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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, 2001 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 0-18314
DEAN WITTER PRINCIPAL PLUS FUND L.P.
(Exact name of registrant as specified in its Limited Partnership Agreement)
DELAWARE 13-3541588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management Corporation
c/o Managed Futures Department,
825 Third Avenue, 8th Floor,
New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 876-4647
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: $34,962,115 at January 31,
2002.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
DEAN WITTER PRINCIPAL PLUS FUND L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2001
Page No.
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . 1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . 2-4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 4-5
Item 4. Submission of Matters to a Vote of Security Holders . . .. 5
Part II.
Item 5. Market for the Registrant's Partnership Units
and Related Security Holder Matters. . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . .7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . .8-22
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . 22-37
Item 8. Financial Statements and Supplementary Data. . . . . . . .37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . .38
Part III.
Item 10. Directors and Executive Officers of the Registrant. . 39-43
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . .43
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . .44
Item 13. Certain Relationships and Related Transactions . . . . .. 44
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . .45-46
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
November 8, 1995 I
Annual Report to Dean Witter
Principal Plus Fund L.P.
Limited Partners for the year
ended December 31, 2001 II, III and IV
PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter Principal Plus
Fund 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.
The Partnership commenced operations on February 14, 1990.
The general partner for the Partnership 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. Inc. ("MS & Co.") and
Morgan Stanley & Co. International Limited ("MSIL"). Demeter,
Morgan Stanley DW, MS & Co. and MSIL are wholly-owned subsidiaries
of Morgan Stanley Dean Witter & Co. ("MSDW"). RXR Inc. ("RXR"),
the trading manager to the Partnership (the "Trading Manager"),
was acquired by SSARIS Advisors, LLC, effective June 1, 2001.
Effective April 2, 2001, Dean Witter Reynolds Inc. changed its
name to Morgan Stanley DW Inc.
The Partnership's net asset value per unit of limited partnership
interest ("Unit(s)") at December 31, 2001, was $1,983.47,
representing an increase of 2.14 percent from the net asset value
per Unit of $1,941.87 at December 31, 2000. For a more detailed
description of the Partnership's business see subparagraph (c).
(b) Financial Information about Segments. For financial
information 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 its Trading
Manager. For a detailed description of the different facets of the
Partnership's business, see those portions of the Partnership's
prospectus, dated November 8, 1995 (the "Prospectus"),
incorporated by reference in this Form 10-K, set forth below.
Facets of Business
1. Summary 1. "Summary of the Prospectus"
(Pages 2-14).
2. Commodity Markets 2. "The Futures, Options and
Forward Markets" (Pages
51-56).
3. Partnership's Commodity 3. "Trading Policies" (Page
Trading Arrangements and 62). "The Trading Advisor"
Policies (Pages 58-62). "The Yield
Pool" (Page 63). "The
Trading Company" (Pages
63-64).
4. Management of the Part- 4. "The Management Agree-
nership ment"(Pages 66-67).
"The General Partner"
(Pages 48-50) and
"The Commodity Broker"
(Pages 64-65). "The
Partnership Agreement"
(Pages 70-73).
5. Taxation of the Partner- 5. "Material Federal Income
ship's Limited Partners Tax Aspects" and "State
and Local Income Tax
Aspects" (Pages 77-86).
(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 in futures, forwards,
and options on foreign exchanges.
Item 2. PROPERTIES
The 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, 8th
Floor, New York, NY 10022.
Demeter changed its address from Two World Trade Center, New York,
NY 10048.
Item 3. LEGAL PROCEEDINGS
In April 2001, the Appellate Division of New York State dismissed
the class action previously disclosed in the Partnership's Form
10-K for the year ended December 31, 2000. Because plaintiffs did
not exercise their right to appeal any further, this dismissal
constituted a final resolution of the case.
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, 2001 was
approximately 2,158.
(c) Distributions
No distributions have been made by the Partnership since it
commenced operations on February 14, 1990. 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 distribution of Partnership profits.
Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
2001 2000 1999 1998 1997 .
Total Revenues
(including interest
and change in value
of yield pool) 3,610,515 5,646,730 (1,332,776) 10,243,111 10,461,123
Net Income (Loss) 1,665,637 3,386,012 (3,799,938) 7,203,198 7,414,966
Net Income (Loss)
Per Unit for Tax and
Net Asset Valuation
(Limited & General
Partners) 41.60 126.37 (72.12) 180.03 227.74
Total Assets 38,196,829 41,777,291 45,768,631 54,061,143 54,294,132
Total Limited
Partners' Capital 36,673,490 38,861,681 43,352,757 51,660,212 51,607,436
Net Asset Value Per
Unit 1,983.47 1,941.87 1,815.50 1,887.62 1,707.59
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 the Trading Manager, which assets are used as
margin to engage in trading. The assets are held in either non-
interest bearing bank accounts or in securities and instruments
permitted by the Commodity Futures Trading Commission for
investment of customer segregated or secured funds. The
Partnership's assets held by the commodity brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures, forwards, and
options, it is expected that the Partnership will continue to own
such liquid assets for margin purposes.
The Partnership's investment in futures, forwards, and options
may, from time to time, be illiquid. Most U.S. futures exchanges
limit fluctuations in prices during a single day by regulations
referred to as "daily price fluctuations limits" or "daily
limits". Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures or options contract
has increased or decreased by an amount equal to the daily limit,
positions in that futures or options contract can neither be taken
nor liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, nor expect to
have, any capital assets. Redemptions of 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.
Results of Operations.
General. The Partnership's results depend on the Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements or other profit opportunities in the
futures, forwards and options markets. The following presents a
summary of the Partnership's operations for the three years ended
December 31, 2001, and a general discussion of its trading
activities during each period. It is important to note, however,
that the Trading Manager trades in various markets at different
times and that prior activity in a particular market does not mean
that such market will be actively traded by the Trading Manager or
will be profitable in the future. Consequently, the results of
operations of the Partnership are difficult to discuss other than
in the context of the Trading Manager's trading activities on
behalf of the Partnership and how the Partnership has performed in
the past.
At December 31, 2001, the Partnership's total capital was
$37,312,312, a decrease of $2,158,035 from the Partnership's total
capital of $39,470,347 at December 31, 2000. For the year ended
December 31, 2001, the Partnership generated net income of
$1,665,637, and total redemptions aggregated $3,823,672.
For the year ended December 31, 2001, the Partnership recorded
total trading revenues, including interest income and change in
value of the Yield Pool, of $3,610,515 and posted an increase in
net asset value per Unit. The most significant gains of
approximately 3.4% were recorded in the global interest rate
futures markets primarily during January from long positions in
eurodollar futures as prices moved higher due to a surprise
interest rate cut by the U.S. Federal Reserve on January 3 and
the subsequent anticipation of an additional interest rate cut
later in January. Throughout a majority of the third quarter,
additional profits were recorded from long positions in U.S. and
Australian interest rate futures as prices trended higher amid
continued concerns for the sluggish U.S. economy, interest rate
cuts by the U.S. Federal Reserve and as investors sought a safe
haven from declining stock prices. In the currency markets,
gains of approximately 1.0% were recorded primarily from short
positions in the South African rand as its value fell to an all-
time low versus the U.S. dollar during December amid emerging
market concerns and political turmoil in neighboring Zimbabwe.
