UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to__________________
Commission File No. 0-17446
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3490286
State or other jurisdiction of (I.R.S.
Employer
incorporation or organization) Identification
No.)
c/o Demeter Management Corporation
Two World Trade Center, 62 Fl., New York, NY 10048
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code (212) 392-5454
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check-mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___________
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition June 30, 2000
(Unaudited) and December 31, 1999.....................2
Statements of Operations for the Quarters Ended
June 30, 2000 and 1999 (Unaudited)....................3
Statements of Operations for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)....................4
Statements of Changes in Partners' Capital for the
Six Months ended June 30, 2000 and 1999
(Unaudited)...........................................5
Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)....................6
Notes to Financial Statements (Unaudited)..........7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..13-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................23-34
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..............................35-36
Item 5. Other Information..............................36-37
Item 6. Exhibits and Reports on Form 8-K..................37
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
June 30, December 31,
2000 1999
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 8,211,611 8,042,490
Net unrealized gain on open contracts (MSIL)
595 -
Net unrealized loss on open contracts (MS & Co.)
(60,727) -
Net unrealized gain (loss) on open contracts (Carr)
(148,598) 293,674
Total net unrealized gain (loss) on open contracts (208,730)
293,674
Total Trading Equity 8,002,881 8,336,164
Interest receivable (DWR) 30,295 29,570
Total Assets 8,033,176 8,365,734
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 286,386 291,006
Accrued management fees (DWFCM) 20,083 20,914
Total Liabilities 306,469 311,920
Partners' Capital
Limited Partners (2,769.370 and
3,046.638 Units, respectively) 7,447,044 7,787,964
General Partner (104 Units) 279,663 265,850
Total Partners' Capital 7,726,707 8,053,814
Total Liabilities and Partners' Capital 8,033,176 8,365,734
NET ASSET VALUE PER UNIT 2,689.07 2,556.25
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended June 30,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized 1,089,177 37,455
Net change in unrealized (876,432) 88,003
Total Trading Results 212,745 125,458
Interest Income (DWR) 92,267 83,860
Total Revenues 305,012 209,318
EXPENSES
Brokerage commissions (DWR) 104,800 158,925
Management fees (DWFCM) 60,410 71,618
Transaction fees and costs 6,504 11,267
Incentive fee (DWFCM) ______-__ 3,324
Total Expenses 171,714 245,134
NET INCOME (LOSS) 133,298 (35,816)
NET INCOME (LOSS) ALLOCATION
Limited Partners 128,647 (34,769)
General Partner 4,651 (1,047)
NET INCOME (LOSS) PER UNIT
Limited Partners 44.73
(10.07) General Partner
44.73 (10.07)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized 1,108,208
(557,135)
Net change in unrealized (502,404) 181,980
Total Trading Results 605,804
(375,155)
Interest Income (DWR) 179,572 173,149
Total Revenues 785,376 (202,006)
EXPENSES
Brokerage commissions (DWR) 236,733 308,856
Management fees (DWFCM) 121,402 147,426
Transaction fees and costs 16,393 23,135
Incentive fee (DWFCM) _ _____-__ (3,716)
Total Expenses 374,528 475,701
NET INCOME (LOSS) 410,848 (677,707)
NET INCOME (LOSS) ALLOCATION
Limited Partners 397,035 (658,830)
General Partner 13,813 (18,877)
NET INCOME (LOSS) PER UNIT
Limited Partners 132.82 (181.51)
General Partner 132.82 (181.51)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S>
<C> <C> <C>
<C>
Partners' Capital,
December 31, 1998 3,744.082 $10,281,223
$293,743 $10,574,966
Net Loss - (658,830)(18,877) (677,707)
Redemptions (324.305) (859,001)
- (859,001)
Partners' Capital,
June 30, 1999 3,419.777 $8,763,392 $274,866 $9,038,258
Partners' Capital,
December 31, 1999 3,150.638 $7,787,964 $265,850 $8,053,814
Net Income - 397,035 13,813 410
,848
Redemptions (277.268) (737,955)
- (737,955)
Partners' Capital,
June 30, 2000 2,873.370 $7,447,044 $279,663 $7,726,707
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S>
<C> <C>
Net income (loss) 410,848 (
677,707)
Noncash item included in net income (loss):
Net change in unrealized 502,404 (
181,980)
(Increase) decrease in operating assets:
Interest receivable (DWR) (725) 4,156
Decrease in operating liabilities:
Accrued management fees (DWFCM) (831) (3,552)
Accrued incentive fee (DWFCM) ______-__
(3,871)
Net cash provided by (used for) operating activities 911,696
(862,954)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions payable(4,620) 123,365
Redemptions of Units (737,955)
(859,001)
Net cash used for financing activities (742,575)
(735,636)
Net increase (decrease) in cash 169,121 (
1,598,590)
Balance at beginning of period 8,042,490
10,606,680
Balance at end of period 8,211,611
9,008,090
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The financial statements include, in the opinion of management,
all adjustments necessary for a fair presentation of the results
of operations and financial condition of Dean Witter Diversified
Futures Fund II L.P. (the "Partnership"). The financial
statements and condensed notes herein should be read in
conjunction with the Partnership's December 31, 1999 Annual
Report on Form 10-K.
