10-Q 1 ppff.txt PRINCIPAL PLUS FUND 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, 2004 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 Number 0-18314 DEAN WITTER PRINCIPAL PLUS FUND L.P. (Exact name of registrant as specified in its charter) Delaware 13-3541588 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Demeter Management Corporation 825 Third Avenue, 9th Floor New York, NY 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 310-6444 (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__________ Indicate by check-mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes No X DEAN WITTER PRINCIPAL PLUS FUND L.P. INDEX TO QUARTERLY REPORT ON FORM 10-Q June 30, 2004

PART I. FINANCIAL INFORMATION Item 1. Financial Statements DEAN WITTER PRINCIPAL PLUS FUND L.P. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, December 31, 2004 2003 $ $ (Unaudited) ASSETS Equity in futures interests trading accounts: Cash 24,871,916 26,475,763 Net unrealized gain on open contracts (MS & Co.) 134,833 633,291 Net unrealized gain (loss) on open contracts (MSIL) (15,514) 203,735 Total net unrealized gain on open contracts 119,319 837,026 Net option premiums - (11,000) Total Trading Equity 24,991,235 27,301,789 Interest receivable (Morgan Stanley DW) 18,813 20,168 Total Assets 25,010,048 27,321,957 LIABILITIES AND PARTNERS' CAPITAL Liabilities Redemptions payable 276,559 447,519 Accrued administrative expenses 164,127 211,963 Accrued brokerage fees (Morgan Stanley DW) 82,819 90,367 Accrued management fees 20,705 22,592 Total Liabilities 544,210 772,441 Minority Interest 15,153 25,518 Partners' Capital Limited Partners (12,195.131 and 12,764.514 Units, respectively) 24,145,714 26,207,748 General Partner (154.030 Units) 304,971 316,250 Total Partners' Capital 24,450,685 26,523,998 Total Liabilities and Partners' Capital 25,010,048 27,321,957 NET ASSET VALUE PER UNIT 1,979.95 2,053.17 The accompanying notes are an integral part of these consolidated financial statements. DEAN WITTER PRINCIPAL PLUS FUND L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Quarters Ended June 30, 2004 2003 $ $ REVENUES Trading profit (loss): Realized (552,581) 642,278 Net change in unrealized (41,491) 5,986 Total Trading Results (594,072) 648,264 Interest income 56,483 444,190 Change in value of Yield Pool - (361,585) Total (537,589) 730,869 EXPENSES Brokerage fees (Morgan Stanley DW) 250,826 329,075 Management fees 62,706 82,269 Administrative expenses 23,000 40,000 Transaction fees and costs 8,814 6,218 Total 345,346 457,562 INCOME (LOSS) BEFORE MINORITY INTEREST (882,935) 273,307 Less: Minority interest (9,558) 11,594 NET INCOME (LOSS) (873,377) 261,713 NET INCOME (LOSS) ALLOCATION Limited Partners (862,751) 257,511 General Partner (10,626) 4,202 NET INCOME (LOSS) (873,377) 261,713 Less: Change in excess of market value over amortized cost of zero-coupon U.S. Treasury Securities - (361,585) NET INCOME (LOSS) ALLOCATED TO PARTNERS FOR TAX AND NET ASSET VALUATION (873,377) 623,298 Net Income (Loss) Allocation for Tax and Net Asset Valuation Limited Partners (862,751) 613,178 General Partner (10,626) 10,120 Net Income (Loss) Per Unit for Tax and Net Asset Valuation Limited Partners (68.98) 39.21 General Partner (68.98) 39.21 The accompanying notes are an integral part of these consolidated financial statements.
