zealand dollar and Norwegian krone. FACTORS INFLUENCING ANNUAL TRADING GAINS: . Gains were recorded from long positions in the euro, Swiss franc, and Norwegian krone versus the U.S. dollar as the dollar's value significantly weakened during April, May, and June amid falling equity prices and concerns regarding corporate integrity. Additional gains from long positions in the euro, Swiss franc, and Norwegian krone were experienced in December as the looming threat of a potential military conflict with Iraq and North Korea further weakened the dollar. . Additional gains stemmed from long positions in the South African rand versus the U.S. dollar as its value approached a 16-month high during the second and fourth quarter amid strong demand for South African exports and high relative interest rates. . Profits were recorded from long positions in the Australian dollar and New Zealand dollar versus the U.S. dollar as the value of both currencies strengthened during April, May, and throughout the fourth quarter amid higher gold prices. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . Losses were recorded in the British pound from short positions versus the U.S. dollar during the summer months and into the fourth quarter as the value of the dollar weakened amid geopolitical and economic concerns. . Losses resulted from positions in the Japanese yen versus the U.S. dollar during March as the yen initially strengthened amid asset repatriation out of the U.S. into Japan, only to retreat by month-end on expectations that the repatriation flow would soon subside ahead of the Japanese fiscal year-end. Further losses in the Japanese yen were experienced in December from short positions versus the U.S. dollar as the value of the dollar weakened versus most major currencies. SPECTRUM GLOBAL BALANCED [CHART] Year ended December 31, 2002 ----------------- Currencies 1.31% Interest Rates 7.42% Stock Indices -14.15% Energies 0.00% Metals -0.45% Agriculturals -0.43% Note:Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . In the global stock index futures markets, losses were experienced from long positions in European, U.S., and Japanese stock index futures as prices continued to weaken throughout the majority of the year, particularly during July, September, and December, amid continued economic uncertainty and ongoing political concerns. FACTORS INFLUENCING ANNUAL TRADING GAINS: . In the global interest rate futures markets, gains resulted from long positions in European, Japanese, and U.S. interest rate futures, predominantly during the third quarter, as prices trended higher amid a shift in assets from stocks into bonds as investors sought the "safe haven" of fixed income investments. . In the currency markets, gains were recorded from long positions in the euro and Swiss franc versus the U.S. dollar as the dollar's value weakened during May, June, and December amid investors' fears concerning increased global tensions, specifically the threat of war between India and Pakistan, the looming threat of a military strike against Iraq, and the resumption of North Korea's nuclear program. SPECTRUM SELECT [CHART] Year ended December 31, 2002 ----------------- Currencies 12.08% Interest Rates 9.54% Stock Indices 0.45% Energies 1.01% Metals -1.82% Agriculturals 1.23% Note:Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . In the currency markets, gains were recorded from long positions in the euro and Swiss franc versus the U.S. dollar during May, June and December, as the dollar's value weakened amid investors' fears concerning global political tensions, specifically the threat of war between India and Pakistan, the looming threat of a military strike against Iraq, and the resumption of North Korea's nuclear program. . In the global interest rate futures markets, gains were recorded from long positions in European and U.S. interest rate futures during the period from June through September, as well as in December, as prices trended higher amid a shift of assets from stocks into bonds as investors sought the "safe haven" of fixed income investments. . In the agricultural futures markets, gains were recorded from long futures positions in soybean and wheat as prices rallied during the second and third quarter amid fears that hot and dry weather would adversely affect crops in the U.S. midwest. . In the energy futures markets, gains were experienced from long positions in natural gas futures during March, August, September, and December as prices moved higher amid supply concerns. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . In the metals futures markets, losses were incurred early in the year from long positions in copper futures as prices fell amid weak industrial demand. Additional losses were recorded from short positions in copper futures as prices reversed higher in response to a temporary rally in global equity prices in October. SPECTRUM STRATEGIC [CHART] Year ended December 31, 2002 ----------------- Currencies 7.56% Interest Rates -0.28% Stock Indices -2.92% Energies -0.06% Metals -2.87% Agriculturals 18.25% Note:Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . In the agricultural markets, gains were recorded from long futures positions in cocoa as political unrest in the Ivory Coast threatened supplies throughout a majority of the year. Additional gains were recorded from long futures positions in coffee as technical factors and concerns regarding supplies placed upward pressure on prices. Further gains resulted from long positions in wheat, soybean, and corn futures as weather-related concerns threatened supplies in the U.S. midwest. . In the currency markets, gains were recorded from long positions in the euro and Swiss franc versus the U.S. dollar as the dollar's value weakened amid investors' fears concerning increased global tensions and prolonged uncertainty regarding the U.S. economy. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . In the global stock index futures markets, losses were recorded from long positions in U.S. and European stock index futures as prices continued to weaken throughout a majority of the year amid ongoing concerns regarding the global economic recovery, corporate accounting scandals, and geopolitical concerns. Additional losses were incurred from short positions in U.S. and European stock index futures as global equity prices reversed higher during the fourth quarter amid temporary economic optimism. . In the metals futures markets, losses were experienced from long positions in copper, aluminum, and zinc futures as prices reversed lower during April and July amid growing inventory levels and weak industrial demand. SPECTRUM TECHNICAL [CHART] Year ended December 31, 2002 ----------------- Currencies 13.05% Interest Rates 17.05% Stock Indices 4.34% Energies 0.01% Metals -2.34% Agriculturals 0.96% Note:Reflects trading results only and does not include fees or interest income. FACTORS INFLUENCING ANNUAL TRADING GAINS: . In the global interest rate futures markets, gains resulted from long positions in Japanese, European, and U.S. interest rate futures as prices trended higher during the period from June through September, as well as in December, amid global economic uncertainty and falling equity prices. . In the currency markets, gains were recorded during the second quarter, as well as in December, from long positions in the euro versus the U.S. dollar as the value of the dollar weakened amid continued uncertainty regarding the U.S. economic recovery and heightened global political tensions. . In the global stock index futures markets, gains were recorded from short positions in European stock index futures as prices trended lower during June, July, and September amid skepticism regarding a global economic recovery. FACTORS INFLUENCING ANNUAL TRADING LOSSES: . In the metals futures markets, losses resulted from long positions in copper futures as prices reversed lower during the second quarter amid growing inventory levels and weak industrial demand. Additional losses were recorded during October from short positions in copper futures as prices reversed higher amid renewed economic optimism. MORGAN STANLEY SPECTRUM SERIES INDEPENDENT AUDITORS' REPORT To the Limited Partners and the General Partner of Morgan Stanley Spectrum Commodity L.P., Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P. and Morgan Stanley Spectrum Technical L.P.: We have audited the accompanying statements of financial condition of Morgan Stanley Spectrum Commodity L.P., Morgan Stanley Spectrum Currency L.P. ("Spectrum Currency"), Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. (collectively, the "Partnerships"), including the schedules of investments, as of December 31, 2002 and 2001, and the related statements of operations, changes in partners' capital, and cash flows for the period from July 3, 2000 (commencement of operations) to December 31, 2000 and the years ended December 31, 2001 and 2002 for Spectrum Currency, and for each of the three years in the period ended December 31, 2002 for the other above mentioned Partnerships. