UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT
[X] Annual report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996 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: $12,773,240.66 at January 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1996
<CAPTION>
Page No.
<S> <C>
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . 1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . 2-3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 4-5
Item 4. Submission of Matters to a Vote of Security Holders . . .5
Part II.
Item 5. Market for the Registrant's Partnership Units and
Related Security Holder Matters . . . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 8-12
Item 8. Financial Statements and Supplementary Data. . . . . . 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . 12
Part III.
Item 10. Directors, Executive Officers, Promoters and
Control Persons of the Registrant . . . . . . . . . 13-16
Item 11. Executive Compensation . . . . . . . . . . . . . . . 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . 16
Item 13. Certain Relationships and Related Transactions . . .16-17
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE>
<TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference as
follows:
<CAPTION>
Documents Incorporated Part of Form 10-K
<S> <C>
Partnership's Registration Statement I and IV
on Form S-1, File No. 33-24662
December 31, 1996 Annual Report II and IV
for the Dean Witter Diversified
Futures Fund II L.P.
</TABLE>
<PAGE>
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.
Units of limited partnership interest 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"), a commodity broker and an affiliated corporation of the
Partnership's general partner, Demeter Management Corporation ("Demeter").
The Partnership commenced operations on January 18, 1989. The
Partnership's net asset value per unit, as of December 31, 1996, was
$2,412.41 representing a decrease of 4.8 percent from the net asset value
per unit of $2,534.82 at December 31, 1995. For a more detailed
description of the Partnership's business see subparagraph (c).
(b) Financial Information about Industry Segments. The
Partnership's business comprises only one segment for financial reporting
purposes, speculative trading of commodity futures contracts and other
commodity interests. The relevant financial information is presented in
Items 6 and 8.
(c) Narrative Description of Business. The Partnership is in the
business of speculative trading in commodity futures contracts and other
commodity interests, pursuant to trading instructions provided by Dean
Witter Futures & Currency Management Inc. ("DWFCM"), a wholly-owned
<PAGE>
subsidiary of Dean Witter, Discover & Co. ("DWD") 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 Part-
nership 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 broker) enters
into forward contract transactions where foreign banks are the contracting
party and futures contracts on foreign exchanges.
<PAGE>
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, 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
DWD, (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. 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. Generally, these complaints allege, among other things, that
the defendants committed fraud, deceit, misrepresentation, breach of
fiduciary duty, fraudulent and unfair business practices, unjust
enrichment, and conversion in connection with the sale and operation of
the various limited partnership commodity pools. 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
<PAGE>
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.
<PAGE>
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, 1996 was approximately 762. 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.
<PAGE>
<TABLE>
Item 6. SELECTED FINANCIAL DATA (in dollars)
<CAPTION>
For the Years Ended December 31,
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Total Revenues
(including interest) 643,498 1,556,726 3,037,932 3,868,460 5,240,665
Net Income (Loss) (824,517) (410,574) 853,441 1,263,735 2,627,638
Net Income (Loss)
Per Unit (Limited
& General Partners) (122.41) (75.58) 133.96 169.48 351.78
Total Assets 12,617,666 15,550,215 17,710,240 18,055,627 18,580,721
Total Limited
Partners' Capital 12,019,867 14,341,357 16,676,005 17,109,409 16,853,690
Net Asset Value Per
Unit of Limited
Partnership Interest 2,412.41 2,534.82 2,610.40 2,476.44 2,306.96
</TABLE>
<PAGE>
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, the commodity broker, and are used by
the Partnership as margin to engage in commodity futures contract trading.
DWR holds such assets in either designated depositories or in securities
approved by the Commodity Futures Trading Commission ("CFTC") for
investment of customer funds. The Partnership's assets held by DWR 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 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.
<PAGE>
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 Agreement) override the trading instructions of the Trading
Advisor to the extent necessary to comply with the Partnership's Trading
Policies.
