Item 1. BUSINESS
(a) General Development of Business. Dean Witter
Spectrum Balanced L.P. (the "Partnership") is a Delaware
limited partnership formed to engage in the speculative
trading of futures and forward contracts and options on
futures contracts, and on physical commodities, and other
commodity interests, including foreign currencies, financial
instruments, precious and industrial metals, energy products
and agriculturals (collectively "futures interests").
An aggregate of 10,000,000 Units of limited
partnership interest ("Units") in the Partnership and its
affiliated partnership's, Dean Witter Spectrum Strategic
L.P. and Dean Witter Spectrum Technical L.P., were
registered pursuant to a Registration Statement on Form S-1
(File No. 33-80146) which became effective on September 15,
1994, with an arbitrary allocation of 2,000,000 Units to the
Partnership. The offering of units was underwritten
initially at $10.00 per unit on a "best efforts" basis by
Dean Witter Reynolds Inc. ("DWR"). The Partnership's General
Partner is Demeter Management Corporation ("Demeter"). DWR
and Demeter are wholly-owned subsidiaries of Morgan Stanley,
Dean Witter, Discover & Co. ("MSDWD").
The Partnership commenced operations on November 2,
1994. An aggregate of 6,000,000 additional Units in the
Partnership were registered pursuant to Registration
Statements on Form S-1 (File Nos. 333-00494 and 333-3222),
which became effective on January 31, 1996 and April 30,
1996, respectively. Units of limited partnership interest
are offered at monthly closings 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.
Through July 31, 1997, the sole commodity broker for
the Partnership's transactions was DWR. On July 31, 1997,
DWR closed the sale of its institutional futures business
and foreign currency trading operations to Carr Futures,
Inc. ("Carr"), a subsidiary of Credit Agricole Indosuez.
Following the sale, Carr became the clearing commodity
broker for the Partnership's futures and futures options
trades and the counterparty on the Partnership's foreign
currency trades. DWR serves as the non-clearing commodity
broker for the Partnerships with Carr providing all clearing
services for the Partnerships' transactions.
The Partnership's Net Asset Value per Unit as of
December 31, 1997 was $13.75, representing an increase of
18.23 percent from the Net Asset Value per Unit of $11.63 on
December 31, 1996. For a more detailed description of the
Partnership's business, see subparagraph (c).
(b) Financial Information about Industry Segments. The
Partnership's business comprises only one segment for
financial reporting purposes, speculative trading of
commodity futures contracts and other commodity 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 in commodity
futures contracts and other commodity interests, pursuant to
trading instructions provided by RXR, Inc., its independent
trading advisor. For a detailed description of the
different facets of the Partnership's business, see those
portions of the Partnership's Prospectus, dated April 25,
1997 (the "Prospectus"), filed as part of the Registration
Statement on Form S-1 (File No. 333-3222) (see "Documents
Incorporated by Reference" Page 1), set forth below and the
corresponding portions of the Prospectus Supplement dated
December 19, 1997 (the "Supplement").
Facets of Business
1. Summary 1. "Summary of the Prospectus" (Pages 1-9 of the Prospectus).
2. Futures, Options and 2. "The Futures, Options and Forward Markets and Forwards Markets" (Pages 146-150 of the Prospectus).
3. Partnership's Trading 3. "Investment Program, Arrangements and Use of Proceeds and Policies Trading Policies" (Page 34 of the Prospectus) "The Trading Advisors" (Pages 58-139 of the Prospectus and Pages S-6 -S-9 of the Supplement).
4. Management of the Part- 4. "The Management Agree- nership ments (Page 141 of the Prospectus). "The General Partner" (Pages 52-54 of the Prospectus and Page S-5 of the Supplement), "The Commodity Broker" (Page 145 and Page S-8 of the Supplement) and "The Limited Partnership Agreements" (Pages 150- 153 of the Prospectus).
5. Taxation of the Partner- 5. "Material Federal Income ship's Limited Partners Tax Considerations" and "State and Local Income Tax Aspects" (Pages 158-165 of the Prospectus and Page S-9 of the Supplement).
(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) enters into forward contract transactions
where foreign banks are the contracting party and trades in
futures interests on foreign exchanges.
Item 2.
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.
Item 3. LEGAL PROCEEDINGS
On September 6, 10, and 20, 1996, and on March 13,
1997, similar 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"), MSDWD (all such parties referred
to hereafter as the "Dean Witter Parties"), certain limited
partnership commodity pools of which Demeter is the general
partner, 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 partnerships commodity
pools. 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 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. 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. The complaints seek
unspecified amounts of comp-ensatory and punitive damages
and other relief. It is possible that additional similar
actions may be filed and that, in the course of these
actions, other parties could be added as defendants. The
Dean Witter Parties believe that they have strong defenses
to, and they will vigorously contest the actions. Although
the ultimate outcome of legal proceedings cannot be
predicted with certainty, it is the opinion of management of
the Dean Witter Parties that the resolution of the actions
will not have a material adverse effect on the financial
condition or the results of operations of any of the Dean
Witter Parties.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS
There is no established public trading market for the
Units of Limited Partnership Interest in the Partnership.
The number of holders of Units at December 31, 1997 was
approximately 3,642. No distributions have been made by the
Partnership since it commenced trading operations on
November 2, 1994. Demeter has sole discretion to decide
what distri-butions, if any, shall be made to investors in
the Partnership. No determination has yet been made as to
future distributions.
Dean Witter Spectrum Strategic L.P. ("Spectrum
Strategic"); Dean Witter Spectrum Technical L.P. ("Spectrum
Technical"); and Dean Witter Spectrum Balanced L.P.
