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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from ___________to_______________
Commission File Number 33-24662
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
(Exact name of registrant as specified in its Limited Partnership
Agreement)
DELAWARE 13-
3490286
(State or other jurisdiction of
(I.R.S. Employer
incorporation of organization)
Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, New York, N.Y.-62nd Fl.
10048
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code
(212) 392-5454
Securities registered pursuant to Section 12(b) of the Act:
Name
of each exchange
Title of each class
on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10K. [X ]
State the aggregate market value of the Units of Limited
Partnership Interest held by non-affiliates of the registrant.
The aggregate market value shall be computed by reference to the
price at which units were sold, or the average bid and asked
prices of such units, as of a specified date within 60 days prior
to the date of filing: $11,015,305.31 at January 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
Page No.
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . .
1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . 2-4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 5-6
Item 4. Submission of Matters to a Vote of Security Holders . 7
Part II.
Item 5. Market for the Registrant's Partnership Units and
Related Security Holder Matters . . . . . . . . . . . . 8
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . .10-17
Item 8. Financial Statements and Supplementary Data. . . . . 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . 17
Part III.
Item10. Directors, Executive Officers, Promoters and
Control Persons of the Registrant . . . . . . . . . 18-23
Item11. Executive Compensation . . . . . . . . . . . . . . 23
Item12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . 23
Item13. Certain Relationships and Related Transactions . . .23-24
Part IV.
Item14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . 25
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by
reference as follows:
Documents Incorporated Part
of Form 10-K
Partnership's Registration Statement
I and IV
on Form S-1,
File No. 33-24662
December 31,
1997 Annual Report III and IV
for the Dean Witter Diversified
Futures Fund II L.P.
PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter
Diversified Futures Fund II L.P. (the "Partnership") is a
Delaware limited partnership formed to engage in the
speculative trading of commodity futures contracts and other
commodity interests, including, but not limited to, forward
contracts on foreign currencies and options on futures
contracts and physical commodities (collectively "futures
interests").
Units of limited partnership interest ("Units") in the
Partnership were registered pursuant to a Registration
Statement on Form S-1 (File No. 33-24662) which became
effective on October 28, 1988. The offering of units was
underwritten on a "best efforts" basis by Dean Witter
Reynolds Inc. ("DWR"). The Partnership's general partner is
Demeter Management Corporation ("Demeter"). Both DWR and
Demeter are wholly-owned subsidiaries of Morgan Stanley,
Dean Witter, Discover & Co. ("MSDWD").
Through July 31, 1997, the sole commodity broker for
the Partner-ship'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 commenced operations on January 18,
1989. The Partnership's net asset value per unit, as of
December 31, 1997, was $2,684.43 representing an increase of
11.28 percent from the net asset value per unit of $2,412.41
at 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 futures
interests, pursuant to trading instructions provided by Dean
Witter Futures & Currency Management Inc. ("DWFCM"), a
wholly-owned subsidiary of MSDWD and an affiliate of DWR
and Demeter. For a detailed description of the different facets
of the Partnership's
business, see those portions of the Partnership's
Prospectus, dated
October 28, 1988, filed as part of the Registration
Statement on Form S-1 (see "Documents Incorporated by
Reference" Page 1), set forth below:
Facets of Business
1. Summary 1. "Summary of the
Prospectus"
(Pages 2-7).
2. Commodity Markets 2. "The Commodities
Markets"
(Pages 57-67).
3. Partnership's Commodity 3. "Trading Policies"
(Pages
Trading Arrangements and 28-29). "The Trading
Policies Manager" (Pages 29-
38).
4. Management of the Part- 4. "The Management
Agreement"
nership (Pages 39-41). "The
General Partner" (Pages 41-56)
and "The Commodity
Broker"(Pages 56-57). "The
Limited Partnership
Agreement" (Pages 68-
73).
5. Taxation of the Partner- 5. "Federal Income Tax
ship's Limited Partners Aspects" and "State
and Local Income Tax
Aspects" (Pages 75-
83).
