-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AvIctGIoqbZ20hls5aUIy+/P0Q5m0goZ/QGu2JKZtwnLDZzaOsUUNTUap7vo0h3y uwXnhnqEcrCLSoC1fuYadA== 0000701286-01-500010.txt : 20010813 0000701286-01-500010.hdr.sgml : 20010813 ACCESSION NUMBER: 0000701286-01-500010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WITTER DEAN DIVERSIFIED FUTURES FUND II L P CENTRAL INDEX KEY: 0000839945 STANDARD INDUSTRIAL CLASSIFICATION: [6221] IRS NUMBER: 133490286 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17446 FILM NUMBER: 1704313 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER 62ND FLR STREET 2: C/O DEMETER MANAGEMENT CORP CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2123925454 MAIL ADDRESS: STREET 1: C/O DEMETER MANAGEMENT CORP STREET 2: TWO WORLD TRADE CENTER 62ND FL CITY: NEW YORK STATE: NY ZIP: 10048 10-Q 1 dff2.txt DIVERSIFIED FUTURES FUND II UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to__________________ Commission File No. 0-17446 DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. (Exact name of registrant as specified in its charter) Delaware 13-3490286 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) c/o Demeter Management Corporation Two World Trade Center, 62 Fl., New York, NY 10048 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 392-5454 (Former name, former address, and former fiscal year, if changed since last report) Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___________ DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. INDEX TO QUARTERLY REPORT ON FORM 10-Q June 30, 2001
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Financial Condition as of June 30, 2001 (Unaudited) and December 31, 2000........................2 Statements of Operations for the Quarters Ended June 30, 2001 and 2000 (Unaudited) ......................3 Statements of Operations for the Six Months Ended June 30, 2001 and 2000 (Unaudited).......................4 Statements of Changes in Partners' Capital for the Six Months ended June 30, 2001 and 2000 (Unaudited)......5 Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 (Unaudited).......................6 Notes to Financial Statements (Unaudited).............7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....12-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................21-33 Part II. OTHER INFORMATION Item 1. Legal Proceedings ...................................34 Item 6. Exhibits and Reports on Form 8-K..................34-35
PART I. FINANCIAL INFORMATION Item 1. Financial Statements DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF FINANCIAL CONDITION
June 30, December 31, 2001 2000 $ $ (Unaudited) ASSETS Equity in futures interests trading accounts: Cash 7,660,375 7,441,614 Net unrealized gain on open contracts (MS & Co.) 648,067 1,212,863 Net unrealized gain (loss) on open contracts (MSIL) 109,486 (168,289) Total net unrealized gain on open contracts 757,553 1,044,574 Total Trading Equity 8,417,928 8,486,188 Interest receivable (Morgan Stanley DW) 19,021 31,123 Total Assets 8,436,949 8,517,311 LIABILITIES AND PARTNERS' CAPITAL Liabilities Redemptions payable 116,485 127,081 Accrued incentive fees (DWFCM) 30,290 21,097 Accrued management fees (DWFCM) 21,092 21,293 Total Liabilities 167,867 169,471 Partners' Capital Limited Partners (2,522.584 and 2,609.949 Units, respectively) 7,941,666 8,027,946 General Partner (104 Units) 327,416 319,894 Total Partners' Capital 8,269,082 8,347,840 Total Liabilities and Partners' Capital 8,436,949 8,517,311 NET ASSET VALUE PER UNIT 3,148.23 3,075.90 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Quarters Ended June 30, 2001 2000 $ $ REVENUES Trading profit (loss): Realized (12,462) 1,089,177 Net change in unrealized (118,848) ( 876,432) Total Trading Results (131,310) 212,745 Interest income (Morgan Stanley DW) 60,494 92,267 Total (70,816) 305,012 EXPENSES Brokerage commissions (Morgan Stanley DW) 122,578 104,800 Management fees (DWFCM) 62,910 60,410 Transaction fees and costs 6,460 6,504 Incentive fee (DWFCM) (48,489) - Total 143,459 171,714 NET INCOME (LOSS) (214,275) 133,298 NET INCOME (LOSS) ALLOCATION Limited Partners (205,909) 128,647 General Partner (8,366) 4,651 NET INCOME (LOSS) PER UNIT Limited Partners (80.44) 44.73 General Partner (80.44) 44.73 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2001 2000 $ $ REVENUES Trading profit (loss): Realized 710,477 1,108,208 Net change in unrealized (287,021) (502,404) Total Trading Results 423,456 605,804 Interest income (Morgan Stanley DW) 140,125 179,572 Total 563,581 785,376 EXPENSES Brokerage commissions (Morgan Stanley DW) 215,738 236,733 Management fees (DWFCM) 125,524 121,402 Incentive fee (DWFCM) 10,998 - Transaction fees and costs 10,982 16,393 Total 363,242 374,528 NET INCOME 200,339 410,848 NET INCOME ALLOCATION Limited Partners 192,817 397,035 General Partner 7,522 13,813 NET INCOME PER UNIT Limited Partners 72.33 132.82 General Partner 72.33 132.82 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Six