Additional currency gains were recorded from transactions
involving the Singapore dollar during the third quarter. Profits
were also recorded from short positions in the Japanese yen as
the value of the yen trended lower versus the U.S. dollar during
a majority of the fourth quarter due to concerns regarding the
overall health of the Japanese economy. Smaller gains of
approximately 0.6% were recorded in soft commodities throughout
the first and second quarters from short cotton futures positions
as prices moved lower on weak demand. These gains were partially
offset by losses of approximately 2.8% incurred in the global
stock index futures markets primarily during February, March,
June and throughout a majority of the third quarter from long
positions in S&P 500 Index futures as the trend in equity prices
continued sharply lower amid worries regarding global economic
uncertainty. In the energy markets, smaller losses of
approximately 0.7% were recorded throughout the first nine months
of the year from positions in crude oil futures and its related
products as a result of volatility in oil prices due to a
continually changing outlook for supply, production and demand.
Total expenses for the year were $2,009,820, resulting in net
income before minority interest of $1,600,695. The minority
interest in such income was $64,942, resulting in net income of
$1,665,637 for the Partnership. The net asset value of a Unit
increased from $1,941.87 at December 31, 2000 to $1,983.47 at
December 31, 2001.
At December 31, 2000, the Partnership's total capital was
$39,470,347, a decrease of $4,442,369 from the Partnership's total
capital of $43,912,716 at December 31, 1999. For the year ended
December 31, 2000, the Partnership generated net income of
$3,386,012, and total redemptions aggregated $7,828,381.
For the year ended December 31, 2000, the Partnership recorded
total trading revenues, including interest income and change in
value of the Yield Pool, of $5,646,730 and posted an increase in
net asset value per Unit. The Partnership's exposure to
Australian, European, Japanese and North American fixed income
markets added value to the global interest rate futures markets
sector with gains of approximately 5.9%. The currency sector
also recorded gains of approximately 0.9% aided by a
strengthening euro and a weakening Japanese yen. The
Partnership's exposure to the energy sector also performed well
with profits of approximately 1.2%, taking advantage of falling
crude oil inventories during the early part of the year and
reactionary supply boosts later in 2000. Conversely, equity
markets declined in all G4 economies, creating a subsequent
flight-to-quality and driving nominal interest rates lower in
most major money markets. The G4 economies are U.S., Japan,
Germany and Britain. As a result, losses of approximately 3.2%
were recorded in these markets. Exposure to agricultural
commodities markets under-performed slightly reflecting non-
directional price movement within the sector. The Partnership
experienced a profitable first quarter, despite tremendous
volatility in the U.S. stock market. The S&P 500 Index declined
through February but rallied to post a positive quarter and
enabled the hedged equity strategy to salvage a modest gain. The
Federal Reserve Bank raised the overnight borrowing rate by 50
basis points during the quarter responding to a perceived
inflationary threat. U.S. interest rates, however, continued to
decline benefiting the hedged fixed income component. The global
macro component also added value, enjoying most of its gains from
long futures positions in Sweden's OMX Index as the market
advanced throughout the quarter. The second quarter was a
sluggish one for the Partnership. The Federal Reserve Bank
decided to raise short-term rates by another 50 basis points at
its May meeting, which proved to be the last proactive move made
by the U.S. central bank in 2000. The hedged equity component
underperformed as U.S. stocks endured a modest decline. Treasury
bonds continued to strengthen and the hedged fixed income
strategy helped to buffer the Partnership. The global macro
component under-performed due to unexpected weakness in the U.S.
dollar and simultaneous strength in the euro. Conversely, long
futures positions in the crude oil complex performed well after
OPEC failed to raise output in a timely fashion. The
Partnership's performance was relatively flat for the third
quarter. U.S. interest rates fell by an average of 15 basis
points along the yield curve benefiting the hedged fixed income
strategy. Rising energy prices prompted the Clinton
Administration to release 30 million barrels of crude oil from
the Strategic Petroleum Reserve prior to the winter months. Long
futures positions in the energy sector were adversely affected by
this decision as crude oil prices fell. Short positions in
Australian financial futures also under performed as the Reserve
Bank of Australia failed to make good on an expected interest
rate hike. The global macro component did enjoy gains from long
positions in copper futures along with short positions in New
Zealand dollar, South African rand and Australian dollar. The
Partnership posted a profitable fourth quarter due primarily to
performance in the global macro component. Interest rates fell
throughout the world, supporting the Partnership's long positions
in U.S., European and Australian financial futures. Long
positions in the Swiss franc and euro versus most major
currencies also added value. Long positions in natural gas
futures were profitable as prices rose due to a severe inventory
shortage, which was first noted in California and continued
spreading throughout the country. The S&P 500, DAX 30, FTSE 100
and Nikkei 225 Index all posted losses for the fourth quarter and
the year 2000. Total expenses for the year were $2,271,429,
resulting in income before minority interest of $3,375,301. The
minority interest in such income was $10,711, resulting in net
income of $3,386,012 for the Partnership. The net asset value of
a Unit increased from $1,815.50 at December 31, 1999 to $1,941.87
at December 31, 2000.
At December 31, 1999, the Partnership's total capital was
$43,912,716, a decrease of $8,351,449 from the Partnership's total
capital of $52,264,165 at December 31, 1998. For the year ended
December 31, 1999, the Partnership generated a net loss of
$3,799,938, and total redemptions aggregated $4,551,511.
For the year ended December 31, 1999, the Partnership recorded
total trading losses, net of interest income and change in value
of the Yield Pool, of $1,332,776 and posted a decrease in net
asset value per Unit. Extreme price volatility in U.S. and
Australian fixed income markets created losses, while the
Partnership's exposure to the U.S. equity and energy markets and
its net short exposure to European interest rate sector helped
steady performance. The most significant losses of approximately
5.00% were experienced primarily during February, April and May
in the fixed income component of the balanced portfolio from long
U.S. interest rate futures positions as prices dropped in
reaction to Federal Reserve Chairman Alan Greenspan's warnings in
Congressional testimony in late February that a strong economy
could reignite inflation. Fears that the Federal Reserve
eventually could boost target interest rates continued to push
down domestic bond prices and forced yields higher. Losses were
also experienced in this market complex during July and August
after Federal Reserve Chairman Alan Greenspan commented that
central bankers must consider stock prices when setting monetary
policy and as reports on labor costs, home sales, manufacturing
and personal income added to concern that the U.S. Federal
Reserve will raise interest rates soon. Mitigating gains of
approximately 1.12% were recorded in the energy markets primarily
during March from long positions in crude and gas oil futures as
prices moved significantly higher due largely to the news that
both OPEC and non-OPEC countries had reached an agreement to cut
total output beginning April 1st. Gains were also recorded in
this market complex during the third quarter after OPEC ministers
confirmed that they would uphold their global cutbacks until
April of 2000. Reports of declining crude oil and gasoline
inventories also boosted oil prices during the third quarter.