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Morgan Stanley Spectrum Commodity L.P., Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the period from July 3, 2000 (commencement of operations) to December 31, 2000 and the years ended December 31, 2001 and 2002 for Spectrum Cur- rency, and for each of the three years in the period ended December 31, 2002 for the other above mentioned Partnerships, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP New York, New York February 14, 2003 MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ---------------------- 2002 2001 ---------- ---------- $ $ ASSETS Equity in futures interests trading accounts: Cash 14,290,282 12,980,361 Net unrealized gain on open contracts (MS&Co.) -- 289,317 Net unrealized gain (loss) on open contracts (MSIL) (101,856) 77,762 ---------- ---------- Total net unrealized gain (loss) on open contracts (101,856) 367,079 ---------- ---------- Total Trading Equity 14,188,426 13,347,440 Interest receivable (Morgan Stanley DW and MS&Co.) 11,963 17,129 Subscriptions receivable -- 108,050 ---------- ---------- Total Assets 14,200,389 13,472,619 ========== ========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 5,357,853 417,678 Accrued brokerage fees (Morgan Stanley DW and MS&Co.) 52,969 52,001 Accrued management fees (MSCM) 28,788 28,261 ---------- ---------- Total Liabilities 5,439,610 497,940 ---------- ---------- PARTNERS' CAPITAL Limited Partners (1,243,152.442 and 2,180,009.505 Units, respectively) 8,465,275 12,721,444 General Partner (43,395.648 Units) 295,504 253,235 ---------- ---------- Total Partners' Capital 8,760,779 12,974,679 ---------- ---------- Total Liabilities and Partners' Capital 14,200,389 13,472,619 ========== ========== NET ASSET VALUE PER UNIT 6.81 5.84 ========== ==========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 --------- ---------- --------- $ $ $ REVENUES Trading profit (loss): Realized 3,310,675 (4,662,750) 1,696,824 Net change in unrealized (468,935) 392,362 (567,711) --------- ---------- --------- Total Trading Results 2,841,740 (4,270,388) 1,129,113 Interest income (Morgan Stanley DW and MS&Co.) 178,063 518,759 1,047,350 --------- ---------- --------- Total 3,019,803 (3,751,629) 2,176,463 --------- ---------- --------- EXPENSES Brokerage fees (Morgan Stanley DW and MS&Co.) 607,846 736,436 949,310 Management fees (MSCM) 330,352 400,237 546,187 Service fees (Demeter) -- -- 58,604 --------- ---------- --------- Total 938,198 1,136,673 1,554,101 --------- ---------- --------- NET INCOME (LOSS) 2,081,605 (4,888,302) 622,362 ========= ========== ========= NET INCOME (LOSS) ALLOCATION: Limited Partners 2,039,336 (4,800,953) 612,086 General Partner 42,269 (87,349) 10,276 NET INCOME (LOSS) PER UNIT: Limited Partners .97 (2.01) .24 General Partner .97 (2.01) .24
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM CURRENCY L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, --------------------- 2002 2001 ---------- ---------- $ $ ASSETS Equity in futures interests trading accounts: Cash 88,478,803 43,241,135 Net unrealized gain on open contracts (MS&Co.) 5,651,549 3,178,383 ---------- ---------- Total Trading Equity 94,130,352 46,419,518 Subscriptions receivable 4,178,758 2,642,117 Interest receivable (Morgan Stanley DW) 70,210 50,588 ---------- ---------- Total Assets 98,379,320 49,112,223 ========== ========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 1,526,335 165,224 Accrued brokerage fees (Morgan Stanley DW) 316,460 154,729 Accrued incentive fees 239,482 913,255 Accrued management fees 137,591 67,274 ---------- ---------- Total Liabilities 2,219,868 1,300,482 ---------- ---------- PARTNERS' CAPITAL Limited Partners (6,739,826.121 and 3,674,315.446 Units, respectively) 93,891,619 45,598,611 General Partner (162,791.986 and 178,332.987 Units, respectively) 2,267,833 2,213,130 ---------- ---------- Total Partners' Capital 96,159,452 47,811,741 ---------- ---------- Total Liabilities and Partners' Capital 98,379,320 49,112,223 ========== ========== NET ASSET VALUE PER UNIT 13.93 12.41 ========== ==========
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JULY 3, 2000 FOR THE YEARS ENDED (COMMENCEMENT OF DECEMBER 31, OPERATIONS) TO -------------------- DECEMBER 31, 2002 2001 2000 ---------- --------- ------------------- $ $ $ REVENUES Trading profit: Realized 12,877,202 3,998,924 1,126,201 Net change in unrealized 2,473,166 2,622,814 555,569 ---------- --------- --------- Total Trading Results 15,350,368 6,621,738 1,681,770 Interest income (Morgan Stanley DW) 833,523 731,716 236,461 ---------- --------- --------- Total 16,183,891 7,353,454 1,918,231 ---------- --------- --------- EXPENSES Brokerage fees (Morgan Stanley DW) 3,077,048 1,297,698 249,571 Incentive fees 1,485,875 1,155,201 188,423 Management fees 1,337,848 564,216 171,693 ---------- --------- --------- Total 5,900,771 3,017,115 609,687 ---------- --------- --------- NET INCOME 10,283,120 4,336,339 1,308,544 ========== ========= ========= NET INCOME ALLOCATION: Limited Partners 10,038,409 4,119,027 1,134,371 General Partner 244,711 217,312 174,173 NET INCOME PER UNIT: Limited Partners 1.52 1.24 1.17 General Partner 1.52 1.24 1.17
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ---------------------- 2002 2001 ---------- ---------- $ $ ASSETS Equity in futures interests trading accounts: Cash 49,330,482 57,396,091 Net unrealized gain on open contracts (MS&Co.) 758,782 839,855 Net unrealized loss on open contracts (MSIL) (12,849) (150,647) ---------- ---------- Total net unrealized gain on open contracts 745,933 689,208 Net option premiums 712,573 -- ---------- ---------- Total Trading Equity 50,788,988 58,085,299 Subscriptions receivable 716,792 611,641 Interest receivable (Morgan Stanley DW) 53,458 93,818 ---------- ---------- Total Assets 51,559,238 58,790,758 ========== ========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 896,775 725,284 Accrued brokerage fees (Morgan Stanley DW) 202,109 219,946 Accrued management fees 54,922 59,768 ---------- ---------- Total Liabilities 1,153,806 1,004,998 ---------- ---------- PARTNERS' CAPITAL Limited Partners (3,419,596.378 and 3,524,663.525 Units, respectively) 49,814,229 57,127,967 General Partner (40,584.304 Units) 591,203 657,793 ---------- ---------- Total Partners' Capital 50,405,432 57,785,760 ---------- ---------- Total Liabilities and Partners' Capital 51,559,238 58,790,758 ========== ========== NET ASSET VALUE PER UNIT 14.57 16.21 ========== ==========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- $ $ $ REVENUES Trading profit (loss): Realized (3,772,374) 3,618,628 (2,091,009) Net change in unrealized 56,725 (2,628,436) 2,507,530 ---------- ---------- ---------- (3,715,649) 990,192 416,521 Proceeds from Litigation Settlement 233,074 -- -- ---------- ---------- ---------- Total Trading Results (3,482,575) 990,192 416,521 Interest income (Morgan Stanley DW) 916,179 2,160,076 3,275,958 ---------- ---------- ---------- Total (2,566,396) 3,150,268 3,692,479 ---------- ---------- ---------- EXPENSES Brokerage fees (Morgan Stanley DW) 2,532,371 2,597,121 2,558,008 Management fees 688,151 705,746 695,117 ---------- ---------- ---------- Total 3,220,522 3,302,867 3,253,125 ---------- ---------- ---------- NET INCOME (LOSS) (5,786,918) (152,599) 439,354 ========== ========== ========== NET INCOME (LOSS) ALLOCATION: Limited Partners (5,720,328) (150,650) 433,786 General Partner (66,590) (1,949) 5,568 NET INCOME (LOSS) PER UNIT: Limited Partners (1.64) (.05) .14 General Partner (1.64) (.05) .14
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ------------------------ 2002 2001 ----------- ----------- $ $ ASSETS Equity in futures interests trading accounts: Cash 274,780,334 235,183,061 Net unrealized gain on open contracts (MS&Co.) 20,865,525 7,164,265 Net unrealized loss on open contracts (MSIL) (2,967,507) (1,767,529) ----------- ----------- Total net unrealized gain on open contracts 17,898,018 5,396,736 Net option premiums -- 167,063 ----------- ----------- Total Trading Equity 292,678,352 240,746,860 Subscriptions receivable 6,690,744 4,991,166 Interest receivable (Morgan Stanley DW) 235,283 305,356 ----------- ----------- Total Assets 299,604,379 246,043,382 =========== =========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 1,876,403 2,595,426 Accrued brokerage fees (Morgan Stanley DW) 1,662,321 1,440,360 Accrued management fees 687,856 596,011 ----------- ----------- Total Liabilities 4,226,580 4,631,797 ----------- ----------- PARTNERS' CAPITAL Limited Partners (10,567,690.403 and 9,966,639.126 Units, respectively) 292,226,000 238,821,840 General Partner (113,977.644 and 108,076.600 Units, respectively) 3,151,799 2,589,745 ----------- ----------- Total Partners' Capital 295,377,799 241,411,585 ----------- ----------- Total Liabilities and Partners' Capital 299,604,379 246,043,382 =========== =========== NET ASSET VALUE PER UNIT 27.65 23.96 =========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- ----------- ---------- $ $ $ REVENUES Trading profit (loss): Realized 46,999,853 43,420,724 6,845,291 Net change in unrealized 12,501,282 (20,155,561) 18,665,233 ---------- ----------- ---------- 59,501,135 23,265,163 25,510,524 Proceeds from Litigation Settlement 4,636,156 -- -- ---------- ----------- ---------- Total Trading Results 64,137,291 23,265,163 25,510,524 Interest income (Morgan Stanley DW) 3,468,437 7,203,732 9,573,095 ---------- ----------- ---------- Total 67,605,728 30,468,895 35,083,619 ---------- ----------- ---------- EXPENSES Brokerage fees (Morgan Stanley DW) 18,943,743 17,183,347 14,706,945 Management fees 7,838,786 7,110,346 6,085,629 Incentive fees -- 3,009,853 -- ---------- ----------- ---------- Total 26,782,529 27,303,546 20,792,574 ---------- ----------- ---------- NET INCOME 40,823,199 3,165,349 14,291,045 ========== =========== ========== NET INCOME ALLOCATION: Limited Partners 40,391,145 3,123,455 14,165,099 General Partner 432,054 41,894 125,946 NET INCOME PER UNIT: Limited Partners 3.69 .39 1.57 General Partner 3.69 .39 1.57