Months Ended June 30, 2001 and 2000 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total $ $ $ Partners' Capital, December 31, 1999 3,150.638 7,787,964 265,850 8,053,814 Net Income - 397,035 13,813 410,848 Redemptions (277.268) (737,955) - (737,955) Partners' Capital, June 30, 2000 2,873.370 7,447,044 279,663 7,726,707 Partners' Capital, December 31, 2000 2,713.949 8,027,946 319,894 8,347,840 Net Income - 192,817 7,522 200,339 Redemptions (87.365) (279,097) - (279,097) Partners' Capital, June 30, 2001 2,626.584 7,941,666 327,416 8,269,082 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2001 2000 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net income 200,339 410,848 Noncash item included in net income: Net change in unrealized 287,021 502,404 (Increase) decrease in operating assets: Interest receivable (Morgan Stanley DW) 12,102 (725) Increase (decrease) in operating liabilities: Accrued incentive fee (DWFCM) 9,193 - Accrued management fees (DWFCM) (201) (831) Net cash provided by operating activities 508,454 911, 696 CASH FLOWS FROM FINANCING ACTIVITIES Decrease in redemptions payable (10,596) ( 4,620) Redemptions of Units (279,097) (737,955) Net cash used for financing activities (289,693) (742,575) Net increase in cash 218,761 169,121 Balance at beginning of period 7,441,614 8,042,490 Balance at end of period 7,660,375 8,211,611 The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. NOTES TO FINANCIAL STATEMENTS June 30, 2001 (UNAUDITED) The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial condition of Dean Witter Diversified Futures Fund II L.P. (the "Partnership"). The financial statements and condensed notes herein should be read in conjunction with the Partnership's December 31, 2000 Annual Report on Form 10-K. 1. Organization Dean Witter Diversified Futures Fund II L.P. is a Delaware limited partnership organized to engage primarily in the speculative trading of commodity futures contracts and forward contracts on physical commodities and other commodity interests. The general partner for the Partnership is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc. ("Morgan Stanley DW"). Dean Witter Reynolds Inc. changed its name to Morgan Stanley DW Inc., effective April 2, 2001. The clearing commodity brokers are DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Morgan Stanley & Co., Inc. ("MS & Co.") and Morgan Stanley & Co. International Limited ("MSIL"). The trading manager is Dean Witter Futures & Currency Management Inc. ("DWFCM" or the "Trading Manager"). Demeter, Morgan Stanley DW, MS & Co., MSIL and DWFCM are wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co. 2. Related Party Transactions The Partnership's cash is on deposit with Morgan Stanley DW, MS & Co. and MSIL in futures and forwards trading accounts to meet margin requirements as needed. Morgan Stanley DW pays interest on these funds based on current 13-week U.S. Treasury bills. The Partnership pays brokerage commissions to Morgan Stanley DW. Management fees and incentive fees (if any) incurred by the Partnership are paid to DWFCM. 3. Financial Instruments The Partnership trades commodity futures contracts and forward contracts on physical commodities and other commodity interests. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) influence the market value of these contracts, including interest rate volatility. The Partnership accounts for its derivative investments in accordance with the provisions of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics: 1) One or more underlying notional amounts or payment provisions; 2) Requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors; 3) Terms require or permit net settlement. Generally derivatives include futures, forward, swaps or option contracts and other financial instruments with similar characteristics such as caps, floors and collars. DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The net unrealized gains on open contracts, reported as a component of "Equity in futures interest trading accounts" on the statements of financial condition and longest contract maturity were as follows: Net Unrealized Gains on Open Contracts Longest Maturity Exchange- Off-Exchange- Exchange- Off-Exchange- Traded Traded Total Traded Traded Date Contracts Contracts Contracts Contracts Contracts $ $ $ June 30, 2001 670,588 86,965 757,553 Dec. 2001 Oct. 2001 December 31, 2000 718,718 325,856 1,044,574 June 2002 March 2001 The Partnership has credit risk associated with counterparty non- performance. The credit risk associated with the instruments in which the Partnership is involved is limited to the amounts reflected in the Partnership's statements of financial condition. The Partnership also has credit risk because Morgan Stanley DW, MS & Co. and MSIL act as the futures commission merchants or the counterparties, with respect to most of the Partnership's assets. Exchange-traded futures contracts are marked to market on a daily basis, with variations