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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, 1999 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 0-24035
MORGAN STANLEY TANGIBLE ASSET FUND L.P.
(Exact name of registrant as specified in its Limited Partnership
Agreement)
DELAWARE
13-3968008
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, - 62nd Flr., New York, N.Y.
10048
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code
(212) 392-5454
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: $24,009,777 at January 31,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
MORGAN STANLEY TANGIBLE ASSET FUND L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1999
Page No.
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . .
. . . . . 1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . .
. . . . 2-4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . .
. . . . 4
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . .
. . . . 5-6
Item 4. Submission of Matters to a Vote of Security Holders
. . . . . 7
Part II.
Item 5. Market for the Registrant's Partnership Units
and Related Security Holder Matters . . . . . . . .
. . . . 8
Item 6. Selected Financial Data . . . . . . . . . . . . . .
. . . . . 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . .
. . . 10-21
Item 7A. Quantitative
and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . .
. . . . 22-31
Item 8. Financial Statements and Supplementary Data. . . . .
. . . .31-32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . .
. . . . . 32
Part III.
Item 10. Directors and
Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . .
. . 33-37
Item 11. Executive
Compensation . . . . . . . . . . . . . . . . . . . 37
Item 12. Security
Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . .
. .. . 37
Item 13. Certain
Relationships and Related Transactions . . . . . . . . 38
Part IV.
Item 14. Exhibits,
Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . .
. . . . .39
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 10, 1997 I
Partnership's Supplement to Prospectus
dated July 10, 1998 I
Annual Report to Morgan Stanley
Tangible Asset Fund L.P. Limited
Partners for the year ended
December 31, 1999 II, III and IV
PART I
Item 1. BUSINESS
(a) General Development of Business. Morgan Stanley Tangible
Asset Fund L.P. (the "Partnership") is a Delaware limited
partnership organized to engage primarily in speculative trading
of futures contracts in metals, energy and agricultural markets
(collectively, "futures interests"). The Partnership commenced
operations on January 2, 1998.
The Partnership's general partner is Demeter Management
Corporation ("Demeter"). The commodity brokers are Morgan
Stanley & Co. Incorporated ("MS & Co.") and Morgan Stanley & Co.
International Limited ("MSIL"), (collectively, the "Commodity
Brokers"). The trading advisor is Morgan Stanley Dean Witter
Commodities Management, Inc. ("MSCM" or the "Trading Advisor").
The selling agent is Dean Witter Reynolds Inc. ("DWR"). MSCM,
DWR, the Commodity Brokers and Demeter are all wholly-owned
subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW").
The Partnership's Net Asset Value per Unit of limited partnership
interest ("Unit(s)"), as of December 31, 1999 was $7.61,
representing an increase of 15.8 percent from the Net Asset Value
per Unit of $6.57 at December 31, 1998. For a more detailed
description of the Partnership's business see subparagraph (c).
(b) Financial Information about Industry Segments. For financial
information reporting purposes the Partnership is deemed to
engage in one industry segment, the speculative trading of
futures interests. 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 interests pursuant to
trading instructions provided by the Trading Advisor. For a
detailed description of the different facets of the Partnership's
business, see those portions of the Partnership's prospectus,
dated November 10, 1997, (the "Prospectus"), and the
corresponding portions of the Prospectus Supplement dated July
10, 1998, (the "Supplement"), each incorporated by reference in
this Form 10-K, set forth below.
Facets of Business
1. Summary 1. "Summary of the Prospectus"
(Pages 1-10 of the Prospec-
tus).
2. Futures Markets 2. "The Futures Markets"
(Pages 35-38 of the
Prospectus).
3.Partnership's Trading 3.
"Investment Program, Use of
Arrangements and Proceeds and Trading Poli-
Policies cies" (Pages 26-28 of the
Prospectus) and "The
Trading Advisor" (Page
40-43 of the Prospectus
and Page S-11 of the
Supplement).
4. Management of the Part- 4. "The Management Agreement"
nership (Pages 45-46 of the
Prospectus). "The General
Partner" (Pages 29-32 of
the Prospectus and Page
S-7-8 of the Supplement).
"The Commodity Brokers"
(Pages 43-44 of the
Prospectus) and "The
Limited Partnership
Agreement" (Pages
47-51 of the Prospectus).
5. Taxation of the Partnership's 5. "Material Federal Income
Limited Partners Tax Considerations" and
"State and Local Income
Tax Aspects" (Pages
56-64 of the Prospectus).
(d) Financial Information About Foreign and Domestic Operations
and Export Sales
The Partnership has not engaged in any operations in foreign
countries; however, the Partnership (through the Commodity
Brokers) trades in futures interests on foreign exchanges.
Item 2. PROPERTIES
The executive and administrative offices are located within the
offices of DWR. The DWR offices utilized by the Partnership are
located at Two World Trade Center, 62nd Floor, New York, NY
10048.
Item 3. LEGAL PROCEEDINGS
The class actions first filed in 1996 in California and in New
York State courts were each dismissed in 1999. However, in the
New York State class action, plaintiffs appealed the trial
court's dismissal of their case on March 3, 2000.
On September 6, 10, and 20, 1996, and on March 13, 1997,
purported class actions were filed in the Superior Court of the
State of California, County of Los Angeles, on behalf of all
purchasers of interests in limited partnership commodity pools
sold by DWR. Named defendants include DWR, Demeter, Dean Witter
Futures & Currency Management Inc. ("DWFCM"), MSDW, certain
limited partnership commodity pools of which Demeter is the
general partner (all such parties referred to hereafter as the
"Morgan Stanley Dean Witter Parties") and certain trading
advisors to those pools. On June 16, 1997, the plaintiffs in the
above actions filed a consolidated amended complaint, alleging,
among other things, that the defendants committed fraud, deceit,
negligent misrepresentation, various violations of the California
Corporations Code, intentional and negligent breach of fiduciary
duty, fraudulent and unfair business practices, unjust
enrichment, and conversion in the sale and operation of the
various limited partnership commodity pools. The complaints seek
unspecified amounts of compensatory and punitive damages and
other relief. The court entered an order denying class
certification on August 24,
1999. On September 24, 1999, the court entered an order
dismissing the case without prejudice on consent. Similar
purported class actions were also filed on September 18 and 20,
1996, in the Supreme Court of the State of New York, New York
County, and on November 14, 1996 in the Superior Court of the
State of Delaware, New Castle County, against the Morgan Stanley
Dean Witter Parties and certain trading advisors on behalf of all
purchasers of interests in various limited partnership commodity
pools sold by DWR. A consolidated and amended complaint in the
action pending in the Supreme Court of the State of New York was
filed on August 13, 1997, alleging that the defendants committed
fraud, breach of fiduciary duty, and negligent misrepresentation
in the sale and operation of the various limited partnership
commodity pools. The complaints seek unspecified amounts of
compensatory and punitive damages and other relief. The New York
Supreme Court dismissed the New York action in November 1998, but
granted plaintiffs leave to file an amended complaint, which they
did in early December 1998. The defendants filed a motion to
dismiss the amended complaint with prejudice on February 1, 1999.