Total expenses for the year were $2,589,673, resulting in a net
loss before minority interest of $3,922,449. The minority
interest in such losses was $122,511, resulting in a net loss of
$3,799,938 for the Partnership. The net asset value of a Unit
decreased from $1,887.62 at December 31, 1998 to $1,815.50 at
December 31, 1999.
The Partnership's overall performance record represents varied
results of trading in different futures, forwards, and options
markets. For a further description of 2001 trading results, refer
to the letter to the Limited Partners in the accompanying Annual
Report to Limited Partners for the year ended December 31, 2001,
which is incorporated by reference to Exhibit 13.01 of this Form
10-K. The Partnership's gains and losses are allocated among its
partners for income tax purposes.
Credit Risk.
Financial Instruments. The Partnership is a party to financial
instruments with elements of off-balance sheet market and credit
risk. The Partnership may trade futures, forwards, and options
to gain long biased exposure to global stock markets and global
bond markets, as well as long and short exposure to a component
of managed futures contracts in agricultural commodities, energy
products, foreign currencies, precious and base metals, and soft
commodities. In entering into these contracts, the Partnership
is subject to the market risk that such contracts may be
significantly influenced by market conditions, such as interest
rate volatility, resulting in such contracts being less valuable.
If the markets should move against all of the positions held by
the Partnership at the same time, and if the Trading Manager were
unable to offset positions of the Partnership, the Partnership
could lose all of its assets and investors would realize a 100%
loss.
In addition to the Trading Manager's internal controls, the
Trading Manager must comply with the trading policies of the
Partnership. These trading policies include standards for
liquidity and leverage with which the Partnership must comply.
The Trading Manager and Demeter monitor the Partnership's trading
activities to ensure compliance with the trading policies.
Demeter may require the Trading Manager to modify positions of
the Partnership if Demeter believes they violate the
Partnership's trading policies.
In addition to market risk, in entering into futures, 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 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 any one exchange has typically amounted
to only a small percentage of its total net assets. On those
relatively few occasions where the Partnership's credit exposure
may climb above that level, Demeter deals with the situation on a
case by case basis, carefully weighing whether the increased
level of credit exposure remains appropriate. Material changes
to the trading policies may be made only with the prior written
approval of the limited partners owning more than 50% of Units
then outstanding.
Third, with respect to forward contract trading, the Partnership
trades with only those counterparties which Demeter, together
with Morgan Stanley DW, have determined to be creditworthy. The
Partnership presently deals with MS & Co. as the sole
counterparty on forward contracts.
Inflation has not been a major factor in the Partnership's
operations.
See "Financial Instruments" under Notes to Financial Statements
in the Partnership's Annual Report to Limited Partners for the
year ended December 31, 2001, which is incorporated by reference
to Exhibit 13.01 of this Form 10-K.
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 Manager is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the
VaR model include equity and commodity prices, interest rates,
foreign exchange rates, and correlation among these variables.
The hypothetical changes in portfolio value are based on daily
percentage changes observed in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. The historical observation period of the
Partnership's VaR is approximately four years. The one-day 99%
confidence level of the Partnership's VaR corresponds to the
negative change in portfolio value that, based on observed market
risk factors, would have been exceeded once in 100 trading days.
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Manager in their daily risk management
activities.
The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by primary market risk category at December 31, 2001 and 2000. At
December 31, 2001 and 2000, the Partnership's total capitalization
was approximately $37 million and $39 million, respectively.
Primary Market December 31, 2001 December 31, 2000
Risk Category Value at Risk Value at Risk
Equity (1.03)% (0.05)%
Interest Rate (0.18) (0.87)
Currency (0.12) (0.35)
Commodity (0.09) (0.15)
Aggregate Value at Risk (0.98)% (0.91)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual market categories listed above. Aggregate VaR will be
lower as it takes into account correlation among different
positions and categories.
The table above represents the VaR of the Partnership's open
positions at December 31, 2001 and 2000 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, 2001 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, 2001 through December 31, 2001.
Primary Market Risk Category High Low Average
Equity (1.03)% (0.04)% (0.66)%
Interest Rate (0.73) (0.18) (0.52)
Currency (0.36) (0.12) (0.26)
Commodity (0.17) (0.09) (0.14)
Aggregate Value at Risk (1.30)% (0.73)% (0.95)%
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, 2001 and 2000 and for the end of
the four quarterly reporting periods during calendar year 2001.
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, 2001, the Partnership's cash balance at Morgan
Stanley DW was approximately 6% of its total net asset value. A
decline in short-term interest rates will result in a decline in
the Partnership's cash management income. This cash flow risk is
not considered to be material.
The Partnership also has non-trading risk on the Zero-Coupon U.S.
Treasury Securities it holds to support the guaranteed net asset
value per Unit at the Guaranteed Redemption Date of August 31,
2003. The fair value of these securities is subject to interest
rate risk.
For non-trading securities, the Partnership measures its market
risk using sensitivity analysis. The sensitivity analysis
estimates the potential change in fair value based on a
hypothetical 10% change in interest rates. Based on the current
valuation of the Partnership's Zero-Coupon U.S. Treasury
Securities, such a change in interest rates will cause an
approximately 6.05% decline in their fair value. Such a change
will not have a material effect on the net asset value per Unit.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality and multiplier features of the Partnership's market-
sensitive instruments, 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 Manager for managing such exposures are
subject to numerous uncertainties, contingencies and risks, any
one of which could cause the actual results of the Partnership's
risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and expropri-
ations, illiquid markets, the emergence of dominant fundamental
factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased
regulation and many other factors could result in material losses
as well as in material changes to the risk exposures and the risk
management strategies of the Partnership. Investors must be
prepared to lose all or substantially all of their investment in
the Partnership.
The following were the primary trading risk exposures of the
Partnership at December 31, 2001, by market sector. It may be
anticipated, however, that these market exposures will vary
materially over time.
Equity. The primary market exposure of the Partnership at
December 31, 2001 was to the global stock index sector. The
primary equity exposure was to equity price risk in the G-7
countries. The G-7 countries consist of France, U.S., Britain,
Germany, Japan, Italy and Canada. The stock index futures traded
by the Partnership are by law limited to futures on broadly-based
indices. At December 31, 2001, the Partnership's primary
exposures were to the S&P 500 (U.S.) and Nikkei (Japan) stock
indices. The Partnership is primarily exposed to the risk of
adverse price trends or static markets in the U.S. and Japanese
indices. Static markets would not cause major market changes but
would make it difficult for the Partnership to avoid being
"whipsawed" into numerous small losses.
Interest Rate. The second largest market exposure at December
31, 2001 was to the global interest rate complex. Exposure was
primarily spread across the U.S. and European interest rate
sectors. Interest rate movements directly affect the price of
the sovereign bond futures positions held by the Partnership and
indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially
impact the Partnership's profitability. The Partnership's
primary interest rate exposure is generally to interest rate
fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions in the
government debt of smaller nations - e.g. Australia. Demeter
anticipates that G-7 interest rates will remain the primary
interest rate exposure of the Partnership for the foreseeable
future. The 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.