in value settled on a daily basis. Morgan Stanley DW, MS & Co. and MSIL, each as a futures commission merchant of the Partnership's exchange-traded futures contracts, DEAN WITTER DIVERSIFIED FUTURES FUND II L.P. NOTES TO FINANCIAL STATEMENTS (CONCLUDED) are required, pursuant to regulations of the Commodity Futures Trading Commission ("CFTC"), to segregate from their own assets, and for the sole benefit of their commodity customers, all funds held by them with respect to exchange-traded futures contracts, including an amount equal to the net unrealized gain on all open futures contracts, which funds, in the aggregate, totaled $8,330,963 and $8,160,332 at June 30, 2001 and December 31, 2000, respectively. With respect to the Partnership's off-exchange- traded forward currency contracts, there are no daily settlements of variations in value nor is there any requirement that an amount equal to the net unrealized gain on open forward contracts be segregated. With respect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the ability of MS & Co., the sole counterparty on all of such contracts, to perform. The Partnership has a netting agreement with MS & Co. This agreement, which seeks to reduce both the Partnership's and MS & Co.'s exposure on off-exchange-traded forward currency contracts, should materially decrease the Partnership's credit risk in the event of MS & Co.'s bankruptcy or insolvency. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity - The Partnership deposits its assets with Morgan Stanley DW as non-clearing broker and MS & Co. and MSIL as clearing brokers in separate futures and forwards accounts established for the Trading Manager, which assets are used as margin to engage in trading. The assets are held in either non- interest-bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. The Partnership's assets held by the commodity brokers may be used as margin solely for the Partnership's trading. Since the Partnership's sole purpose is to trade in futures and forwards, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership's investment in futures and forwards may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as "daily price fluctuations limits" or "daily limits". Trades may not be executed at prices beyond the daily limit. If the price for a particular futures contract has increased or decreased by an amount equal to the daily limit, positions in that futures contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating its futures contracts and result in restrictions on redemptions. There is no limitation on daily price moves in trading forward contracts on foreign currency. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. The Partnership has never had illiquidity affect a material portion of its assets. Capital Resources. The Partnership does not have, or expect to have, any capital assets. Redemptions of additional units of limited partnership interest ("Unit(s)") in the future will affect the amount of funds available for investment in futures and forwards in subsequent periods. It is not possible to estimate the amount and therefore the impact of future redemptions of Units. Results of Operations General. The Partnership's results depend on its Trading Manager and the ability of the Trading Manager's trading programs to take advantage of price movements or other profit opportunities in the futures and forwards markets. The following presents a summary of the Partnership's operations for the three and six month periods ended June 30, 2001 and 2000, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Manager trades in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Manager or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of its Trading Manager's trading activities on behalf of the Partnership as a whole and how the Partnership has performed in the past. For the Quarter and Six Months Ended June 30, 2001 For the quarter ended June 30, 2001, the Partnership recorded total trading losses, net of interest income, of $70,816 and posted a decrease in net asset value per Unit. The most significant losses of approximately 2.9% were experienced primarily during June in the global interest rate futures markets from short U.S. and German interest rate futures positions as prices jumped higher on weaker-than-expected U.S. and European economic data that set the stage for possible interest rate cuts. In the metals markets, losses of approximately 2.3% were incurred primarily during April from short aluminum futures positions as prices rose on technically-based buying and production concerns. In the global stock index futures markets, losses of approximately 1.8% were recorded primarily during late May and June from long positions in S&P 500 Index futures as global stock prices declined on worries that the U.S. economic slowdown will ignite a global downturn and corporate earnings will suffer. In the currency markets, losses of approximately 0.1% were recorded primarily during April and