By decision dated December 21, 1999, the New York Supreme Court
dismissed the case with prejudice.
In addition, on December 16, 1997, upon motion of the plaintiffs,
the action pending in the Superior Court of the State of Delaware
was voluntarily dismissed without prejudice.
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, 1999 was
approximately 2,795.
(c) Distributions
No distributions have been made by the Partnership since it
commenced trading operations on January 2, 1998. 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 Period
from
January 2, 1998
For the Year Ended (commencement
December 31, of operations) to
1999 December 31, 1998
Total Revenues
(including interest) 5,045,724 (11,239,913)
Net Income (Loss) 3,375,789 (13,543,631)
Net Income (Loss)
Per Unit (Limited
& General Partners) 1.04 (3.43)
Total Assets 24,048,757 25,962,970
Total Limited
Partners' Capital 23,310,162 24,622,999
Net Asset Value Per
Unit 7.61
6.57
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with the
Commodity Brokers in separate futures trading accounts
established for the 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 ("CFTC")
for investment of customer segregated or secured funds. The
Partnership's assets held by the Commodity Brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures and forwards it
is expected that the Partnership will continue to own such liquid
assets for margin purposes.
The Partnership's investment in futures and forwards, 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 contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures 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 contracts and result in restrictions on
redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, or expect to
have, any capital assets. Redemptions of Units in the future
will affect the amount of funds available for investments in
futures interests in subsequent periods. It is not possible to
estimate the amount, and therefore, the impact of future
redemptions.
Results of Operations.
General. The Partnership's results depend on its Trading Advisor
and the ability of the Trading Advisor's trading programs to take
advantage of price movements or other profit opportunities in the
futures and forwards markets. The following presents a summary
of the Partnership's operations for the two years ended December
31, 1999 and a general discussion of its trading activities
during each period. It is important to note, however, that the
Trading Advisor 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 Advisor or will be profitable in the
future. Consequently, the results of operations of the
Partnership are difficult to discuss other than in the context of
its Trading Advisor's trading activities on behalf of the
Partnership and how the Partnership has performed in the past.
At December 31, 1999, the Partnership's total capital was
$23,640,470, a decrease of $1,267,846 from the Partnership's
total capital of $24,908,316 at December 31, 1998. For the year
ended December 31, 1999, the Partnership generated net income of
$3,375,789 and total redemptions aggregated $4,643,635.
For the year ended December 31, 1999, the Partnership recorded
total trading revenues, including interest income of $5,045,724
and posted an increase in Net Asset Value per Unit. During 1999,
commodity market price behavior returned to the more normal
pattern of some commodities gaining in price, while other
commodities declined in price. Of the seventeen components of
the Bridge Commodity Research Bureau Index ("CRB"), 10 increased
in price during 1999, while the remaining seven declined in
price. This was noticeably different from 1998, when all but one
of the components of the CRB declined in price. Energy markets,
which had been the worst performing sector during 1998, rebounded
strongly to become the best performing commodity sector in 1999,
which resulted in gains for the Partnership of approximately
13.35%. OPEC, which had suffered economically as their late 1997
decision to expand
production coincided with the onset of economic difficulties in
virtually all of the world's emerging economies, cooperated with
other major global oil producing countries to rein in production
and allow for the drawing down of inventories that had grown
steadily throughout 1998. Crude oil, its refined products, and
natural gas all benefited from the improving global demand for
energy and the decreased supply of crude oil. Base metals
markets also improved in price during 1999 resulting in gains of
approximately 8.55%. Historically, copper has been referred to
by some as "the world's economist", rising in price as economic
activity improves and falling in price when economic difficulties
are encountered. During both 1998 and 1999, copper served as an
accurate barometer of global economic health. Copper producers'
decisions to curtail production in the short-term helped support
prices. Perhaps more importantly for the long-term, the
consolidation of major mining companies in both copper and
aluminum bodes well for less over-expansion during future periods
of elevated prices, likely leading to "higher highs" and "higher
lows" in future price cycles. Precious metals prices also
improved modestly during 1999. After several years of lower gold
prices, with central banks continuing to sell despite the lower
prices, an announcement by a group of European central banks
abruptly reversed the price slide and caught many short-sellers
off guard. For 1999, gold was up in price by less than 1%, while
silver and platinum, which have significant industrial demand,
fared much better. Grain markets continued to suffer in price
during 1999 resulting
in a loss of approximately 5.37%. Despite an early summer scare
caused by dry weather, overall conditions were favorable for
another good harvest. As the year drew to a close, improved
demand finally surfaced, perhaps signaling an end to multi-decade
low prices. Total expenses for the year were $1,669,935,
resulting in net income of $3,375,789. The value of a Unit
increased from $6.57 at December 31, 1998 to $7.61 at December
31, 1999.
At December 31, 1998, the Partnership's total capital was
$24,908,316, an increase of $24,906,316 from the Partnership's
total capital of $2,000 at January 2, 1998. For the year ended
December 31, 1998, the Partnership generated a net loss of
$13,543,631, total subscriptions aggregated $41,665,223 and total
redemptions aggregated $3,213,276.