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM STRATEGIC L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ---------------------- 2002 2001 ---------- ---------- $ $ ASSETS Equity in futures interests trading accounts: Cash 68,224,648 65,967,662 Net unrealized gain on open contracts (MS&Co.) 7,430,755 4,515,344 Net unrealized loss on open contracts (MSIL) (499,611) (23,578) ---------- ---------- Total net unrealized gain on open contracts 6,931,144 4,491,766 Net option premiums 222,768 288,552 ---------- ---------- Total Trading Equity 75,378,560 70,747,980 Subscriptions receivable 1,654,471 651,936 Interest receivable (Morgan Stanley DW) 61,778 89,359 ---------- ---------- Total Assets 77,094,809 71,489,275 ========== ========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 1,115,549 2,072,098 Accrued brokerage fees (Morgan Stanley DW) 431,596 424,242 Accrued management fees 178,592 175,549 ---------- ---------- Total Liabilities 1,725,737 2,671,889 ---------- ---------- PARTNERS' CAPITAL Limited Partners (6,454,424.204 and 6,449,326.013 Units, respectively) 74,487,934 68,012,216 General Partner (76,351.101 Units) 881,138 805,170 ---------- ---------- Total Partners' Capital 75,369,072 68,817,386 ---------- ---------- Total Liabilities and Partners' Capital 77,094,809 71,489,275 ========== ========== NET ASSET VALUE PER UNIT 11.54 10.55 ========== ==========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ----------- $ $ $ REVENUES Trading profit (loss): Realized 10,648,811 2,132,212 (23,193,914) Net change in unrealized 2,439,378 2,505,634 (7,577,681) ---------- ---------- ----------- 13,088,189 4,637,846 (30,771,595) Proceeds from Litigation Settlement 17,556 -- -- ---------- ---------- ----------- Total Trading Results 13,105,745 4,637,846 (30,771,595) Interest income (Morgan Stanley DW) 972,942 2,217,963 3,832,634 ---------- ---------- ----------- Total 14,078,687 6,855,809 (26,938,961) ---------- ---------- ----------- EXPENSES Brokerage fees (Morgan Stanley DW) 5,304,486 5,152,756 5,798,093 Management fees 2,194,958 2,183,596 2,880,999 Incentive fees 264,827 -- 1,269,237 ---------- ---------- ----------- Total 7,764,271 7,336,352 9,948,329 ---------- ---------- ----------- NET INCOME (LOSS) 6,314,416 (480,543) (36,887,290) ========== ========== =========== NET INCOME (LOSS) ALLOCATION: Limited Partners 6,238,448 (475,383) (36,503,461) General Partner 75,968 (5,160) (383,829) NET INCOME (LOSS) PER UNIT: Limited Partners .99 (.06) (5.24) General Partner .99 (.06) (5.24)
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM TECHNICAL L.P. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ------------------------ 2002 2001 ----------- ----------- $ $ ASSETS Equity in futures interests trading accounts: Cash 310,115,973 246,172,354 Net unrealized gain on open contracts (MS&Co.) 27,172,226 14,299,794 Net unrealized loss on open contracts (MSIL) (3,069,013) (2,794,179) ----------- ----------- Total net unrealized gain on open contracts 24,103,213 11,505,615 ----------- ----------- Total Trading Equity 334,219,186 257,677,969 Subscriptions receivable 7,108,790 4,445,562 Interest receivable (Morgan Stanley DW) 268,836 318,673 ----------- ----------- Total Assets 341,596,812 262,442,204 =========== =========== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Redemptions payable 3,195,919 2,377,346 Accrued brokerage fees (Morgan Stanley DW) 1,906,305 1,509,205 Accrued management fees 672,962 581,531 ----------- ----------- Total Liabilities 5,775,186 4,468,082 ----------- ----------- PARTNERS' CAPITAL Limited Partners (18,038,726.045 and 17,089,473.684 Units, respectively) 332,124,550 255,122,417 General Partner (200,799.812 and 191,022.517 Units, respectively) 3,697,076 2,851,705 ----------- ----------- Total Partners' Capital 335,821,626 257,974,122 ----------- ----------- Total Liabilities and Partners' Capital 341,596,812 262,442,204 =========== =========== NET ASSET VALUE PER UNIT 18.41 14.93 =========== ===========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- ----------- ---------- $ $ $ REVENUES Trading profit (loss): Realized 76,058,451 30,115,483 12,255,064 Net change in unrealized 12,597,598 (28,536,694) 22,006,013 ---------- ----------- ---------- 88,656,049 1,578,789 34,261,077 Proceeds from Litigation Settlement 306,400 -- -- ---------- ----------- ---------- Total Trading Results 88,962,449 1,578,789 34,261,077 Interest income (Morgan Stanley DW) 3,686,460 8,288,660 11,613,896 ---------- ----------- ---------- Total 92,648,909 9,867,449 45,874,973 ---------- ----------- ---------- EXPENSES Brokerage fees (Morgan Stanley DW) 20,470,797 19,556,056 17,835,223 Management fees 7,377,756 7,501,053 9,595,464 Incentive fees 4,024,921 2,093,709 166,085 ---------- ----------- ---------- Total 31,873,474 29,150,818 27,596,772 ---------- ----------- ---------- NET INCOME (LOSS) 60,775,435 (19,283,369) 18,278,201 ========== =========== ========== NET INCOME (LOSS) ALLOCATION: Limited Partners 60,110,064 (19,062,561) 18,053,408 General Partner 665,371 (220,808) 224,793 NET INCOME (LOSS) PER UNIT: Limited Partners 3.48 (1.15) 1.17 General Partner 3.48 (1.15) 1.17
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ---------- ------- ---------- $ $ $ Partners' Capital, December 31, 1999 3,105,867.170 23,310,162 330,308 23,640,470 Offering of Units 277,607.062 2,115,964 -- 2,115,964 Net income -- 612,086 10,276 622,362 Redemptions (809,685.913) (6,178,815) -- (6,178,815) -------------- ---------- ------- ---------- Partners' Capital, December 31, 2000 2,573,788.319 19,859,397 340,584 20,199,981 Offering of Units 287,171.772 1,838,372 -- 1,838,372 Net loss -- (4,800,953) (87,349) (4,888,302) Redemptions (637,554.938) (4,175,372) -- (4,175,372) -------------- ---------- ------- ---------- Partners' Capital, December 31, 2001 2,223,405.153 12,721,444 253,235 12,974,679 Offering of Units 261,767.021 1,602,387 -- 1,602,387 Net income -- 2,039,336 42,269 2,081,605 Redemptions (1,198,624.084) (7,897,892) -- (7,897,892) -------------- ---------- ------- ---------- Partners' Capital, December 31, 2002 1,286,548.090 8,465,275 295,504 8,760,779 ============== ========== ======= ==========
MORGAN STANLEY SPECTRUM CURRENCY L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND THE PERIOD FROM JULY 3, 2000 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 2000
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL ------------- ----------- --------- ----------- $ $ $ Partners' Capital, July 3, 2000 (commencement of operations) 2.000 10 10 20 Initial Offering 633,152.332 4,886,888 1,444,635 6,331,523 Offering of Units 980,783.417 10,281,803 100,000 10,381,803 Net income -- 1,134,371 174,173 1,308,544 Redemptions (207,486.516) (2,314,658) -- (2,314,658) ------------- ----------- --------- ----------- Partners' Capital, December 31, 2000 1,406,451.233 13,988,414 1,718,818 15,707,232 Offering of Units 2,572,156.095 28,921,302 277,000 29,198,302 Net income -- 4,119,027 217,312 4,336,339 Redemptions (125,958.895) (1,430,132) -- (1,430,132) ------------- ----------- --------- ----------- Partners' Capital, December 31, 2001 3,852,648.433 45,598,611 2,213,130 47,811,741 Offering of Units 3,918,276.910 48,564,478 420,000 48,984,478 Net income -- 10,038,409 244,711 10,283,120 Redemptions (868,307.236) (10,309,879) (610,008) (10,919,887) ------------- ----------- --------- ----------- Partners' Capital, December 31, 2002 6,902,618.107 93,891,619 2,267,833 96,159,452 ============= =========== ========= ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL ------------- ----------- ------- ----------- $ $ $ Partners' Capital, December 31, 1999 3,589,823.691 57,209,838 654,174 57,864,012 Offering of Units 568,088.752 8,983,545 -- 8,983,545 Net income -- 433,786 5,568 439,354 Redemptions (720,447.437) (11,407,161) -- (11,407,161) ------------- ----------- ------- ----------- Partners' Capital, December 31, 2000 3,437,465.006 55,220,008 659,742 55,879,750 Offering of Units 640,074.598 10,254,342 -- 10,254,342 Net loss -- (150,650) (1,949) (152,599) Redemptions (512,291.775) (8,195,733) -- (8,195,733) ------------- ----------- ------- ----------- Partners' Capital, December 31, 2001 3,565,247.829 57,127,967 657,793 57,785,760 Offering of Units 572,583.510 8,829,394 -- 8,829,394 Net loss -- (5,720,328) (66,590) (5,786,918) Redemptions (677,650.657) (10,422,804) -- (10,422,804) ------------- ----------- ------- ----------- Partners' Capital, December 31, 2002 3,460,180.682 49,814,229 591,203 50,405,432 ============= =========== ======= ===========
MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ----------- --------- ----------- $ $ $ Partners' Capital, December 31, 1999 9,716,887.432 210,877,519 2,928,155 213,805,674 Offering of Units 1,339,972.159 28,581,403 -- 28,581,403 Net income -- 14,165,099 125,946 14,291,045 Redemptions (1,693,772.364) (35,441,903) (506,250) (35,948,153) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2000 9,363,087.227 218,182,118 2,547,851 220,729,969 Offering of Units 1,676,778.529 41,261,535 -- 41,261,535 Net income -- 3,123,455 41,894 3,165,349 Redemptions (965,150.030) (23,745,268) -- (23,745,268) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2001 10,074,715.726 238,821,840 2,589,745 241,411,585 Offering of Units 2,459,750.992 62,682,840 130,000 62,812,840 Net income -- 40,391,145 432,054 40,823,199 Redemptions (1,852,798.671) (49,669,825) -- (49,669,825) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2002 10,681,668.047 292,226,000 3,151,799 295,377,799 ============== =========== ========= ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM STRATEGIC L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ----------- --------- ----------- $ $ $ Partners' Capital, December 31, 1999 6,795,971.519 106,542,362 1,150,159 107,692,521 Offering of Units 1,467,043.314 17,566,488 35,000 17,601,488 Net loss -- (36,503,461) (383,829) (36,887,290) Redemptions (1,268,061.404) (14,172,270) -- (14,172,270) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2000 6,994,953.429 73,433,119 801,330 74,234,449 Offering of Units 892,802.518 9,240,482 9,000 9,249,482 Net loss -- (475,383) (5,160) (480,543) Redemptions (1,362,078.833) (14,186,002) -- (14,186,002) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2001 6,525,677.114 68,012,216 805,170 68,817,386 Offering of Units 1,160,993.682 13,475,899 -- 13,475,899 Net income -- 6,238,448 75,968 6,314,416 Redemptions (1,155,895.491) (13,238,629) -- (13,238,629) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2002 6,530,775.305 74,487,934 881,138 75,369,072 ============== =========== ========= ===========
MORGAN STANLEY SPECTRUM TECHNICAL L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
UNITS OF PARTNERSHIP LIMITED GENERAL INTEREST PARTNERS PARTNER TOTAL -------------- ----------- --------- ----------- $ $ $ Partners' Capital, December 31, 1999 18,027,896.093 265,907,998 2,847,720 268,755,718 Offering of Units 2,110,290.038 29,668,693 -- 29,668,693 Net income -- 18,053,408 224,793 18,278,201 Redemptions (3,467,967.635) (48,569,520) -- (48,569,520) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2000 16,670,218.496 265,060,579 3,072,513 268,133,092 Offering of Units 2,591,525.213 40,832,142 -- 40,832,142 Net loss -- (19,062,561) (220,808) (19,283,369) Redemptions (1,981,247.508) (31,707,743) -- (31,707,743) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2001 17,280,496.201 255,122,417 2,851,705 257,974,122 Offering of Units 3,538,032.569 58,538,660 180,000 58,718,660 Net income -- 60,110,064 665,371 60,775,435 Redemptions (2,579,002.913) (41,646,591) -- (41,646,591) -------------- ----------- --------- ----------- Partners' Capital, December 31, 2002 18,239,525.857 332,124,550 3,697,076 335,821,626 ============== =========== ========= ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 2,081,605 (4,888,302) 622,362 Noncash item included in net income (loss): Net change in unrealized 468,935 (392,362) 567,711 (Increase) decrease in operating assets: Interest receivable (Morgan Stanley DW and MS&Co.) 5,166 71,999 (12,936) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW and MS&Co.) 968 (25,627) 6,801 Accrued management fees (MSCM) 527 (13,928) (6,322) Service fees payable (Demeter) -- -- (19,404) ---------- ---------- ---------- Net cash provided by (used for) operating activities 2,557,201 (5,248,220) 1,158,212 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Offering of Units 1,602,387 1,838,372 2,115,964 (Increase) decrease in subscriptions receivable 108,050 107,847 (215,897) Increase (decrease) in redemptions payable 4,940,175 (72,245) 220,378 Redemptions of Units (7,897,892) (4,175,372) (6,178,815) ---------- ---------- ---------- Net cash used for financing activities (1,247,280) (2,301,398) (4,058,370) ---------- ---------- ---------- Net increase (decrease) in cash 1,309,921 (7,549,618) (2,900,158) Balance at beginning of period 12,980,361 20,529,979 23,430,137 ---------- ---------- ---------- Balance at end of period 14,290,282 12,980,361 20,529,979 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM CURRENCY L.P. STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM FOR THE YEARS JULY 3, 2000 ENDED (COMMENCEMENT OF DECEMBER 31, OPERATIONS) TO ----------------------- DECEMBER 31, 2002 2001 2000 ----------- ---------- ------------------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income 10,283,120 4,336,339 1,308,544 Noncash item included in net income: Net change in unrealized (2,473,166) (2,622,814) (555,569) (Increase) decrease in operating assets: Interest receivable (Morgan Stanley DW) (19,622) 4,876 (55,464) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) 161,731 99,484 55,245 Accrued incentive fees (673,773) 880,379 32,876 Accrued management fees 70,317 43,254 24,020 ----------- ---------- ---------- Net cash provided by operating activities 7,348,607 2,741,518 809,652 ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Initial offering -- -- 6,331,543 Offering of Units 48,984,478 29,198,302 10,381,803 (Increase) decrease in subscriptions receivable (1,536,641) 412,033 (3,054,150) Increase (decrease) in redemptions payable 1,361,111 (2,072,127) 2,237,351 Redemptions of Units (10,919,887) (1,430,132) (2,314,658) ----------- ---------- ---------- Net cash provided by financing activities 37,889,061 26,108,076 13,581,889 ----------- ---------- ---------- Net increase in cash 45,237,668 28,849,594 14,391,541 Balance at beginning of period 43,241,135 14,391,541 -- ----------- ---------- ---------- Balance at end of period 88,478,803 43,241,135 14,391,541 =========== ========== ==========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2002 2001 2000 ----------- ---------- ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) (5,786,918) (152,599) 439,354 Noncash item included in net income (loss): Net change in unrealized (56,725) 2,628,436 (2,507,530) (Increase) decrease in operating assets: Net option premiums (712,573) 192,500 (192,500) Interest receivable (Morgan Stanley DW) 40,360 191,236 (40,455) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) (17,837) 17,157 (14,106) Accrued management fees (4,846) 4,661 (3,833) ----------- ---------- ----------- Net cash provided by (used for) operating activities (6,538,539) 2,881,391 (2,319,070) ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Offering of Units 8,829,394 10,254,342 8,983,545 (Increase) decrease in subscriptions receivable (105,151) (81,007) 317,320 Increase (decrease) in redemptions payable 171,491 122,794 (65,251) Redemptions of Units (10,422,804) (8,195,733) (11,407,161) ----------- ---------- ----------- Net cash provided by (used for) financing activities (1,527,070) 2,100,396 (2,171,547) ----------- ---------- ----------- Net increase (decrease) in cash (8,065,609) 4,981,787 (4,490,617) Balance at beginning of period 57,396,091 52,414,304 56,904,921 ----------- ---------- ----------- Balance at end of period 49,330,482 57,396,091 52,414,304 =========== ========== ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SELECT L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ----------- ----------- ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income 40,823,199 3,165,349 14,291,045 Noncash item included in net income: Net change in unrealized (12,501,282) 20,155,561 (18,665,233) (Increase) decrease in operating assets: Net option premiums 167,063 (167,063) 776,380 Interest receivable (Morgan Stanley DW) 70,073 584,598 (167,649) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) 221,961 208,881 (39,496) Accrued management fees 91,845 86,434 (16,344) ----------- ----------- ----------- Net cash provided by (used for) operating activities 28,872,859 24,033,760 (3,821,297) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Offering of Units 62,812,840 41,261,535 28,581,403 (Increase) decrease in subscriptions receivable (1,699,578) (3,407,225) 2,146,110 Increase (decrease) in