(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. PROPERTIES
The executive and administrative offices are located
within the offices of DWR. The DWR offices utilized by the
Partnership are located at Two World Trade Center, 62nd
Floor, New York, NY 10048.
Item 3. LEGAL PROCEEDINGS
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 interest in limited
partnership commodity pools sold by DWR. Named defendants
include DWR, Demeter, DWFCM, MSDWD (all such parties referred
to hereafter as the "Dean Witter Parties"), the
Partnership, certain other 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, including the Partnership, 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 and the Partnership
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 or the
Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND
RELATED
SECURITY HOLDER MATTERS
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 656. No distributions have been made by the
Partnership since it commenced operations on January 18,
1989. Demeter has sole discretion to decide what
distributions, if any, shall be made to investors in the
Partnership. No determination has yet been made as to
future distributions.
Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
1997 1996 1995 1994
1993
Total Revenues
(including interest)2,490,979 643,498 1,556,726 3,037,932 3,868,460
Net Income (Loss) 1,247,087 (824,517) (410,574) 853,4411,263,7
35
Net Income (Loss)
Per Unit (Limited
& General Partners) 272.02 (122.41) (75.58) 133.96 169.48
Total Assets 11,801,17212,617,666 15,550,215 17,710,24018,055,6
27
Total Limited
Partners' Capital 11,209,045 12,019,867 14,341,357 16,676,00517,109,409
Net Asset Value Per
Unit of Limited
Partnership Interest 2,684.43 2,412.41 2,534.82 2,610.40 2,476.44
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership's assets are deposited 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 at 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 were 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 on a
daily basis to ensure compliance with the Trading Policies.
Demeter may (under terms of the Management Agreements)
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 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 $11,488,226, a decrease of
$782,531 from the
Partnership's total capital of $12,270,757, at December 31,
1996. For the year ended December 31, 1997, the Partnership
generated net income of $1,247,087 and total redemptions
aggregated $2,029,618.
For the year ended December 31, 1997, the Partnership's
total trading revenues including interest income were
$2,490,979. The Partnership's total expenses for the year
were $1,243,892, resulting in net income of $1,247,087. The
value of an individual unit in the Partnership increased
from $2,412.41 at December 31, 1996 to $2,684.43 at December
31, 1997.
As of December 31, 1996, the Partnership's total capital
was $12,270,757, a decrease of $2,334,221 from the
Partnership's total capital of $14,604,978 at December 31,
1995. For the year ended December 31, 1996, the Partnership
incurred a net loss of $824,517 and total redemptions
aggregated $1,509,704.
For the year ended December 31, 1996, the Partnership's
total trading revenues including interest income were
$643,498. The Partnership's total expenses for the year
were $1,468,015, resulting in a net loss of $824,517. The
value of an individual unit in the Partnership decreased
from $2,534.82 at December 31, 1995 to $2,412.41 at December
31, 1996.
As of December 31, 1995, the Partnership's total
capital was $14,604,978, a decrease of $2,342,508 from the
Partnership's total
capital of $16,947,486 at December 31, 1994. For the year
ended December 31, 1995, the Partnership incurred a net loss
of $410,574 and total redemptions aggregated $1,931,934.
For the year ended December 31, 1995, the Partnership's
total trading revenues including interest income were
$1,556,726. The Partnership's total expenses for the year
were $1,967,300, resulting in a net loss of $410,574. The
value of an individual unit in the Partnership decreased
from $2,610.40 at December 31, 1994 to $2,534.82 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. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
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 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. EXECUTIVE COMPENSATION
The Partnership has no directors and executive
officers. As a limited partnership, the business of the
Partnership is managed by Demeter which is responsible for
the administration of the business affairs of the
Partnership but receives no compensation for such services.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT (a) Security Ownership of Certain
Beneficial Owners - As of December 31, 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 104 Units of General Partnership
Interest representing a 2.43 percent interest in the
Partnership.
(c) Changes in Control - None
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of
"Notes to Financial Statements", in the accompanying 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 $814,111 for the year ended December 31, 1997. In its
capacity as the Partnership's trading manager, DWFCM
received management fees of $360,670 for the year ended
December 31, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of independent
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 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
DIVERSIFIED FUTURES FUND II L.P.
