10-Q 1 comm.txt SPECTRUM COMMODITY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to __________________ Commission File Number 0-24035 MORGAN STANLEY SPECTRUM COMMODITY L.P. (Exact name of registrant as specified in its charter) Delaware 13-3968008 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Demeter Management Corporation c/o Managed Futures Department Harborside Financial Center, Plaza Two, 1st Floor, Jersey City, NJ 07311 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (201)209-8400 825 Third Ave., 8th Floor., New York, NY 10022 (Former name, former address, and former fiscal year, if changed since last report) Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___________ MORGAN STANLEY SPECTRUM COMMODITY L.P. INDEX TO QUARTERLY REPORT ON FORM 10-Q September 30, 2002

PART I. FINANCIAL INFORMATION Item 1. Financial Statements MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF FINANCIAL CONDITION

MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF OPERATIONS (Unaudited)

MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF OPERATIONS (Unaudited)

MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Nine Months Ended September 30, 2002 and 2001 (Unaudited)

MORGAN STANLEY SPECTRUM COMMODITY L.P. STATEMENTS OF CASH FLOWS (Unaudited)

MORGAN STANLEY SPECTRUM COMMODITY L.P. NOTES TO FINANCIAL STATEMENTS September 30, 2002 (Unaudited) The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial condition of Morgan Stanley Spectrum Commodity L.P. (the "Partnership"). The financial statements and condensed notes herein should be read in conjunction with the Partnership's December 31, 2001 Annual Report on Form 10-K. 1. Organization Morgan Stanley Spectrum Commodity L.P. is a Delaware limited partnership organized to engage primarily in the speculative trading of futures contracts, options on futures contracts, and forward contracts in metals, energy, and agricultural products. The Partnership is one of the Morgan Stanley Spectrum Series of funds, comprised of the Partnership, Morgan Stanley Spectrum Currency L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Strategic L.P., and Morgan Stanley Spectrum Technical L.P. MORGAN STANLEY SPECTRUM COMMODITY L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Partnership's general partner is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc. ("Morgan Stanley DW"). The clearing commodity brokers are Morgan Stanley & Co., Incorporated ("MS & Co.") and Morgan Stanley & Co. International Limited ("MSIL"). The trading advisor is Morgan Stanley Commodities Management, Inc. ("MSCM" or the "Trading Advisor"). Demeter, Morgan Stanley DW, MS & Co., MSIL, and MSCM are wholly-owned subsidiaries of Morgan Stanley. 2. Related Party Transactions The Partnership's cash is on deposit with Morgan Stanley DW, MS & Co., and MSIL in futures, forwards, and options trading accounts to meet margin requirements as needed. Morgan Stanley DW pays interest on these funds based on a prevailing rate on U.S. Treasury bills. The Partnership pays brokerage fees to Morgan Stanley DW and MS & Co., and management fees and incentive fees (if applicable) to MSCM. MORGAN STANLEY SPECTRUM COMMODITY L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. Financial Instruments The Partnership trades futures contracts, options on futures contracts, 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. The market value of contracts is based on closing prices quoted by the exchange, bank or clearing firm through which the contracts are traded. The Partnership's contracts are accounted for on a trade-date basis and marked to market on a daily basis. The Partnership accounts for its derivative investments in accordance with the provisions of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics: MORGAN STANLEY SPECTRUM COMMODITY L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1) One or more underlying notional amounts or payment provisions; 2) Requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors; 3) Terms require or permit net settlement. Generally derivatives include futures, forward, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors and collars. The net unrealized gains on open contracts, reported as a component of "Equity in futures interests trading accounts" on the statements of financial condition, and their longest contract maturities were as follows: Net Unrealized Gains on Open Contracts Longest Maturities Exchange- Off-Exchange- Exchange- Off-Exchange- Date Traded Traded Total Traded Traded $ $ $ Sep. 30, 2002 300,049 - 300,049 Mar. 2003 - Dec. 31, 2001 367,079 - 367,079 Dec. 2002 - MORGAN STANLEY SPECTRUM COMMODITY L.P. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) The Partnership has credit risk associated with counterparty non- performance. The credit risk associated with the instruments in which the Partnership is involved is limited to the amounts reflected in the Partnership's statements of financial condition. 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. Each of Morgan Stanley DW, MS & Co., and MSIL, as a futures commission merchant for the Partnership's exchange-traded futures and futures-styled options contracts, are required, pursuant to regulations of the Commodity Futures Trading Commission ("CFTC"), to segregate from their own assets, and for the sole benefit of their commodity customers, all funds held by them with respect to exchange-traded futures and futures-styled options contracts, including an amount equal to the net unrealized gains on all open futures and futures-styled options contracts, which funds, in the aggregate, totaled $13,676,132 and $13,347,440 at September 30, 2002 and December 31, 2001, respectively. Item 2. 