Credit Risk. In addition to market risk, the Partnership is subject
to credit risk in that a counterparty may not be able to meet its
obligations to the Partnership. The 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. In cases where the Partnership
<PAGE>
trades on exchanges 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. With respect to
futures contracts, DWR, in its business as an international commodity
broker, constantly monitors the creditworthiness of the exchanges and
clearing members of the foreign exchanges with which it does business for
clients, including the Partnership. DWR employees also from time to time
serve on supervisory or management committees of such exchanges. If DWR
believed that there was a problem with the creditworthiness of an exchange
on which the Partnership deals, it would so advise Demeter. With respect
to exchanges of which DWR is not a member, DWR acts only through clearing
brokers it has determined to be creditworthy. If DWR believed that a
clearing broker with which it deals on behalf of clients were not
creditworthy, it would terminate its relationship with such broker.
While DWR monitors the creditworthiness and risks involved in dealing
on the various exchanges (and their clearinghouses) and with other
exchange members, there can be no assurance that an exchange (or its
clearinghouse) or other exchange member will be able to meet its
obligations to the Partnership. DWR has not undertaken to indemnify the
Partnership against any loss. Further, the law is unclear, particularly
with respect to trading in various non-U.S. jurisdictions, as to whether
DWR has any obligation to protect the Partnership from any liability in
the event that an exchange or its clearinghouse or another exchange member
defaults on its obligations on trades effected for the Partnership.
<PAGE>
Although DWR monitors the creditworthiness of the foreign exchanges
and clearing brokers with which it does business for clients, DWR does not
have the capability to precisely quantify the Partnership's exposure to
risks inherent in its trading activities on foreign exchanges, and, as a
result, the risk is not monitored by DWR on an individual client basis
(including the Partnership). In this regard, DWR must clear its customer
trades through one or more other clearing brokers on each exchange where
DWR is not a clearing member. Such other clearing brokers calculate the
net margin requirements of DWR in respect of the aggregate of all of DWR's
customer positions carried in DWR's omnibus account with that clearing
broker. Similarly, DWR calculates a net margin requirement for the
exchange-traded futures positions of each of its customers, including the
Partnership. Neither DWR nor DWR's respective clearing brokers on each
foreign futures exchange calculates the margin requirements of an
individual customer, such as the Partnership, in respect of the customer's
aggregate contract positions on any particular exchange. With respect to
forward contract trading, the Partnership trades with only those
counterparties which Demeter, together with DWR, have determined to be
creditworthy. As set forth in the Partnership's Trading Policies, in
determining creditworthiness, Demeter and DWR consult with the Corporate
Credit Department of DWR. Currently, the Partnership deals solely with
DWR as its counterparty on forward contracts. While DWR and Demeter
monitor creditworthiness and risk involved in dealing on the various
exchanges and with counterparties, there can be no assurance that an
exchange or counterparty will be able to meet its obligations to the
Partnership. See "Financial Instruments", under Notes to Financial
Statements - to the Partnership's Financial Statements in its 1996 Annual
Report to Partners, incorporated by reference in this Form 10-K.
<PAGE>
Capital Resources. The Partnership does not have, nor does it expect
to have, any capital assets. Redemptions of Units in the future will
impact the amount of funds available for investments in commodity futures,
forward contracts on foreign currencies and other commodity interests 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, 1996, the Partnership's
total capital was $12,270,757, a decrease of $2,334,221 from the Partner-
ship'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.
<PAGE>
As of December 31, 1994, the Partnership's total capital was
$16,947,486, a decrease of $508,624 from the Partnership's total capital
of $17,456,110 at December 31, 1993. For the year ended December 31, 1994,
the Partnership generated net income of $853,441 and total redemptions
aggregated $1,362,065.
For the year ended December 31, 1994, the Partnership's total trading
revenues including interest income were $3,037,932. The Partnership's
total expenses for the year were $2,184,491, resulting in net income of
$853,441. The value of an individual unit in the Partnership increased
from $2,476.44 at December 31, 1993 to $2,610.40 at December 31, 1994.
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 1996 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 1996
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.
<PAGE>
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 DWD and
is an affiliate of DWR. DWD, 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.
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 banker, 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, and is a clearing member of the
Chicago Board of Trade, the Chicago Mercantile Exchange, the Commodity
Exchange Inc., and other major commodities exchanges.
DWR is registered with the CFTC as a futures commission merchant and
is a member of the NFA in such capacity. DWR is currently servicing its
clients through a network of over 371 branch offices with approximately
9,080 account executives servicing individual and institutional client
accounts.