For the year ended December 31, 1998, the Partnership recorded
trading losses net of interest income of $11,239,913 and posted a
decrease in Net Asset Value per Unit. The Partnership, with its
long-only approach to traditional commodities markets, had a
difficult year in terms of performance as commodity prices
declined to record lows. From a historical perspective, 1998 in
the commodities markets qualifies as the "worst of times" in
several aspects, including the magnitude of declines, the broad-
based nature of the declines and the nearly unrelenting nature of
declines. The major factors impacting
commodities in 1998 were the emerging markets economic woes and
the unusual weather on a global basis. Demand for almost every
commodity was negatively impacted by the downturn in virtually
all of the world's emerging economies, as currency difficulties
in one emerging country quickly threatened the economic well-
being of its neighbors, as well as its counterparts half way
around the globe. Most commodity producers had become accustomed
to seeing the fastest growth in demand come from emerging
markets, and the ultimate contractions in demand in these
economies was the worst possible match for the supply increases
being provided by the world's producers, particularly of energy
and metals. The Partnership experienced losses of approximately
16.32% in the energy markets and approximately 10.55% in the
agricultural and livestock markets. Warm weather, particularly
in the winter, led to a decreased demand for heating products,
while near ideal growing conditions produced bumper harvests in
most of the world's major grain producing areas. The mathematics
of most commodity markets in 1998 was decreased demand plus
increased supply equals lower prices. In such an environment the
Partnership was, unfortunately, not able to generate positive
returns during 1998. Total expenses for the year were
$2,303,718, resulting in a net loss of $13,543,631. The value of
a Unit decreased from $10.00 at inception of trading on January
2, 1998 to $6.57 at December 31, 1998.
The Partnership's overall performance record represents varied
results of trading in futures interests markets. For a further
description of 1999 trading results, refer to the letter to the
Limited Partners in the accompanying Annual Report to Limited
Partners for the year ended December 31, 1999, 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 and forwards in a
portfolio of agricultural commodities, precious and base metals,
soft commodities, and energy products. In entering into these
contracts, the Partnership is subject to the market risk that
such contracts may be significantly influenced by market
conditions, 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 Advisor was
unable to offset positions of the Partnership, the Partnership
could lose all of its assets and investors would realize a 100%
loss.
In addition to the Trading Advisor's internal controls, the
Trading Advisor 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 Advisor and Demeter monitor the Partnership's trading
activities to ensure compliance with the trading policies.
Demeter may require the Trading Advisor 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 and forwards
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 contract counterparty.
There is no assurance that a clearinghouse or exchange will meet
its obligations to the Partnership, and Demeter and the Commodity
Brokers will not indemnify the Partnership against a default by
such parties. Further, the law is unclear as to whether a
commodity broker has any obligation to protect its customers from
loss in the event of an exchange or clearinghouse defaulting on
trades effected for the broker's customers. Any such obligation
on the part of a broker appears even less clear where the default
occurs in a non-U.S. jurisdiction.
Demeter deals with these credit risks of the Partnership in
several ways. First, it monitors the Partnership's credit
exposure to each exchange on a daily basis, calculating not only
the amount of margin required for it but also the amount of its
unrealized gains at each exchange, if any. The Commodity Brokers
inform the Partnership, as with all their customers, of its net
margin requirements for all its existing open positions, but do
not break that net figure down, exchange by exchange. Demeter,
however, has installed a system which permits it to monitor the
Partnership's potential margin liability, exchange by exchange.
As a result, Demeter is able to monitor the
Partnership's potential net credit exposure to each exchange by
adding the unrealized trading gains on that exchange, if any, to
the Partnership's margin liability thereon.
Second, the Partnership's trading policies limit the amount of
its Net Assets that can be committed at any given time to futures
contracts and require, in addition, a minimum amount of
diversification in the Partnership's trading, usually over
several different products. One of the aims of such trading
policies has been to reduce the credit exposure of the
Partnership to a single exchange and, historically, the
Partnership's exposure 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.
With respect to forward contract trading, the Partnership trades
with only those counterparties which Demeter, together with DWR,
have determined to be creditworthy. At the date of this filing,
the Partnership deals only with the Commodity Brokers as its
counterparties 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, 1999, which is incorporated by reference
to Exhibit 13.01 of this Form
10-K.
Year 2000. Commodity pools, like financial and business
organizations and individuals around the world, depend on the
smooth functioning of computer systems. The Year 2000 issue
arose since many of the world's computer systems (including those
in non-information technology systems) traditionally recorded
years in a two-digit format. If not addressed, such computer
systems may have been unable to properly interpret dates beyond
the year 1999, which may have led to business disruptions in the
U.S. and internationally. Such disruptions could have adversely
affected the handling or determination of futures trades and
prices and other services for the Partnership. Accordingly,
Demeter has fully participated in a firmwide initiative
established by MSDW to address issues associated with the Year
2000. As part of this initiative, MSDW reviewed its global
software and hardware infrastructure for mainframe, server and
desktop computing environments and engaged in extensive
remediation and testing. The Year 2000 initiative also
encompassed the review of agencies, vendors and facilities for
Year 2000 compliance.
Since 1995, MSDW prepared actively for the Year 2000 issue to
ensure that it would have the ability to respond to any critical
business process failure, to prevent the loss of workspace and
technology, and to mitigate any potential financial loss or
damage to its global franchise. Where necessary, contingency
plans were expanded or developed to address specific Year 2000
risk scenarios, supplementing existing business policies and
practices. In conjunction with MSDW's Year 2000 preparations,
Demeter monitored the progress of the Commodity Brokers and the
Trading Advisor throughout 1999 in their Year 2000 compliance
and, where applicable, tested its external interfaces, with the
Commodity Brokers and the Trading Advisor. In addition, Demeter,
the Commodity Brokers, the Trading Advisor and all U.S. futures
exchanges were subjected to monitoring by the CFTC of their Year
2000 preparedness, and the major foreign futures exchanges
engaged in market-wide testing of their Year 2000 compliance
during 1999.
MSDW and Demeter consider the transition into the Year 2000
successful from the perspective of their internal systems and
global external interactions.
Over the millennial changeover period, no material issues were
encountered, and MSDW, Demeter and the Partnership conducted
business as usual.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. 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 interests traded by the Partnership involve varying
degrees of market risk. Market risk is often dependent upon
changes in the level or volatility of interest rates, exchange
rates, and prices of financial instruments and commodities.
Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Partnership's open
positions, and, consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the
Partnership's market risk exposures contain "forward-looking
statements" within the meaning of the safe harbor from civil
liability provided for such statements by the Private Securities
Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934). All quantitative disclosures in this section are
deemed to be forward-looking statements for purposes of the safe
harbor, except for statements of historical fact.
The Partnership accounts for open positions using mark-to-market
accounting principles. Any loss in the market value of the
Partnership's open positions is directly reflected in the
Partnership's earnings, whether realized or unrealized, and cash
flow. Profits and losses on open positions of exchange traded-
futures interests are settled daily through variation margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Advisor 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 Advisor in their
daily risk management activities.
The Partnership's Value at Risk in Different Market Sectors
The following tables indicates the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category as of December 31, 1999 and 1998.
As of December 31, 1999 and 1998, the Partnership's total
capitalization was approximately $24 million and $25 million,
respectively.