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 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 CFTC for investment of customer segregated or secured funds. The Partnership's assets held by the commodity brokers may be used as margin solely for the Partnership's trading. Since the Partnership's sole purpose is to trade in futures, forwards, and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership's investment in futures, forwards, and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as "daily price fluctuations limits" or "daily limits". Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating its futures or options contracts and result in restrictions on redemptions. There are no material trends, demands, commitments, events, or uncertainties known at the present time that will result in or that are reasonably likely to result in the Partnership's liquidity increasing or decreasing in any material way. 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, exchanges, and sales of additional units of limited partnership interest ("Unit(s)") in the future will affect the amount of funds available for investment in futures, forwards and options in subsequent periods. It is not possible to estimate the amount and therefore, the impact of future redemptions of Units. There are no known material trends, favorable or unfavorable, nor any expected material changes to the Partnership's capital resource arrangements at the present time. The Partnership has no off-balance sheet arrangements, nor contractual obligations or commercial commitments to make future payments that would affect the Partnership's liquidity or capital resources. The contracts traded by the Partnership are accounted for on a trade-date basis and marked to market on a daily basis. The value of foreign currency forward contracts is based on the spot rate as of the close of business, New York City time, on a given day. Results of Operations General. The Partnership's results depend on the Trading Advisor and the ability of the Trading Advisor'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 and nine month periods ended September 30, 2002 and 2001, 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 the Trading Advisor's trading activities on behalf of the Partnership and how the Partnership has performed in the past. The Partnership's results of operations are set forth in financial statements prepared in accordance with United States generally accepted accounting principles, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: The contracts the Partnership trades are accounted for on a trade- date basis and marked to market on a daily basis. The difference between their cost and market value is recorded on the Statements of Operations as "Net change in unrealized profit/loss" for open (unrealized) contracts, and recorded as "Realized profit/loss" when open positions are closed out, and the sum of these amounts constitutes the Partnership's trading revenues. Earned interest income revenue, as well as management fees, incentive fees and brokerage fees expenses of the Partnership are recorded on an accrual basis. Demeter believes that, based on the nature of the operations of the Partnership, no assumptions other than those presently used relating to the application of critical accounting policies are reasonably plausible that could affect reported amounts. For the Quarter and Nine Months Ended September 30, 2002 For the quarter ended September 30, 2002, the Partnership recorded total trading revenues, including interest income, of $815,076 and posted an increase in net asset value per Unit. The most significant gains of approximately 5.7% were recorded in the agricultural markets, primarily in July, from long positions in grain futures as prices trended higher amid weather related concerns. Additional gains were provided from long cocoa futures positions as prices increased from speculative buying. Bullish sentiment was also present in pork belly futures as prices rose from supply and demand concerns during September, resulting in gains from long positions. Gains of approximately 4.3% were recorded in the energy markets, primarily from long heating oil futures positions in August, due to supply and demand dilemmas. Long natural gas futures positions, which increased in price during August amid supply and demand concerns, also provided gains to the fund. A portion of the Partnership's overall gains for the quarter was offset by losses of approximately 4.0% in the metals futures markets, recorded primarily in July, from previously established long positions in copper futures. Losses in the metals markets also stemmed from long silver futures positions as prices reversed lower during a brief rally in the U.S. equities markets. Total expenses for the three months ended September 30, 2002 were $234,072, resulting in net income of $581,004. The net asset value of a Unit increased from $6.11 at June 30, 2002 to $6.38 at September 30, 2002. For the nine months ended September 30, 2002, the Partnership recorded total trading revenues, including interest income, of $1,862,952 and posted an increase in net asset value per Unit. The most significant gains of approximately 7.7% were recorded in the agricultural markets from long positions in wheat, soybean, and corn futures as grain prices trended higher throughout a majority of the year amid weather related concerns. Gains of approximately 6.8% were recorded in the energy markets primarily from long