1. Organization
Dean Witter Diversified Futures Fund II L.P. is a Delaware
limited partnership organized to engage primarily in the
speculative trading of commodity futures and forward contracts,
physical commodities, and other commodity interests
(collectively, "futures interests").
The general partner for the Partnership is Demeter Management
Corporation ("Demeter"). The non-clearing commodity broker is
Dean Witter Reynolds ("DWR"). Morgan Stanley & Co., Inc. ("MS &
Co.") and Morgan Stanley & Co. International Limited ("MSIL")
provide clearing and execution services. Prior to May 2000, Carr
Futures Inc. provided clearing and execution services. The
trading manager is Dean Witter Futures & Currency Management Inc.
("DWFCM" or the "Trading Manager"). Demeter, DWR, DWFCM, MS &
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Co. and MSIL are wholly-owned subsidiaries of Morgan Stanley Dean
Witter & Co.
2. Related Party Transactions
The Partnership's cash is on deposit with DWR, MS & Co., and MSIL
in futures interests trading accounts to meet margin requirements
as needed. DWR pays interest on these funds based on current 13-
week U.S. Treasury bills. The Partnership pays brokerage
commissions to DWR. Management fees and incentive fees (if any)
incurred by the Partnership are paid to DWFCM.
3. Financial Instruments
The Partnership trades commodity futures and forward contracts on
physical commodities, and other commodity interests. Futures and
forwards represent contracts for delayed delivery of an
instrument at a specified date and price. Risk arises from
changes in the value of these contracts and the potential
inability of counterparties to perform under the terms of the
contracts. There are numerous factors which may significantly
influence the market value of these contracts, including interest
rate volatility.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
133, "Accounting for Derivative Instruments and Hedging
Activities" effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133," which defers the required
implementation of SFAS No. 133 until fiscal years beginning after
June 15, 2000. However, the Partnership had previously elected
to adopt the provisions of SFAS No. 133 beginning with the fiscal
year ended December 31, 1998. SFAS No. 133 supersedes SFAS No.
119 and No. 105, which required the disclosure of average
aggregate fair values and contract/notional values, respectively,
of derivative financial instruments for an entity which carries
its assets at fair value. The application of SFAS No. 133 does
not have a significant effect on the Partnership's financial
statements.
The net unrealized gain (loss) on open contracts is reported as a
component of "Equity in futures interests trading accounts" on
the statements of financial condition and totaled ($208,730) and
$293,674 at June 30, 2000 and December 31, 1999, respectively.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Of the $208,730 net unrealized loss on open contracts at June 30,
2000, $266,528 related to exchange-traded futures contracts and
$(475,258) related to off-exchange-traded forward currency
contracts.
Of the $293,674 net unrealized gain on open contracts at December
31, 1999, $262,869 related to exchange-traded futures contracts
and $30,805 related to off-exchange-traded forward currency
contracts.