redemptions payable (719,023) 484,897 (1,653,713) Redemptions of Units (49,669,825) (23,745,268) (35,948,153) ----------- ----------- ----------- Net cash provided by (used for) financing activities 10,724,414 14,593,939 (6,874,353) ----------- ----------- ----------- Net increase (decrease) in cash 39,597,273 38,627,699 (10,695,650) Balance at beginning of period 235,183,061 196,555,362 207,251,012 ----------- ----------- ----------- Balance at end of period 274,780,334 235,183,061 196,555,362 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM STRATEGIC L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ----------- ----------- ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 6,314,416 (480,543) (36,887,290) Noncash item included in net income (loss): Net change in unrealized (2,439,378) (2,505,634) 7,577,681 (Increase) decrease in operating assets: Net option premiums 65,784 (62,352) (237,853) Interest receivable (Morgan Stanley DW) 27,581 217,520 32,703 Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) 7,354 14,950 (180,709) Accrued management fees 3,043 (11,028) (127,069) Accrued incentive fee -- (289,687) 289,687 ----------- ----------- ----------- Net cash provided by (used for) operating activities 3,978,800 (3,116,774) (29,532,850) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Offering of Units 13,475,899 9,249,482 17,601,488 (Increase) decrease in subscriptions receivable (1,002,535) (189,876) 1,281,898 Increase (decrease) in redemptions payable (956,549) 765,005 459,233 Redemptions of Units (13,238,629) (14,186,002) (14,172,270) ----------- ----------- ----------- Net cash provided by (used for) financing activities (1,721,814) (4,361,391) 5,170,349 ----------- ----------- ----------- Net increase (decrease) in cash 2,256,986 (7,478,165) (24,362,501) Balance at beginning of period 65,967,662 73,445,827 97,808,328 ----------- ----------- ----------- Balance at end of period 68,224,648 65,967,662 73,445,827 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM TECHNICAL L.P. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2002 2001 2000 ----------- ----------- ----------- $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) 60,775,435 (19,283,369) 18,278,201 Noncash item included in net income (loss): Net change in unrealized (12,597,598) 28,536,694 (22,006,013) (Increase) decrease in operating assets: Interest receivable (Morgan Stanley DW) 49,837 744,371 (162,089) Net option premiums -- -- (74,725) Increase (decrease) in operating liabilities: Accrued brokerage fees (Morgan Stanley DW) 397,100 51,079 (101,355) Accrued management fees 91,431 21,704 (300,576) Accrued incentive fee -- (111,599) 111,599 ----------- ----------- ----------- Net cash provided by (used for) operating activities 48,716,205 9,958,880 (4,254,958) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Offering of Units 58,718,660 40,832,142 29,668,693 (Increase) decrease in subscriptions receivable (2,663,228) (3,357,977) 2,839,329 Increase (decrease) in redemptions payable 818,573 (1,055,038) 374,791 Redemptions of Units (41,646,591) (31,707,743) (48,569,520) ----------- ----------- ----------- Net cash provided by (used for) financing activities 15,227,414 4,711,384 (15,686,707) ----------- ----------- ----------- Net increase (decrease) in cash 63,943,619 14,670,264 (19,941,665) Balance at beginning of period 246,172,354 231,502,090 251,443,755 ----------- ----------- ----------- Balance at end of period 310,115,973 246,172,354 231,502,090 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM COMMODITY L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2002 AND 2001
FUTURES AND FORWARD CONTRACTS: LONG GAIN/(LOSS) SHORT GAIN/(LOSS) NET UNREALIZED GAIN(LOSS) ------------------------------ ---------------- ----------------- -------------------------- 2002 PARTNERSHIP NET ASSETS: $8,760,779 $ $ $ Commodity (101,856) -- (101,856) -------- Total Net Unrealized Loss per Statement of Financial Condition (101,856) ======== 2001 PARTNERSHIP NET ASSETS: $12,974,679 Commodity 367,079 -- 367,079 -------- Total Net Unrealized Gain per Statement of Financial Condition 367,079 ========
FUTURES AND FORWARD CONTRACTS: PERCENTAGE OF NET ASSETS # OF CONTRACTS ------------------------------ ------------------------ -------------- 2002 PARTNERSHIP NET ASSETS: $8,760,779 % Commodity (1.16) -- Total Net Unrealized Loss per Statement of Financial Condition 2001 PARTNERSHIP NET ASSETS: $12,974,679 Commodity 2.83 795 Total Net Unrealized Gain per Statement of Financial Condition
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM CURRENCY L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2002 AND 2001
FUTURES AND FORWARD CONTRACTS: LONG GAIN/(LOSS) SHORT GAIN/(LOSS) NET UNREALIZED GAIN/(LOSS) ------------------------------ ---------------- ----------------- --------------------------- 2002 PARTNERSHIP NET ASSETS: $96,159,452 $ $ $ Foreign currency: Other 4,758,215 (4,013,755) 744,460 Euro/US dollar Mar. 03 4,860,786 -- 4,860,786 --------- ---------- --------- Grand Total: 9,619,001 (4,013,755) 5,605,246 ========= ========== Unrealized Currency Gain 46,303 --------- Total Net Unrealized Gain per Statement of Financial Condition 5,651,549 ========= 2001 PARTNERSHIP NET ASSETS: $47,811,741 Foreign currency 503,253 2,675,130 3,178,383 --------- Total Net Unrealized Gain per Statement of Financial Condition 3,178,383 =========
FUTURES AND FORWARD CONTRACTS: PERCENTAGE OF NET ASSETS NOTIONAL AMOUNTS ------------------------------ ------------------------ ---------------- 2002 PARTNERSHIP NET ASSETS: $96,159,452 % Foreign currency: Other 0.77 9,742,575,176 Euro/US dollar Mar. 03 5.05 143,425,000 ------ Grand Total: 5.82 ====== Unrealized Currency Gain Total Net Unrealized Gain per Statement of Financial Condition 2001 PARTNERSHIP NET ASSETS: $47,811,741 Foreign currency 6.65* 7,044,346,181 Total Net Unrealized Gain per Statement of Financial Condition
* No single contract's value exceeds 5% of Net Assets. The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM GLOBAL BALANCED L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2002 AND 2001
FUTURES AND FORWARD CONTRACTS: LONG GAIN/(LOSS) SHORT GAIN/(LOSS) NET UNREALIZED GAIN/(LOSS) ------------------------------ ---------------- ----------------- -------------------------- 2002 PARTNERSHIP NET ASSETS: $50,405,432 $ $ $ Foreign Currency 641,746 137,676 779,422 Interest Rate 806,083 (1,737) 804,346 Equity (812,665) -- (812,665) Commodity 120,736 26,606 147,342 -------- ------- -------- Grand Total: 755,900 162,545 918,445 ======== ======= Unrealized Currency Loss (172,512) -------- Total Net Unrealized Gain per Statement of Financial Condition 745,933 ======== 2001 PARTNERSHIP NET ASSETS: $57,785,760 Foreign Currency 545,662 121,385 667,047 Interest Rate (30,784) 207,014 176,230 Commodity (166,876) 43,389 (123,487) Equity 57,696 -- 57,696 -------- ------- -------- Grant Total: 405,698 371,788 777,486 ======== ======= Unrealized Currency Loss (88,278) -------- Total Net Unrealized Gain per Statement of Financial Condition 689,208 ========
FUTURES AND FORWARD CONTRACTS: PERCENTAGE OF NET ASSETS # OF CONTRACTS/NOTIONAL AMOUNTS ------------------------------ ------------------------ ------------------------------- 2002 PARTNERSHIP NET ASSETS: $50,405,432 % Foreign Currency 1.55 6,800,258 Interest Rate 1.60 1,479 Equity (1.61) 477 Commodity 0.29 425 ---- Grand Total: 1.83 ==== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition 2001 PARTNERSHIP NET ASSETS: $57,785,760 Foreign Currency 1.15 6,800,319 Interest Rate 0.30 1,132 Commodity (0.21) 437 Equity 0.10 209 ---- Grant Total: 1.34 ==== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SELECT L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2002 AND 2001
FUTURES AND FORWARD CONTRACTS: LONG GAIN/(LOSS) SHORT GAIN/(LOSS) NET UNREALIZED GAIN/(LOSS) ------------------------------ ---------------- ----------------- -------------------------- 2002 PARTNERSHIP NET ASSETS: $295,377,799 $ $ $ Foreign currency 16,008,784 (5,655,235) 10,353,549 Interest rate 9,770,731 (48,039) 9,722,692 Commodity (1,443,818) 371,055 (1,072,763) Equity (194,728) 829,442 634,714 ---------- ---------- ---------- Grand Total: 24,140,969 (4,502,777) 19,638,192 ========== ========== Unrealized Currency Loss (1,740,174) ---------- Total Net Unrealized Gain per Statement of Financial Condition 17,898,018 ========== 2001 PARTNERSHIP NET ASSETS: $241,411,585 Foreign currency 3,340,060 5,340,666 8,680,726 Interest rate (590,545) 1,010,165 419,620 Commodity (1,867,521) (573,394) (2,440,915) Equity 142,296 (57,555) 84,741 ---------- ---------- ---------- Grand Total: 1,024,290 5,719,882 6,744,172 ========== ========== Unrealized Currency Loss (1,347,436) ---------- Total Net Unrealized Gain per Statement of Financial Condition 5,396,736 ==========