positions in natural gas futures during March amid a decline in supply and sever weather in the Northeast U.S. Long natural gas futures provided additional gains to the portfolio as intensified buying pressed prices higher in September due to the disruption of output in the Gulf of Mexico caused by Hurricane Isidore. Further gains were recorded in September from long positions in crude oil futures and its related products as prices drifted higher on the increasing possibility of military action against Iraq. Total expenses for the nine months ended September 30, 2002 were $692,859, resulting in net income of $1,170,093. The net asset value of a Unit increased from $5.84 at December 31, 2001 to $6.38 at September 30, 2002. For the Quarter and Nine Months Ended September 30, 2001 For the quarter ended September 30, 2001, the Partnership recorded total trading losses, net of interest income, of $941,659 and posted a decrease in net asset value per Unit. The most significant losses of approximately 2.9% were experienced primarily during August and September in the energy markets from long natural gas features positions as price declined to two year lows on reports of rising supply levels. In the metals markets, losses of approximately 1.8% were recorded throughout a majority of the quarter from long positions in copper and aluminum futures as prices declined due to higher inventories and weak demand. Offsetting gains were recorded during August and September from long gold futures positions as prices continued moving higher, boosted by falling equity prices and uncertainty linked to possible U.S. military action. In the agricultural markets, losses of approximately 1.3% were recorded primarily during August and September from long futures positions in soybeans and its related products as prices decreased on reports of declining demand. In soft commodities, losses of approximately 1.2% were incurred primarily during August and September from long cotton futures positions as prices fell following a U.S.D.A. report for a record crop in 2001. Offsetting gains were recorded during September from long cocoa futures positions as prices increased on expectations that global demand will outpace production. Total expenses for the three months ended September 30, 2001 were $262,936, resulting in a net loss of $1,204,595. The net asset value of a Unit decreased from $6.42 at June 30, 2001 to $5.90 at September 30, 2001. For the nine months ended September 30, 2001, the Partnership recorded total trading losses, net of interest income, of $3,851,530 and posted a decrease in net asset value per Unit. The most significant losses of approximately 8.6% were recorded throughout the first nine months of the year in the energy markets from long positions in natural gas futures as prices reversed the sharp upward trend experienced in late 2000 amid reports of increased inventories and forecasts for favorable weather. In the metals markets, losses of approximately 6.4% were recorded throughout the first nine months of the year from long positions in copper and aluminum futures as the slowdown in the U.S. economy and weak demand drove prices lower. In the agricultural markets, losses of approximately 5.6% were experienced primarily during January, March, September and a majority of the second quarter from long positions in corn and wheat futures as prices moved lower due to favorable weather forecasts and on reports of declining demand. In soft commodities, losses of approximately 4.2% were incurred throughout the first nine months of the year from long cotton futures positions as prices moved lower on weak export sales and low demand. Total expenses for the nine months ended September 30, 2001 were $898,713, resulting in a net loss of $4,750,243. The net asset value of a Unit decreased from $7.85 at December 31, 2000 to $5.90 at September 30, 2001. Item 3. 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 experience 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 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 Partner- ship's VaR is approximately four years. The one-day 99% confidence level of the Partnership's VaR corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 100 trading days. In other words, one-day VaR for a portfolio is a number such that losses in this portfolio are estimated to exceed the VaR only one day in 100. VaR is calculated using historical simulation. Demeter uses approximately four years of daily market data (1,000 observations) and revalues its portfolio (using delta-gamma approximations) for each of the historical market moves that occurred over this time period. This generates a probability distribution of daily 'simulated profit and loss' outcomes. The VaR is the appropriate percentile of this distribution. For example, the 99% one-day VaR would represent the 10th worst outcome from Demeter's simulated profit and loss series. 