("Spectrum Balanced" and, collectively with Spectrum
Strategic and Spectrum Technical, the "Partnerships")
collectively registered 10,000,000 Units of Limited
Partnership Interest ("Units") pursuant to a Registration
Statement on Form S-1, which became effective on September
15, 1994 (the "Registration Statement") (SEC File Number 33-
80146). While such Units were not allocated among the
Partnerships at that time, they were subsequently allocated
for convenience purposes as follows: Spectrum Strategic
4,000,000, Spectrum Technical 4,000,000 and Spectrum
Balanced 2,000,000. The Partnerships registered an
additional 20,000,000 Units pursuant to a new Registration
Statement on Form S-1, which become effective on January 31,
1996 (SEC
File Number 333-00494); such units were allocated among the
Partnerships as follows: Spectrum Strategic 6,000,000,
Spectrum Technical 9,000,000 and Spectrum Balanced
5,000,000. The Partnerships registered an additional
8,500,000 Units pursuant to another Registration Statement
on Form S-1, which become effective on April 30, 1996 (SEC
File Number 333-3222); such Units were allocated among the
Partnerships as follows: Spectrum Strategic 2,500,000,
Spectrum Technical 5,000,000 and Spectrum Balanced
1,000,000. The managing underwriter for the Partnerships is
DWR.
The "Initial Offering" by the Partnerships, when Units
were sold for $10 each, commenced on September 15, 1994 and
closed on November 2, 1994; a "Continuing Offering" began
thereafter, during which Units are being sold at monthly
closings as of the last day of each month at a price equal
to 100% of the Net Asset Value of a Unit as of the date of
such monthly closing.
Through December 31, 1997, 2,376,582.520 Units were
sold, leaving 5,623,417.480 Units unsold as of January 1,
1998. The aggregate offering amount registered was
$89,740,000, based upon the offering prices of $10 per Unit
for the 2,000,000 Units registered on September 15, 1994;
$11.73 per Unit for the 5,000,000 Units registered on
January 31, 1996; and $11.09 per Unit for the 1,000,000
Units registered on April 30, 1996.
The aggregate price of the Units sold through December 31,
1997 is $27,053,422.
Since DWR has paid all expenses of the Initial and
Continuing Offerings, and no other expenses are chargeable
against proceeds, 100% of the proceeds of the offering have
been applied to the working capital of the Partnership for
use in accordance with the "Use of Proceeds" section of the
Prospectus included as part of each Registration Statement.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership's assets are on deposit in
separate commodity interest trading accounts with DWR and
Carr, the commodity brokers, and are used by the Partnership
as margin to engage in commodity futures, forward contracts
and other commodity interest trading. DWR and Carr hold
such assets in either designated depositories or in
securities approved by the Commodity Futures Trading
Commission ("CFTC") for investment of customer funds. The
Partnership's assets held by DWR and Carr may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in commodity futures
contracts and other commodity interests, it is expected that
the Partnership will continue to own such liquid assets for
margin purposes.
The Partnership's investment in commodity futures
contracts, forward contracts and other commodity interests
may be illiquid. If the price for a futures contract for a
particular commodity has increased or decreased by an amount
equal to the "daily limit", positions in the commodity can
neither be taken nor liquidated unless traders are willing
to effect trades at or within the limit. Commodity futures
prices have occasionally moved the daily limit for several
consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly
liquidating its commodity futures positions.
There is no limitation on daily price moves in trading
forward contracts on foreign currencies. The markets for
some world currencies have low trading volume and are
illiquid, which may prevent the Partnership from trading in
potentially profitable markets or prevent the Partnership
from promptly liquidating unfavorable positions in such
markets and subjecting it to substantial losses. Either of
these market conditions could result in restrictions on
redemptions.
Market Risk. The Partnership trades futures, options
and forward contracts in interest rates, stock indices,
commodities and currencies. In entering into these
contracts there exists a risk to the Partnership (market
risk) that such contracts may be significantly influenced by
market conditions, such as interest rate volatility,
resulting in such contracts being less valuable. If the
markets should move against all of the futures interest
positions held by the Partnership at the same time, and if
the Trading Advisor was unable to offset futures interest
positions of the Partnership, the Partnership could lose all
of its assets and the Limited Partners would realize a 100%
loss. The Partnership has established Trading Policies,
which include standards for liquidity and leverage which
help control market risk. Both the Trading Advisor and
Demeter monitor the Partnership's trading activities to
ensure compliance with the Trading Policies. Demeter may
(under terms of
The Management Agreement) override the trading instructions
of the Trading Advisor to the extent necessary to comply
with the Partnership's Trading Policies.
Credit Risk. In addition to market risk, in entering
into futures, options and forward 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 of the Partnership
for futures contracts traded in the United States and most
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, and, as such,
should significantly reduce this credit risk. For example,
a clearinghouse may cover a default by (i) 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 (ii)
assessing its members. In cases where the Partnership
trades on a foreign exchange where the clearinghouse is not
funded or guaranteed by the membership or where the exchange
is a "principals' market" in which performance is the
responsibility of the exchange member and not the
exchange or a clearinghouse, or when the Partnership enters
into off-exchange contracts with a counterparty, the sole
recourse of the Partnership will be the clearinghouse, the
exchange member or the off-exchange contract counterparty,
as the case may be.
There can be no assurance that a clearinghouse,
exchange or other exchange member will meet its obligations
to the Partnership, and the Partnership is not
indemnified against a default by such parties from Demeter
or MSDWD or DWR. 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,
clearinghouse or other exchange member default on trades
effected for the broker's customers; any such obligation on
the part of the broker appears even less clear where the
default occurs in a non-US jurisdiction.
Demeter deals with the credit risks of all
partnerships for which it serves as General Partner in
several ways. First, it monitors each 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 each 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 each Partnership's
potential margin liability, exchange by exchange. Demeter
is then able to monitor the individual 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, as discussed earlier, each partnership's
trading policies limit the amount of partnership Net Assets
that can be committed at any given time to futures contracts
and require, in addition, a certain 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 any
partnership to any single exchange and, historically, such
partnership exposure has typically amounted to only a small
percentage of its total Net Assets. On those relatively few
occasions where a partnership's credit exposure has climbed
above that level, Demeter has dealt with the situations on a
case by case basis, carefully weighing whether the increased
level of credit exposure remained appropriate. Demeter
expects to continue to deal with such situations in a
similar manner in the future.
Third, Demeter has secured, with respect to Carr acting
as the clearing broker for the partnerships, a guarantee by
Credit Agricole Indosuez, Carr's parent, of the payment of
the "net liquidating value" of the transactions (futures,
options and forward contracts) in each
partnership's account. As of December 31, 1997, Credit
Agricole Indosuez' total capital was over $3.25 billion and
it is currently rated AA2 by Moody's.