<PAGE>
Directors and Officers of the General Partner
The directors and officers of Demeter as of December 31, 1996 are as
follows:
Richard M. DeMartini, age 44, is the Chairman of the Board and a
Director of Demeter. Mr. DeMartini is also the Chairman of the Board and
a Director of DWFCM, a registered commodity trading advisor. Mr.
DeMartini has served as President and Chief Operating Officer of Dean
Witter Capital, a division of DWR since January 1989. From January 1988
until January 1989, Mr. DeMartini served as President and Chief Operating
Officer of the Consumer Banking Division of DWD, and from May 1985 until
January 1988 was President and Chief Executive Officer of the Consumer
Markets Division of DWD. Mr. DeMartini currently serves as a Director of
DWD and DWR, and has served as an officer of DWR for the past five years.
Mr. DeMartini has been with DWD and its affiliates for 22 years.
Mark J. Hawley, age 53, is President and a Director of Demeter. Mr.
Hawley joined DWR in February 1989 and currently serves as Executive Vice
President and Director of DWR's Managed Futures and Precious Metals
Department. Mr. Hawley also serves as President of DWFCM. From 1978 to
1989, Mr. Hawley was a member of the senior management team at Heinold
Asset Management, Inc., a commodity pool operator, 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 & Co.
Lawrence Volpe, age 49, 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
<PAGE>
Assistant Controller. From 1970 to July 1979, he was associated with
Arthur Anderson & Co. and prior to his departure he served as audit
manager in the financial services division.
Joseph G. Siniscalchi, age 51, is a Director of Demeter. Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President, Director
of General Accounting. He is currently Senior Vice President and
Controller of the Dean Witter Financial Division of DWR. From February
1980 to July 1984, Mr. Siniscalchi was Director of Internal Audit at
Lehman Brothers Kuhn Loeb, Inc.
Laurence E. Mollner, age 55, is a Director of Demeter. Mr. Mollner
joined DWR in May 1979 as Vice President and Director of Commercial Sales.
He is currently Executive Vice President and Deputy Director of the
Futures Markets Division of DWR.
Edward C. Oelsner III, age 54, is a Director of Demeter. Mr.
Oelsner joined DWR in March 1981 as a Managing Director in the Corporate
Finance Department. He currently manages DWR's Retail Products Group
within the Corporate Finance Department. While Mr. Oelsner has extensive
experience in the securities industry, he has no experience in commodity
interests trading.
Robert E. Murray, age 36, is a Director of Demeter. Mr. Murray is
currently a Senior Vice President of the DWR Managed Futures Division and
is a Director and the Senior Administrative Officer of DWFCM. Mr. Murray
graduated from Geneseo State University in May 1983 with a B.A. degree in
Finance. Mr. Murray began at DWR in 1984 and is currently the Director
of Product Development for the Managed Futures Division and is responsible
for the development and maintenance of the proprietary Fund Management
System utilized by Demeter and DWFCM for organizing information and
producing reports for monitoring investors' accounts.
<PAGE>
Patti L. Behnke, age 36, is Vice President and Chief Financial
Officer of Demeter. Ms. Behnke joined DWR in 1991 as Assistant Vice
President of Financial Reporting and is currently First Vice President and
Director of Financial Reporting and Managed Futures Accounting in the
Capital Markets division of DWR. From August 1988 to September 1990, Ms.
Behnke was Assistant Controller of L.F. Rothschild & Co. and from
September 1986 to August 1988, she was associated with Carteret Savings
Bank as Assistant Vice President - Financial Analysis. From April 1982
to September 1986, Ms. Behnke was an auditor at Arthur Andersen & Co.
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, 1996 there were no persons as 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, 1996,
Demeter owned 104 Units of General Partnership Interest representing a
2.04 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 1996 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
<PAGE>
fees (paid and accrued by the Partnership) of $1,004,389 for the year
ended December 31, 1996. In its capacity as the Partnership's trading
manager, DWFCM received management fee of $383,830 for the year ended
December 31, 1996.
<PAGE>
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 1996 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, 1996, 1995 and 1994.
- Statements of Financial Condition as of December 31, 1996 and
1995.
- Statements of Operations, Changes in Partners' Capital, and
Cash Flows for the years ended December 31, 1996, 1995 and
1994.
- Notes to Financial Statements.
With exception of the aforementioned information and the information
incorporated in Items 7, 8, and 13, the 1996 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.