Currency. The Partnership's currency exposure at December 31,
2001 was to exchange rate fluctuations, primarily fluctuations
which disrupt the historical pricing relationships between
different currencies and currency pairs. Interest rate changes
as well as political and general economic conditions influence
these fluctuations. The Partnership trades in a large number of
currencies, including cross-rates - i.e., positions between two
currencies other than the U.S. dollar. At December 31, 2001, the
Partnership's major exposures were to the euro and Japanese
currency crosses and outright U.S. dollar positions. Outright
positions consist of the U.S. dollar vs. other currencies. These
other currencies include major and minor currencies. Demeter
does not anticipate that the risk profile of the Partnership's
currency sector will change significantly in the future. The
currency trading VaR figure includes foreign margin amounts
converted into U.S. dollars with an incremental adjustment to
reflect the exchange rate risk inherent to the dollar-based
Partnership in expressing VaR in a functional currency other than
dollars.
Commodity.
Soft Commodities and Agriculturals. At December 31,
2001, the Partnership had exposure to the markets that
comprise these sectors. Most of the exposure was to the
corn and soybean oil markets. Supply and demand
inequalities, severe weather disruption and market
expectations affect price movements in these markets.
Metals. The Partnership's metals exposure at December 31,
2001 was to fluctuations in the price of base metals, such
as nickel and copper. Economic forces, supply and demand
inequalities, geopolitical factors and market expectations
influence price movement in these markets. The Trading
Manager has, from time to time, taken positions when market
opportunities develop. Demeter anticipates that the
Partnership will continue to be exposed to the base metals
markets.
Energy. At December 31, 2001, the Partnership's energy
exposure was primarily to futures contracts in the natural
gas and gas oil markets. Natural gas has exhibited
volatility in prices resulting from weather patterns and
supply and demand factors and may continue in this choppy
pattern.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership at December 31, 2001:
Foreign Currency Balances. The Partnership's primary
foreign currency balances at December 31, 2001 were in
British pounds and Japanese yen. 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.
Zero-Coupon U.S. Treasury Securities. It is the
Partnership's intention to hold the Zero-Coupon U.S.
Treasury Securities until their August 15, 2003 maturity
date except as needed to fund quarterly redemptions.
Consequently, the period to period interest rate risk these
securities are subject to is not considered material.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Manager, separately, attempt to
manage the risk of the Partnership's open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership's assets among different market sectors and trading
approaches, and monitoring the performance of the Trading Manager
daily. In addition, the Trading Manager establishes
diversification guidelines, often set in terms of the maximum
margin to be committed to positions in any one market sector or
market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership's non-
trading instruments, cash and Zero-Coupon U.S. Treasury
Securities. Cash and Zero-Coupon U.S. Treasury Securities are
the only Partnership investments directed by Demeter, rather than
the Trading Manager.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the
Partnership's Annual Report, which is filed as Exhibit 13.01
hereto.
Supplementary data specified by Item 302 of Regulation S-K:
Summary of Quarterly Results (Unaudited)
Net
Income/(Loss) Net Income/(Loss)
Allocated to Per Unit for Tax
Partners for and Net Asset
Quarter Revenue Tax and Net Valuation of Limited
Ended (Net Trading Loss) Asset Valuation Partnership Interest
2001
March 31 $ 549,547 $ (432,192) $(21.64)
June 30 162,029 (108,274) (5.61)
September 30 1,578,448 289,311 15.49
December 31 1,320,491 971,818 53.36
Total $ 3,610,515 $ 720,663 $ 41.60
2000
March 31 $ 1,328,247 $ 717,732 $ 29.67
June 30 (90,854) (599,538) (26.33)
September 30 690,073 168,111 7.60
December 31 3,719,264 2,414,242 115.43
Total $ 5,646,730 $2,700,547 $126.37
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING 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 officers of Demeter are as follows:
Robert E. Murray, age 41, is the Executive Director of Morgan
Stanley DW's Managed Futures Department, a leading commodity pool
operator with approximately $1.4 billion in assets across a
variety of U.S. and international public and private managed
futures funds. In this capacity, Mr. Murray is responsible for
overseeing all aspects of Morgan Stanley DW's Managed Futures
Department. 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 17 years. He is also the Chairman and President of
Morgan Stanley Futures & Currency Management Inc. ("MSFCM")
(formerly known as Dean Witter Futures & Currency Management
Inc.), Morgan Stanley's internal commodity trading advisor, and
is Chairman and President of Demeter, the entity which acts as a
general partner for Morgan Stanley DW's managed futures funds.
Mr. Murray has 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.
Mitchell M. Merin, age 48, is a Director of Demeter. Mr. Merin
is also a Director of MSFCM. Mr. Merin was appointed the Chief
Operating Officer of Individual Asset Management for MSDW in
December 1998 and the President and Chief Executive Officer of
Morgan Stanley Dean Witter Advisors in February 1998. He has
been an Executive Vice President of Morgan Stanley DW since 1990,
during which time he has been Director of Morgan Stanley DW's
Taxable Fixed Income and Futures divisions, Managing Director in
Corporate Finance and Corporate Treasurer. Mr. Merin received
his Bachelors degree from Trinity College in Connecticut and his
M.B.A. degree in Finance and Accounting from the Kellogg Graduate
School of Management of Northwestern University in 1977.
Joseph G. Siniscalchi, age 56, 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 60, is a Director of Demeter. Mr.
Oelsner is currently an Executive Vice President and head of the
Product Development Group at Morgan Stanley Dean Witter Advisors,
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 his M.B.A.
in Finance from the Columbia University Graduate School of
Business in 1966 and an A.B. in Politics from Princeton
University in 1964.
Richard A. Beech, age 50, is a Director of Demeter. Mr. Beech
has been associated with the futures industry for over 24 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 also had worked at two investment banking firms in
operations, research, managed futures and sales management.
Raymond A. Harris, age 45, is currently Managing Director in
Asset Management Services. He previously served as CAO 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 Dean
Witter & Co. 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 39, became a Director of Demeter on
September 14, 2000. Mr. DeLuca is also a Director of MSFCM. Mr.
DeLuca was appointed the Controller of Asset Management for MSDW
in June 1999. Prior to that, Mr. DeLuca was a partner at the
accounting firm of Ernst & Young LLP, where he had MSDW as a
major client. Mr. DeLuca had worked continuously at Ernst &
Young LLP ever since 1984, after he graduated from Pace
University with a B.B.A. degree in Accounting.
Raymond E. Koch, age 46, is Chief Financial Officer of Demeter.
Mr. Koch began his career at MSDW in 1988, has overseen the
Managed Futures Accounting function since 1992, and is currently
an Executive Director in Investment Management Controllers. From
November 1979 to June 1988, Mr. Koch held various positions at
Thomson McKinnon Securities, Inc. culminating as Manager, Special
Projects in the Capital Markets Division. From August 1977 to
November 1979 he was an auditor, specializing in financial
services at Deloitte Haskins & Sells. Mr. Koch received his
B.B.A. in accounting from Iona College in 1977, an M.B.A. in
finance from Pace University in 1984 and is a Certified Public
Accountant.
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, 2001, 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, 2001,
Demeter owned 308 Units of General Partnership Interest
representing a 1.71 percent interest in the Partnership.