With respect to forward contract trading, the
partnerships trade with only those counterparties which
Demeter, together with DWR, have determined to be
creditworthy. At the date of this filing, the
partnerships deal only with Carr as their counterparty on
forward contracts. The guarantee by Carr's parent,
discussed above, covers these forward contracts.
See "Financial Instruments" under Notes to Financial
Statements in the Partnership's 1997 Annual Report to
Partners, incorporated by reference in this Form 10-K.
Capital Resources. The Partnership does not have, nor
does it expect to have, any capital assets. Redemptions,
exchanges and sales of additional Units of Limited
Partnership Interest in the future will affect the amount of
funds available for investments in subsequent periods. As
redemptions are at the discretion of Limited Partners, it is
not possible to estimate the amount and therefore, the
impact of future redemptions.
Results of Operations. As of December 31, 1997, the
Partnership's total capital was $25,683,236, an increase of
$6,976,981 from the Partnership's total capital of
$18,706,255, at December 31, 1996. For
the year ended December 31, 1997, the Partnership generated
net income of $3,599,516, total subscriptions aggregated
$6,527,261 and total redemptions aggregated $3,149,796.
For the year ended December 31, 1997, the Partnership's
total trading revenues including interest income were
$5,293,459. The Partnership's total expenses for the year
were $1,693,943, resulting in net income of $3,599,516. The
value of an individual unit in the Partnership increased
from $11.63 at December 31, 1996 to $13.75 at December 31,
1997.
As of December 31, 1996, the Partnership's total
capital was $18,706,255, an increase of $3,951,755 from the
Partnership's total capital of $14,754,500 at December 31,
1995. For the year ended December 31, 1996, the Partnership
incurred a net loss of $357,966, total subscriptions
aggregated $7,259,621 and redemptions aggregated $2,949,900.
For the year ended December 31, 1996, the Partnership's
total trading revenues including interest income were
$893,626. The Partnership's total expenses for the year
were $1,251,592, resulting in a net loss of $357,966. The
value of an individual unit in the Partnership decreased
from $12.07 at December 31, 1995 to $11.63 at December 31,
1996.
As of December 31, 1995, the Partnership's total
capital was $14,754,500, an increase of $10,956,655 from the
Partnership's total capital of $3,797,845 at December 31,
1994. For the year ended December 31, 1995, the Partnership
generated net income of $1,559,664, total subscriptions
aggregated $9,639,381 and redemptions aggregated $242,390.
For the year ended December 31, 1995, the Partnership's
total trading revenues including interest income were
$2,329,813. The Partnership's total expenses for the year
were $770,149, resulting in net income of $1,559,664. The
value of an individual unit in the Partnership increased
from $9.83 at December 31, 1994 to $12.07 at December 31,
1995.
The Partnership's overall performance record represents
varied results of trading in different commodity markets.
For a further description of trading results, refer to the
letter to the Limited Partners in the accompanying 1997
Annual Report to Partners, incorporated by reference in this
Form 10-K. The Partnership's gains and losses are allocated
among its Limited Partners for income tax purposes.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item appears in the
attached 1997 Annual Report to Partners and is incorporated
by reference in this Annual Report on Form 10-K.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT
General Partner
Demeter, a Delaware corporation, was formed on August
18, 1977 to act as a commodity pool operator and is
registered with the CFTC as a commodity pool operator and
currently is a member of the National Futures Association
("NFA") in such capacity. Demeter is wholly-owned by MSDWD
and is an affiliate of DWR. MSDWD, DWR and Demeter may each
be deemed to be "promoters" and/or a "parent" of the
Partnership within the meaning of the federal securities
laws.
On July 21, 1997, MSDWD, the sole shareholder of
Demeter, appointed a new Board of Directors consisting of
Richard M. DeMartini, Mark J. Hawley, Lawrence Volpe, Joseph
G. Siniscalchi, Edward C. Oelsner III, and Robert E. Murray.
Dean Witter Reynolds Inc.
DWR is a financial services company which provides to
its individual, corporate and institutional clients services
as a broker in securities and commodity interest contracts,
a dealer in corporate, municipal and government securities,
an investment adviser and an agent in the sale of life
insurance and various other products and services. DWR is a
member firm of the New York Stock Exchange, the American
Stock
Exchange, the Chicago Board Options Exchange, and other
major securities
exchanges.
DWR is registered with the CFTC as a futures commission
merchant and is a member of the NFA in such capacity. As of
December 31, 1997, DWR is servicing its clients through a
network of approximately 401 branch offices with
approximately 10,155 account executives servicing individual
and institutional client accounts.
Directors and Officers of the General Partner
The directors and officers of Demeter as of December
31, 1997 are as follows:
Richard M. DeMartini, age 45, is the Chairman of the
Board and a Director of Demeter. Mr. DeMartini is also
Chairman of the Board and a Director of Dean Witter Futures
& Currency Management Inc. ("DWFCM"). Mr. DeMartini is
president and chief operating officer of MSDWD's Individual
Asset Management Group. He was named to this position in
May of 1997 and is responsible for Dean Witter InterCapital,
Van Kampen American Capital, insurance services, managed
futures, unit trust, investment consulting services, Dean
Witter Realty, and NOVUS Financial Corporation. Mr.
DeMartini is a member of the MSDWD management committee, a
director of the InterCapital funds, a trustee of the TCW/DW
funds and a trustee of the Van Kampen American Capital and
Morgan
Stanley retail funds. Mr. DeMartini has been with Dean
Witter his entire career, joining the firm in 1975 as an
account executive. He served as a branch manager, regional
director and national sales director, before being appointed
president and chief operating officer of the Dean Witter
Consumer Markets. In 1988 he was named president and chief
operating officer of Sears' Consumer Banking Division and in
January 1989 he became president and chief operating officer
of Dean Witter Capital. Mr. DeMartini has served as
chairman of the board of the Nasdaq Stock Market, Inc. and
vice chairman of the board of the National Association of
Securities Dealers, Inc. A native of San Francisco, Mr.