May from short positions in the Japanese yen as the value of the yen reversed higher versus the U.S. dollar following a surprise interest rate cut by the U.S. Federal Reserve and on optimism that the Japanese government would unveil an emergency package to stimulate that country's ailing economy. Offsetting currency gains were recorded during May from short positions in the euro as its value weakened relative to the British pound amid pessimism about European growth prospects. These losses were partially offset by gains of approximately 3.0% recorded in the energy markets primarily during May and June from short natural gas futures positions as prices declined on reports of growing inventories and a lack of demand throughout most of the United States. In soft commodities, gains of approximately 0.9% were recorded throughout a majority of the quarter from short cotton futures positions as prices moved lower on weak export sales and low demand. Total expenses for the three months ended June 30, 2001 were $143,459, resulting in a net loss of $214,275. The net asset value of a Unit decreased from $3,228.67 at March 31, 2001 to $3,148.23 at June 30, 2001. For the six months ended June 30, 2001, the Partnership recorded total trading revenues, including interest income, of $563,581 and posted an increase in net asset value per Unit. The most significant gains of approximately 5.0% were recorded throughout a majority of the first quarter in the global interest rate futures markets from long positions in Japanese government bond futures as prices moved higher on concerns regarding that country's economy. Additional gains were recorded from short positions in Australian interest rate futures as prices moved lower amid the weakening of the Australian dollar. In soft commodities, gains of approximately 3.7% were recorded throughout a majority of the first and second quarter from short cotton futures positions as prices moved lower on weak export sales and low demand. In the currency markets, gains of approximately 1.5% were recorded during May from short positions in the euro as its value weakened relative to the British pound amid pessimism about European economic growth prospects. These gains were partially offset by losses of approximately 3.4% recorded in the metals markets primarily during February from long positions in aluminum futures as prices moved lower, pressured by the decline in the U.S. equity market and the subsequent concerns over demand. Additional losses were incurred during April from short aluminum futures positions as prices rose on technically-based buying and production concerns. In the energy markets, losses of approximately 3.4% were recorded throughout the first six months of the year from crude oil futures and its related products as a result of volatility in oil prices due to a continually changing outlook for supply, production and demand. In the global stock index futures markets, losses of approximately 1.2% were recorded primarily during late May and June from long positions in S&P 500 Index futures as global stock prices declined on worries that the U.S. economic slowdown will ignite a global downturn. Total expenses for the six months ended June 30, 2001 were $363,242, resulting in net income of $200,339. The net asset value of a Unit increased from $3,075.90 at December 31, 2000 to $3,148.23 at June 30, 2001. For the Quarter and Six Months Ended June 30, 2000 For the quarter ended June 30, 2000, the Partnership recorded total trading revenues, including interest income, of $305,012 and posted an increase in net asset value per Unit. The most significant gains of approximately 9.7% were recorded in the energy markets primarily during May from long positions in natural gas futures as prices continued their upward trend on fears that inventory levels would remain low and that U.S. demand would outstrip production this summer, when inventories are typically refilled for the winter. Additional gains were recorded during May and June from long futures positions in crude oil and its related products as the previous upward movement in oil prices re- emerged amid rising concerns regarding supplies and production levels. In the agricultural markets, gains of approximately 1.1% were recorded primarily during June from short corn futures positions as corn prices were pressured lower by a damp weather forecast in the U.S. Midwest. In soft commodities, gains of approximately 0.4% were recorded primarily during June from short coffee futures positions as prices decreased amid continued pressure from bearish technical factors and large warehouse supplies. These gains were partially offset by losses of approximately 6.3% recorded throughout a majority of the quarter primarily from long positions in U.S. interest rate futures as prices declined on inflation fears provoked by stronger-than- forecasted U.S. economic data. Losses were also recorded throughout the majority of the quarter from short positions in German