Primary Market December 31, 1999
December 31, 1998
Risk Category Value at Risk Value
at Risk
Commodity (1.41)%
(1.86)%
Aggregate Value at Risk (1.41)%
(1.86)%
The table above represents the VaR of the Partnership's open
positions at December 31, 1999 and 1998 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 interests,
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 year end VaR by presenting the
Partnership's high, low and average VaR, as a percentage of total
Net Assets for the four quarterly reporting periods from January
1, 1999 through December 31, 1999.
Primary Market Risk Category High Low
Average
Commodity (2.04)% (1.41)%
(1.78)%
Aggregate Value at Risk (2.04)% (1.41)%
(1.78)%
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, gives
no indication of such "risk of ruin". In
addition, VaR risk measures should be viewed in light of the
methodology's limitations, which include the following:
past changes in market risk factors will not always result
in accurate predictions of the distributions and correlations of
future market movements;
changes in portfolio value in response to market movements
may differ from those of the VaR model;
VaR results reflect past trading positions while future risk
depends on future positions;
VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
the historical market risk factor data used for VaR
estimation may provide only limited insight into losses that
could be incurred under certain unusual market movements.
The VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at December 31, 1999 and for the end of the four
quarterly reporting periods during calendar year 1999. Since VaR
is based on historical data, VaR should not be viewed as
predictive of the Partnership's future financial performance or
its ability to manage or monitor risk. There can be no assurance
that the
Partnership's actual losses on a particular day will not exceed
the VaR amounts indicated above or that such losses will not
occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market
risk they may represent are immaterial. The Partnership also
maintains a substantial portion (approximately 90%) of its
available assets in cash at MS & Co. 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.
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 Advisor 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 expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx
of new market participants, increased regulation and many other
factors could result in material losses as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership as of December 31, 1999, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Commodity.
Metals. The Partnership's primary exposure in the metals market
is to fluctuations in the price of copper and silver. The
Partnership will, from
time to time, trade base metals such as nickel, aluminum and
zinc, and offer precious metals like gold and platinum. A
reasonable amount of exposure was evident in the gold market as
the price of gold retreated during the fourth quarter. Silver
prices remained volatile over this period, and the Trading
Advisor, from time to time, took substantial positions when
perceived market opportunities developed. Demeter anticipates
that gold and silver will remain the primary metals market
exposure for the Partnership.
Soft Commodities and Agricultural. On December 31, 1999, the
Partnership had a reasonable amount of exposure in the markets
that comprise these sectors. Most of the exposure was in the
coffee, sugar and wheat markets. Supply and demand inequalities,
severe weather disruption and market expectations affect price
movements in these markets.
Energy. On December 31, 1999, the Partnership's energy exposure
was shared by futures contracts in the crude oil, refined
products and natural gas markets. Price movements in these
markets result from political developments in the Middle East,
weather patterns, and other economic fundamentals. As oil prices
have increased approximately 100% this year, and, given that the
agreement by OPEC to cut production is approaching expiration in
March 2000, it is possible that volatility will remain on the
high end. Significant profits and losses have been and are
expected to continue to be experienced in this market.
Natural gas, also a primary energy market exposure, exhibited
more volatility than the oil markets on an intra-day and daily
basis and is expected to continue in this choppy pattern.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisor, 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 Advisor
daily. In addition, the Trading Advisor 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 instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Advisor.
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
(selected quarterly financial data) is not applicable.
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 39, is Chairman of the Board, President and
a Director of Demeter. Mr. Murray is also Chairman of the Board,
President and a Director of DWFCM. Effective as of the close of
business on January 31, 2000, Mr. Murray replaced Mr. Hawley as
Chairman of the Board of Demeter and DWFCM. Mr. Murray is
currently a Senior Vice President of DWR's Managed Futures
Department. Mr. Murray began his career at DWR in 1984 and is
currently the Director of the Managed Futures Department. In this
capacity, Mr. Murray is responsible for overseeing all aspects of
the firm's Managed Futures Department. Mr. Murray currently
serves as Vice Chairman and a Director of the Managed Funds
Association, an industry association for investment professionals
in futures, hedge funds and other alternative investments. Mr.
Murray graduated from Geneseo State University in May 1983 with a
B.A. degree in Finance.
Mitchell M. Merin, age 46, is a Director of Demeter. Mr. Merin
is also a Director of DWFCM. Mr. Merin was appointed the Chief
Operating Officer of Individual Asset Management for MSDW in
December 1998 and the President and Chief Executive Officer of
Morgan Stanley Dean Witter Advisors in February 1998. He has
been an Executive Vice President of DWR since 1990, during which
time he has been director of DWR's Taxable Fixed Income and
Futures divisions, Managing Director in Corporate Finance and
Corporate Treasurer. Mr. Merin received his Bachelor's degree
from Trinity College in Connecticut and his M.B.A. degree in
finance and accounting from the Kellogg Graduate School of
Management of Northwestern University in 1977.
Joseph G. Siniscalchi, age 54, is a Director of Demeter. Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President,
Director of General Accounting and served as a Senior Vice
President and Controller for DWR's Securities Division through
1997. He is currently Executive Vice President and Director of
the Operations Division of DWR. From February 1980 to July 1984,
Mr. Siniscalchi was Director of Internal Audit at Lehman Brothers
Kuhn Loeb, Inc.
Edward C. Oelsner, III, age 57, 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 DWR. Mr.
Oelsner joined DWR in 1981 as a Managing Director in DWR's
Investment Banking Department specializing in coverage of
regulated industries and, subsequently, served as head of the DWR
Retail Products Group. Prior to joining DWR, Mr. Oelsner held
positions at The First Boston Corporation as a member of the
Research and Investment Banking Departments from 1967 to 1981.
Mr. Oelsner received his M.B.A. in Finance from the Columbia
University Graduate School of Business in 1966 and an A.B. in
Politics from Princeton University in 1964.
Lewis A. Raibley, III, age 37, is Vice President, Chief Financial
Officer, and a Director of Demeter. Mr. Raibley is also a
Director of DWFCM. Mr. Raibley is currently Senior Vice
President and Controller in the Individual Asset Management Group
of MSDW. From July 1997 to May 1998, Mr. Raibley served as
Senior Vice President and Director in the Internal Reporting
Department of MSDW and prior to that, from 1992 to 1997, he
served as Senior Vice President and Director in the Financial
Reporting and Policy Division of Dean Witter Discover & Co. He
has been with MSDW and its affiliates since June 1986.