(c) Changes in Control - None
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of "Notes to
Consolidated Financial Statements", in the accompanying Annual
Report to Limited Partners for the year ended December 31, 2001,
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 $1,488,976 for the year ended
December 31, 2001.
PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of independent auditors,
all appearing in the accompanying Annual Report to Limited Partners for
the year ended December 31, 2001, 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, 2001, 2000 and 1999.
- - Consolidated Statements of Financial Condition as of December 31,
2001 and 2000.
- - Consolidated Schedule of Investments as of December 31, 2001.
- - Consolidated Statements of Operations, Changes in Partners'
Capital, and Cash Flows for the years ended December 31, 2001,
2000 and 1999.
- - Notes to Consolidated Financial Statements.
With the exception of the aforementioned information and the information
incorporated in Items 7, 8 and 13, the Annual Report to Limited Partners
for the year ended December 31, 2001 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
During the quarter ended December 31, 2001, the Current Report on Form
8-K was filed by the Partnership on November 13, 2001 for the purpose of
reporting, under Item 5, the relocation of offices of the Partnership
and Demeter; the transfer of futures and options clearing of the
Partnership to MS & Co.; and the replacement by MS & Co. as counterparty
on all foreign currency forward contracts for the Partnership.
(c) Exhibits
Refer to Exhibit Index on Page E-1 to E-2.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DEAN WITTER PRINCIPAL PLUS FUND L.P.
(Registrant)
BY: Demeter Management Corporation,
General Partner
April 1, 2002 BY: /s/ Robert E. Murray
Robert E. Murray, Director,
Chairman of the Board and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Demeter Management Corporation.
BY: /s/ Robert E. Murray April 1, 2002
Robert E. Murray, Director,
Chairman of the Board and
President
/s/ Mitchell M. Merin April 1, 2002
Mitchell M. Merin, Director
/s/ Joseph G. Siniscalchi April 1, 2002
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III April 1, 2002
Edward C. Oelsner III, Director
/s/ Richard A. Beech April 1, 2002
Richard A. Beech, Director
/s/ Raymond A. Harris April 1, 2002
Raymond A. Harris, Director
/s/ Anthony J. DeLuca April 1, 2002
Anthony J. DeLuca, Director
/s/ Raymond E. Koch April 1, 2002
Raymond E. Koch, Chief
Financial Officer and Principal
Accounting Officer
EXHIBIT INDEX
ITEM
3.01 Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of August 29, 1995, is incorporated by
reference to Exhibit 3.01 and Exhibit 3.02 of the
Partnership's Registration Statement (File No. 33-95414) on
Form S-1.
10.01 Amended and Restated Management Agreement among the
Partnership, Demeter and RXR, Inc., dated as of December 29,
1995, is incorporated by reference to Exhibit 10.02 of the
Partnership's Registration Statement (File No. 33-95414) on
Form S-1.
10.02 Amended and Restated Management Agreement between the
Partnership and Dean Witter Reynolds Inc., dated as of
December 29, 1995, is incorporated by reference to Exhibit
10.01 of the Partnership's Registration Statement (File No.
33-95414) on Form S-1.
10.03 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW, dated as of June 22,
2000, is incorporated by reference to Exhibit 10.01 of the
Partnership's Form 8-K (File No. 0-18314) filed with the
Securities and Exchange Commission on November 13, 2001.
10.04 Commodity Futures Customer Agreement between MS & Co. and
the Partnership, and acknowledged and agreed to by Morgan
Stanley DW, dated as of May 1, 2000, is incorporated by
reference to Exhibit 10.02 of the Partnership's Form 8-K
(File No. 0-18314) filed with the Securities and Exchange
Commission on November 13, 2001.
10.05 Customer Agreement between the Partnership and MS & Co.,
dated as of May 1, 2000, is incorporated by reference to
Exhibit 10.04 of the Partnership's Form 8-K (File No. 0-
18314) filed with the Securities and Exchange Commission on
November 13, 2001.
10.06 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. 0-18314) filed with the
Securities and Exchange Commission on November 13, 2001.
10.07 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. 0-18314) filed with the
Securities and Exchange Commission on November 13, 2001.
13.01 December 31, 2001 Annual Report to Limited Partners is filed
herewith.
Principal
Plus
Fund
December 31, 2001
Annual Report
[LOGO] Morgan Stanley
Dean Witter Principal Plus Fund L.P.
Historical Fund Performance
Presented below is the percentage change in Net Asset Value per Unit from the
start of each calendar year the Fund has traded. Also provided is the
inception-to-date return and the annualized return since inception for the
Fund. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Year Return
---- ------
1990 (10 1/2 months) 7.5%
1991 10.4%
1992 9.4%
1993 11.6%
1994 -8.6%
1995 18.0%
1996 -5.3%
1997 15.4%
1998 10.5%
1999 -3.8%
2000 7.0%
2001 2.1%
Inception-to-Date Return: 98.3%
Annualized Return: 5.9%
Demeter Management Corporation
c/o Managed Futures Department
825 Third Avenue, 8th Floor,
New York, NY 10022
Telephone (201) 876-4647
Principal Plus Fund L.P.
Annual Report
2001
Dear Limited Partner:
This marks the twelfth annual report for the Dean Witter Principal Plus Fund
L.P. (the "Fund"). The Fund began the year at a Net Asset Value per Unit of
$1,941.87 and increased by 2.1% to $1,983.47 on December 31, 2001. The Fund has
increased by 98.3% since it began trading in February 1990 (a compound
annualized rate of 5.9%). A review of trading results for the year is provided
in the Annual Report of the Trading Manager located on the next page of this
report.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation, c/o Managed Futures Department, 825
Third Avenue, 8th 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/ Robert E. Murray
Robert E. Murray
Chairman
Demeter Management Corporation
General Partner
Dean Witter Principal Plus Fund L.P.
Annual Report of the Trading Manager
Principal Plus Fund's Net Asset Value rose in 2001, despite continued
underperformance in the U.S. equity markets and the shocking events of
September 11th.
The Fund posted a trading loss during the first quarter, reflecting a weak
equity market and the introduction of a year-long stimulus package by the U.S.
central bank. The second quarter showed a small trading loss for the Fund. The
interest rate, currency and energy sectors all failed to establish any
sustained direction, causing the global asset overlay to incur small losses.
These losses, however, were almost completely offset by gains in the hedged
equity strategy. The Fund managed to produce a slight gain for the third
quarter, due primarily to performance from the long/short global asset overlay.
The Fund benefited from long positions in U.S. and European interests rate
futures, as well as long positions in the euro, Swiss franc and Singapore
dollar. Short positions in Japan's Nikkei Index also resulted in profits as
Japanese stock prices sank to levels not witnessed since 1984. Principal Plus
Fund finished the year on a positive note, registering a profitable fourth
quarter. The global asset strategy remained flat with some gains witnessed in
short Japanese yen positions, as the currency declined to a 3-year low versus
the U.S. dollar.
We thank you for your continued support and look forward to serving your
investment needs in 2002.
RXR, Inc.
Dean Witter Principal Plus Fund L.P.