DeMartini holds a bachelor's degree in marketing from San
Diego State University.
Mark J. Hawley, age 54, is President and a Director of
Demeter. Mr. Hawley is also President and a Director of
DWFCM. Mr. Hawley joined DWR in February 1989 as Senior
Vice President and is currently the Executive Vice President
and Director of DWR's Managed Futures Department. From 1978
to 1989, Mr. Hawley was a member of the senior management
team at Heinold Asset Management, Inc., a CPO, 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.
Lawrence Volpe, age 50, is a Director of Demeter and
DWFCM. Mr. Volpe joined DWR as a Senior Vice President and
Controller in September 1983, and currently holds those
positions. From July 1979 to September 1983, he was
associated with E.F. Hutton & Company Inc. and prior to his
departure, held the positions of First Vice President and
Assistant Controller. From 1970 to July 1979, he was
associated with Arthur Anderson & Co. and prior to his
departure served as audit manager in the financial services
division.
Joseph G. Siniscalchi, age 52, 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 55, is a Director of
Demeter. Mr. Oelsner is currently an Executive Vice
President and head of the Product Development Group at Dean
Witter InterCapital Inc., 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.
Robert E. Murray, age 37, is a Director of Demeter.
Mr. Murray is also a Director of DWFCM. Mr. Murray is
currently a Senior Vice President of DWR's Managed Futures
Department and is the Senior Administrative Officer of
DWFCM. Mr. Murray began his career at DWR in 1984 and is
currently the Director of Product Development for the
Managed Futures Department. He is responsible for the
development and maintenance of the proprietary Fund
Management System utilized by DWFCM and Demeter in
organizing information and producing reports for monitoring
clients' accounts. Mr. Murray currently serves as a
Director of the Managed Funds Association. Mr. Murray
graduated from Geneseo State University in May 1983 with a
B.A. degree in Finance.
Patti L. Behnke, age 37, is Vice President and Chief
Financial Officer of Demeter. Ms. Behnke joined DWR in
April 1991 as Assistant Vice President of Financial
Reporting and is currently a First Vice President and
Director of Financial Reporting and Managed Futures
Accounting in the Individual Asset Management Group. Prior
to joining DWR, Ms. Behnke held positions of increasing
responsibility at L.F. Rothschild & Co. and Carteret Savings
Bank. Ms. Behnke began her career
at Arthur Anderson & Co., where she was employed in the
audit division from 1982-1986. She is a member of the AICPA
and the New York State Society of Certified Public
Accountants.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive
officers. As a limited partnership, the business of the
Partnership is managed by Demeter which is responsible for
the administration of the business affairs of the
Partnership but receives no compensation for such services.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners -
As of December 31, 1997, there were no persons known to be
beneficial owners of more than 5 percent of the Units of
Limited Partnership Interest in the Partnership.
(b) Security Ownership of Management - At December 31,
1997, Demeter owned 19,230.497 Units of General Partnership
Interest representing a 1.03 percent interest in the
Partnership.
(c) Changes in Control - None
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of
"Notes to Financial Statements", in the accompanying 1997
Annual Report to Partners, incorporated by reference in this
Form 10-K. In its capacity
as the Partnership's retail commodity broker, DWR received
commodity brokerage commissions (paid and accrued by the
Partnership) of $1,124,531 for the year ended December 31,
1997.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of
independent public accountants, all appearing in the
accompanying 1997 Annual Report to Partners, are
incorporated by reference in this Form 10-K:
- Report of Deloitte & Touche LLP, independent auditors, for the years ended December 31, 1997, 1996 and 1995.
- Statements of Financial Condition as of December 31, 1997 and 1996.
- Statements of Operations, Changes in Partners' Capital, and Cash Flows for the years ended December 31, 1997, 1996 and 1995.
- Notes to Financial Statements.
With the exception of the aforementioned information
and the information incorporated in Items 7, 8 and 13, the
1997 Annual Report to Partners 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 requirement of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DEAN WITTER SPECTRUM BALANCED L.P.
(Registrant)
BY: Demeter Management Corporation, General Partner
March 23, 1998 BY: /s/ Mark J. Hawley Mark J. Hawley, Director and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Demeter Management Corporation.
BY: /s/ Mark J. Hawley March 23, Mark J. Hawley, Director and President
/s/ Richard M. DeMartini March 23, Richard M. DeMartini, Director and Chairman of the Board
/s/ Lawrence Volpe March 23, Lawrence Volpe, Director
/s/ Joseph G. Siniscalchi March 23, Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 23, Edward C. Oelsner III, Director
/s/ Robert E. Murray March 23, Robert E. Murray, Director
/s/ Patti L. Behnke March 23, Patti L. Behnke, Chief Financial Officer and Principal Accounting Officer
EXHIBIT INDEX
ITEM METHOD OF FILING
-3. Limited Partnership Agreement of the Partnership, dated as of May 27, 1994. (1)
- -10. Form to the Management Agreement among the Partnership, Demeter Management Corporation and RXR, Inc. dated as (2) of November 1, 1994.
- -10. Form of Amended and Restated Customer Agreement between the Partnership and Dean Witter Reynolds Inc., dated as of September 1, 1996. (3)
- -13. December 31, 1997 Annual Report to Limited Partners. (4)
(1) Incorporated by reference to Exhibit 3.01 and Exhibit 3.02 of the Partnership's Registration Statement on Form S-1 (File No. 33-80146).
(2) Incorporated by reference to Exhibit 10.02 of the Partnership's Registration Statement on Form S-1 (File No. 33-80146).
(3) Incorporated by reference to Exhibit 10.01(a) of the Partnership's Registration Statement on Form S-1 (File No. 333-3222).
(4) Filed herewith.