bond futures as prices were pushed higher by the rise in U.S. prices. In the global stock index futures markets, losses of approximately 1.6% were incurred primarily during April from long positions in S&P 500 Index futures as fears of inflation negatively impacted domestic equity prices. In the currency markets, losses of approximately 1.3% were experienced primarily during April and early May from long positions in the Japanese yen as its value weakened relative to the U.S. dollar amid fears of an additional Bank of Japan intervention and as Japanese consumer confidence remained sluggish. In the metals markets, losses of approximately 0.6% were recorded primarily during June from short aluminum futures positions as prices increased on consumer and speculative buying. Total expenses for the three months ended June 30, 2000 were $171,714, resulting in net income of $133,298. The net asset value of a Unit increased from $2,644.34 at March 31, 2000 to $2,689.07 at June 30, 2000. For the six months ended June 30, 2000, the Partnership recorded total trading revenues, including interest income, of $785,376 and posted an increase in net asset value per Unit. The most significant gains of approximately 14.9% were recorded in the energy markets primarily during May from long positions in natural gas futures as prices continued their upward trend on fears that inventory levels would remain low and that U.S. demand will outstrip production this summer, when inventories are typically refilled for the winter. Additional gains were recorded during February from long positions in crude oil futures as prices increased due to a combination of cold weather, declining inventories and increasing demand. Oil prices also increased during June in reaction to the dismissal by OPEC of a price setting mechanism and a promise of a modest production increase. In the currency markets, gains of approximately 1.1% were recorded primarily during January from short positions in the Swedish krona, the euro and the Swiss franc as the value of these European currencies weakened relative to the U.S. dollar, hurt by skepticism about Europe's economic outlook and lack of support from European officials. During April, profits were recorded from short positions in the euro as the value of the European common currency dropped to record lows versus the U.S. dollar and British pound. In the agricultural markets, gains of approximately 1.0% were recorded primarily during June from short corn futures positions as corn prices were pressured lower by a damp weather forecast in the U.S. Midwest. These gains were partially offset by losses of approximately 7.5% recorded throughout a majority of the second quarter from long positions in U.S. interest rate futures as prices declined on inflation fears provoked by stronger-than-forecasted U.S. economic data. Losses were also recorded throughout the majority of the second quarter from short positions in German bond futures as prices were pushed higher by the rise in U.S. prices. In the global stock index futures markets, losses of approximately 2.9% were incurred throughout a majority of the first quarter and during April from long positions in S&P 500 Index futures as domestic stock prices declined due to volatility in the technology sector and fears that the Federal Reserve will be forced to take aggressive action to slow the economy. In the metals markets, losses of approximately 2.1% were experienced primarily from long positions in base metal futures as a previous upward price trend reversed sharply lower during February in response to interest rate hikes across the globe. During June, smaller losses were recorded from short aluminum futures positions as prices increased on consumer and speculative buying. Total expenses for the six months ended June 30, 2000 were $374,528, resulting in net income of $410,848. The net asset value of a Unit increased from $2,556.25 at December 31, 1999 to $2,689.07 at June 30, 2000. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction The Partnership is a commodity pool engaged primarily in the speculative trading of futures and forwards. The market-sensitive instruments held by the Partnership are acquired for speculative trading purposes only and, as a result, all or substantially all of the Partnership's assets are at risk of trading loss. Unlike an operating company, the risk of market-sensitive instruments is central, not incidental, to the Partnership's main business activities. The futures and forwards traded by the Partnership involve varying degrees of related market risk. Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities. Fluctuations in market risk based upon these factors result in frequent changes in the fair value of the Partnership's open positions, and, consequently, in its earnings and cash flow. The Partnership's total market risk is influenced by a wide variety of factors, including the diversification among the Partnership's open positions, the volatility present within the markets, and the liquidity of the markets. At different times, each of these factors may act to increase or decrease the market risk associated with the Partnership. The Partnership's past performance is not necessarily indicative of its future results. Any attempt to numerically quantify the Partnership's market risk is limited by the uncertainty of its speculative trading. The Partnership's speculative trading may cause future losses and volatility (i.e. "risk of ruin") that far exceed the Partnership's experience to date or any reasonable expectations based upon historical changes in market value. Quantifying the Partnership's Trading Value at Risk The following quantitative disclosures regarding the Partnership's market risk exposures contain "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward- looking statements for purposes of the safe harbor, except for statements of historical fact. The Partnership accounts for open positions using mark-to-market accounting principles. Any loss in the market value of the Partnership's open positions is directly reflected in the Partnership's earnings, whether realized or unrealized, and its cash flow. Profits and losses on open positions of exchange- traded futures and forwards are settled daily through variation margin. The Partnership's risk exposure in the market sectors traded by the Trading Manager is estimated below in terms of Value at Risk ("VaR"). The VaR model used by the Partnership includes many variables that could change the market value of the Partnership's trading portfolio. The Partnership estimates VaR using a model based on historical simulation with a confidence level of 99%. Historical simulation involves constructing a distribution of hypothetical daily changes in the value of a trading portfolio. The VaR model takes into account linear exposures to price and interest rate risk. Market risks that are incorporated in the VaR model include equity and commodity prices, interest rates, foreign exchange rates, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors ("market risk factors") to which the portfolio is sensitive. The historical observation period of the Partnership's VaR is approximately four years. The one-day 99% confidence level of the Partnership's VaR corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 100 trading days. VaR models, including the Partnership's, are continuously evolving as trading portfolios become more diverse and modeling techniques and systems capabilities improve. Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either Demeter or the Trading Manager in its daily risk management activities. The Partnership's Value at Risk in Different Market Sectors The following table indicates the VaR associated with the Partnership's open positions as a percentage of total net assets by primary market risk category at June 30, 2001 and 2000. At June 30, 2001 and 2000, the Partnership's total capitalization was approximately $8 million. Primary Market June 30, 2001 June 30, 2000 Risk Category Value at Risk Value at Risk Currency (2.93)% (1.46)% Commodity (2.25) (1.75) Interest Rate (1.10) (1.56) Equity (0.10) (0.08) Aggregate Value at Risk (3.87)% (2.63)% Aggregate Value at Risk represents the aggregate VaR of all the Partnership's open positions and not the sum of the VaR of the individual market categories listed above. Aggregate VaR will be lower as it takes into account correlation among different position and categories. The table above represents the VaR of the Partnership's open positions at June 30, 2001 and 2000 only and is not necessarily representative of either the historic or future risk of an investment in the Partnership. Because the Partnership's only business is the speculative trading of futures and forwards, the composition of its trading portfolio can change significantly over any given time period, or even within a single trading day. Any changes in open positions could positively or negatively materially impact market risk as measured by VaR. The table below supplements the quarter-end VaR by presenting the Partnership's high, low and average VaR as a percentage of total net assets for the four quarterly reporting periods from July 1, 2000 through June 30, 2001. Primary Market Risk Category High Low Average Currency (2.93)% (1.64)% (2.48)% Commodity (2.40) (1.07) (1.85) Interest Rate (2.79) (0.57) (1.62) Equity (0.25) - (0.14) Aggregate Value at Risk (3.87)% (3.28)% (3.55)% Limitations on Value at Risk as an Assessment of Market Risk The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership to typically be many times the total capitalization of the Partnership. The value of the Partnership's open positions thus creates a "risk of ruin" not typically found in other investments. The relative size of the positions held may cause the Partnership to incur losses greatly in excess of VaR within a short period of time, given the effects of the leverage employed and market volatility. The