Exchange-traded futures contracts held by the Partnership at June
30, 2000 and December 31, 1999 mature through December 2000 and
September 2000, respectively. Off-exchange-traded forward
currency
contracts held by the Partnership at June 30, 2000 and December
31, 1999 mature through September 2000 and March 2000,
respectively.
The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership is involved is limited to the amounts
reflected in the Partnership's statements of financial condition.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Partnership also has credit risk because DWR, MS & Co., and
MSIL act as the futures commission merchants or the
counterparties, with respect to most of the Partnership's assets.
Exchange-traded futures contracts are marked to market on a daily
basis, with variations in value settled on a daily basis. DWR, MS
& Co., and MSIL, each as a futures commission merchant for all of
the Partnership's exchange-traded futures contracts, are
required, pursuant to regulations of the Commodity Futures
Trading Commission ("CFTC") to segregate from their own assets,
and for the sole benefit of their commodity customers, all funds
held by them with respect to exchange-traded futures contracts,
including an amount equal to the net unrealized gain (loss) on
all open futures contracts, which funds, in the aggregate,
totaled $8,478,139 and $8,305,359 at June 30, 2000 and December
31, 1999, 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 (loss) on open
forward contracts be segregated. With respect to those off-
exchange-traded forward currency contracts, the Partnership is at
risk to the ability of MS & Co., the sole counterparty on all of
such contracts, to
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND II L.P.
NOTES TO FINANCIAL STATEMENTS - (CONCLUDED)
perform. The Partnership has a netting agreement with MS & Co.
This agreement, which seeks to reduce both the Partnership's and
MS & Co.'s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership's credit
risk in the event of MS & Co.'s bankruptcy or insolvency.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with DWR as non-
clearing broker and MS & Co. and MSIL as clearing brokers in
separate futures trading accounts established for the Trading
Manager, which assets are used as margin to engage in trading.
The assets are held in either non-interest-bearing bank accounts
or in securities and instruments permitted by the CFTC for
investment of customer segregated or secured funds. The
Partnership's assets held by the commodity brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures and forwards,
it is expected that the Partnership will continue to own such
liquid assets for margin purposes.
The Partnership's investment in futures and forwards may, from
time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations
referred to as "daily price fluctuations limits" or "daily
limits". Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
trading. These market conditions could
<PAGE>
prevent the Partnership from promptly liquidating its futures
contracts and result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currency. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, or expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest ("Unit(s)") in the future will
affect the amount of funds available for investment in futures
interests in subsequent periods. It is not possible to estimate
the amount and therefore, the impact of future redemptions of
Units.
<PAGE>
Results of Operations
General. The Partnership's results depend on its Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements or other profit opportunities in the
futures and forwards markets. The following presents a summary
of the Partnership's operations for the quarter and six months
ended June 30, 2000 and 1999, respectively, and a general
discussion of its trading activities during each period. It is
important to note, however, that the Trading Manager trades in
various markets at different times and that prior activity in a
particular market does not mean that such market will be actively
traded by the Trading Manager or will be profitable in the
future. Consequently, the results of operations of the
Partnership are difficult to discuss other than in the context of
its Trading Manager's trading activities on behalf of the
Partnership as a whole and how the Partnership has performed in
the past.
For the Quarter and Six Months Ended June 30, 2000
For the quarter ended June 30, 2000, the Partnership recorded
total trading revenues, including interest income of $305,012 and
posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 9.7% were recorded in the
energy markets primarily during May from long positions in
natural gas futures as prices continued their upward trend on
fears that inventory levels would remain low and that U.S. demand
<PAGE>
would outstrip production this summer, when inventories are
typically refilled for the winter. Additional gains were
recorded during May and June from long futures positions in crude
oil and its related products as the previous upward movement in
oil prices re-emerged amid rising concerns regarding supplies and
production levels. In the agricultural markets, gains of
approximately 1.1% were recorded primarily during June from short
corn futures positions as corn prices were pressured lower by a
damp weather forecast in the U.S. Midwest. In soft commodities,
gains of approximately 0.4% were recorded primarily during June
from short coffee futures positions as prices decreased amid
continued pressure from bearish technical factors and large
warehouse supplies. These gains were partially offset by losses
of approximately 6.3% recorded throughout a majority of the
quarter primarily from long positions in U.S. interest rate
futures as prices declined on inflation fears provoked by
stronger-than-forecasted U.S. economic data. Losses were also
recorded throughout the majority of the quarter from short
positions in German bond futures as prices were pushed higher by
the rise in U.S. prices. In the global stock index futures
markets, losses of approximately 1.6% were incurred primarily
during April from long positions in S&P 500 Index futures as
fears of inflation negatively impacted domestic equity prices.