(Registrant)
BY: Demeter
Management Corporation,
General
Partner
March 24, 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 24,
1998
Mark J. Hawley, Director and
President
/s/ Richard M. DeMartini March 24,
1998
Richard M. DeMartini, Director
and Chairman of the Board
/s/ Lawrence Volpe March 24,
1998
Lawrence Volpe, Director
/s/ Joseph G. Siniscalchi March 24,
1998
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 24,
1998
Edward C. Oelsner III, Director
/s/ Robert E. Murray March 24,
1998
Robert E. Murray, Director
/s/ Patti L. Behnke March 24,
1998
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
October 28, 1988. (1)
- -10. Management Agreement among the
Partnership, Demeter Management
Corporation and Dean Witter Futures (2)
& Currency Management Inc. dated
as of October 28, 1988.
- -10. Customer Agreement Between the
Partnership and Dean Witter
Reynolds, Inc., dated as of (3)
October 28, 1988.
- -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.
24662)
(2)
Incorporated by reference to Exhibit 10.02 of the Partnership's
Registration Statement on Form S-1. (File No. 24462)
(3)
Incorporated by reference to Exhibit 10.01 of the Partnership's
Registration Statement on Form S-1. (File No. 24462)
(4) Filed
herewith.
Diversified
Futures
Fund II
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 DIVERSIFIED FUTURES FUND II L.P.
ANNUAL REPORT
1997
Dear Limited Partner:
This marks the ninth annual report for the Dean Witter Diversified Futures Fund
II L.P. (the "Fund"). The Fund began the year at a Net Asset Value per Unit of
$2,412.41 and finished 1997 at $2,684.43, reflecting a gain of 11.2%. The Fund
has increased by 168.4% since it began trading in 1989 (a compound annualized
return of 11.7%).
Gains were recorded during January and February as a result of a strengthening
in the value of the U.S. dollar versus the Japanese yen and most major European
currencies. Additional gains were recorded during this two month period from
long coffee futures positions as prices increased over concerns regarding the
weather and labor conditions in South America. Smaller gains were recorded from
short positions in the energy markets as oil and gas prices moved lower.
Performance during March resulted in a portion of previous months' profits
being given back as many of the markets that produced gains in January and
February experienced trend reversals and choppy price movement. The most
significant losses were recorded in the currency markets as the value of most
European currencies reversed higher versus the U.S. dollar. Additional losses
were recorded in the financial futures and most domestic commodities markets as
prices in these markets moved in a choppy pattern.
Losses were experienced during April as the difficult trading environment that
began in March continued. The most significant losses were recorded in the
financial futures markets as domestic bond prices rallied higher late in the
month after showing signs of trending lower
previously. Small losses were recorded during May as profits in soft
commodities and financial futures were more than offset by losses in the energy
and currency markets. During June, losses were recorded from long copper
futures positions as prices moved lower late in the month. Smaller losses were
recorded from trading in soft commodities and energies. A portion of these
losses was offset from long global interest rate and stock index futures
positions as prices in these markets moved higher.
During July, profits were recorded from long positions in global interest rate
futures as U.S., Australian, European and Japanese interest rate futures prices
trended higher. Additional gains were recorded from short European currency
positions as the U.S. dollar again strengthened relative to the German mark. A
sharp trend reversal in global interest rate futures prices during August
resulted in a giveback of a portion of July's profits. Additional losses were
recorded in the currency markets as the value of most European currencies
increased relative to the U.S. dollar after moving lower previously. A strong
upward move in international interest rate futures prices during September
resulted in gains for the Fund's long positions. Smaller gains were recorded
from long natural gas futures positions as prices in this market also
increased.
A sharp trend reversal in international interest rate futures prices during
October resulted in a giveback of a portion of September's profits. Additional
losses were recorded as a result of short-term volatility in domestic bond and
stock index futures throughout a majority of the month. Trading gains recorded
in the currency and agricultural markets offset a small portion of the overall
losses for the month. During November and December, profits were recorded in
the currency markets from short Japanese yen positions as the value of the yen
decreased relative to the U.S. dollar and other world currencies amid concerns
of the stability of the Asian economy. Additional profits were recorded from
short gold futures positions as gold prices declined to their lowest level in
over twelve years.