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. Please further note that VaR as described above may not be comparable to similarly titled measures used by other entities. The Partnership's Value at Risk in Different Market Sectors The following table indicates the VaR associated with the Partnership's open positions as a percentage of total net assets by primary market risk category at September 30, 2002 and 2001. The VaR for a market category represents the one-day downside risk for the aggregate exposures associated with this market category. At both September 30, 2002 and 2001, the Partnership's total capitalization was approximately $14 million. Primary Market September 30, 2002 September 30, 2001 Risk Category Value at Risk Value at Risk Commodity (2.57)% (1.65)% The table above represents the VaR of the Partnership's open positions at September 30, 2002 and 2001 only and is not necessarily representative of either the historic or future risk of an investment in the Partnership. Because the Partnership's only business is the speculative trading of futures, forwards, and options, the composition of its trading portfolio can change significantly over any given time period, or even within a single trading day. Any changes in open positions could positively or negatively materially impact market risk as measured by VaR. The table below supplements the quarter-end VaR by presenting the Partnership's high, low, and average VaR, as a percentage of total net assets for the four quarterly reporting periods from October 1, 2001 through September 30, 2002. Primary Market Risk Category High Low Average Commodity (2.57)% (1.56)% (2.03)% Limitations on Value at Risk as an Assessment of Market Risk The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. 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 its market risk exposure at September 30, 2002 and 2001, and for the end of the four quarterly reporting periods from October 1, 2001 through September 30, 2002. Since VaR is based on historical data, VaR should not be viewed as predictive of the Partnership's future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership's actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days. Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances not needed for margin. These balances and any market risk they may represent are immaterial. At September 30, 2002, the Partnership's cash balance at Morgan Stanley DW was approximately 91% 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. 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 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 at September 30, 2002, by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Commodity Energy. At September 30, 2002, the Partnership's energy exposure was primarily to futures contracts in crude oil and its related products, and natural gas. Price movements in the energy markets result from political developments in the Middle East, weather patterns, and other economic fundamentals. Significant profits and losses, which have been experienced in the past, are expected to continue to be experienced in these markets. Natural gas has exhibited volatility in prices resulting from weather patterns and supply and demand factors and may continue in this choppy pattern. Soft Commodities and Agriculturals. At September 30, 2002, the Partnership had exposure to the markets that comprise these sectors. Most of the exposure was to sugar, cotton and coffee markets. Supply and demand inequalities, severe weather disruptions, and market expectations affect price movements in these markets. Metals. The Partnership's metals exposure at September 30, 2002 was to fluctuations in the price of precious metals, such as silver, gold and platinum, and base metals, such as copper, aluminum, nickel, zinc and lead. Economic forces, supply and demand inequalities, geopolitical factors and market expectations influence price movements in these markets. The Trading Advisor, from time to time, takes positions when market opportunities develop. Demeter anticipates that the Partnership will continue to be exposed to the precious and base metals markets. Qualitative Disclosures Regarding Non-Trading Risk Exposure At September 30, 2002 there was no non-trading risk exposure because the Partnership did not have any foreign currency balances. 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 4. CONTROLS AND PROCEDURES (a) As of a date within 90 days of the filing date of this quarterly report, the President, and Chief Financial Officer of the general partner, Demeter, have evaluated the Partnership's disclosure controls and procedures, and have judged such controls and procedures to be effective. (b) There have been no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Partnership initially registered 5,000,000 Units pursuant to a Registration Statement on Form S-1, which became effective on November 10, 1997 (the "Registration Statement") (SEC File Number 333-33975). The Partnership, Demeter and Morgan Stanley DW extended the offering period for unsold Units until no later than October 16, 1998 pursuant to Post Effective Amendment No. 1 to the Registration Statement, which became effective on July 10, 1998. The managing underwriter for the Partnership is Morgan Stanley DW. The offering originally commenced on November 10, 1997 with 5,000,000 Units registered and 4,045,503.483 Units sold through April 1, 1998. The aggregate price of the offering amount registered was $50,000,000 (based upon the initial offering price of $10.00 per Unit) for the initial closing on January 2, 1998 (the "Initial Offering"). After the Initial Offering, Units were sold at three closings held on February 2, March 2, and April 1, 1998, at a price equal to 100% of the net asset value per Unit at the close of business on the last day of the month immediately preceding the closing. The aggregate price of the Units sold at the four closings of the offering was $40,100,218 (based upon the net asset value per Unit of $10.00 at January 2, 1998, $10.13 at February 2, 1998, $9.53 at March 2, 1998, and $9.54 at April 1, 1998 closings, respectively). An additional 149,990.149 Units were sold at subsequent closings; held on August 3, September 1, and October 1, 1998 at a price equal to 