In the currency markets, losses of approximately 1.3% were
experienced primarily during April and early May from long
positions in the Japanese yen as its value weakened relative to
<PAGE>
the U.S. dollar amid fears of an additional Bank of Japan
intervention and as Japanese consumer confidence remained
sluggish. In the metals markets, losses of approximately 0.6%
were recorded primarily during June from short aluminum futures
positions as prices increased on consumer and speculative buying.
Total expenses for the three months ended June 30, 2000 were
$171,714, resulting in net income of $133,298. The value of a
Unit increased from $2,644.34 at March 31, 2000 to $2,689.07 at
June 30, 2000.
For the six months ended June 30, 2000, the Partnership recorded
total trading revenues, including interest income of $785,376 and
posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 14.9% were recorded in the
energy markets primarily during May from long positions in
natural gas futures as prices continued their upward trend on
fears that inventory levels would remain low and that U.S. demand
will outstrip production this summer, when inventories are
typically refilled for the winter. Additional gains were
recorded during February from long positions in crude oil futures
as prices increased due to a combination of cold weather,
declining inventories and increasing demand. Oil prices also
increased during June in reaction to the dismissal by OPEC of a
price setting mechanism and a promise of a modest production
increase. In the currency markets, gains of approximately 1.1%
<PAGE>
were recorded primarily during January from short positions in
the Swedish krona, the euro and the Swiss franc as the value of
these European currencies weakened relative to the U.S. dollar,
hurt by skepticism about Europe's economic outlook and lack of
support from European officials. During April, profits were
recorded from short positions in the euro as the value of the
European common currency dropped to record lows versus the U.S.
dollar and British pound. In the agricultural markets, gains of
approximately 1.0% were recorded primarily during June from short
corn futures positions as corn prices were pressured lower by a
damp weather forecast in the U.S. Midwest. These gains were
partially offset by losses of approximately 7.5% recorded
throughout a majority of the second quarter from long positions
in U.S. interest rate futures as prices declined on inflation
fears provoked by stronger-than-forecasted U.S. economic data.
Losses were also recorded throughout the majority of the second
quarter from short positions in German bond futures as prices
were pushed higher by the rise in U.S. prices. In the global
stock index futures markets, losses of approximately 2.9% were
incurred throughout a majority of the first quarter and during
April from long positions in S&P 500 Index futures as domestic
stock prices declined due to volatility in the technology sector
and fears that the Federal Reserve will be forced to take
aggressive action to slow the economy. In the metals markets,
losses of approximately 2.1% were experienced primarily from long
<PAGE>
positions in base metal futures as a previous upward price trend
reversed sharply lower during February in response to interest
rate hikes across the globe. During June, smaller losses were
recorded from short aluminum futures positions as prices
increased on consumer and speculative buying. Total expenses for
the six months ended June 30, 2000 were $374,528, resulting in
net income of $410,848. The value of a Unit increased from
$2,556.25 at December 31, 1999 to $2,689.07 at June 30, 2000.
For the Quarter and Six Months Ended June 30, 1999
For the quarter ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $209,318 and,
after expenses, posted a decrease in Net Asset Value per Unit.
The most significant net trading losses of approximately 3.8%
were experienced in the metals markets primarily from long
positions in copper and aluminum futures as base metals prices
declined significantly during late May amid large supply, low
demand and the possibility of a production cut in the near future
being judged unlikely. During June, additional losses were
incurred in this market complex from short copper futures
positions as prices moved higher due to a drop in warehouse
stocks. In the global stock index futures markets, losses of
approximately 0.6% were recorded primarily during mid April and
May from long S&P 500 Index futures positions as domestic equity
prices dropped following stronger-than-expected Consumer Price
Index data and indications by the Federal Open Market Committee
that the U.S.