FUTURES AND FORWARD CONTRACTS: PERCENTAGE OF NET ASSETS # OF CONTRACTS/NOTIONAL AMOUNTS ------------------------------ ------------------------ ------------------------------- 2002 PARTNERSHIP NET ASSETS: $295,377,799 % Foreign currency 3.51 11,828,382,656 Interest rate 3.29 14,820 Commodity (0.36) 5,211 Equity 0.21 1,202 ---- Grand Total: 6.65 ==== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition 2001 PARTNERSHIP NET ASSETS: $241,411,585 Foreign currency 3.60 19,685,077,273 Interest rate 0.17 6,472 Commodity (1.01) 2,686 Equity 0.03 722 ---- Grand Total: 2.79 ==== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM STRATEGIC L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2002 AND 2001
FUTURES AND FORWARD CONTRACTS: LONG GAIN/(LOSS) SHORT GAIN/(LOSS) NET UNREALIZED GAIN/(LOSS) ------------------------------ ---------------- ----------------- -------------------------- 2002 PARTNERSHIP NET ASSETS: $75,369,072 $ $ $ Foreign currency 2,362,577 3,680 2,366,257 Commodity 3,548,205 4,379 3,552,584 Interest rate 1,057,473 -- 1,057,473 Equity -- 131,610 131,610 --------- --------- --------- Grand Total: 6,968,255 139,669 7,107,924 ========= ========= Unrealized Currency Loss (176,780) --------- Total Net Unrealized Gain per Statement of Financial Condition 6,931,144 ========= 2001 PARTNERSHIP NET ASSETS: $68,817,386 Foreign currency (163,374) 1,006,617 843,243 Commodity 2,761,214 632,208 3,393,422 Interest rate 160,801 -- 160,801 Equity 137,400 2,400 139,800 --------- --------- --------- Grand Total: 2,896,041 1,641,225 4,537,266 ========= ========= Unrealized Currency Loss (45,500) --------- Total Net Unrealized Gain per Statement of Financial Condition 4,491,766 =========
FUTURES AND FORWARD CONTRACTS: PERCENTAGE OF NET ASSETS # OF CONTRACTS/NOTIONAL AMOUNTS ------------------------------ ------------------------ ------------------------------- 2002 PARTNERSHIP NET ASSETS: $75,369,072 % Foreign currency 3.14 1,471,600,565 Commodity 4.72 12,920 Interest rate 1.40 3,130 Equity 0.17 172 ---- Grand Total: 9.43 ==== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition 2001 PARTNERSHIP NET ASSETS: $68,817,386 Foreign currency 1.23 13,274,657 Commodity 4.93 4,965 Interest rate 0.23 599 Equity 0.20 35 ---- Grand Total: 6.59 ==== Unrealized Currency Loss Total Net Unrealized Gain per Statement of Financial Condition
The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM TECHNICAL L.P. SCHEDULES OF INVESTMENTS DECEMBER 31, 2002 AND 2001
FUTURES AND FORWARD CONTRACTS: LONG GAIN/(LOSS) SHORT GAIN/(LOSS) NET UNREALIZED GAIN/(LOSS) ------------------------------ ---------------- ----------------- --------------------------- 2002 PARTNERSHIP NET ASSETS: $335,821,626 $ $ $ Foreign currency 10,097,643 967,843 11,065,486 Commodity 2,703,202 1,100,261 3,803,463 Interest rate 9,047,725 (683,890) 8,363,835 Equity (486,130) 449,469 (36,661) ---------- ---------- ---------- Grand Total: 21,362,440 1,833,683 23,196,123 ========== ========== Unrealized Currency Gain 907,090 ---------- Total Net Unrealized Gain per Statement of Financial Condition 24,103,213 ========== 2001 PARTNERSHIP NET ASSETS: $257,974,122 Foreign currency 2,247,864 10,754,547 13,002,411 Interest rate (323,455) 1,378,568 1,055,113 Commodity (2,009,527) (1,765,451) (3,774,978) Equity 195,865 (31,771) 164,094 ---------- ---------- ---------- Grand Total: 110,747 10,335,893 10,446,640 ========== ========== Unrealized Currency Gain 1,058,975 ---------- Total Net Unrealized Gain per Statement of Financial Condition 11,505,615 ==========
FUTURES AND FORWARD CONTRACTS: PERCENTAGE OF NET ASSETS # OF CONTRACTS/NOTIONAL AMOUNTS ------------------------------ ------------------------ ------------------------------- 2002 PARTNERSHIP NET ASSETS: $335,821,626 % Foreign currency 3.30 3,317,707,667 Commodity 1.13 11,280 Interest rate 2.49 10,261 Equity (0.01) 881 ----- Grand Total: 6.91 ==== Unrealized Currency Gain Total Net Unrealized Gain per Statement of Financial Condition 2001 PARTNERSHIP NET ASSETS: $257,974,122 Foreign currency 5.04* 29,705,176,931 Interest rate 0.41 8,984 Commodity (1.46) 5,538 Equity 0.06 584 ---- Grand Total: 4.05 ==== Unrealized Currency Gain Total Net Unrealized Gain per Statement of Financial Condition
* No single contract's value exceeds 5% of Net Assets. The accompanying notes are an integral part of these financial statements. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. Morgan Stanley Spectrum Commodity L.P. ("Spectrum Commodity"), Morgan Stanley Spectrum Currency L.P. ("Spectrum Currency"), Morgan Stanley Spectrum Global Balanced L.P. ("Spectrum Global Balanced"), Morgan Stanley Spectrum Select L.P. ("Spectrum Select"), Morgan Stanley Spectrum Strategic L.P. ("Spectrum Strategic") and Morgan Stanley Spectrum Technical L.P. ("Spectrum Technical") (individually, a "Partnership," or collectively, the "Partnerships"), are limited partnerships organized to engage in the speculative trading of futures contracts, options on futures contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy and agricultural products (collectively, "futures interests"). The Partnerships' general partner is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc. ("Morgan Stanley DW"). The clearing commodity brokers are Morgan Stanley & Co. Incorporated ("MS&Co.") and Morgan Stanley & Co. International Limited ("MSIL"). Prior to October 2000, Carr Futures Inc. ("Carr") provided clearing and execution services to Spectrum Global Balanced, Spectrum Select, Spectrum Strategic and Spectrum Technical. Morgan Stanley Commodities Management, Inc. ("MSCM") was the trading advisor to Spectrum Commodity. Demeter, Morgan Stanley DW, MS&Co., MSIL and MSCM are wholly-owned subsidiaries of Morgan Stanley. Spectrum Commodity became one of the Spectrum Series of funds effective March 6, 2000. Spectrum Currency commenced trading as of July 3, 2000. On April 2, 2001, Dean Witter Reynolds Inc. changed its name to Morgan Stanley DW Inc. On September 28, 2001, Morgan Stanley Dean Witter Commodities Management Inc. changed its name to Morgan Stanley Commodities Management Inc. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) On November 1, 2001, the Partnerships were renamed Morgan Stanley Spectrum Commodity L.P., Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P. and Morgan Stanley Spectrum Technical L.P. On June 20, 2002, Morgan Stanley Dean Witter & Co. changed its name to Morgan Stanley. Spectrum Commodity terminated trading on December 31, 2002, and commenced its dissolution in January 2003 in accordance with the Limited Partnership Agreement. Demeter is required to maintain a 1% minimum interest in the equity of each 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 accounting 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 believes that the estimates utilized in the preparation of the financial statements are prudent and reasonable. Actual results could differ from those estimates. REVENUE RECOGNITION. 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 profits (losses) on open contracts from one period to the next in the statements of operations. Monthly, Morgan Stanley DW pays each Partnership interest income based upon 80% of the month's average daily "Net Assets" (as defined in the limited partnership agreements) for the month in the case of Spectrum Commodity, Spectrum Currency, Spectrum Select, Spectrum Strategic and Spectrum Technical, and on 100% in the case of Spectrum Global Balanced. The interest rate is equal to a prevailing rate on U.S. Treasury bills. For purposes of such interest payments, Net Assets do not include monies owed to the Partnerships on futures interests. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) 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. CONDENSED SCHEDULES OF INVESTMENTS. In March 2001, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position ("SOP") 01-1, "Amendment to the Scope of Statement of Position 95-2, Financial Reporting by Nonpublic Investment Partnerships, to Include Commodity Pools" effective for fiscal years ending after December 15, 2001. Accordingly, commodity pools are required to include a condensed schedule of investments identifying those investments which constitute more than 5% of Net Assets, taking long and short positions into account separately. EQUITY IN FUTURES INTERESTS TRADING ACCOUNTS. The Partnerships' asset "Equity in futures interests trading accounts," reflected in the statements of financial condition consists of (A) cash on deposit with Morgan Stanley DW, 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 Partnerships, in their normal course of business, enter into various contracts with MS&Co. and MSIL acting as their commodity brokers. Pursuant to brokerage agreements with MS&Co. and MSIL, to the extent that such trading results in unrealized gains or losses, these amounts are offset and reported on a net basis on the Partnerships' statements of financial condition. The Partnerships have offset the fair value amounts recognized for forward contracts executed with the same counterparty as allowable under terms of master netting agreements with MS&Co., the sole counterparty on such contracts. The Partnerships have consistently