100% of the net asset value per Unit at the close of business on the last day of the month immediately preceding the closing. The aggregate offering price of the three subsequent closings was $1,135,005 (based upon the net asset value per Unit of $7.85 at August 3, 1998, $7.23 at September 1, 1998, and $7.75 at October 1, 1998, respectively). Subsequent to these closings, the remaining unsold Units were de- registered. In conjunction with becoming part of the Spectrum Series on March 7, 2000, the Partnership registered an additional 7,000,000 Units pursuant to another Registration Statement on Form S-1, which became effective on March 6, 2000 (SEC File Number 333-90483). As part of the Spectrum Series, Units of the Partnership are now sold monthly on a continuous basis at a price equal to 100% of the net asset value per Unit at the close of business on the last day of each month. Through September 30, 2002, 4,991,443.299 Units were sold, leaving 6,204,050.333 Units unsold. The aggregate price of Units sold through September 30, 2002 was $46,591,236. Since no expenses are chargeable against proceeds, 100% of the proceeds of the offering have been applied to the working capital of the Partnership for use in accordance with the "Use of Proceeds" section of its Prospectus and Supplement to the Prospectus. Item 5. OTHER INFORMATION Changes in Management The following changes have been made to the Board of Directors and Officers of Demeter Management Corporation, the general partner: Mr. Robert E. Murray resigned the position of President of Demeter. Mr. Murray however, retains his position as Chairman and as a Director of Demeter. Mr. Jeffrey A. Rothman, age 41, was named President and a Director of Demeter. Mr. Rothman is the Executive Director of Morgan Stanley Managed Futures, responsible for overseeing all aspects of the firm's managed futures department. He is also President and a Director of Morgan Stanley Futures & Currency Management Inc., Morgan Stanley's internal commodity trading advisor. Mr. Rothman has been with the Managed Futures Department for sixteen years and most recently held the position of National Sales Manager, assisting Branch Managers and Financial Advisors with their managed futures education, marketing, and asset retention efforts. Throughout his career, Mr. Rothman has helped with the development, marketing, and administration of approximately 33 commodity pool investments. Mr. Rothman is an active member of the Managed Funds Association and serves on its Board of Directors. Mr. Frank Zafran, age 47, will become a Director of Demeter and of Morgan Stanley Futures & Currency Management Inc. once he has registered with the National Futures Association as an associated person of both firms, which registration is currently pending. Mr. Zafran is an Executive Director of Morgan Stanley and, in September 2002, was named Chief Administrative Officer of Morgan Stanley's Global Products and Services Division. Mr. Zafran joined the firm in 1979 and has held various positions in Corporate Accounting and the Insurance Department, including Senior Operations Officer - Insurance Division, until his appointment in 2000 as Director of 401(k) Plan Services, responsible for all aspects of 401(k) Plan Services including marketing, sales and operations. Mr. Zafran received a B.S. degree in Accounting from Brooklyn College, New York. Mr. Raymond E. Koch resigned the position of Chief Financial Officer of Demeter. Mr. Jeffrey D. Hahn, age 45, was named Chief Financial Officer of Demeter. Mr. Hahn began his career at Morgan Stanley in 1992 and is currently an Executive Director responsible for the management and supervision of the accounting, reporting, tax and finance functions for the firm's private equity, managed futures, and certain legacy real estate investing activities. He is also Chief Financial Officer of Morgan Stanley Futures & Currency Management Inc. From August 1994 through May 1992, Mr. Hahn held various positions as an auditor at Coopers & Lybrand, specializing in manufacturing businesses and venture capital organizations. Mr. Hahn received his B.A. in Economics from St. Lawrence University in 1979, an M.B.A. from Pace University in 1984, and is a Certified Public Accountant. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 3.01 Form of Amended and Restated Limited Partnership Agreement of the Partnership is incorporated by reference to Exhibit A of the Partnership's Prospectus, dated April 30, 2002, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 8, 2002. 3.02 Certificate of Limited Partnership, dated 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. 3.03 Amendment of Certificate of Limited Partnership of the Partnership, dated March 7, 2000, (changing its name from Morgan Stanley Tangible Asset Fund L.P.), is incorporated by reference to Exhibit 3.1 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on March 23, 2000. 3.04 Certificate of Amendment of Certificate of Limited Partnership, dated November 1, 2001 (changing its name from Morgan Stanley Dean Witter Spectrum Commodity L.P.), is incorporated by reference to Exhibit 3.01 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on November 1, 2001. 10.05 Form of Subscription and Exchange Agreement and Power of Attorney to be executed by each purchaser of Units is incorporated by reference to Exhibit B of the Partnership's Prospectus, dated April 30, 2002, as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 8, 2002. 