<PAGE>
Federal Reserve is shifting towards a tightening bias. In the
agricultural markets, losses of approximately 0.1% were
experienced primarily from long corn futures positions as prices
regressed in early April in reaction to reports by the USDA that
the expected corn surplus will be one of the biggest in years and
from declining demand in the Asian markets. These losses were
partially offset by gains of approximately 2.0% recorded in the
currency markets primarily during April and May from short
Swedish krona positions as its value weakened versus the U.S.
dollar on speculation as to when Sweden will join Europe's
Monetary Union and due to a decline in oil prices. In the global
interest rate futures markets, gains of approximately 0.9% were
recorded primarily from long Japanese government bonds as prices
rallied during April after the Japanese government proposed no
new economic spending plans and on comments by a Senior Finance
Ministry official that the supply-demand balance in the market
will deteriorate. In soft commodities, gains of approximately
0.6% were recorded primarily from short cotton futures positions
as prices dropped in late June on reports of beneficial rainfalls
across the Southeastern U.S. In the energy markets, gains of
approximately 0.6% were recorded primarily during April from long
natural gas futures positions as prices climbed following reports
of an increase in storage stocks that was well-below market
expectations. Total expenses for the three months ended June 30,
1999 were $245,134, resulting in a net loss of $35,816. The
value
<PAGE>
of a Unit decreased from $2,653.01 at March 31, 1999 to $2,642.94
at June 30, 1999.
For the six months ended June 30, 1999, the Partnership recorded
total trading losses net of interest income of $202,006 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 4.3% were experienced in the
metals markets primarily from long positions in copper and zinc
futures as base metals prices declined significantly in late May
amid large supply, low demand and the possibility of a production
cut in the near future being judged unlikely. During June,
additional losses were incurred in this market complex from short
copper futures positions as prices moved higher due to a drop in
warehouse stocks. In the global interest rate futures markets,
losses of approximately 3.0% were recorded primarily from short
Japanese bond futures positions throughout a majority of the
first quarter as prices increased amid growing speculation that
the Bank of Japan may underwrite Japanese government bonds.
Fears that a rise in Japanese bond yields would lead many
Japanese money managers to repatriate assets from foreign
investments to yen-denominated debt also pushed prices higher.
Additional losses were recorded during February and March from
short German government bond futures positions as prices
increased on reports that Germany's industrial production showed
a sharp increase, creating hopes that Europe's biggest economy
<PAGE>
could be strengthening. In the currency markets, losses of
approximately 2.2% were experienced primarily from long
Australian dollar positions throughout a majority of the first
quarter as its value dropped significantly relative to the U.S.
dollar on speculation regarding potential currency devaluations
in the Asian region. Losses recorded from short British pound
positions in March offset profits recorded in February as its
value strengthened versus the U.S. dollar as the market scaled
back the chances of a British interest rate cut following an
announcement of a budget that was more generous than expected.
In the global stock index futures markets, losses of
approximately 0.7% were experienced primarily during February,
mid-April and May from long S&P 500 Index futures positions as
domestic equity prices moved lower on concerns that the Federal
Reserve may raise interest rates in an effort to control
inflation, following stronger-than-expected Consumer Price Index
data and on indications by the Federal Open Market Committee that
the U.S. Federal Reserve is shifting towards a tightening bias.
These losses were partially offset by gains recorded in the
energy markets of approximately 2.8% primarily during March from
long positions in crude and heating oil futures as prices moved
significantly higher on news that both OPEC and non-OPEC
countries had reached an agreement to cut total output by
approximately two million barrels a day beginning April 1st.
Total expenses for the six months ended June 30, 1999 were
<PAGE>
$475,701, resulting in a net loss of $677,707. The value of a
Unit decreased from $2,824.45 at December 31, 1998 to $2,642.94
at June 30, 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. The market-sensitive instruments
held by the Partnership are acquired for speculative trading
purposes only and, as a result, all or substantially all of the
Partnership's assets are at risk of trading loss. Unlike an
operating company, the risk of market-sensitive instruments is
central, not incidental, to the Partnership's main business
activities.