Independent Auditors' Report
The Limited Partners and the General Partner:
We have audited the accompanying consolidated statements of financial condition
of Dean Witter Principal Plus Fund L.P. and subsidiary (the "Partnership") as
of December 31, 2001 and 2000, including the schedule of investments as of
December 31, 2001, and the related consolidated statements of operations,
changes in partners' capital, and cash flows for each of the three years in the
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Dean Witter Principal
Plus Fund L.P. and subsidiary at December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
February 15, 2002
(February 27, 2002 as to Note 7)
Dean Witter Principal Plus Fund L.P.
Consolidated Statements of Financial Condition
December 31,
----------------------
2001 2000
---------- ----------
$ $
ASSETS
Equity in futures interests trading accounts:
Cash 3,272,814 3,417,831
Net unrealized gain on open contracts
(MS&Co.) 423,058 1,655,071
Net unrealized loss on open contracts
(MSIL) (47,990) (25,107)
---------- ----------
Total net unrealized gain on open
contracts 375,068 1,629,964
Net option premiums -- 365,750
---------- ----------
Total Trading Equity 3,647,882 5,413,545
Investment in Zero-Coupon U.S. Treasury
Securities 32,913,297 35,655,852
Unrealized gain on Zero-Coupon U.S. Treasury
Securities 1,630,439 685,465
Interest receivable (Morgan Stanley DW) 5,211 22,429
---------- ----------
Total Assets 38,196,829 41,777,291
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 445,453 1,828,856
Accrued administrative expenses 164,965 120,003
Accrued brokerage fees (Morgan Stanley DW) 121,338 136,573
Accrued management fees 30,334 34,143
---------- ----------
Total Liabilities 762,090 2,119,575
---------- ----------
Minority interest 122,427 187,369
---------- ----------
PARTNERS' CAPITAL
Limited Partners (17,681.656 and 19,664.981
Units, respectively) 36,673,490 38,861,681
General Partner (308 Units) 638,822 608,666
---------- ----------
Total Partners' Capital 37,312,312 39,470,347
---------- ----------
Total Liabilities and
Partners' Capital 38,196,829 41,777,291
========== ==========
Total Partners' Capital 37,312,312 39,470,347
Less: Excess of market value over amortized
cost of Zero-Coupon U.S. Treasury
Securities 1,630,439 685,465
---------- ----------
NET ASSETS PER LIMITED
PARTNERSHIP AGREEMENT 35,681,873 38,784,882
========== ==========
NET ASSET VALUE PER UNIT 1,983.47 1,941.87
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Dean Witter Principal Plus Fund L.P.
Consolidated Statements of Operations
For the Years Ended
December 31,
---------------------------------
2001 2000 1999
---------- --------- ----------
$ $ $
REVENUES
Trading profit (loss):
Realized 1,893,318 332,570 (190,005)
Net change in unrealized (1,254,896) 1,249,228 (819,971)
---------- --------- ----------
Total Trading Results 638,422 1,581,798 (1,009,976)
Interest income 2,027,119 2,361,077 2,648,334
Change in value of Yield Pool 944,974 1,703,855 (2,971,134)
---------- --------- ----------
Total 3,610,515 5,646,730 (1,332,776)
---------- --------- ----------
EXPENSES
Brokerage fees (Morgan Stanley
DW) 1,488,976 1,683,956 1,953,687
Management fees 372,244 420,989 488,421
Administrative expenses 97,000 93,000 58,000
Transaction fees and costs 51,600 73,484 89,565
---------- --------- ----------
Total 2,009,820 2,271,429 2,589,673
---------- --------- ----------
INCOME (LOSS) BEFORE
MINORITY INTEREST 1,600,695 3,375,301 (3,922,449)
Less: Minority interest (64,942) (10,711) (122,511)
---------- --------- ----------
NET INCOME (LOSS) 1,665,637 3,386,012 (3,799,938)
========== ========= ==========
Net Income (Loss) Allocation:
Limited Partners 1,635,481 3,337,305 (3,755,944)
General Partner 30,156 48,707 (43,994)
NET INCOME (LOSS) 1,665,637 3,386,012 (3,799,938)
Less: Change in excess of market
value over amortized cost of Zero-
Coupon U.S. Treasury Securities 944,974 685,465 (1,952,744)
---------- --------- ----------
NET INCOME (LOSS)
ALLOCATED TO PARTNERS
FOR TAX AND NET ASSET
VALUATION 720,663 2,700,547 (1,847,194)
========== ========= ==========
Net Income (Loss) Allocation For
Tax and Net Asset Valuation
Limited Partners 707,808 2,660,735 (1,824,381)
General Partner 12,855 39,812 (22,813)
Net Income (Loss) per Unit For
Tax and Net Asset Valuation
Limited Partners 41.60 126.37 (72.12)
General Partner 41.60 126.37 (72.12)
The accompanying notes are an integral part of these consolidated financial
statements.
Dean Witter Principal Plus Fund L.P.
Consolidated Statements of Changes in Partners' Capital
For the Years Ended December 31, 2001, 2000 and 1999
Units of
Partnership Limited General
Interest Partners Partner Total
----------- ---------- ------- ----------
$ $ $
Partners' Capital,
December 31, 1998 26,653.343 51,660,212 603,953 52,264,165
Net loss -- (3,755,944) (43,994) (3,799,938)
Redemptions (2,465.611) (4,551,511) -- (4,551,511)
---------- ---------- ------- ----------
Partners' Capital,
December 31, 1999 24,187.732 43,352,757 559,959 43,912,716
Net income -- 3,337,305 48,707 3,386,012
Redemptions (4,214.751) (7,828,381) -- (7,828,381)
---------- ---------- ------- ----------
Partners' Capital,
December 31, 2000 19,972.981 38,861,681 608,666 39,470,347
Net income -- 1,635,481 30,156 1,665,637
Redemptions (1,983.325) (3,823,672) -- (3,823,672)
---------- ---------- ------- ----------
Partners' Capital,
December 31, 2001 17,989.656 36,673,490 638,822 37,312,312
========== ========== ======= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Dean Witter Principal Plus Fund L.P.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 1,665,637 3,386,012 (3,799,938)
Noncash items included in net
income (loss):
Net change in unrealized 1,254,896 (1,249,228) 819,971
Change in value of Yield Pool (944,974) (1,703,855) 2,971,134
(Increase) decrease in operating
assets:
Net option premiums 365,750 (365,750) --
Investment in Zero-Coupon
U.S. Treasury Securities 2,742,555 4,711,684 1,235,218
Interest receivable (Morgan
Stanley DW) 17,218 2,297 9,618
Increase (decrease) in operating
liabilities:
Accrued administrative expenses 44,962 (1,841) (34,436)
Accrued brokerage fees (Morgan
Stanley DW) (15,235) (18,978) (17,623)
Accrued management fees (3,809) (4,745) (4,405)
Accrued incentive fee -- -- (147,477)
---------- ---------- ----------
Net cash provided by operating
activities 5,127,000 4,755,596 1,032,062
---------- ---------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Increase (decrease) in redemptions
payable (1,383,403) 487,304 385,389
Decrease in minority interest (64,942) (10,711) (122,511)
Redemptions of Units (3,823,672) (7,828,381) (4,551,511)
---------- ---------- ----------
Net cash used for financing
activities (5,272,017) (7,351,788) (4,288,633)
---------- ---------- ----------
Net decrease in cash (145,017) (2,596,192) (3,256,571)
Balance at beginning of period 3,417,831 6,014,023 9,270,594
---------- ---------- ----------
Balance at end of period 3,272,814 3,417,831 6,014,023
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Dean Witter Principal Plus Fund L.P.