Richard A. Beech, age 48, is a Director of Demeter. Mr. Beech
has been associated with the futures industry for over 23 years.
He has been at DWR since August 1984 where he is presently Senior
Vice President and head of Branch Futures. Mr. Beech began his
career at the Chicago Mercantile
Exchange, where he became the Chief Agricultural Economist doing
market analysis, marketing and compliance. Prior to joining DWR,
Mr. Beech also had worked at two investment banking firms in
operations, research, managed futures and sales management.
Ray Harris, age 43, is a Director of Demeter. Mr. Harris is
currently Senior Vice President, Planning and Administration for
Morgan Stanley Dean Witter Asset Management and has worked at DWR
or its affiliates since July 1982, serving in both financial and
administrative capacities. From August 1994 to January 1999, he
worked in two separate DWR affiliates, Discover Financial
Services and Novus Financial Corp., culminating as Senior Vice
President. Mr. Harris received his B.A. degree from Boston
College and his M.B.A. in finance from the University of Chicago.
Mark J. Hawley, age 56, served as Chairman of the Board and a
Director of Demeter and DWFCM throughout 1999. Mr. Hawley joined
DWR in February 1989 as Senior Vice President and served as
Executive Vice President and Director of DWR's Product Management
for Individual Asset Management throughout 1999. In this
capacity, Mr. Hawley was responsible for directing the activities
of the firm's Managed Futures, Insurance, and Unit Investment
Trust Business. From 1978 to 1989, Mr. Hawley was a member of
the senior management team at Heinold Asset Management, Inc., a
commodity pool operator, and was responsible for a
variety of projects in public futures funds. From 1972 to 1978,
Mr. Hawley was a Vice President in charge of institutional block
trading for the Mid-West at Kuhn Loeb & Company. Mr. Hawley
resigned effective January 31, 2000.
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 - As of
December 31, 1999 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, 1999,
Demeter owned 43,395.648 Units of General Partnership Interest in
the Partnership representing a 1.4 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
Financial Statements", in the accompanying Annual Report to
Limited Partners for the year ended December 31, 1999, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K.
For the year ended December 31, 1999 the Commodity Brokers
received brokerage fees (paid and accrued by the Partnership) of
$852,484, the Trading Advisor received a management fee of
$583,893 and Demeter received a service fee of $233,558.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON
FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and reports of independent
auditors, all appearing in the accompanying Annual Report to
Limited Partners for the year ended December 31, 1999, are
incorporated by reference to Exhibit 13.01 of this Form 10-K:
- - Report of Deloitte & Touche LLP, independent auditors, for
the year ended December 31, 1999 and the period from January 2,
1998 (commencement of operations) to December 31 1998.
- - Statements of Financial Condition as of December 31,
1999 and 1998.
- - Statements of Operations, Changes in Partners' Capital, and
Cash Flows for the year ended December 31, 1999 and the period
from January 2, 1998 (commencement of operations) to December 31,
1998.
- - 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, 1999 is not
deemed to be filed with this report.
2. Listing of Financial Statement Schedules
No financial statement schedules are required to be filed with
this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Partnership during
the last quarter of the period covered by this report.
(c) Exhibits
Refer to Exhibit Index on Page E-1.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MORGAN STANLEY
TANGIBLE ASSET FUND L.P.
(Registrant)
BY: Demeter
Management Corporation,
General
Partner
March 29, 2000 BY: /s/ Robert E. Murray
Robert E. Murray, Director,
Chairman of the Board and
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Demeter Management Corporation.
BY: /s/ Robert E. Murray ____ March 29,
2000
Robert E. Murray, Director,
Chairman of the Board and
President
/s/ Joseph G. Siniscalchi ___ March 29,
2000
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III __ March
29, 2000
Edward C. Oelsner III, Director
/s/ Mitchell M. Merin March 29, 2000
Mitchell M. Merin, Director
/s/ Richard A. Beech March 29, 2000
Richard A. Beech, Director
/s/ Ray Harris March 29,
2000
Ray Harris, Director
/s/ Lewis A. Raibley, III __ March 29,
2000
Lewis A. Raibley, III, Director, Chief
Financial Officer and Principal
Accounting Officer
EXHIBIT INDEX
ITEM
3.01 Form of Limited Partnership Agreement of the
Partnership, dated as of July 31, 1997, is
incorporated by reference to Exhibit A of the
Partnership's Prospectus, dated November 10, 1997,
filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) under the Securities Act
of 1933, as amended, on November 18, 1998.
3.02 Certificate of Limited Partnership, dated July 31,
1997, is incorporated by reference to Exhibit 3.02 of
the Partnership's Registration Statement on Form S-1
(File No. 333-33975) filed with the Securities and
Exchange Commission on August 20, 1997.
10.01 Management Agreement, dated as of December 31, 1997,
among the Partnership, Demeter Management
Corporation, and Morgan Stanley Commodities
Management Inc. is incorporated by reference to
Exhibit 10.01 of the Partnership's Form 10-K (File
No. 0-24035) for fiscal year ended December 31, 1998.
10.02 Commodity Futures Customer Agreement, dated as of
December 31, 1997, between Morgan Stanley & Co.
Incorporated and the Partnership is incorporated by
reference to Exhibit 10.02 of the Partnership's Form
10-K (File No. 0-24035) for fiscal year ended
December 31, 1998.
10.03 Customer Agreement, dated as of December 31, 1997,
among the Partnership, Morgan Stanley & Co.
International Limited and Morgan Stanley & Co.
Incorporated is incorporated by reference to Exhibit
10.03 of the Partnership's Form 10-K (File No. 0-
24035) for fiscal year ended December 31, 1998.
10.04 Subscription and Exchange Agreement and Power of
Attorney to be executed by each purchaser of Units is
incorporated by reference to Annex A of the
Partnership's Supplement to the Prospectus, dated
July 10, 1998, filed with the Securities and Exchange
Commission pursuant to Rule 424(b)(3) under the
Securities Act of 1933, as amended, on July 10, 1998.
10.05 Escrow Agreement, dated October 14, 1998, among the
Partnership, Dean Witter Reynolds Inc., and Chemical
Bank is incorporated by reference to Exhibit 10.05 of
the Partnership's Form 10-K (File No. 0-24035) for
fiscal year ended December 31, 1998.
13.01 December 31, 1999 Annual Report to Limited Partners
is filed herewith.
E-1
Morgan Stanley
Tangible Asset
Fund L.P.