The futures interests traded by the Partnership involve varying
degrees of related market risk. Market risk is often dependent
upon changes in the level or volatility of interest rates,
exchange rates, and prices of financial instruments and
commodities. Fluctuations in market risk based upon these
factors result in frequent changes in the fair value of the
Partnership's open positions, and, consequently, in its earnings
and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
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markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the
Partnership's market risk exposures contain "forward-looking
statements" within the meaning of the safe harbor from civil
liability provided for such statements by the Private Securities
Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934). All quantitative disclosures in this section are
deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions using mark-to-market
accounting principles. Any loss in the market value of the
Partnership's open positions is directly reflected in the
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Partnership's earnings, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of exchange-
traded futures interests are settled daily through variation
margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Manager is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based on historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the
VaR model include equity and commodity prices, interest rates,
foreign exchange rates, and correlation among these variables.
The hypothetical changes in portfolio value are based on daily
percentage changes in key market indices or other market factors
("market risk factors") to which the portfolio is sensitive. The
historical observation period of the Partnership's VaR is
approximately four years. The one-day 99% confidence level of the
Partnership's VaR corresponds to the negative change in portfolio
value that, based on observed market risk factors, would have
been exceeded once in 100 trading days.
<PAGE>
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Manager in their daily risk management
activities.
The Partnership's Value at Risk in Different Market Sectors
The following tables indicate the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category as of June 30, 2000 and 1999. As
of June 30, 2000 and 1999, the Partnership's total capitalization
was approximately $8 million and $9 million, respectively.
Primary Market June 30, 2000 June 30,
1999
Risk Category Value at Risk Value at Risk
Currency (1.46)% (1.94)%
Interest Rate (1.56) (1.93)
Commodity (1.75) (0.93)
Equity (0.08) (0.50)
Aggregate Value at Risk (2.63)% (3.12)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual Market Categories listed above. Aggregate VaR will be
<PAGE>
lower as it takes into account correlation among different
positions and categories.
The table above represents the VaR of the Partnership's open
positions at June 30, 2000 and 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. Because the Partnership's only
business is the speculative trading of futures interests, the
composition of its trading portfolio can change significantly
over any given time period, or even within a single trading day.
Any changes in open positions could positively or negatively
materially impact market risk as measured by VaR.
The table below supplements the quarter-end VaR by presenting the
Partnership's high, low and average VaR as a percentage of total
Net Assets for the four quarterly reporting periods from July 1,
1999 through June 30, 2000.
Primary Market Risk Category High Low Average
Currency (1.94)% (1.46)% (1.74)%
Interest Rate (1.93) (0.80) (1.46)
Commodity (1.99) (0.93) (1.45)
Equity (1.16) (0.08) (0.62)
Aggregate Value at Risk (3.27)% (2.31)% (2.83)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
<PAGE>
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses greatly
in excess of VaR within a short period of time, given the effects
of the leverage employed and market volatility. The VaR tables
above, as well as the past performance of the Partnership, gives
no indication of such "risk of ruin". In addition, VaR risk
measures should be viewed in light of the methodology's
limitations, which include the following:
past changes in market risk factors will not always result
in accurate predictions of the distributions and correlations of
future market movements;
changes in portfolio value in response to market movements
may differ from those of the VaR model;
VaR results reflect past trading positions while future risk
depends on future positions;
VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
<PAGE>
the historical market risk factor data used for VaR
estimation may provide only limited insight into losses that
could be incurred under certain unusual market movements.
The VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at June 30, 2000 and for the end of the four
quarterly reporting periods from July 1, 1999 through June 30,
2000. Since VaR is based on historical data, VaR should not be
viewed as predictive of the Partnership's future financial
performance or its ability to manage or monitor risk. There can
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated above or
that such losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market
risk they may represent are immaterial. At June 30, 2000 the
Partnership's cash balance at DWR was approximately 97% of its
total Net Asset Value. A decline in short-term interest rates
will result in a decline in the Partnership's cash management
income. This cash flow risk is not considered material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
<PAGE>
associated potential losses, taking into account the leverage,
optionality and multiplier features of the Partnership's market-
sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures -
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act.