1997 was a profitable year for the Fund as profits were recorded from sustained
price movements in the currency markets during January and February and then
again in November and December from short Japanese yen positions as the value
of the U.S. dollar increased versus the yen. Additional gains were also
recorded from long global interest rate futures positions during June and July.
Although many of the profitable periods with long price trends were followed by
trend reversals and short-term volatile price movement, Dean Witter Futures &
Currency Management Inc's ("DWFCM's") intermediate to long-term trend following
trading methodology was able to retain profits. Looking ahead, we remain
confident in DWFCM's time tested methodology and in its ability to profit over
long-term periods.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048, or your 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 DIVERSIFIED FUTURES FUND II L.P.
INDEPENDENT AUDITORS' REPORT
The Limited Partners and the General Partner:
We have audited the accompanying statements of financial condition of Dean
Witter Diversified Futures Fund II L.P. (the "Partnership") 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
Partnership's 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 Diversified Futures Fund II
L.P. as of December 31, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 17, 1998
New York, New York
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1997 1996
---------- ----------
$ $
ASSETS
Equity in Commodity futures trading
accounts:
Cash 10,015,151 12,415,430
Net unrealized gain on open contracts 1,749,349 160,193
---------- ----------
Total Trading Equity 11,764,500 12,575,623
Interest receivable (DWR) 36,672 42,043
---------- ----------
Total Assets 11,801,172 12,617,666
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 283,443 297,904
Accrued management fee (DWFCM) 29,503 31,538
Accrued brokerage commissions (DWR) -- 15,137
Accrued transaction fees and costs -- 2,330
---------- ----------
Total Liabilities 312,946 346,909
---------- ----------
PARTNERS' CAPITAL
Limited Partners (4,175.580 and 4,982.521 Units,
respectively) 11,209,045 12,019,867
General Partner (104 Units) 279,181 250,890
---------- ----------
Total Partners' Capital 11,488,226 12,270,757
---------- ----------
Total Liabilities and Partners' Capital 11,801,172 12,617,666
========== ==========
NET ASSET VALUE PER UNIT 2,684.43 2,412.41
========== ==========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS
ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ----------
$ $ $
REVENUES
Trading Profit (Loss):
Realized 427,530 832,912 2,142,749
Net change in unrealized 1,589,156 (692,226) (1,324,261)
--------- --------- ----------
Total Trading Results 2,016,686 140,686 818,488
Interest income (DWR) 474,293 502,812 738,238
--------- --------- ----------
Total Revenues 2,490,979 643,498 1,556,726
--------- --------- ----------
EXPENSES
Brokerage commissions (DWR) 814,111 1,004,389 1,522,301
Management fee (DWFCM) 360,670 383,830 507,434
Transaction fees and costs 69,111 82,386 132,583
Incentive fee (DWFCM) -- (2,590) (195,018)
--------- --------- ----------
Total Expenses 1,243,892 1,468,015 1,967,300
--------- --------- ----------
NET INCOME (LOSS) 1,247,087 (824,517) (410,574)
========= ========= ==========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 1,218,796 (811,786) (402,714)
General Partner 28,291 (12,731) (7,860)
NET INCOME (LOSS) PER UNIT:
Limited Partners 272.02 (122.41) (75.58)
General Partner 272.02 (122.41) (75.58)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
----------- ---------- ------- ----------
$ $ $
Partners' Capital,
December 31, 1994 6,492.295 16,676,005 271,481 16,947,486
Net Loss -- (402,714) (7,860) (410,574)
Redemptions (730.544) (1,931,934) -- (1,931,934)
--------- ---------- ------- ----------
Partners' Capital,
December 31, 1995 5,761.751 14,341,357 263,621 14,604,978
Net Loss -- (811,786) (12,731) (824,517)
Redemptions (675.230) (1,509,704) -- (1,509,704)
--------- ---------- ------- ----------
Partners' Capital,
December 31, 1996 5,086.521 12,019,867 250,890 12,270,757
Net Income -- 1,218,796 28,291 1,247,087
Redemptions (806.941) (2,029,618) -- (2,029,618)
--------- ---------- ------- ----------
Partners' Capital,
December 31, 1997 4,279.580 11,209,045 279,181 11,488,226
========= ========== ======= ==========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS
ENDED
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 1,247,087 (824,517) (410,574)
Noncash item included in net income
(loss):
Net change in unrealized (1,589,156) 692,226 1,324,261
Decrease in operating assets:
Interest receivable (DWR) 5,371 12,224 12,917
Increase (decrease) in
operating liabilities:
Accrued management fee (DWFCM) (2,035) (7,324) (5,406)
Accrued brokerage commissions (DWR) (15,137) (101,450) (16,216)
Accrued transaction fees and costs (2,330) (2,911) 2,068
Accrued incentive fee (DWFCM) -- (3,299) (210,269)
---------- ---------- ----------
Net cash provided by (used for) operating
activities (356,200) (235,051) 696,781
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions
payable (14,461) (483,344) 412,306
Redemptions of units (2,029,618) (1,509,704) (1,931,934)
---------- ---------- ----------
Net cash used for financing activities (2,044,079) (1,993,048) (1,519,628)
---------- ---------- ----------
Net decrease in cash (2,400,279) (2,228,099) (822,847)
Balance at beginning of period 12,415,430 14,643,529 15,466,376
---------- ---------- ----------
Balance at end of period 10,015,151 12,415,430 14,643,529
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Dean Witter Diversified Futures Fund II L.P. (the "Partnership")
is a limited partnership organized to engage in the speculative trading of
commodity futures contracts, commodity options contracts and forward contracts
on foreign currencies. The general partner for the 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 Partnership's futures and futures options
trades and the counterparty on the Partnership's foreign currency trades. DWR
will continue to serve as the non-clearing commodity broker for the Partnership
with Carr providing all clearing services for the Partnership's transactions.
Demeter is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by Demeter and the Limited Partners
based upon their proportional ownership interests.
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 other commodity interests
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 the Partnership interest income based upon 80% of the average daily Net
Assets for the month at a rate equal to the average yield on 13-Week U.S.
Treasury Bills issued during such month. 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.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS--The Partnership's asset "Equity
in Commodity futures trading accounts" consists of cash on deposit at 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. 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 COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS--Prior to
September 1, 1996, the monthly brokerage fee was equal to 4/5 of 1% per month
of the Partnership's adjusted month-end Net Assets, as defined in the Limited
Partnership Agreement.
As of September 1, 1996, brokerage commissions are accrued on a half-turn basis
at 80% of DWR's published non-member rates, to a maximum of 13/20 of 1% per
month, inclusive of transaction fees and costs, of the Partnership's month-end
Net Assets (as defined in the Limited Partnership Agreement).
Transaction fees and costs are accrued on a half-turn basis.
OPERATING EXPENSES--The Partnership incurs a monthly management fee and may
incur an incentive fee. Demeter and/or DWR bear all other operating expenses.
INCOME TAXES--No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible for reporting
income or loss based upon their respective share of the Partnership's revenues
and expenses for income tax purposes.
DISTRIBUTIONS--Distributions, other than on redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made to date.
REDEMPTIONS--Limited Partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit effective as of the last day of any calendar
quarter upon five business days advance notice by redemption form to Demeter.
DISSOLUTION OF THE PARTNERSHIP--The Partnership will terminate on December 31,
2025 or at an earlier date if certain conditions set forth in the Limited
Partnership Agreement occur.
2. RELATED PARTY TRANSACTIONS
Under its Customer Agreement with DWR, the Partnership pays a monthly brokerage
fee to DWR as described in Note 1. The Partnership's cash is on
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Demeter, on behalf of the Partnership and itself, has entered into a Management
Agreement with DWFCM to make all trading decisions for the Partnership.