VaR tables above, as well as the past performance of the Partnership, give no indication of such "risk of ruin". In addition, VaR risk measures should be viewed in light of the methodology's limitations, which include the following: ? past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements; ? changes in portfolio value caused by market movements may differ from those of the VaR model; ? VaR results reflect past trading positions while future risk depends on future positions; ? VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and ? the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements. The VaR tables above present the results of the Partnership's VaR for each of the Partnership's market risk exposures and on an aggregate basis at June 30, 2001 and for the end of the four quarterly reporting periods from July 1, 2000 through June 30, 2001. Since VaR is based on historical data, VaR should not be viewed as predictive of the Partnership's future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership's actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days. Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances not needed for margin. These balances and any market risk they may represent are immaterial. At June 30, 2001, the Partnership's cash balance at Morgan Stanley DW was approximately 90% of its total net asset value. A decline in short-term interest rates will result in a decline in the Partnership's cash management income. This cash flow risk is not considered material. Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality and multiplier features of the Partnership's market- sensitive instruments, in relation to the Partnership's net assets. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership's market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership's primary market risk exposures as well as the strategies used and to be used by Demeter and the Trading Manager for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership's risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Partnership. Investors must be prepared to lose all or substantially all of their investment in the Partnership. The following were the primary trading risk exposures of the Partnership at June 30, 2001, by market sector. It may be anticipated however, that these market exposures will vary materially over time. Currency. The Partnership's primary market exposure at June 30, 2001 was to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. Interest rate changes as well as political and general economic conditions influence these fluctuations. The Partnership trades in a large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. For the second quarter of 2001, the Partnership's major exposures were to outright U.S. dollar positions. Outright positions consist of the U.S. dollar vs. other currencies. These other currencies include major and minor currencies. Demeter does not anticipate that the risk profile of the Partnership's currency sector will change significantly in the future. The currency trading VaR figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk inherent to the dollar-based Partnership in expressing VaR in a functional currency other than dollars. Commodity Energy. The next largest market exposure of the Partnership this quarter was in the energy sector. At June 30, 2001, the Partnership's energy exposure was shared primarily by futures contracts in the crude oil and natural gas markets. Price movements in these markets result from political developments in the Middle East, weather patterns, and other economic fundamentals. It is possible that volatility will remain high. Significant profits and losses, which have been experienced in the past, are expected to continue to be experienced in this market. Natural gas has exhibited volatility in prices resulting from weather patterns and supply and demand factors and may continue in this choppy pattern. Soft Commodities and Agriculturals. At June 30, 2001, the Partnership had exposure in the markets that comprise these sectors. Most of the exposure, however, was to the corn, cocoa, cotton and coffee markets. Supply and demand inequalities, severe weather disruption, and market expectations affect price movements in these markets. Metals. The Partnership's metals market exposure at June 30, 2001 was primarily to fluctuations in the price of base metals. During periods of volatility, base metals will affect performance dramatically. The Trading Manager will from time to time trade precious metals, such as gold. Demeter anticipates that the base metals will remain the primary metals market exposure of the Partnership. Interest Rate. At June 30, 2001, the Partnership's exposure to the interest rate market complex was primarily spread across the U.S., Australian and Japanese interest rate sectors. Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly affect the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Partnership's profitability. The Partnership's primary interest rate exposure is generally to interest rate fluctuations in the United States and the other G-7 countries. The G-7 countries consist of France, U.S., Britain, Germany, Japan, Italy and Canada. However, the Partnership also takes futures positions in the government debt of smaller nations - e.g. Australia. Demeter anticipates that G-7 interest rates will remain the primary interest rate exposure of the Partnership for the foreseeable future. The changes in interest rates which have the most effect on the Partnership are changes in long-term, as opposed to short- term, rates. Most of the speculative futures positions held by the Partnership are in medium to long-term instruments. Consequently, even a material change in short-term rates would have little effect on the Partnership, were the medium to long- term rates to remain steady. Equity. The stock index futures traded by the Partnership are by law limited to futures on broadly-based indices. At June 30, 2001, the Partnership's equity exposure was to the Nikkei (Japan) stock index. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the U.S. and Japanese stock indices. Static markets would not cause major market changes but would make it difficult for the Partnership to avoid being "whipsawed" into numerous small losses. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposure of the Partnership at June 30, 2001: Foreign Currency Balances. The Partnership's primary foreign currency balances at June 30, 2001 were in euros and British pounds. The Partnership controls the non-trading risk of these balances by regularly converting these balances back into dollars upon liquidation of the respective position. Qualitative Disclosures Regarding Means of Managing Risk Exposure The Partnership and the Trading Manager, separately, attempt to manage the risk of the Partnership's open positions in essentially the same manner in all market categories traded. Demeter attempts to manage market exposure by diversifying the Partnership's assets among different market sectors and trading approaches, and monitoring the performance of the Trading Manager daily. In addition, the Trading Manager establishes diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument. Demeter monitors and controls the risk of the Partnership's non- trading instrument, cash. Cash is the only Partnership investment directed by Demeter, rather than the Trading Manager. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In April 2001 the Appellate Division of New York State dismissed the class action previously disclosed in the Partnership's Form 10-K for the year ended December 31, 2000. Because plaintiffs did not exercise their right to appeal any further, this dismissal constituted a final resolution of the case. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits 3.01 Limited Partnership Agreement of the Partnership, dated as of October 28, 1988 is incorporated by reference to Exhibit 3.01 and Exhibit 3.02 of the Partnership's Registration Statement on Form S-1, (File No. 24662). 10.01 Management Agreement among the Partnership, Demeter Management Corporation and Dean Witter Futures & Currency Management Inc. dated as of October 28, 1988 is incorporated by reference to Exhibit 10.02 of the Partnership's Registration Statement on Form S-1, (File No. 24462). 10.03 Amended and Restated Customer Agreement dated as of December 1, 1997, between the Partnership and Dean Witter Reynolds Inc. is incorporated by reference to Exhibit 10.03 of the Partnership's quarterly report on Form 10-Q for the quarter ended March 31, 2000, (File No. 0-17446). 10.04 Customer Agreement dated as of December 1, 1997, between the Partnership, Carr Futures, Inc., and Dean Witter Reynolds Inc. is incorporated by reference to Exhibit 10.04 of the Partnership's quarterly report on Form 10-Q for the quarter ended March 31, 2000, (File No. 0-17446). 10.05 International Foreign Exchange Master Agreement dated as of August 1, 1997, between the Partnership and Carr Futures, Inc. is incorporated by reference to Exhibit 10.05 of the Partnership's quarterly report on Form 10-Q for the quarter ended March 31, 2000, (File No. 0-17446). 10.06 Customer Agreement, dated as of May 1, 2000 between Morgan Stanley & Co. Incorporated, the Partnership and Dean Witter Reynolds Inc. is incorporated by reference to Exhibit 10.06 of the Partnership's quarterly Report on Form 10-Q for the quarter ended June 30, 2000, (File No. 0-17446). (B) Reports on Form 8-K. - None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dean Witter Diversified Futures Fund II L.P. (Registrant) By: Demeter Management Corporation (General Partner) August 14, 2001 By:/s/Raymond E. Koch Raymond E. Koch Chief Financial Officer The General Partner which signed the above is the only party authorized to act for the Registrant. The Registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors. -----END PRIVACY-ENHANCED MESSAGE-----