applied their right to offset. BROKERAGE AND RELATED TRANSACTION FEES AND COSTS. The brokerage fees for Spectrum Commodity, Spectrum MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) Currency and Spectrum Global Balanced are accrued at a flat monthly rate of 1/12 of 4.6% (a 4.6% annual rate) of Net Assets as of the first day of each month. Prior to April 1, 2000, brokerage fees for Spectrum Commodity were accrued at a monthly rate of 1/12 of 3.65% of Net Assets (a 3.65% annual rate) as of the first day of each month. Brokerage fees for Spectrum Select, Spectrum Strategic and Spectrum Technical are accrued at a flat monthly rate of 1/12 of 7.25% (a 7.25% annual rate) of Net Assets as of the first day of each month. Such brokerage fees currently cover all brokerage commissions, transaction fees and costs and ordinary administrative and continuing offering expenses. SERVICE FEE. Prior to April 1, 2000, Spectrum Commodity paid Demeter a monthly service fee equal to 1/12 of 1% per month (a 1% annual rate) of the Partnership's Net Assets as of the first day of each month. OPERATING EXPENSES. The Partnerships incur monthly management fees and may incur incentive fees. All common administrative and continuing offering expenses including legal, auditing, accounting, filing fees and other related expenses are bore by Morgan Stanley DW through the brokerage fees paid by the Partnerships. INCOME TAXES. No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of each Partnership's revenues and expenses for income tax purposes. DISTRIBUTIONS. Distributions, other than redemptions of Units, are made on a pro-rata basis at the sole discretion of Demeter. No distributions have been made to date. CONTINUING OFFERING. Units of each Partnership are offered at a price equal to 100% of the Net Asset Value per Unit as of the close of business on the last day of the month. No selling commissions or charges related to the continuing offering of Units are paid by the Limited Partners or the Partnerships. Morgan Stanley DW pays all such costs. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) REDEMPTIONS. Limited Partners may redeem some or all of their Units at 100% of the Net Asset Value per Unit as of the end of the last day of any month that is at least six months after the closing at which a person becomes a Limited Partner, upon five business days advance notice by redemption form to Demeter. Thereafter, Units redeemed on or prior to the last day of the twelfth month after such Units were purchased will be subject to a redemption charge equal to 2% of the Net Asset Value of a Unit on the date of such redemption. Units redeemed after the last day of the twelfth month and on or prior to the last day of the twenty-fourth month after which such Units were purchased will be subject to a redemption charge equal to 1% of the Net Asset Value of a Unit on the date of such redemption. Units redeemed after the last day of the twenty-fourth month after which such Units were purchased will not be subject to a redemption charge. The foregoing redemption charges are paid to Morgan Stanley DW. Redemptions must be made in whole Units, in a minimum amount of 50 Units, unless a Limited Partner is redeeming his entire interest in a Partnership. EXCHANGES. On the last day of the first month which occurs more than six months after a person first becomes a Limited Partner in any of the Partnerships, and at the end of each month thereafter, Limited Partners may exchange their investment among the Partnerships (subject to certain restrictions outlined in the Limited Partnership Agreements) without paying additional charges. DISSOLUTION OF THE PARTNERSHIPS. Spectrum Commodity terminated trading on December 31, 2002 and its dissolution was effective January 31, 2003. Spectrum Currency, Spectrum Global Balanced, Spectrum Strategic and Spectrum Technical will terminate on December 31, 2035 and Spectrum Select will terminate on December 31, 2025, regardless of financial condition at such time, or at an earlier date if certain conditions occur as defined in each Partnership's Limited Partnership Agreement. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) LITIGATION SETTLEMENT. On February 27, 2002, Spectrum Global Balanced, Spectrum Select, Spectrum Strategic and Spectrum Technical received notification of a preliminary entitlement to payment from the Sumitomo Copper Litigation Administrator and received settlement award payments in the amounts of $233,074, $4,636,156, $17,556 and $306,400, respectively as of August 30, 2002. -------------------------------------------------------------------------------- 2. RELATED PARTY TRANSACTIONS The Partnerships pay brokerage fees to Morgan Stanley DW as described in Note 1. Each Partnership's cash is on deposit with Morgan Stanley DW, MS&Co. and MSIL in futures interests trading accounts to meet margin requirements as needed. Morgan Stanley DW pays interest on these funds as described in Note 1. Spectrum Commodity paid Demeter a service fee prior to April 1, 2000 and paid management fees, and when applicable, incentive fees to MSCM. -------------------------------------------------------------------------------- 3. TRADING ADVISORS Demeter, on behalf of each Partnership, retains certain commodity trading advisors to make all trading decisions for the Partnerships. The trading advisors for each Partnership at December 31, 2002 were as follows: Morgan Stanley Spectrum Commodity L.P. Morgan Stanley Commodities Management Inc. Morgan Stanley Spectrum Currency L.P. John W. Henry & Company, Inc. ("JWH") Sunrise Capital Partners, LLC ("Sunrise") Morgan Stanley Spectrum Global Balanced L.P. SSARIS Advisors, LLC ("SSARIS") Effective December 6, 2002, SSARIS replaced RXR, Inc. as a trading advisor to Spectrum Global Balanced. Morgan Stanley Spectrum Select L.P. EMC Capital Management, Inc. Northfield Trading L.P. Rabar Market Research, Inc. Sunrise Capital Management, Inc. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) Effective May 1, 2001 Spectrum Select entered into a management agreement with Northfield Trading L.P., ("Northfield") adding Northfield as its fourth trading advisor to the Partnership. Morgan Stanley Spectrum Strategic L.P. Allied Irish Capital Management, Ltd. Blenheim Capital Management, L.L.C. ("Blenheim") Eclipse Capital Management, Inc. ("Eclipse") Effective April 14, 2000, Willowbridge Associates Inc. ("Willowbridge") was terminated as an advisor to Spectrum Strategic. The assets of the Partnership previously allocated to Willowbridge were allocated to Eclipse, effective June 26, 2000. Effective August 31, 2001 Blenheim Investments, Inc. changed its name to Blenheim Capital Management, L.L.C. Morgan Stanley Spectrum Technical L.P. Campbell & Company, Inc. ("Campbell") Chesapeake Capital Corporation ("Chesapeake") John W. Henry & Company, Inc. Compensation to the trading advisors by the Partnerships consists of a management fee and an incentive fee as follows: MANAGEMENT FEE. The management fee for Spectrum Commodity was accrued at the rate of 5/24 of 1% of Net Assets on the first day of each month (a 2.5% annual rate). The management fee for Spectrum Currency is accrued at the rate of 1/12 of 2% of Net Assets allocated to each trading advisor on the first day of each month (a 2% annual rate). Prior to December 1, 2000, the management fee was accrued at the rate of 1/3 of 1% of Net Assets allocated to JWH on the first day of each month and 1/4 of 1% of Net Assets allocated to Sunrise on the first day of each month (annual rates of 4% and 3%, respectively). The management fee for Spectrum Global Balanced is accrued at the rate of 5/48 of 1% per month of Net Assets allocated to each trading advisor on the first day of each month (a 1.25% annual rate). MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) The management fee for Spectrum Select is accrued at the rate of 1/4 of 1% per month of Net Assets allocated to each trading advisor on the first day of each month (a 3% annual rate). The management fee for Spectrum Strategic is accrued at the rate of 1/12 of 3% of Net Assets allocated to each trading advisor on the first day of each month (a 3% annual rate). Prior to March 23, 2001, the management fee allocated to Blenheim was accrued at a rate of 1/12 of 4% per month of Net Assets as of the first day of each month (a 4% annual rate). The management fee for Spectrum Technical is accrued at the rate of 1/12 of 2% of Net Assets allocated to JWH on the first day of each month, and 1/12 of 3% of Net Assets allocated to Campbell and Chesapeake on the first day of each month (annual rates of 2%, 3% and 3% respectively). Prior to May 1, 2002, the management fee for Chesapeake was accrued at a rate of 1/12 of 4% of Net Assets on the first day of each month (a 4% annual rate). Prior to December 1, 2000, the management fee was accrued to each trading advisor at the rate of 1/3 of 1% of Net Assets on the first day of each month (a 4% annual rate). INCENTIVE FEE. Spectrum Commodity was