Dean Witter Spectrum Series
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[ART]
December 31, 1997 Annual Report
[LOGO OF DEAN WITTER APPEARS HERE]
DEAN WITTER Two World Trade Center 62nd Floor New York, NY 10048 Telephone (212) 392-8899
DEAN WITTER SPECTRUM SERIES ANNUAL REPORT
Dear Limited Partner:
This marks the fourth annual report for Dean Witter Spectrum Series. The Net Asset Value per Unit for each of the three Dean Witter Spectrum Funds as of December 31, 1997 were as follows:
DEAN WITTER SPECTRUM BALANCED L.P., a Fund that replicates a balanced portfolio of stocks, bonds and managed futures utilizing the futures, options and forward markets, achieved a profitable year. In January, the Fund recorded gains in the currency markets from short positions in most European currencies as the value of the U.S. dollar strengthened relative to these currencies. Additional gains were recorded in the stock index portion of the balanced portfolio as long S&P 500 Index futures positions profited from an increase in domestic stock prices. During February, gains were recorded in the currency markets from a continued strengthening in the value of the U.S. dollar relative to most European currencies, as well as the Singapore dollar. Additional gains were recorded from short energy futures positions as oil and gas prices declined, and from long positions in corn futures as prices in this market moved higher. In March, losses were recorded from long S&P 500 Index futures positions as U.S. stock prices moved lower late in the month. In currencies, a portion of previous months' profits was given back as the previous upward trend in the value of the U.S. dollar relative to most European currencies reversed lower.
The Fund experienced losses during April from short U.S. interest rate futures positions in the managed futures component as U.S. bond prices rallied late in the month, after showing signs of trending lower previously. These losses were partially offset by gains recorded from long positions in both the stock index and bond components of the balanced portfolio as prices in the domestic capital markets increased. During May, profits were recorded from long positions in Australian bond futures as prices in this market moved higher. Additional gains were recorded from long positions in U.S. stock index and bond futures as prices in these markets continued their upward trend. This bullish trend in U.S. equity and bond prices continued into June, thus resulting in additional profits for the Fund's long positions. Gains were also recorded from long Australian bond futures positions, as prices moved higher, and from long Japanese yen positions as the value of the yen increased versus the U.S. dollar.
The third quarter began with additional gains being recorded in the stock index and bond futures components of the balanced portfolio as U.S. stock and bond prices continued to move higher. Gains were also recorded in the managed futures portion from long positions in U.S. and Australian interest rate futures, as well as from a strengthening in the value of the U.S. dollar. During August, a price reversal lower in U.S. stock index and bond futures, as well as in international bond futures, resulted in a portion of previous months' profits being given back. In September, gains were recorded from long positions in the stock and bond portions of the portfolio as U.S. stock index and bond futures prices regained their previous upward momentum. Additional gains were recorded in the managed futures component from long positions in global interest rate futures.
Losses were recorded during October from long S&P 500 Index futures positions as U.S. equity prices declined sharply on October 27. These losses were mitigated as stock prices rebounded on October 28. Smaller losses were
experienced from long positions in Australian and European interest rate futures as prices in these markets reversed lower during early October. During November, the Fund recorded a small loss primarily from long U.S. Treasury note futures positions as prices moved lower. A majority of these losses were offset by gains recorded from long S&P 500 Index futures positions as U.S. stock prices rallied late in the month. In the managed futures portion, small losses were experienced from long energy futures positions as oil and gas prices declined on easing tensions in Iraq. During December, gains were recorded from short positions in most Pacific Rim currencies, particularly the New Zealand and Singapore dollars, as the value of these currencies declined over concerns of economic instability in Asia. Additional gains were recorded from short positions in crude oil and natural gas futures.
DEAN WITTER SPECTRUM STRATEGIC L.P., a Fund managed by three trading advisors who employ fundamental trading methodologies in a diverse portfolio of futures, recorded a small net gain in net asset value per unit for the year. During January, the Fund posted losses primarily from choppy price movement in global interest rate futures. Smaller losses were experienced from short positions in S&P 500 Index futures as U.S. stock prices moved higher. During February, significant profits were recorded from short energy futures positions as oil and gas prices moved lower as demand declined due to unseasonably warm weather in key market areas. Additional gains were recorded from long positions in silver and copper futures. In March, the Fund profited from short U.S. interest rate futures positions as domestic bond prices dropped off due in large part to an increase in the Fed Funds rate late in the month. Additional gains were recorded from short S&P 500 Index futures positions as U.S. equity prices also moved lower during late March.
In April, losses were recorded due primarily to choppy price movement in European interest rate futures. Additionally, a portion of previous months' profits was given back as
short positions in U.S. interest rate futures experienced losses due to a rally in U.S. bond prices late in the month after showing signs of weakening previously. During May, the Fund recorded small profits as long positions in copper and zinc futures profited from an increase in base metals prices. In currency trading, gains from transactions involving the Japanese yen more than offset losses from transactions involving the British pound. In June, losses were recorded from long positions in soybean and soybean products as prices moved lower. Smaller losses were experienced from short-term volatile price movement in Japanese government bond futures. These losses were partially offset by gains from long cocoa futures positions.
In July, gains were recorded from short positions in most major foreign currencies as the value of the U.S. dollar strengthened relative to these currencies. Additional gains were recorded from long positions in global interest rate and stock index futures as prices in these markets moved higher. During August, losses were experienced from long positions in these same markets as prices reversed lower. Smaller losses were recorded from long positions in aluminum and copper futures as prices declined. The Fund recorded losses during September from short positions in S&P 500 Index futures as the U.S. stock market regained its previous bullish momentum. Smaller losses were recorded from long positions in soft commodities as prices moved lower.
During October, losses were recorded from long positions in base and precious metals futures as prices declined. Smaller losses were recorded from short-term volatility in the value of the Japanese yen and Swiss franc relative to the U.S. dollar. These losses were partially offset by gains from long positions in corn and soybean meal futures as prices increased. In November, the Fund experienced losses from short positions in U.S., Hong Kong and German stock index futures as most global equity prices rebounded higher after moving sharply lower in late October and early
November. Smaller losses were experienced from long cocoa futures positions as prices moved lower. These losses were partially offset by gains recorded from short Japanese yen positions as the value of the yen weakened versus the U.S. dollar due to the economic turmoil in Asia. Profits were also recorded during December from short Japanese yen positions as the value of the yen continued to decline versus the U.S. dollar amid concerns over the instability of the Japanese economy. Additional gains were recorded from long silver futures positions.