Compensation to DWFCM by the Partnership consists of a management fee and an
incentive fee as follows:
MANAGEMENT FEE--The management fee is accrued daily at the rate of 1/4 of 1%
per month of adjusted Net Assets, as defined in the Management Agreement, at
each month-end.
INCENTIVE FEE--The Partnership will pay an annual incentive fee to DWFCM equal
to 15% of the "Trading Profits", as defined in the Management Agreement, earned
by the Partnership as of the end of each annual incentive period ending January
31. Such incentive fee is accrued in each month in which "Trading Profits"
occur. In those months in which "Trading Profits" are negative, previous
accruals, if any, during the incentive period will be reduced.
3. FINANCIAL INSTRUMENTS
The Partnership trades 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:
CONTRACT OR NOTIONAL AMOUNT
---------------------------
1997 1996
------------- -------------
$ $
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase 3,419,000 --
Commodity Futures:
Commitments to Purchase 449,000 2,026,000
Commitments to Sell 7,245,000 6,083,000
Foreign Futures:
Commitments to Purchase 22,719,000 6,629,000
Commitments to Sell 5,110,000 11,748,000
OFF-EXCHANGE-TRADED FORWARD
CURRENCY CONTRACTS
Commitments to Purchase 22,401,188 33,150,000
Commitments to Sell 43,182,518 42,844,000
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
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 $1,749,349 and $160,193 at December 31, 1997 and 1996,
respectively.
Of the $1,749,349 net unrealized gain on open contracts at December 31, 1997,
$703,453 related to exchange-traded futures contracts and $1,045,896 related to
off-exchange-traded forward currency contracts.
Of the $160,193 net unrealized gain on open contracts at December 31, 1996,
$423,229 related to exchange-traded futures contracts and $(263,036) related to
off-exchange-traded forward currency contracts.
Exchange-traded futures contracts held by the Partnership at December 31, 1997
and 1996 mature through June 1998 and June 1997, respectively. Off-exchange-
traded forward currency contracts held by the Partnership at December 31, 1997
and 1996 mature through April 1998 and February 1997, respectively. The
contract amounts in the above table represent the Partnership's 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 Partnership's
Statements of Financial Condition.
The Partnership also has credit risk because either DWR or Carr acts as the
futures commission merchant or the counterparty, with respect to most of the
Partnership's assets. Exchange-traded futures contracts are marked to market on
a daily basis, with variations in value settled on a daily basis. DWR and Carr,
as the futures commission merchants for the Partnership's exchange-traded
futures contracts, are required pursuant to regulations of the Commodity
Futures Trading Commission to segregate from their own assets, and for the sole
benefit of their commodity customers, all funds held by them with respect to
exchange-traded futures contracts including an amount equal to the net
unrealized gain on all open futures contracts, which funds totaled $10,718,604
and $12,838,659 at December 31, 1997 and 1996, respectively. With respect to
the Partnership's off-exchange-traded forward currency contracts, there are no
daily settlements of variations in value nor is there any requirement that an
amount equal to the net unrealized gain on open forward contracts be
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
segregated. With respect to those off-exchange-traded forward currency
contracts, the Partnership is 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 the partnership.
For the years ended December 31, 1997 and 1996, the average fair value of
financial instruments held for trading purposes was as follows:
1997
----------------------
ASSETS LIABILITIES
---------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 3,335,000 11,531,000
Commodity Futures 4,614,000 5,619,000
Foreign Futures 13,703,000 7,965,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 25,073,000 33,538,000
1996
----------------------
ASSETS LIABILITIES
---------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 15,923,000 8,572,000
Commodity Futures 7,188,000 5,152,000
Foreign Futures 22,067,000 8,118,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 37,689,000 41,562,000
4. 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,
DWFCM, MSDWD (all such parties referred to hereafter as the "Dean Witter
Parties"), the Partnership, certain other 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, Newcastle County, against the Dean Witter Parties and certain trading
advisors on behalf of all purchasers of interests in various limited
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
partnership commodity pools, including the Partnership, 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 and the Partnership 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 or the Partnership.
DEAN WITTER REYNOLDS INC.
Two World Trade Center
62nd Floor
New York, NY 10048
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