December 31, 1999
Annual Report
MORGAN STANLEY DEAN WITTER
Demeter Management Corporation
Two World Trade Center
62nd Floor
New York, NY 10048
Telephone (212) 392-8899
Morgan Stanley Tangible Asset Fund L.P.
Annual Report
1999
Dear Limited Partner:
This marks the second annual report for the Morgan Stanley Tangible Asset Fund
L.P. ("MSTAF") (the "Fund"). The Fund began the year trading at a Net Asset
Value per Unit of $6.57 and increased by 15.8% to $7.61 on December 31, 1999.
Since its inception in January 1998, the Fund has decreased by 23.9% (a
compound annualized return of -12.8%). A review of trading results for the year
is provided in the Annual Report of the Trading Advisor located on the next
page of this report.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048, or your Morgan Stanley Dean Witter Financial Advisor.
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is not a
guarantee of future results.
Sincerely,
/s/Robert E. Murray
Robert E. Murray
Chairman
Demeter Management Corporation
General Partner
Morgan Stanley Tangible Asset Fund L.P.
1999 Annual Report of the Trading Advisor
After continuing to struggle during the first two months of 1999, commodities
markets began to benefit from the global economic healing that took hold over
the remainder of the year. By the end of the year, commodities markets were
generally higher, as evidenced by the 7.28% gain during December in the Bridge
Commodity Research Bureau Index ("CRB").
During 1999, commodity market price behavior returned to the more normal pat-
tern of some commodities gaining in price, while other commodities declined in
price. Of the seventeen components of the CRB, 10 increased in price during
1999, while the remaining seven declined in price. This was noticeably differ-
ent from 1998, when all but one of the components of the CRB declined in price.
Energy markets, which had been the worst performing sector during 1998, re-
bounded strongly to become the best performing commodity sector in 1999. OPEC,
which had suffered economically as their late 1997 decision to expand produc-
tion coincided with the onset of economic difficulties in virtually all of the
world's emerging economies, cooperated with other major global oil producing
countries to rein in production and allow for the drawing down of inventories
that had grown steadily throughout 1998. Crude oil, its refined products, and
natural gas all benefited from the improving global demand for energy and the
decreased supply of crude oil.
Base metals markets also improved in price during 1999. Historically, copper
has been referred to by some as "the world's economist", rising in price as
economic activity improves and falling in price when economic difficulties are
encountered. During both 1998 and 1999 copper served as an accurate barometer
of global economic health. Additionally, copper producers' decisions to curtail
production in the short-term helped support prices. Perhaps more importantly
for the long-term, the consolidation of major mining companies in both copper
and aluminum bodes well for less over-expansion during future periods of ele-
vated prices, likely leading
Morgan Stanley Tangible Asset Fund L.P.
1999 Annual Report of the Trading Advisor--(Concluded)
to "higher highs" and "higher lows" in future price cycles.
Precious metals prices also improved modestly during 1999. After several years
of lower gold prices, with central banks continuing to sell despite the lower
prices, an announcement by a group of European central banks abruptly reversed
the price slide and caught many short-sellers off guard. For 1999, gold was up
in price by less than 1%, while silver and platinum, which have significant in-
dustrial demand, fared much better.
Grain markets continued to suffer in price during 1999. Despite an early summer
scare caused by dry weather, overall conditions were favorable for another good
harvest. As the year drew to a close, improved demand finally surfaced, perhaps
signaling an end to multi-decade low prices.
We appreciate your continued investment in MSTAF and look forward to what we
hope will be another successful year.
Morgan Stanley Dean Witter Commodities Management, Inc.
Note: Investors are cautioned that past results are not necessarily indicative
of future results.
Morgan Stanley Tangible Asset Fund L.P.
Independent Auditors' Report
The Limited Partners and the General Partner:
We have audited the accompanying statements of financial condition of Morgan
Stanley Tangible Asset Fund L.P. (the "Partnership") as of December 31, 1999
and 1998 and the related statements of operations, changes in partners' capi-
tal, and cash flows for the year ended December 31, 1999 and the period from
January 2, 1998 (commencement of operations) to December 31, 1998. These finan-
cial statements are the responsibility of the Partnership's management. Our re-
sponsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting 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 pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Morgan Stanley Tangible Asset Fund L.P. at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the year ended December 31, 1999 and the period from January 2, 1998
(commencement of operations) to December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
February 7, 2000
(March 3, 2000 as to Note 5)
New York, New York
Morgan Stanley Tangible Asset Fund L.P.
Statements of Financial Condition
December 31,
1999 1998
---------- ----------
$ $
ASSETS
Equity in futures interests trading accounts:
Cash 23,430,137 26,519,891
Net unrealized loss on
open contracts (MS & Co.) (100,830) (501,388)
Net unrealized gain (loss) on open contracts (MSIL) 643,258 (134,255)
---------- ----------
Total unrealized gain (loss) on open contracts 542,428 (635,643)
---------- ----------
Total Trading Equity 23,972,565 25,884,248
Interest receivable (MS & Co.) 76,192 78,722
---------- ----------
Total Assets 24,048,757 25,962,970
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 269,545 895,547
Accrued brokerage fees (MS & Co. and MSIL) 70,827 81,222
Accrued management fee (MSCM) 48,511 55,632
Service fee (Demeter) 19,404 22,253
---------- ----------
Total Liabilities 408,287 1,054,654
---------- ----------
PARTNERS' CAPITAL
Limited Partners (3,062,471.522 and 3,745,069.052
Units, respectively) 23,310,162 24,622,999
General Partner (43,395.648 Units) 330,308 285,317
---------- ----------
Total Partners' Capital 23,640,470 24,908,316
---------- ----------
Total Liabilities and Partners' Capital 24,048,757 25,962,970
========== ==========
NET ASSET VALUE PER UNIT 7.61 6.57
========== ==========
The accompanying notes are an integral part of these financial statements.
Morgan Stanley Tangible Asset Fund L.P.
Statements of Operations
For the Period from
January 2, 1998
For the (commencement of
Year Ended operations) to
December 31, December 31,
1999 1998
------------ -------------------
$ $
REVENUES
Trading profit (loss):
Realized 3,003,270 (11,870,063)
Net change in unrealized 1,178,071 (635,643)
--------- -----------
Total Trading Results 4,181,341 (12,505,706)
Interest income (MS & Co.) 864,383 1,265,793
--------- -----------
Total Revenues 5,045,724 (11,239,913)
--------- -----------
EXPENSES
Brokerage fees (MS & Co. and MSIL) 852,484 1,176,024
Management fee (MSCM) 583,893 805,496
Service fee (Demeter) 233,558 322,198
--------- -----------
Total Expenses 1,669,935 2,303,718
--------- -----------
NET INCOME (LOSS) 3,375,789 (13,543,631)
========= ===========
Net Income (Loss) Allocation:
Limited Partners 3,330,798 (13,398,948)
General Partner 44,991 (144,683)
Net Income (Loss) per Unit:
Limited Partners 1.04 (3.43)
General Partner 1.04 (3.43)
The accompanying notes are an integral part of these financial statements.