<PAGE>
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, 1997 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
registrantand in the capacities and on the dates indicated.
Demeter Management Corporation.
BY: /s/ Mark J. Hawley March 25, 1997
Mark J. Hawley, Director and
President
/s/ Richard M. DeMartini March 25, 1997
Richard M. DeMartini, Director
and Chairman of the Board
/s/ Lawrence Volpe March 25, 1997
Lawrence Volpe, Director
/s/ Laurence E. Mollner March 25, 1997
Laurence E. Mollner, Director
/s/ Joseph G. Siniscalchi March 25, 1997
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 25, 1997
Edward C. Oelsner III, Director
/s/ Robert E. Murray March 25, 1997
Robert E. Murray, Director
/s/ Patti L. Behnke March 25, 1997
Patti L. Behnke, Chief Financial
Officer and Principal Accounting
Officer
<PAGE>
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.
- -99. December 31, 1996 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.
(2) Incorporated by reference to Exhibit 10.02 of the Partnership's
Registration Statement on Form S-1.
(3) Incorporated by reference to Exhibit 10.01 of the Partnership's
Registration Statement on Form S-1.
(4) Filed herewith.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Dean
Witter Diversified Futures Fund II L.P. and is qualified in its entirety
by references to such financial instruments.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,415,430
<SECURITIES> 0
<RECEIVABLES> 42,043
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,617,666<F1>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,617,666<F2>
<SALES> 0
<TOTAL-REVENUES> 643,498<F3>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,468,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (824,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (824,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (824,517)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>In addition to cash and receivables, total assets include net unrealized
gain on open contracts of $160,193.
<F2>Liabilities include redemptions payable of $297,904 and accrued management
fees of $31,538.
<F3>Total revenues include realized trading revenue of $832,912, net change
in unrealized of ($692,226) and interest income of $502,812.
</FN>
</TABLE>
<PAGE>
Diversified
Futures
Fund II
December 31, 1996
Annual Report
[LOGO] DEAN WITTER
<PAGE>
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
1996
Dear Limited Partner:
This marks the eighth 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 $2,534.82 and finished 1996 at $2,412.41, reflecting a loss of 4.8%.
The Fund has increased by 141.2% since it began trading in 1989 (a compound
annualized return of 11.6%).
Modest gains were recorded during January as short Japanese yen, German mark
and Swiss franc positions profited from a downward move. A majority of these
losses were offset by long positions in energy futures as gas and oil prices
reversed lower after an upward move late in 1995. Significant losses were
recorded in February as a result of a series of sharp trend reversals in the
value of the Japanese yen and major European currencies. Additional losses were
recorded in the energy markets, as a result of inconsistent price movement, and
in global interest rate futures as a result of a sharp reversal in the previous
upward move. Small gains were recorded in March from newly established long
positions in the energy markets as oil and gas futures prices finished the
month higher. Additional gains were recorded in the currency markets.
Trading gains posted during April were recorded from short positions in the
German mark and Swiss franc as the value of these currencies moved lower
relative to the U.S. dollar. Smaller gains were recorded from trading in the
agricultural and energy futures markets. Sharp trend reversals in a majority of
the markets traded resulted in losses during May. The most significant
<PAGE>
losses were recorded in metals from long copper futures positions as prices
moved dramatically lower on May 17 and 20. During June, global interest rate
and stock index futures prices moved in a choppy pattern, resulting in losses
for the Fund. Smaller losses were recorded in the agricultural markets. A
portion of these losses was offset by gains from short copper futures positions
as prices moved dramatically lower on news of significant losses in copper by
Sumitomo Corporation.
During July, long German mark and Swiss franc positions profited from an upward
move in the value of these currencies relative to the U.S. dollar. Additional
gains were recorded during July from long global interest rate futures
positions. Trend reversals and choppy movement in the currency markets resulted
in losses for the Fund during August. Smaller losses were recorded from trading
in agricultural commodities and metals. Gains from long energy futures
positions offset a portion of these losses. A strong upward move in global
interest rate futures prices during September resulted in gains for the Fund's
long positions. Additional gains were recorded in the energy markets as oil and
gas prices continued to trend higher.
Gains were recorded during October and November from long British pound
positions as the value of the pound surged higher relative to the U.S. dollar.