DEAN WITTER SPECTRUM TECHNICAL L.P., a Fund managed by three trading advisors who employ long-term technical trend-following trading systems across a diverse portfolio of futures, recorded net gains for the year. In January, gains were recorded from short positions in the German mark, Swiss franc and Japanese yen as the value of the U.S. dollar strengthened relative to these currencies. Additional gains were recorded from short gold futures positions as gold prices declined to their lowest levels since 1993. A continued strengthening in the value of the U.S. dollar versus most major European currencies during February resulted in additional currency gains for the Fund's short German mark and Swiss franc positions. Long positions in coffee futures profited from an upward price trend as concerns about declining supplies grew stronger. During March, a portion of previous months' profits were given back as the previous downward trend in the value of the German mark and Swiss franc reversed higher relative to the U.S. dollar. Smaller losses were recorded from short positions in the energy markets as oil and gas prices reversed higher after moving lower during February.
In April, losses were recorded from short positions in U.S. interest rate futures established during late March as U.S. bond prices rallied higher late in the month after moving lower previously. During May, losses were recorded in currencies from short positions in the Japanese yen as the previous decline in the value of the yen reversed higher
relative to the U.S. dollar in late May. Subsequently, additional losses were recorded in late May from newly established long yen positions as its value reversed lower late in the month. In June, gains were recorded as long positions in global interest rate and stock index futures profited from an upward price trend. Additional gains were recorded in currency trading from long Japanese yen positions as the value of the yen moved higher.
In July, gains were recorded from long positions in global financial futures as prices in these markets continued to trend higher. Additional gains were recorded from short positions in the German mark and Swiss franc as the previous strengthening in the value of the U.S. dollar relative to these currencies reemerged. Smaller gains were recorded from short gold futures positions as prices declined early in the month. During August, losses were recorded from long positions in international interest rate futures as prices in these markets reversed lower after previously trending higher. These losses were partially offset by gains from short Nikkei Index futures positions as Japanese equity prices declined. September was profitable for the Fund as international bond futures prices regained their previous upward momentum, thus resulting in gains for the Fund's long positions. Additional gains were recorded from long positions in European and U.S. stock index futures, as well as from short positions in Japanese stock index futures. Gains were also recorded from long natural gas futures positions as prices increased significantly.
Small profits were recorded during October from long British pound positions as the value of the pound increased relative to the U.S. dollar. Gains were also recorded from short positions in the Australian and Canadian dollars, as well as from long Japanese and U.S. bond futures positions. A majority of these gains were offset by losses experienced from short-term price volatility in global stock index futures. During November, gains were recorded from short Japanese yen positions as
the value of the yen trended lower versus other major currencies due to economic turmoil in Asia. Additional gains were recorded from long British pound positions as the value of the pound moved higher relative to the U.S. dollar. Gains were also recorded from short gold futures positions as gold prices broke below $300 an ounce for the first time in over 12 years. December was also profitable as silver prices rallied on reports of declining supplies, thus resulting in gains for long positions. Additional gains in metals were recorded from short gold futures positions. Profits were also recorded from long positions in European and U.S. interest rate futures as prices increased due to a "flight-to-quality" by investors as a result of the Asian economic crisis.
Overall, Spectrum Balanced had a successful year due primarily to a strengthening in the value of the U.S. dollar during the first quarter, as well as during December. Additional gains were recorded from long positions in S&P 500 Index futures, as U.S. equity prices continued to trend higher throughout a majority of the year, and in Australian bond futures, as prices trended higher during the second and third quarters. Spectrum Balanced's fixed income component was also profitable as U.S. Treasury note and Treasury bond futures prices finished the year higher despite trendless price movement throughout the first half of the year. 1997 was also a profitable year for Spectrum Technical as long global interest rate futures positions resulted in gains during the second half of the year. Additional profits recorded in currencies, primarily from a strengthening in the value of the U.S. dollar relative during January and February, and again during the final quarter, also contributed to the overall gains for the year. These gains were partially offset by losses from trendless price movement in most tangible commodities, with the exception of a profitable downward trend in gold prices. Spectrum Strategic posted a small net gain in net asset value per unit during the year as profits were recorded by the Fund's discretionary managers in the first quarter,
primarily from commodities trading, and again in the year's final months, from a strengthening U.S. dollar. A majority of these gains were offset by losses experienced during the second quarter as the volatility in global stock index and bond futures that began in March did not develop in line with the discretionary managers' points of view. In much of the second half of the year, small losses were recorded from significant short-term price volatility.
Since inception in November 1994, Spectrum Balanced has increased by 37.5% (a compound annualized return of 10.3%), Spectrum Strategic has increased by 7.1% (a compound annualized return of 2.1%) and Spectrum Technical has increased by 46.3% (a compound annualized return of 12.4%).
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, N.Y. 10048 or your Dean Witter Account Executive.
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/ Mark J. Hawley
Mark J. Hawley President Demeter Management Corporation General Partner
DEAN WITTER SPECTRUM SERIES INDEPENDENT AUDITORS' REPORT
To the Limited Partners and the General Partner of Dean Witter Spectrum Balanced L.P. Dean Witter Spectrum Strategic L.P. Dean Witter Spectrum Technical L.P.:
We have audited the accompanying statements of financial condition of Dean Witter Spectrum Balanced L.P., Dean Witter Spectrum Strategic L.P. and Dean Witter Spectrum Technical L.P., (collectively, the "Partnerships"), as of December 31, 1997 and 1996 and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Dean Witter Spectrum Balanced L.P., Dean Witter Spectrum Strategic L.P. and Dean Witter Spectrum Technical L.P., as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 17, 1998 March 11, 1998 as to Note 6 New York, New York
DEAN WITTER SPECTRUM BALANCED L.P. STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM STRATEGIC L.P. STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM TECHNICAL L.P. STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM SERIES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM SERIES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL--(CONCLUDED) FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM BALANCED L.P. STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM STRATEGIC L.P. STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM TECHNICAL L.P. STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Dean Witter Spectrum Balanced L.P. ("Spectrum Balanced"), Dean Witter Spectrum Strategic L.P. ("Spectrum Strategic") and Dean Witter Spectrum Technical L.P. ("Spectrum Technical") (individually, a "Partnership," or collectively, the "Partnerships") are limited partnerships organized to engage in the speculative trading of futures and forward contracts, options on futures contracts and on physical commodities, and other commodities interests, including foreign currencies, financial instruments, precious and industrial metals, energy products, and agriculturals. The general partner for each Partnership is Demeter Management Corporation ("Demeter"). Demeter is a wholly- owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD").