Consolidated Schedule of Investments
December 31, 2001
Partnership Net Assets: $37,312,312
Net
Long Short Unrealized Percentage of # of Contracts/
Futures and Forward Contracts: Gain/(Loss) Gain/(Loss) Gain/(Loss) Net Assets Notional Amounts
- ------------------------------ ----------- ----------- ----------- ------------- ----------------
$ $ $ %
Foreign currency 167,119 40,797 207,916 0.56 2,210,099
Interest Rate 67,449 84,199 151,648 0.41 287
Commodity (75,843) 13,710 (62,133) (0.17) 223
Equity 54,000 5,524 59,524 0.16 61
------- ------- ------- -----
Grand Total: 212,725 144,230 356,955 0.96
======= ======= =====
Unrealized Currency Gain 18,113
-------
Total Net Unrealized Gain per Statement of
Financial Condition 375,068
=======
The accompanying notes are an integral part of these consolidated financial
statements.
Dean Witter Principal Plus Fund L.P.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization--Dean Witter Principal Plus Fund L.P. (the "Partnership") is a
limited partnership organized to engage primarily in the speculative trading of
futures contracts, options on futures contracts and forward contracts on
physical commodities and other commodity interests (collectively, "futures
interests").
The Partnership's objective is to achieve long-term appreciation while assuring
investors at least a 3% compound annual rate of return over approximately seven
and one-half years from February 1, 1996 to August 31, 2003. At August 31,
2003, which is the Partnership's "Guaranteed Redemption Date," the Net Asset
Value is guaranteed to be at least $1,961.00 per Unit. The Partnership
initially invested approximately 80% of the Partnership's assets in Zero-Coupon
U.S. Treasury Securities (the "Yield Pool") to accomplish this objective. The
Partnership's remaining assets have been contributed to its subsidiary, Dean
Witter Principal Plus Fund Management L.P. (the "Trading Company"), which was
established solely to trade in futures interests on behalf of the Partnership.
The general partner for the Partnership is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc.
("Morgan Stanley DW"). The clearing commodity brokers are Morgan Stanley & Co.,
Inc. ("MS&Co.") and Morgan Stanley & Co. International Limited ("MSIL").
Demeter, Morgan Stanley DW, MS&Co. and MSIL are wholly-owned subsidiaries of
Morgan Stanley Dean Witter & Co. The trading manager to the Partnership is RXR
Inc. (the "Trading Manager").
Effective April 2, 2001, Dean Witter Reynolds Inc. changed its name to Morgan
Stanley DW Inc.
Effective June 1, 2001, SSARIS Advisors, LLC ("SSARIS"), acquired the assets of
RXR. State Street Global Alliance, LLC has taken a 60% ownership in SSARIS and
RXR owns the remaining 40% interest and manages the day-to-day business and
operations of SSARIS. SSARIS acquired RXR's trading program, and there was no
change of strategy. Demeter does not believe the change of ownership impacts
the Partnership's trading.
Demeter is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by Demeter and the Limited Partners
based upon their proportional ownership interests.
Use of Estimates--The financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require management to
Dean Witter Principal Plus Fund L.P.
Notes to Consolidated Financial Statements--(Continued)
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.
Principles of Consolidation--The consolidated financial statements include the
accounts of the Partnership and the Trading Company. All intercompany balances
have been eliminated.
The ownership by Demeter in the Trading Company represents a minority interest
in the Partnership. Demeter's share of the Trading Company's profits and losses
are deducted from consolidated results of operations.
Revenue Recognition--The yield pool is valued at cost plus accreted interest
with the accumulated unrealized gain (loss) on the zero-coupon U.S. Treasury
Securities separately disclosed. The annual change in the yield pool's market
value is reflected in the consolidated statements of operations. The
consolidated statements of financial condition and the consolidated statements
of operations have been reconciled to reflect Net Assets, Net Asset Value per
Unit and Net Income (Loss) in accordance with the terms of the Limited
Partnership Agreement.
The following information pertains to the Yield Pool at December 31, 2001 and
2000:
2001 2000
---------- ----------
$ $
Year to Date Accreted Interest Income 1,890,702 2,108,883
Cost of Yield Pool at year-end 23,609,129 27,062,738
Accreted Interest Receivable at year-end 9,304,168 8,593,114
Market Value of Yield Pool at year-end 34,543,736 36,341,317
Futures interests are open commitments until settlement date. They are valued
at market on a daily basis and the resulting net change in unrealized gains and
losses is reflected in the change in unrealized profit (loss) on open contracts
from one period to the next in the consolidated statements of operations.
Monthly, Morgan Stanley DW pays interest income on 90% of the Trading Company's
average daily Net Assets as defined in the Limited Partnership Agreement for
the month at a prevailing rate on U.S. Treasury bills. For purposes of such
interest payments, Net Assets do not include monies due the Trading Company on
futures interests, but not actually received.
Dean Witter Principal Plus Fund L.P.
Notes to Consolidated 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 Schedule 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 now 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 Partnership's asset "Equity
in futures interests trading accounts," reflected in the consolidated
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 Partnership, in the normal course of business, enters into various
contracts with MS&Co. and MSIL acting as its commodity brokers. Pursuant to
brokerage agreements with MS&Co. and MSIL, to the extent that such trading
results in unrealized gains or losses, the amounts are offset and reported on a
net basis on the Partnership's consolidated statements of financial condition.
The Partnership has offset the fair value amounts recognized for forward
contracts executed with the same counterparty as allowable under terms of the
master netting agreement with MS&Co., the sole counterparty on such contracts.
The Partnership has consistently applied its right to offset.
Brokerage Fees and Related Transaction Fees and Costs-- The monthly brokerage
fee is equal to 1/3 of 1% per month (a 4% annual rate) of the Partnership's
adjusted month-end Net Assets. Transaction fees and costs are accrued on a
half-turn basis. In 2001, 2000, and 1999, the brokerage fees charged were the
equivalent of a roundturn commission charge of approximately $138, $157, and
$124, respectively per contract traded.
Operating Expenses--The Partnership bears all operating expenses related to its
trading activities. These include filing fees, clerical, administrative,
auditing, accounting, mailing,
Dean Witter Principal Plus Fund L.P.
Notes to Consolidated Financial Statements--(Continued)
printing and other incidental operating expenses as permitted by the Limited
Partnership Agreement. In addition, the Partnership incurs a monthly management
fee and may incur an incentive fee. Demeter bears all other operating expenses.
Redemptions--As of the last day of any calendar quarter, Limited Partners may
redeem some or all of their Units at 100% of the Net Asset Value per Unit upon
five business days advance notice by redemption form to Demeter.