Morgan Stanley Tangible Asset Fund L.P.
Statements of Changes in Partners' Capital
For the Year Ended December 31, 1999 and for the Period from January 2, 1998
(commencement of operations) to December 31, 1998
Units of
Partnership Limited General
Interest Partners Partner Total
------------- ----------- -------- -----------
$ $ $
Partners' Capital,
January 2, 1998 200.000 1,000 1,000 2,000
Initial Offering 2,573,486.803 25,475,868 259,000 25,734,868
Offering of Units 1,665,202.477 15,758,355 170,000 15,928,355
Net loss -- (13,398,948) (144,683) (13,543,631)
Redemptions (450,424.580) (3,213,276) -- (3,213,276)
------------- ----------- -------- -----------
Partners' Capital,
December 31, 1998 3,788,464.700 24,622,999 285,317 24,908,316
Net income -- 3,330,798 44,991 3,375,789
Redemptions (682,597.530) (4,643,635) -- (4,643,635)
------------- ----------- -------- -----------
Partners' Capital, December
31, 1999 3,105,867.170 23,310,162 330,308 23,640,470
============= =========== ======== ===========
The accompanying notes are an integral part of these financial statements.
Morgan Stanley Tangible Asset Fund L.P.
Statements of Cash Flows
For the Period from
January 2, 1998
For the (commencement of
Year Ended operations) to
December 31, December 31,
1999 1998
------------ -------------------
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 3,375,789 (13,543,631)
Noncash item included in net income (loss):
Net change in unrealized (1,178,071) 635,643
(Increase) decrease in operating assets:
Interest receivable
(MS & Co.) 2,530 (78,722)
Increase (decrease) in operating
liabilities:
Accrued brokerage fees (MS & Co. and MSIL) (10,395) 81,222
Accrued management fee (MSCM) (7,121) 55,632
Service fee (Demeter) (2,849) 22,253
---------- -----------
Net cash provided by (used for) operating
activities 2,179,883 (12,827,603)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Initial offering -- 25,736,868
Offering of Units -- 15,928,355
Increase (decrease) in redemptions payable (626,002) 895,547
Redemptions of Units (4,643,635) (3,213,276)
---------- -----------
Net cash provided by
(used for) financing activities (5,269,637) 39,347,494
---------- -----------
Net increase (decrease) in cash (3,089,754) 26,519,891
Balance at beginning of period 26,519,891 --
---------- -----------
Balance at end of period 23,430,137 26,519,891
========== ===========
The accompanying notes are an integral part of these financial statements.
Morgan Stanley Tangible Asset Fund L.P.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Organization--Morgan Stanley Tangible Asset Fund L.P. (the "Partnership") is a
limited partnership organized to engage primarily in speculative trading of
futures contracts in metals, energy and agricultural markets, (collectively,
"futures interests"). The Partnership's general partner is Demeter Management
Corporation ("Demeter"). The commodity brokers are Morgan Stanley & Co.
Incorporated ("MS & Co.") and Morgan Stanley & Co. International Limited
("MSIL"), (collectively, the "Commodity Brokers"). The trading advisor is
Morgan Stanley Dean Witter Commodities Management, Inc. ("MSCM" or the "Trading
Advisor"). MSCM, the Commodity Brokers and Demeter are all wholly-owned
subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW").
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
generally accepted accounting principles, 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
(loss) on open contracts from one period to the next in the statements of
operations. MS & Co. credits the Partnership at each month-end with interest
income as if 80% of the Partnership's average daily "Net Assets" for the month,
as defined in the Limited Partnership Agreement, were invested at a rate based
on U.S. Treasury bills. For purposes of such interest payments, Net Assets do
not include monies due the Partnership on futures interests, but not actually
received.
Net Income (Loss) per Unit--Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed using the weighted average number of Units
outstanding during the period.
Equity in Futures Interests Trading Accounts--The Partnership's asset "Equity
in futures interests trading
Morgan Stanley Tangible Asset Fund L.P.
Notes to Financial Statements--(Continued)
accounts," reflected in the statements of financial condition, consists of (A)
cash on deposit with the Commodity Brokers to be used as margin for trading;
and (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.
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, these amounts are offset and reported on
a net basis on the Partnership's statements of financial condition.
Brokerage and Related Transaction Fees and Costs--Brokerage fees are accrued at
a monthly rate of 1/12 of 3.65% of Net Assets as of the first day of each month
(a 3.65% annual rate). Such fees cover all costs of executing trades by the
Partnership, including floor brokerage fees, exchange fees, clearinghouse fees,
NFA fees, "give-ups" or transfer fees and any costs associated with taking
delivery of commodities.
Service Fee--The Partnership pays 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 Partnership incurs monthly management fees and may
incur incentive fees as described in Note 2. All administrative expenses are
borne by Demeter.
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 the 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.
Offering of Units--Units were offered to the public 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 immediately preceding the four closings held on January 2, February 2,
March 2, and April 1, 1998.
The Partnership, Demeter, MSCM and Dean Witter Reynolds Inc. ("DWR"), the
selling agent and an affiliate of Demeter, extended the Offering Period for
those
Morgan Stanley Tangible Asset Fund L.P.
Notes to Financial Statements--(Continued)
Units already registered with the Securities and Exchange Commission but still
unsold, until October 16, 1998. The remaining unsold Units were offered to the
public at a price equal to 100% of the Net Asset Value as of the close of
business on the last day of the month immediately preceding the three closings
held on August 3, September 1, and October 1, 1998.
Redemptions--Limited Partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit effective as of the last day of the sixth month
following the closing at which a person first becomes a Limited Partner, upon
five business days advance notice by redemption form to Demeter. Thereafter,
Units may be redeemed as of the end of any month upon five business days
advance notice by redemption form to Demeter. However, any Units redeemed at or
prior to the last day of the eleventh month after such Units were purchased
were subject to a redemption charge equal to 2% of the Net Asset Value per Unit
on the date of such redemption. Units redeemed after the last day of the
eleventh month and on or prior to the last day of the twenty-fourth month after
which such Units were purchased are subject to a redemption charge equal to 1%
of the Net Asset Value per 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. Limited Partners who
obtained their Units via an exchange from another DWR-sponsored commodity pool
are not subject to the six month holding period or the redemption charges.