Additional gains were recorded as long global interest rate futures positions
profited from a continued upward price trend. A small portion of these gains
was offset by losses experienced during October in the energy markets, and
during November as a result of choppy movement in agricultural futures prices.
Losses were recorded during December as a result of sudden and dramatic
reversal in global interest rate futures prices early in the month. Additional
losses were recorded as the value of the British pound decreased sharply during
the first week of December.
<PAGE>
The intermediate to long-term trend following trading methodology of the Fund's
sole trading advisor, Dean Witter Futures & Currency Management Inc. ("DWFCM"),
was hurt by price volatility in energies and agricultural commodities during
much of 1996. This factor coupled with sharp trend reversals in currencies and
global bond futures in February and December when positions in these areas were
significant, resulted in overall losses for the year despite a better than 20%
increase during the three month period September-November. While such results
are frustrating, we remain confident in DWFCM's time tested methodology and in
its ability to rebound as it has over previous 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
<PAGE>
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,
1996 and 1995 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, 1996. 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, 1996 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 17, 1997
New York, New York
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
$ $
<S> <C> <C>
ASSETS
Equity in Commodity futures trading
accounts:
Cash 12,415,430 14,643,529
Net unrealized gain on open contracts 160,193 852,419
---------- ----------
Total Trading Equity 12,575,623 15,495,948
Interest receivable (DWR) 42,043 54,267
---------- ----------
Total Assets 12,617,666 15,550,215
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 297,904 781,248
Accrued management fee (DWFCM) 31,538 38,862
Accrued brokerage fees (DWR) 15,137 116,587
Accrued transaction fees and costs 2,330 5,241
Accrued incentive fee (DWFCM) -- 3,299
---------- ----------
Total Liabilities 346,909 945,237
---------- ----------
PARTNERS' CAPITAL
Limited Partners (4,982.521 and 5,657.751 Units,
respectively) 12,019,867 14,341,357
General Partner (104 Units) 250,890 263,621
---------- ----------
Total Partners' Capital 12,270,757 14,604,978
---------- ----------
Total Liabilities and Partners' Capital 12,617,666 15,550,215
========== ==========
NET ASSET VALUE PER UNIT 2,412.41 2,534.82
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
$ $ $
<S> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized 832,912 2,142,749 1,613,912
Net change in unrealized (692,226) (1,324,261) 861,395
--------- ---------- ---------
Total Trading Results 140,686 818,488 2,475,307
Interest income (DWR) 502,812 738,238 562,625
--------- ---------- ---------
Total Revenues 643,498 1,556,726 3,037,932
--------- ---------- ---------
EXPENSES
Brokerage fees (DWR) 1,004,389 1,522,301 1,502,699
Management fee (DWFCM) 383,830 507,434 500,900
Transaction fees and costs 82,386 132,583 129,572
Incentive fee (DWFCM) (2,590) (195,018) 51,320
--------- ---------- ---------
Total Expenses 1,468,015 1,967,300 2,184,491
--------- ---------- ---------
NET INCOME (LOSS) (824,517) (410,574) 853,441
========= ========== =========
NET INCOME (LOSS) ALLOCATION:
Limited Partners (811,786) (402,714) 839,933
General Partner (12,731) (7,860) 13,508
NET INCOME (LOSS) PER UNIT:
Limited Partners (122.41) (75.58) 133.96
General Partner (122.41) (75.58) 133.96
</TABLE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
----------- ---------- ------- ----------
$ $ $
<S> <C> <C> <C> <C>
Partners' Capital, December
31, 1993 7,048.887 17,109,409 346,701 17,456,110
Net Income -- 839,933 13,508 853,441
Redemptions (556.592) (1,273,337) (88,728) (1,362,065)
--------- ---------- ------- ----------
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
========= ========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
$ $ $
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (824,517) (410,574) 853,441
Noncash item included in net income
(loss):
Net change in unrealized 692,226 1,324,261 (861,395)
(Increase) decrease in
operating assets:
Interest receivable (DWR) 12,224 12,917 (30,869)
Increase (decrease) in
operating liabilities:
Accrued management fee (DWFCM) (7,324) (5,406) (862)
Accrued brokerage fees (DWR) (101,450) (16,216) (2,587)
Accrued transaction fees and costs (2,911) 2,068 (426)
Accrued incentive fee (DWFCM) (3,299) (210,269) (4,382)
---------- ---------- ----------
Net cash provided by (used for) operating
activities (235,051) 696,781 (47,080)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions
payable (483,344) 412,306 171,494
Redemptions of units (1,509,704) (1,931,934) (1,362,065)
---------- ---------- ----------
Net cash used for financing activities (1,993,048) (1,519,628) (1,190,571)
---------- ---------- ----------
Net decrease in cash (2,228,099) (822,847) (1,237,651)
Balance at beginning of period 14,643,529 15,466,376 16,704,027
---------- ---------- ----------
Balance at end of period 12,415,430 14,643,529 15,466,376
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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")
was organized to engage in the speculative trading of commodity futures
contracts and futures related contracts including forward contracts on foreign
currencies. The general partner is Demeter Management Corporation ("Demeter").