The Partnership's primary market risk exposures as well as the
strategies used and to be used by Demeter and the Trading Manager
for managing such exposures are subject to numerous
uncertainties, contingencies and risks, any one of which could
cause the actual results of the Partnership's risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx
of new market participants, increased regulation and many other
factors could result in material losses as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
<PAGE>
The following were the primary trading risk exposures of the
Partnership as of June 30, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical
pricing relationships between different currencies and currency
pairs. Interest rate changes as well as political and general
economic conditions influence these fluctuations. The
Partnership trades in a large number of currencies, including
cross-rates - i.e., positions between two currencies other than
the U.S. dollar. For the second quarter of 2000, the
Partnership's major exposures were in the euro currency crosses
and outright U.S. dollar positions. Outright positions consist
of the U.S. dollar vs. other currencies. These other currencies
include the major and minor currencies. Demeter does not
anticipate that the risk profile of the Partnership's currency
sector will change significantly in the future. The currency
trading VaR figure includes foreign margin amounts converted into
U.S. dollars with an incremental adjustment to reflect the
exchange rate risk inherent to the dollar-based Partnership in
expressing VaR in a functional currency other than dollars.
Interest Rate. The next largest market exposure at June 30, 2000
was in the interest rate complex. Exposure was spread across
<PAGE>
German and Japanese interest rate sectors. Interest rate
movements directly affect the price of the sovereign bond futures
positions held by the Partnership and indirectly affect the value
of its stock index and currency positions. Interest rate
movements in one country as well as relative interest rate
movements between countries materially impact the Partnership's
profitability. The Partnership's primary interest rate exposure
is generally to interest rate fluctuations in the United States
and the other G-7 countries. The G-7 countries consist of
France, U.S., Britain, Germany, Japan, Italy and Canada.
However, the Partnership also takes futures positions in the
government debt of smaller nations - e.g. Australia. Demeter
anticipates that G-7 and Australian interest rates will remain
the primary interest rate exposure of the Partnership for the
foreseeable future. The changes in interest rates which have the
most effect on the Partnership are changes in long-term, as
opposed to short-term rates. Most of the speculative interest
rate futures positions held by the Partnership are in medium- to
long-term instruments. Consequently, even a material change in
short-term rates would have little effect on the Partnership,
were the medium- to long-term rates to remain steady.
Commodity
Energy. On June 30, 2000, the Partnership's energy exposure was
shared primarily by futures contracts in the crude oil and
natural gas markets. Price movements in these markets result
<PAGE>
from political developments in the Middle East, weather patterns,
and other economic fundamentals. It is possible that volatility
will remain high. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in this market. Natural gas has exhibited volatility
in prices resulting from weather patterns and supply and demand
factors and may continue in this choppy pattern.
Metals. The Partnership's primary metals market exposure at
June 30 2000 was to fluctuations in the price of aluminum and
nickel.
Soft Commodities and Agriculturals. On June 30, 2000, the
Partnership had exposure in the corn, soybean, cotton and coffee
markets. Supply and demand inequalities, severe weather
disruption and market expectations affect price movements in
these markets.