Dissolution of the Partnership--The Partnership will terminate on December 31,
2027 or at an earlier date if certain conditions occur as defined in the
Partnership's Limited Partnership Agreement.
2. Related Party Transactions
The Partnership pays brokerage fees to the Commodity Brokers and a service fee
to Demeter as described in Note 1. The Partnership's cash is on deposit with
the Commodity Brokers in futures interests trading accounts to meet margin
requirements as needed. MS & Co. pays interest on these funds as described in
Note 1.
Demeter, on behalf of the Partnership and itself entered into a Management
Agreement with MSCM whereby MSCM makes all trading decisions for the
Partnership. Compensation to MSCM by the Partnership consists of a management
fee and an incentive fee as follows:
Management Fee--The management fee is accrued at the rate of 5/24 of 1% of Net
Assets on the first day of each month (a 2.5% annual rate).
Morgan Stanley Tangible Asset Fund L.P.
Notes to Financial Statements--(Continued)
Incentive Fee--The Partnership will pay an annual incentive fee equal to 20% of
the trading profits as of the end of each calendar year. Trading profits
represent the amount by which profits from futures trading exceed losses, after
brokerage and management fees have been deducted. Such incentive fee is accrued
in each month in which trading profits occur. In those months in which trading
profits are negative, previous accruals, if any, during the incentive period
will be reduced. Any accrued incentive fees with respect to Units redeemed at
the end of a month that is not the end of a calendar year will be accrued and
paid to MSCM at the time of such redemption.
3. Financial Instruments
The Partnership trades futures and forward contracts in metals, energy and
agricultural markets. Futures and forwards represent contracts for delayed
delivery of an instrument at a specified date and price. Risk arises from
changes in the value of these contracts and the potential inability of
counterparties to perform under the terms of the contracts. There are numerous
factors which may significantly influence the market value of these contracts,
including interest rate volatility.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" effective for fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of SFAS No. 133," which defers the required implementation of
SFAS No. 133 until fiscal years beginning after June 15, 2000. However, the
Partnership had previously elected to adopt the provisions of SFAS No. 133
beginning with the fiscal year ended December 31, 1998. SFAS No. 133 supersedes
SFAS No. 119 and No. 105, which required the disclosure of average aggregate
fair values and contract/notional values, respectively, of derivative financial
instruments for an entity which carries its assets at fair value. The
application of SFAS No. 133 does not have a significant effect on the
Partnership's financial statements.
The net unrealized gains (losses) on open contracts is reported as a component
of "Equity in futures interests trading accounts" on the statements of
financial condition and totaled $542,428 and $(635,643) at December 31, 1999
and 1998 respectively.
The $542,428 net unrealized gain on open contracts at December 31, 1999 and the
$(635,643) net unrealized loss on open contracts at December 31, 1998, were
related to exchange-traded futures contracts that mature through April 2000 and
June 1999, respectively.
Morgan Stanley Tangible Asset Fund L.P.
Notes to Financial Statements--(Continued)
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 statements of
financial condition.
The Partnership also has credit risk because 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 contracts are marked to market on
a daily basis, with variations in value settled on a daily basis. Each of MS &
Co. and MSIL, as a futures commission merchant for the Partnership's exchange-
traded futures 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 contracts, including an amount equal to the
net unrealized gain (loss) on all open futures contracts, which funds, in the
aggregate, totaled $23,972,565 and $25,884,248 at December 31, 1999 and
December 31, 1998, respectively.
4. Legal Matters
The class actions first filed in 1996 in California and in New York State
courts were each dismissed in 1999. On September 6, 10, and 20, 1996 and on
March 13, 1997, purported class actions were filed in the Superior Court of the
State of California, County of Los Angeles, on behalf of all purchasers of in-
terests in limited partnership commodity pools sold by DWR. Named defendants
include DWR, Demeter, Dean Witter Futures & Currency Management Inc., MSDW,
certain limited partnership commodity pools of which Demeter is the general
partner (all such parties referred to hereafter as the "Morgan Stanley Dean
Witter Parties") and certain trading advisors to those pools. On June 16, 1997,
the plaintiffs in the above actions filed a consolidated amended complaint, al-
leging, among other things, that the defendants committed fraud, deceit, negli-
gent misrepresentation, various violations of the California Corporations Code,
intentional and negligent breach of fiduciary duty, fraudulent and unfair busi-
ness practices, unjust enrichment, and conversion in the sale and operation of
the various limited partnership commodity pools. The complaints seek unspeci-
fied amounts of compensatory and punitive damages and other relief. The court
entered an order denying class certification on August 24, 1999. On September
24, 1999, the court entered an order dismissing the case without prejudice on
consent. Similar purported class actions were also filed on September 18 and
20, 1996, in the Supreme Court of the State of New York, New York County, and
on November 14, 1996 in
Morgan Stanley Tangible Asset Fund L.P.
Notes to Financial Statements--(Concluded)
the Superior Court of the State of Delaware, New Castle County, against the
Morgan Stanley Dean Witter Parties and certain trading advisors on behalf of
all purchasers of interests in various limited partnership commodity pools sold
by DWR. A consolidated and amended complaint in the action pending in the Su-
preme Court of the State of New York was filed on August 13, 1997, alleging
that the defendants committed fraud, breach of fiduciary duty, and negligent
misrepresentation in the sale and operation of the various limited partnership
commodity pools. The complaints seek unspecified amounts of compensatory and
punitive damages and other relief. The New York Supreme Court dismissed the New
York action in November 1998, but granted plaintiffs leave to file an amended
complaint, which they did in early December 1998. The defendants filed a motion
to dismiss the amended complaint with prejudice on February 1, 1999. By deci-
sion dated December 21, 1999, the New York Supreme Court dismissed the case
with prejudice.
In addition, on December 16, 1997, upon motion of the plaintiffs, the action
pending in the Superior Court of the State of Delaware was voluntarily
dismissed without prejudice.
5. Subsequent Event
On March 3, 2000, the plaintiffs in the New York action referred to in Note 4
filed an appeal of the order dismissing the consolidated complaint.
MORGAN STANLEY DEAN WITTER & CO.
Two World Trade Center
62nd Floor
New York, NY 10048
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