-----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, NiIGK8Ukchok3Gx+EbdX6Jnv36cisDHvtet5FBj6KJWZBS9gPksA1tXxRzhz/dtA La5uNCBVBbkXaWrSZFHQZw== 0000839945-98-000001.txt : 19980331 0000839945-98-000001.hdr.sgml : 19980331 ACCESSION NUMBER: 0000839945-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE 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-K SEC ACT: SEC FILE NUMBER: 000-17446 FILM NUMBER: 98578705 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-K 1 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 FIRST-CLASS MAIL ZIP + 4 PRESORT U.S. POSTAGE PAID BROOKLYN, NY PERMIT NO. 148 EX-27 2
5 The schedule contains summary financial information extracted from Dean Witter Diversified Futures Fund II L.P. and is qualified in its entirety by reference to such financial instruments. 12-MOS DEC-31-1997 DEC-31-1997 10,015,151 0 36,672 0 0 0 0 0 11,801,172 0 0 0 0 0 0 11,801,172 0 2,490,979 0 0 1,243,892 0 0 1,247,087 0 1,247,087 0 0 0 1,247,087 0 0 Receivables include interest receivable of $36,672 and due from DWR of $0. In addition to cash and receivables, total assets include net unrealized gain on open contracts of $1,749,349. Liabilities include redemptions payable of $283,443, accrued brokerage commissions of $0, accrued management fees of $29,503 and accrued transaction fees and costs of $0. Total revenue includes realized trading revenue of $427,530, net change in unrealized of $1,589,156, and interest income of $474,293.
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