Equity. Exposure to stock indices on June 30, 2000 was limited
to a small position in the Nikkei stock index.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of June 30, 2000:
<PAGE>
Foreign Currency Balances. The Partnership's primary foreign
currency balances at June 30, 2000 were in euros and Japanese
yen. The Partnership controls the non-trading risk of these
balances by regularly converting these balances back into dollars
upon liquidation of the respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Manager, separately, attempt to
manage the risk of the Partnership's open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying
the Partnership's assets among different market sectors and
trading approaches, and monitoring the performance of the Trading
Manager daily. In addition, the Trading Manager establishes
diversification guidelines, often set in terms of the maximum
margin to be committed to positions in any one market sector or
market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership's non-
trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Manager.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in the Partnership's Form 10-Q for the quarter ended March 31,
2000 and Form 10-K for the year ended December 31, 1999:
On October 25, 1996, the Market Surveillance Committee (the
"Committee") of the National Association of Securities Dealers
("NASD") filed a formal complaint against MS & Co. and seven
current and former traders, alleging violations of certain NASD
rules relating to manipulative and deceptive practices, locked
and crossed markets, and failure to supervise. Hearings were
held in June and July 1997. On April 13, 1998 the Committee
ruled that MS & Co. and the seven traders had engaged in
manipulative and deceptive practices and improperly locked or
crossed markets, but not that MS & Co. had failed to supervise
its traders. The Committee levied a fine of $1,000,000 on MS &
Co., a fine of $100,000 and a 90-day suspension on one of its
former traders, and fines of $25,000 and 30-day suspensions on
each of the remaining current and former traders. On January 18,
2000 the National Adjudicatory Council, which heard the appeal,
issued a ruling which upheld the Committee's April 1998 decision,
however, the National Adjudicatory Council reduced the firm's
fine to $495,000,
<PAGE>
reversed all previously imposed suspensions against the traders,
reduced the fine for each of six traders to $2,500 and dismissed
all charges against the seventh trader.
On January 11, 1999, the Securities and Exchange Commission
brought an action against 28 NASDAQ market makers, including MS &
Co., and 51 individuals, including one current and one former
trader employed by MS & Co., for certain conduct during 1994.
The core of the charges against MS & Co. concerns improper or
undisclosed coordination of price quotes with other broker-
dealers and related reporting, recordkeeping and supervisory
deficiencies in violation of Sections 15(b)(4)(E), 15(c)(1) and
(2) and 17(a) of the Securities Exchange Act and Rules 15c1-2,
15c2-7 and 17a-3 promulgated thereunder. Without admitting or
denying the charges, MS & Co. consented to the entry of a cease
and desist order and to the payment of a civil penalty of
$350,000, disgorgement of $4,170 and to submit certain of its
procedures to an independent consultant for review. In addition,
one current and one former trader employed by MS & Co. accepted
suspensions of less than two months each and were fined $25,000
and $30,000 respectively.
Item 5. OTHER INFORMATION
Effective July 1, 2000, Lewis A. Raibley, III resigned as Chief
Financial Officer and a Director of Demeter and DWFCM. Effective
<PAGE>
July 10, 2000, Raymond E. Koch replaced Lewis A. Raibley, III as
Chief Financial Officer of Demeter.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
3.01 Limited Partnership Agreement of the Partnership, dated as
of October 28, 1988 incorporated by reference to Exhibit
3.01 and Exhibit 3.02 of the Partnership's Registration
Statement on Form S-1. (File no. 24662).
10.01 Management Agreement among the Partnership, Demeter
Management Corporation and Dean Witter Futures & Currency
Management Inc. dated as of October 28, 1988 incorporated by
reference to Exhibit 10.02 of the Partnership's
Registration Statement on Form S-1. (File No. 24462)
10.03 Amended and Restated Customer Agreement dated as of
December 1, 1997, between the Partnership and Dean Witter
Reynolds Inc. is incorporated by reference to Exhibit
10.03 of the Partnership's quarterly report on Form 10-Q
for the quarter ended March 31, 2000, File No. 0-17446
10.04 Customer Agreement dated as of December 1, 1997, between
the Partnership, Carr Futures, Inc., and Dean Witter
Reynolds Inc. is incorporated by reference to Exhibit
10.04 of the Partnership's quarterly report on Form 10-Q
for the quarter ended March 31, 2000, File No. 0-17446
10.05 International Foreign Exchange Master Agreement dated as of
August 1, 1997, between the Partnership and Carr Futures,
Inc. is incorporated by reference to Exhibit 10.05 of the
Partnership's quarterly report on Form 10-Q for the quarter
ended March 31, 2000, File No. 0-17446
10.06 Customer Agreement, dated as of May 1, 2000 between
Morgan Stanley & Co. Incorporated, the Partnership and Dean
Witter Reynolds Inc. is filed herewith.
(B) Reports on Form 8-K. - None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dean Witter Diversified Futures
Fund II L.P. (Registrant)
By: Demeter Management Corporation
(General Partner)
August 11, 2000 By:/s/Raymond E. Koch __________
Raymond E. Koch
Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