On May 31, 1997, Morgan Stanley Group Inc. was merged with and into Dean Witter, Discover & Co. ("DWD"). At that time, DWD changed its corporate name to Morgan Stanley, Dean Witter, Discover & Co.
Through July 31, 1997, the sole commodity broker for the Partnership's transactions was Dean Witter Reynolds Inc. ("DWR"), also a subsidiary of MSDWD. On July 31, 1997, DWR closed the sale of its institutional futures business and foreign currency trading operations to Carr Futures Inc. ("Carr"), a subsidiary of Credit Agricole Indosuez. Following the sale, Carr became the clearing commodity broker for the Partnerships' futures and futures options trades and the counterparty on the Partnerships' foreign currency trades. DWR serves as the non-clearing commodity broker for the Partnerships with Carr providing all clearing services for Partnerships' transactions.
Demeter is required to maintain a 1% minimum interest in the equity of each Partnership and income (losses) are shared by the General and Limited Partners based upon their proportional ownership interests.
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements.
REVENUE RECOGNITION--Commodity futures contracts and forward contracts on foreign currencies are open commitments until settlement date. They are valued at market and the resulting unrealized gains and losses are reflected in income. Monthly, DWR pays each Partnership interest income based upon 80% of its
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
average daily Net Assets for the month in the case of Spectrum Strategic and Spectrum Technical and 100% in the case of Spectrum Balanced. The interest rate is equal to a prevailing rate on U.S. Treasury Bills. For purposes of such interest payments, Net Assets do not include monies due the Partnership on forward contracts and other commodity interests, but not actually received.
NET INCOME (LOSS) PER UNIT--Net income (loss) per Unit is computed using the weighted average number of units outstanding during the period.
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS--The Partnerships' assets "Equity in Commodity futures trading accounts" consist of cash on deposit with DWR and Carr to be used as margin for trading and the net asset or liability related to unrealized gains or losses on open contracts and the net option premiums paid and/or received. The asset or liability related to the unrealized gains or losses on forward contracts is presented as a net amount in each period due to master netting agreements.
BROKERAGE AND RELATED TRANSACTION FEES AND COSTS-- Prior to September 1, 1996, brokerage fees for Spectrum Balanced were accrued at a monthly rate of 1/2 of 1% of the Net Assets (a 6% annual rate) as of the first day of each month. Effective September 1, 1996, brokerage fees were reduced to a monthly rate of 11/24 of 1% of the Net Assets (a 5.5% annual rate) as of the first day of the month. Effective August 1, 1997, brokerage fees were further reduced to 49/120 of 1% of the Net Assets (a 4.9% annual rate) as of the first day of the month.
Prior to September 1, 1996, brokerage fees for Spectrum Strategic and Spectrum Technical were accrued at a monthly rate of 35/48 of 1% of the Net Assets (an 8.75% annual rate) as of the first day of each month. Effective September 1, 1996, brokerage fees were reduced to a monthly rate of 33/48 of 1% of the Net Assets (an 8.25% annual rate) as of the first day of the month. Effective August 1, 1997, brokerage fees were further reduced to 51/80 of 1% of the Net Assets (a 7.65% annual rate) as of the first day of the month.
Such fees will cover all brokerage commissions, transaction fees and costs and ordinary administrative and continuing offering expenses.
OPERATING EXPENSES--The Partnerships incur monthly management fees and may incur incentive fees. All common administrative and continuing offering expenses including legal, auditing, accounting, filing fees and other related expenses, are borne by DWR through the brokerage fees paid by each Partnership.
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES--No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of each Partnership's revenues and expenses for income tax purposes.
DISTRIBUTIONS--Distributions, other than on redemption of Units, are made on a pro-rata basis at the sole discretion of Demeter. No distributions have been made to date.
CONTINUING OFFERING--Units of each Partnership are offered at a price equal to 100% of the Net Asset Value per Unit as of the close of business on the last day of the month. No selling commissions or charges related to the continuing offering of Units will be paid by the Limited Partners or the Partnership. DWR will pay all such costs.
REDEMPTIONS--Limited Partners may redeem some or all of their Units at 100% of the Net Asset Value per Unit as of the end of the last day of any month that is at least six months after the closing at which a person 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 end of the twelfth, eighteenth, or twenty-fourth full months following the closing at which such person first becomes a limited partner, may be assessed a redemption charge equal to 3%, 2% or 1%, respectively, of the Net Asset Value per Unit on the date of such redemption.
EXCHANGES--On the last day of the first month which occurs more than six months after a person first becomes a Limited Partner in any of the Partnerships, and the end of each month thereafter, Limited Partners may exchange their investment among the Partnerships (subject to certain restrictions outlined in the Limited Partnership Agreement) without paying additional charges.
DISSOLUTION OF THE PARTNERSHIP--Each Partnership will terminate on December 31, 2035 regardless of its financial condition at such time, or at an earlier date if certain conditions occur as defined in each Partnership's Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
Each Partnership pays brokerage commissions to DWR as described in Note 1. Each Partnership's cash is on deposit with DWR and Carr in commodity trading accounts to meet margin requirements as needed. DWR pays interest on these funds as described in Note 1.
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. TRADING ADVISORS
Demeter, on behalf of each Partnership, retains certain commodity trading advisors to make all trading decisions for the Partnerships. The trading advisors for each Partnership are as follows:
Dean Witter Spectrum Balanced L.P. RXR, Inc.
Dean Witter Spectrum Strategic L.P. Blenheim Investments, Inc. A. Gary Shilling & Co., Inc. Willowbridge Associates Inc.
Dean Witter Spectrum Technical L.P. Campbell & Company, Inc. Chesapeake Capital Corporation John W. Henry & Company, Inc. ("JWH")
Compensation to the trading advisors by the Partnerships consists of a management fee and an incentive fee as follows:
MANAGEMENT FEE--The management fee is accrued at the rate of 5/48 of 1% of the Net Assets on the first day of each month (a 1.25% annual rate) to Spectrum Balanced.