subject to annual incentive fees on its trading profits at a rate of 20% through December 1, 2000 and 17.5% thereafter through December 31, 2002. Spectrum Currency pays a monthly incentive fee equal to 20% of the trading profits experienced with respect to each trading advisor's allocated Net Assets as of the end of each calendar month. Prior to December 1, 2000, Spectrum Currency paid a monthly incentive fee equal to 15% of trading profits. Spectrum Global Balanced, Spectrum Select and Spectrum Strategic each pay a monthly incentive fee equal to 15% of the trading profits experienced with respect to each trading advisor's allocated Net Assets as of the end of each calendar month. Spectrum Technical pays a monthly incentive fee equal to 20% of the trading profits experienced with respect to the Net Assets allocated to Campbell and JWH as of the end of each calendar month and 19% of MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) the trading profits experienced with respect to the Net Assets allocated to Chesapeake as of the end of each calendar month. Prior to December 1, 2000, Spectrum Technical paid a 15% incentive fee to Campbell and JWH. Trading profits represent the amount by which profits from futures, forwards and options trading exceed losses after brokerage and management fees are deducted. For all Partnerships with trading losses, no incentive fee is paid in subsequent months until all such losses are recovered. Cumulative trading losses are adjusted on a pro-rata basis for the net amount of each month's subscriptions and redemptions. -------------------------------------------------------------------------------- 4. FINANCIAL INSTRUMENTS The Partnerships trade futures contracts, options on futures contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to foreign currencies, financial instruments, metals, energy and agricultural products. 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. The market value of contracts is based on closing prices quoted by the exchange, bank or clearing firm through which the contracts are traded. The Partnership's contracts are accounted for on a trade-date basis and marked to market on a daily basis. The Partnership accounts for its derivative investments in accordance with the provisions of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) 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. Generally derivatives include futures, forward, swaps or options contracts and other financial instruments with similar characteristics such as caps, floors and collars. The net unrealized gains (losses) on open contracts at December 31, reported as a component of "Equity in futures interests trading accounts" on the statements of financial condition, and their longest contract maturities were as follows: SPECTRUM COMMODITY
NET UNREALIZED GAINS/ (LOSSES) ON OPEN CONTRACTS LONGEST MATURITIES ---------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- --------- --------- -------- --------- --------- $ $ $ 2002 (101,856) -- (101,856) Mar. 2003 -- 2001 367,079 -- 367,079 Dec. 2002 --
SPECTRUM CURRENCY
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES ----------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- --------- --------- --------- --------- --------- $ $ $ 2002 -- 5,651,549 5,651,549 -- Mar. 2003 2001 -- 3,178,383 3,178,383 -- Mar. 2002
MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) SPECTRUM GLOBAL BALANCED
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES --------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- --------- --------- ------- --------- --------- $ $ $ 2002 717,293 28,640 745,933 Mar. 2003 Mar. 2003 2001 646,308 42,900 689,208 Mar. 2002 Mar. 2002
SPECTRUM SELECT
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES ------------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- ---------- --------- ---------- --------- --------- $ $ $ 2002 12,359,670 5,538,348 17,898,018 Dec. 2003 Mar. 2003 2001 1,010,544 4,386,192 5,396,736 Dec. 2002 Mar. 2002
SPECTRUM STRATEGIC
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES ----------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- --------- --------- --------- --------- --------- $ $ $ 2002 6,387,996 543,148 6,931,144 Jul. 2004 Mar. 2003 2001 4,491,712 54 4,491,766 Dec. 2002 Jan. 2002
SPECTRUM TECHNICAL
NET UNREALIZED GAINS ON OPEN CONTRACTS LONGEST MATURITIES -------------------------------- ------------------- OFF- OFF- EXCHANGE- EXCHANGE- EXCHANGE- EXCHANGE- YEAR TRADED TRADED TOTAL TRADED TRADED ---- ---------- ---------- ---------- --------- --------- $ $ $ 2002 16,269,250 7,833,963 24,103,213 Dec. 2003 Mar. 2003 2001 828,853 10,676,762 11,505,615 Dec. 2002 Mar. 2002
The Partnerships have credit risk associated with counterparty nonperformance. The credit risk associated with the instruments in which the Partnerships are involved is limited to the amounts reflected in the Partnerships' statements of financial condition. The Partnerships also have credit risk because Morgan Stanley DW, MS&Co. and MSIL act as the futures commission merchants or the counterparties, MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) with respect to most of the Partnerships' assets. Exchange-traded futures and futures-styled options contracts are marked to market on a daily basis, with variations in value settled on a daily basis. Each of Morgan Stanley DW, MS&Co. and MSIL, as a futures commission merchant for each Partnership's exchange-traded futures and futures-styled options 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 options contracts, including an amount equal to the net unrealized gains (losses) on all open futures and futures-styled options contracts, which funds, in the aggregate, totaled at December 31, 2002 and 2001 respectively, $14,188,426 and $13,347,440 for Spectrum Commodity, $50,047,775 and $58,042,399 for Spectrum Global Balanced, $287,140,004 and $236,193,605 for Spectrum Select, $74,612,644 and $70,459,374 for Spectrum Strategic and $326,385,223 and $247,001,207 for Spectrum Technical. With respect to the Partnerships' 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 gains (losses) on open forward contracts be segregated. With respect to those off-exchange-traded forward currency contracts, the Partnerships are at risk to the ability of MS&Co., the sole counterparty on all of such contracts, to perform. Each Partnership has a netting agreement with MS&Co. These agreements, which seek to reduce both the Partnerships' and MS&Co.'s exposure on off-exchange-traded forward currency contracts, should materially decrease the Partnerships' credit risk in the event of MS&Co.'s bankruptcy or insolvency. MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------------------------- 5. FINANCIAL HIGHLIGHTS SPECTRUM COMMODITY
PER UNIT: --------- NET ASSET VALUE, JANUARY 1, 2002: $ 5.84 ------ NET OPERATING RESULTS: Realized Profit 1.56 Unrealized Loss (0.22) Interest Income 0.08 Expenses (0.45) ------ Net Income 0.97 ------ NET ASSET VALUE, DECEMBER 31, 2002: $ 6.81 ====== Expense Ratio 7.3% Net Income Ratio 16.2% TOTAL RETURN 16.6%
SPECTRUM CURRENCY
PER UNIT: --------- NET ASSET VALUE, JANUARY 1, 2002: $12.41 ------ NET OPERATING RESULTS: Realized Profit 1.99 Unrealized Profit 0.45 Interest Income 0.15 Expenses (1.07) ------ Net Income 1.52 ------ NET ASSET VALUE, DECEMBER 31, 2002: $13.93 ====== Expense Ratio 8.3% Net Income Ratio 14.5% TOTAL RETURN 12.2%
SPECTRUM GLOBAL BALANCED
PER UNIT: --------- NET ASSET VALUE, JANUARY 1, 2002: $ 16.21 -------- NET OPERATING RESULTS: Realized Loss (1.08) Unrealized Profit 0.02 Proceeds from Litigation Settlement 0.07 Interest Income 0.26 Expenses (0.91) -------- Net Loss (1.64) -------- NET ASSET VALUE, DECEMBER 31, 2002: $ 14.57 ======== Expense Ratio 5.9 % Net Loss Ratio (10.6)% TOTAL RETURN (10.1)%
MORGAN STANLEY SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS (concluded) SPECTRUM SELECT
PER UNIT: --------- NET ASSET VALUE, JANUARY 1, 2002: $23.96 ------ NET OPERATING RESULTS: Realized Profit 4.28 Unrealized Profit 1.20 Proceeds from Litigation Settlement 0.44 Interest Income 0.33 Expenses (2.56) ------ Net Income 3.69 ------ NET ASSET VALUE, DECEMBER 31, 2002: $27.65 ====== Expense Ratio 10.1% Net Income Ratio 15.3% TOTAL RETURN 15.4%
SPECTRUM STRATEGIC
PER UNIT: --------- NET ASSET VALUE, JANUARY 1, 2002: $10.55 ------ NET OPERATING RESULTS: Realized Profit 1.67 Unrealized Profit 0.38 Interest Income 0.15 Expenses (1.21) ------ Net Income 0.99 ------ NET ASSET VALUE, DECEMBER 31, 2001: $11.54 ====== Expense Ratio 10.5% Net Income Ratio 8.6% TOTAL RETURN 9.4%
SPECTRUM TECHNICAL
PER UNIT: --------- NET ASSET VALUE, JANUARY 1, 2002: $14.93 ------ NET OPERATING RESULTS: Realized Profit 4.34 Unrealized Profit 0.72 Proceeds from Litigation Settlement 0.02 Interest Income 0.21 Expenses (1.81) ------ Net Income 3.48 ------ NET ASSET VALUE, DECEMBER 31, 2002: $18.41 ====== Expense Ratio 11.0% Net Income Ratio 21.0% TOTAL RETURN 23.3%
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