The commodity broker is Dean Witter Reynolds Inc. ("DWR"). The Trading Manager
is Dean Witter Futures & Currency Management Inc. ("DWFCM"). DWR, DWFCM and
Demeter are wholly-owned subsidiaries of Dean Witter, Discover & Co. ("DWD").
Demeter is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by the General and Limited Partners
based upon their proportional ownership interests.
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
REVENUE RECOGNITION--Commodity futures contracts and 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.
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS--The Partnership's asset "Equity
in Commodity futures trading accounts" consists of cash on deposit at DWR 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
because the Partnership has a master netting agreement with DWR.
BROKERAGE FEES 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.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective 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 deposit with
DWR 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.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, 1996 and 1995, open contracts were:
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
---------------------------
1996 1995
------------- -------------
$ $
<S> <C> <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase -- 68,504,000
Commitments to Sell -- --
Commodity Futures:
Commitments to Purchase 2,026,000 32,009,000
Commitments to Sell 6,083,000 4,857,000
Foreign Futures:
Commitments to Purchase 6,629,000 50,355,000
Commitments to Sell 11,748,000 3,536,000
OFF-EXCHANGE-TRADED FORWARD
CURRENCY CONTRACTS
Commitments to Purchase 33,150,000 49,215,000
Commitments to Sell 42,844,000 55,478,000
</TABLE>
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 $160,193 and $852,419 at December 31, 1996 and 1995, respectively.
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-
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
exchange-traded forward currency contracts. Of the $852,419 net unrealized gain
on open contracts at December 31, 1995, $1,413,016 related to exchange-traded
futures contracts and $(560,597) related to off-exchange-traded forward
currency contracts.
Exchange-traded futures contracts held by the Partnership at December 31, 1996
and 1995 mature through June 1997 and September 1996, respectively. Off-
exchange-traded forward currency contracts held by the Partnership at December
31, 1996 and 1995 mature through February 1997 and February 1996, 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 DWR acts as the futures commission
merchant or the sole 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, as the futures
commission merchant for all of the Partnership's exchange-traded futures
contracts, is required pursuant to regulations of the Commodity Futures Trading
Commission to segregate from its own assets, and for the sole benefit of its
commodity customers, all funds held by DWR with respect to exchange-traded
futures contracts including an amount equal to the net unrealized gain on all
open futures contracts, which funds totaled $12,838,659 and $16,056,545 at
December 31, 1996 and 1995, 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 DWR, the counterparty on all of such contracts, to
perform.
For the years ended December 31, 1996 and 1995, the average fair value of
financial instruments held for trading purposes was as follows:
<TABLE>
<CAPTION>
1996
----------------------
ASSETS LIABILITIES
---------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
<S> <C> <C>
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
</TABLE>
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
<TABLE>
<CAPTION>
1995
----------------------
ASSETS LIABILITIES
---------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
<S> <C> <C>
Financial Futures 25,157,000 13,498,000
Commodity Futures 13,763,000 6,544,000
Foreign Futures 28,482,000 9,500,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 38,007,000 47,623,000
</TABLE>
4. LEGAL MATTERS
On September 6, 10, and 20, 1996, 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, DWD (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. 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 partnership commodity pools, including the Partnership, sold
by DWR. Generally, these complaints allege, among other things, that the
defendants committed fraud, deceit, misrepresentation, breach of fiduciary
duty, fraudulent and unfair business practices, unjust enrichment, and
conversion in connection with the sale and operation of the various limited
partnership commodity pools. 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.
<PAGE>
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