During 2001, 2000, and 1999, the Partnership sold securities in the Yield Pool
in order to fund redemptions as detailed below:
2001 2000 1999
---------- --------- ---------
$ $ $
Cost of Securities Sold 3,453,609 5,352,371 1,927,054
Interest Accreted on Securities Sold 1,179,649 1,468,197 610,556
Proceeds from Sale of Securities 4,775,331 6,700,824 3,549,406
Distributions--The Partnership will not make any distributions until after the
Guarantee Period, and thereafter will only make distributions on a pro-rata
basis at the sole discretion of Demeter.
Income Taxes--No provision for income taxes has been made in the accompanying
consolidated financial statements, as partners are individually responsible for
reporting income or loss based upon their respective share of the Partnership's
revenues and expenses for income tax purposes.
Dissolution of the Partnership--The Partnership will terminate on December 31,
2025, or at an earlier date if certain conditions set forth in the Limited
Partnership Agreement occur.
The Trading Company may terminate operations if its Net Assets decline to 5% or
less of consolidated Partnership Net Assets, and will terminate operations if
its Net Assets decline to less than 3% of consolidated Partnership Net Assets.
At December 31, 2001 and 2000, the Trading Company had Net Assets of $3,341,255
and $4,941,558 respectively, which represented 9% and 12% respectively, of the
consolidated Partnership's Net Assets at the respective dates. If the
operations of the Trading Company ceased, the remaining Net Assets would be
returned to the Partnership and held until the end of the Guarantee Period,
when they would be distributed to the Limited Partners.
2. Related Party Transactions
The Trading Company pays a monthly brokerage fee to Morgan Stanley DW as
described in Note 1. The Partnership's and Trading Company's cash is on deposit
with Morgan
Dean Witter Principal Plus Fund L.P.
Notes to Consolidated Financial Statements--(Continued)
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. The Yield Pool is on deposit with Morgan Stanley DW in
a customer security account. Pursuant to the Limited Partnership Agreement,
Demeter initially invested $200,000 of General Partnership Interest in the
Trading Company.
3. Trading Manager
Compensation to RXR as trading manager consists of a management fee and an
incentive fee as follows:
Management Fee--The Partnership pays a monthly management fee equal to 1/12 of
1% per month (a 1% annual rate) of the Partnership's adjusted Net Assets, as
defined in the Limited Partnership Agreement, as of the last day of each month.
Incentive Fee--The Partnership will pay an annual incentive fee to RXR equal to
15% of the "New Appreciation", as defined in the Limited Partnership Agreement,
of the Trading Company's Net Assets as of the end of each annual incentive
period ending December 31. Such incentive fee is accrued in each month in which
New Appreciation occurs. In those months in which New Appreciation is negative,
previous accruals, if any, during the incentive period are reduced.
4. Financial Instruments
The Partnership trades futures contracts, options on futures contracts and
forward contracts on physical commodities and other commodity interests.
Futures and forwards represent contracts for delayed delivery of an instrument
at a specified date and price. Risk arises from changes in the value of these
contracts and the potential inability of counterparties to perform under the
terms of the contracts. There are numerous factors which may significantly
influence the market value of these contracts, including interest rate
volatility.
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"). SFAS No.
133 defines a derivative as a financial instrument or other contract that has
all three of the following characteristics:
1)One or more underlying notional amounts or payment provisions;
2)Requires no initial net investment or a smaller initial net investment than
would be required relative to changes in market factors;
3)Terms require or permit net settlement.
Dean Witter Principal Plus Fund L.P.
Notes to Consolidated Financial Statements--(Continued)
Generally derivatives include futures, 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
consolidated statements of financial condition, and their longest contract
maturities were as follows:
Net Unrealized Gains/(Losses)
on Open Contracts Longest Maturities
----------------------------- ---------------------
Off- Off-
Exchange- Exchange- Exchange- Exchange-
Year Traded Traded Total Traded Traded
- ---- --------- --------- --------- ---------- ---------
$ $ $
2001 361,492 13,576 375,068 March 2002 March 2002
2000 1,650,388 (20,424) 1,629,964 June 2001 March 2001
The Partnership has credit risk associated with counterparty nonperformance.
The credit risk associated with the instruments in which the Partnership is
involved is limited to the amounts reflected in the Partnership's consolidated
statements of financial condition.
The Partnership also has credit risk because Morgan Stanley DW, MS&Co., and
MSIL act as the futures commission merchants or the counterparties with respect
to most of the Partnership's assets. Exchange-traded futures and futures-styled
options contracts are marked to market on a daily basis, with variations in
value settled on a daily basis. Morgan Stanley DW, MS&Co. and MSIL, each as a
futures commission merchant for all of the Partnership's exchange-traded
futures and futures-styled options contracts, are required, pursuant to
regulations of the Commodity Futures Trading Commission, to segregate from
their own assets, and for the sole benefit of their commodity customers, all
funds held by them with respect to exchange-traded futures and futures-styled
option contracts including an amount equal to the net unrealized gains (losses)
on all open futures and futures-styled option contracts, which funds, in the
aggregate, totaled $3,634,306 and $5,068,219 at December 31, 2001 and 2000,
respectively. With respect to the Partnership's off-exchange-traded forward
currency contracts, there are no daily settlements of variations in value nor
is there any requirement that an amount equal to the net unrealized gains
(losses) on open forward contracts be segregated. With respect to those
off-exchange-traded forward currency contracts, the Partnership is at risk to
the ability of MS&Co., the sole counterparty on all of such contracts, to
perform. The Partnership has a netting agreement with MS&Co. This agreement,
which seeks to reduce both the Partnership's and MS&Co.'s exposure on
off-exchange-traded forward currency contracts, should materially decrease the
Partnership's credit risk in the event of MS&Co.'s bankruptcy or insolvency.
Dean Witter Principal Plus Fund L.P.
Notes to Consolidated Financial Statements--(Concluded)
5. Financial Highlights
PER UNIT
---------
NET ASSET VALUE, JANUARY 1, 2001: $1,941.87
---------
NET OPERATING RESULTS:
Realized Profit 103.44
Unrealized Loss (66.17)
Interest Income 106.88
Change in Value of the Yield Pool 46.22
Expenses (105.97)
---------
Income before Minority Interest 84.40
Add: Minority Interest 3.42
---------
Net Income 87.82
Less: Change in excess of market value over amortized
cost of Zero-Coupon U.S. Treasury Securities 46.22
---------
Net Income Allocated to Partners for Tax and Net Asset
Valuation 41.60
=========
NET ASSET VALUE, DECEMBER 31, 2001: $1,983.47
=========
Expense Ratio 5.5%
Net Income Ratio 4.5%
TOTAL RETURN 2.1%
6. Legal Matters
In April 2001, the Appellate Division of New York State dismissed the class
action previously disclosed in the Partnership's Annual Report for the year
ended December 31, 2000. Because plaintiffs did not exercise their right to
appeal any further, this dismissal constituted a final resolution of the case.
7. Subsequent Event
On February 27, 2002, the Partnership received notification of a preliminary
entitlement to payment from the Sumitomo Copper Litigation Settlement
Administrator. Such preliminary award, however, is subject to a court hearing
scheduled on April 10, 2002 and is entirely contingent on the court's final
approval. Any amount ultimately received will be accounted for in the period
received, for the benefit of the limited partners at the date of receipt.
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