10.06 Amended and Restated Escrow Agreement, dated as of March 10, 2000, among the Partnership, Morgan Stanley Spectrum Select L.P., Morgan Stanley Spectrum Technical L.P., Morgan Stanley Spectrum Strategic L.P., Morgan Stanley Spectrum Global Balanced L.P., Morgan Stanley Spectrum Currency L.P., Morgan Stanley DW, and The Chase Manhattan Bank, the escrow agent, is incorporated by reference to Exhibit 10.06 of the Partnership's Registration Statement on Form S-1 (File No. 333-90483) filed with the Securities and Exchange Commission on November 2, 2001. 10.07 Form of Subscription Agreement Update Form to be executed by purchasers of Units is incorporated by reference to Exhibit C of the Partnership's Prospectus, dated April 30, 2002, as filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) under the Securities Act of 1933 on May 8, 2002. 10.08 Amended and Restated Management Agreement, dated April 1, 2000, among the Partnership, Demeter, and Morgan Stanley Commodities Management, Inc., is incorporated by reference to Exhibit 10.01 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on April 25, 2001. 10.08(a) Amendment to the Amended and Restated Management Agreement, dated November 30, 2000, among the Partnership, Demeter and Morgan Stanley Commodities Management, Inc. is incorporated by reference to Exhibit 10.02 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on April 25, 2001. 10.11 Amended and Restated Customer Agreement between the Partnership and Morgan Stanley DW, dated as of June 30, 2000, is incorporated by reference to Exhibit 10.01 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on November 1, 2001. 10.12 Commodity Futures Customer Agreement between MS & Co. and the Partnership, and acknowledged and agreed to by Morgan Stanley DW, dated as of June 30, 2000, is incorporated by reference to Exhibit 10.02 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on November 1, 2001. 10.13 Customer Agreement between the Partnership and MSIL, dated as of June 30, 2000, is incorporated by reference to Exhibit 10.04 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on November 1, 2001. 10.14 Securities Account Control Agreement among the Partnership, MS & Co., and Morgan Stanley DW, dated as of June 30, 2000, is incorporated by reference to Exhibit 10.03 of the Partnership's Form 8-K (File No. 0-24035) filed with the Securities and Exchange Commission on November 1, 2001. 99.01 Certification of Periodic Report by Jeffrey A. Rothman, President of Demeter Management Corporation, general partner of the Partnership. 99.02 Certification of Periodic Report by Jeffrey D. Hahn, Chief Financial Officer of Demeter Management Corporation, general partner of the Partnership. (B) Reports on Form 8-K.-None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Spectrum Commodity L.P. (Registrant) By: Demeter Management Corporation (General Partner) November 14, 2002 By: /s/Jeffrey D. Hahn Jeffrey D. Hahn Chief Financial Officer The General Partner which signed the above is the only party authorized to act for the Registrant. The Registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors. CERTIFICATIONS I, Jeffrey A. Rothman, President of Demeter Management Corporation, the general partner of the Partnership, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report; 4. Demeter's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the Partnership and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Demeter's other certifying officers and I have disclosed, based on our most recent evaluation, to the Partnership's auditors and the audit committee of Demeter's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership's ability to record, process, summarize and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership's internal controls; and 6. Demeter's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/Jeffrey A. Rothman Jeffrey A. Rothman President, Demeter Management Corporation, general partner of the Partnership CERTIFICATIONS I, Jeffrey D. Hahn, Chief Financial Officer of Demeter Management Corporation, the general partner of the Partnership, certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report; 4. Demeter's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the Partnership and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Demeter's other certifying officers and I have disclosed, based on our most recent evaluation, to the Partnership's auditors and the audit committee of Demeter's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership's ability to record, process, summarize and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership's internal controls; and 6. Demeter's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/Jeffrey D. Hahn Jeffrey D. Hahn Chief Financial Officer, Demeter Management Corporation, general partner of the Partnership CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Morgan Stanley Spectrum Commodity L.P. (the "Partnership") on Form 10-Q for the period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey A. Rothman, President, Demeter Management Corporation, general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. By: /s/ Jeffrey A. Rothman Name: Jeffrey A. Rothman Title: President Date: November 14, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Morgan Stanley Spectrum Commodity L.P. (the "Partnership") on Form 10-Q for the period ended September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey D. Hahn, Chief Financial Officer, Demeter Management Corporation, general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. By: /s/Jeffrey D. Hahn Name: Jeffrey D. Hahn Title: Chief Financial Officer Date: November 14, 2002

MORGAN STANLEY SPECTRUM COMMODITY LP 10-Q