The management fee is accrued at the rate of 1/3 of 1% per month of the Net Assets allocated to each trading advisor on the first day of each month (a 4% annual rate) to Spectrum Strategic and Spectrum Technical.
INCENTIVE FEE--Each Partnership will pay a monthly incentive fee equal to 15% of the "Trading Profits", as defined in the Limited Partnership Agreement, experienced with respect to each trading advisor's allocated Net Assets as of the end of each calendar month. When trading losses are incurred, no incentive fee will be paid in subsequent months until all such losses are recovered.
4. FINANCIAL INSTRUMENTS
The Partnerships trade futures and forward contracts in interest rates, stock indices, commodities, currencies, petroleum and precious metals. 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. At December 31, 1997 and 1996, open contracts were:
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A portion of the amounts indicated as off-balance-sheet risk in forward currency contracts is due to offsetting forward commitments to purchase and to sell the same currency on the same date in the future. These commitments are economically offsetting, but are not offset in the forward market until the settlement date.
The unrealized gains on open contracts are reported as a component of "Equity in Commodity futures trading accounts" on the Statements of Financial Condition and totaled at December 31, 1997 and 1996, respectively, $681,559 and $216,593 for Spectrum Balanced, $2,527,613 and $140,355 for Spectrum Strategic, and $12,296,712 and $2,533,889 for Spectrum Technical.
For Spectrum Balanced, of the $681,559 net unrealized gain on open contracts at December 31, 1997, $657,913 related to exchange-traded futures contracts and $23,646 related to off-exchange-traded forward currency contracts. Of the $216,593 net unrealized gain on open contracts at December 31, 1996, $292,886 related to exchange-traded futures contracts and $(76,293) related to off- exchange-traded forward currency contracts.
For Spectrum Strategic, of the $2,527,613 net unrealized gain on open contracts at December 31, 1997, all related to exchange-traded futures contracts. Of the $140,355 net unrealized gain on open contracts at December 31, 1996, $140,193 related to exchange-traded futures contracts and $162 related to off-exchange- traded forward currency contracts.
For Spectrum Technical, of the $12,296,712 net unrealized gain on open contracts at December 31, 1997, $11,977,756 related to exchange-traded futures
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
contracts and $318,956 related to off-exchange-traded forward currency contracts. Of the $2,533,889 net unrealized gain on open contracts at December 31, 1996, $2,802,603 related to exchange-traded futures contracts and $(268,714) related to off-exchange-traded forward currency contracts.
The contract amounts in the above table represent the Partnerships' extent of involvement in the particular class of financial instrument, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments is limited to the amounts reflected in the Partnerships' Statements of Financial Condition.
Exchange-traded contracts and off-exchange-traded forward currency contracts held by the Partnerships at December 1997 and 1996 mature as follows:
The Partnerships also have credit risk because either DWR or Carr acts as the futures commission merchant or the counterparty, with respect to most of the Partnerships' assets. Exchange-traded futures and options contracts are marked to market on a daily basis, with variations in value settled on a daily basis. DWR and Carr, as futures commission merchants for each Partnership's exchange- traded futures and options contracts, are required pursuant to regulations of the Commodity Futures Trading Commission to segregate from their own assets, and for the sole benefit of their commodity customers, all funds held by them with respect to exchange-traded futures and futures styled options contracts, including an amount equal to the net unrealized gain on all open futures and futures styled options contracts, which funds totaled at December 31, 1997 and 1996 respectively, $25,612,869 and $19,420,011 for Spectrum Balanced, $59,631,616 and $46,138,105 for Spectrum Strategic and $180,827,678 and $109,262,851 for Spectrum Technical. With respect to the Partnership's off- exchange-traded forward currency contracts, there are no daily settlements of variations in value nor is there any requirement that an amount equal to the net
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
unrealized gain on open forward contracts be segregated. With respect to those off-exchange-traded forward currency contracts, the Partnerships are at risk to the ability of Carr, the sole counterparty on all of such contracts, to perform. Carr's parent, Credit Agricole Indosuez, has guaranteed Carr's obligation to each Partnership.
For the years ended December 31, 1997 and 1996 the average fair value of financial instruments held for trading purposes was as follows:
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LEGAL MATTERS
On September 6, 10, and 20, 1996, and on March 13, 1997, similar 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., MSDWD (all such parties referred to hereafter as the "Dean Witter Parties"), certain limited partnership commodity pools of which Demeter is the general partner, and certain trading advisors (including JWH) 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 partnerships commodity pools. 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 Dean Witter Parties and certain trading advisors (including JWH) on behalf of all purchasers of interests in
DEAN WITTER SPECTRUM SERIES NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
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. 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. The complaints seek unspecified amounts of compensatory and punitive damages and other relief. It is possible that additional similar actions may be filed and that, in the course of these actions, other parties could be added as defendants. The Dean Witter Parties believe that they have strong defenses to, and they will vigorously contest, the actions. Although the ultimate outcome of legal proceedings cannot be predicted with certainty, it is the opinion of management of the Dean Witter Parties that the resolution of the actions will not have a material adverse effect on the financial condition or the results of operations of any of the Dean Witter Parties.
6. SUBSEQUENT EVENTS
On March 11, 1998, the Partnerships filed a registration statement (the "Offering") with the Securities and Exchange Commission to update and make certain changes to the Partnership's registration effective with the first Monthly Closing of the Offering. These changes include a reduction of brokerage fees to 4.60% annually for Spectrum Balanced and 7.25% annually for Spectrum Strategic and Spectrum Technical. At this time the trading program utilized by Spectrum Balanced will be modified and Spectrum Balanced will be renamed Dean Witter Spectrum Global Balanced L.P. Additionally, a fourth partnership, Dean Witter Spectrum Select L.P. ("Spectrum Select") will be made available for investment and exchanges. Prior to being added to the Spectrum series, Spectrum Select was a stand alone commodity pool known as Dean Witter Select Futures Fund L.P.
DEAN WITTER REYNOLDS INC.
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