DEAN WITTER PRINCIPAL PLUS FUND L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2004 2003 $ $ REVENUES Trading profit (loss): Realized 381,358 647,066 Net change in unrealized (717,707) (39,926) Total Trading Results (336,349) 607,140 Interest income 113,622 891,149 Change in value of Yield Pool - (726,376) Total (222,727) 771,913 EXPENSES Brokerage fees (Morgan Stanley DW) 516,982 665,691 Management fees 129,245 166,423 Administrative expenses 44,000 79,000 Transaction fees and costs 22,986 10,525 Total 713,213 921,639 LOSS BEFORE MINORITY INTEREST (935,940) (149,726) Less: Minority interest (10,365) (21,074) NET LOSS (925,575) (128,652) NET LOSS ALLOCATION Limited Partners (914,296) (127,283) General Partner (11,279) (1,369) NET LOSS (925,575) (128,652) Less: Change in excess of market value over amortized cost of zero-coupon U.S. Treasury Securities - (726,376) NET INCOME (LOSS) ALLOCATED TO PARTNERS FOR TAX AND NET ASSET VALUATION (925,575) 597,724 Net Income (Loss) Allocation for Tax and Net Asset Valuation Limited Partners (914,296) 588,003 General Partner (11,279) 9,721 Net Income (Loss) Per Unit for Tax and Net Asset Valuation Limited Partners (73.22) 37.66 General Partner (73.22) 37.66 The accompanying notes are an integral part of these consolidated financial statements.
DEAN WITTER PRINCIPAL PLUS FUND L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Six Months Ended June 30, 2004 and 2003 (Unaudited)
Units of Partnership Limited General Interest Partners Partner Total $ $ $ Partners' Capital, December 31, 2002 16,476.372 33,867,872 517,262 34,385,134 Net Loss - (127,283) (1,369) (128,652) Redemptions (1,210.787) (2,482,509) - (2,482,509) Partners' Capital, June 30, 2003 15,265.585 31,258,080 515,893 31,773,973 Partners' Capital, December 31, 2003 12,918.544 26,207,748 316,250 26,523,998 Net Loss - (914,296) (11,279) (925,575) Redemptions (569.383) (1,147,738) - (1,147,738) Partners' Capital, June 30, 2004 12,349.161 24,145,714 304,971 24,450,685 The accompanying notes are an integral part of these consolidated financial statements.
DEAN WITTER PRINCIPAL PLUS FUND L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2004 2003 $ $ CASH FLOWS FROM OPERATING ACTIVITIES Net loss (925,575) (128,652) Noncash item included in net loss: Net change in unrealized 717,707 39,926 Change in value of Yield Pool - 726,376 (Increase) decrease in operating assets: Net option premiums (11,000) 332,375 Interest receivable (Morgan Stanley DW) 1,355 436 Investment in zero-coupon U.S. Treasury Securities - 1,011,428 Increase (decrease) in operating liabilities: Accrued administrative expenses (47,836) 1,418 Accrued brokerage fees (Morgan Stanley DW) (7,548) (4,737) Accrued management fees (1,887) (1,184) Net cash provided by (used for) operating activities (274,784) 1,977,386 CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in redemptions payable (170,960) 490,794 Decrease in minority interest (10,365) (21,074) Redemptions of Units (1,147,738) (2,482,509) Net cash used for financing activities (1,329,063) (2,012,789) Net decrease in cash (1,603,847) (35,403) Balance at beginning of period 26,475,763 2,146,079 Balance at end of period 24,871,916 2,110,676 The accompanying notes are an integral part of these consolidated financial statements.
DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 (Unaudited) The unaudited consolidated financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the results of operations and financial condition of Dean Witter Principal Plus Fund L.P. (the "Partnership"). The consolidated financial statements and condensed notes herein should be read in conjunction with the Partnership's December 31, 2003 Annual Report on Form 10-K. 1. Organization From February 1, 1996 through August 31, 2003 (the "Guarantee Period"), the Partnership had approximately 80% of its assets invested in zero-coupon United States Treasury Securities (the "Yield Pool") and its remaining assets were invested in the speculative trading of futures contracts, options on futures contracts, and forward contracts on physical commodities and other commodity interests (collectively, "futures interests"). The Partnership's general partner is Demeter Management Corporation ("Demeter"). The non-clearing commodity broker is Morgan Stanley DW Inc. ("Morgan Stanley DW"). The clearing commodity brokers are Morgan Stanley & Co. Incorporated ("MS & Co.") and Morgan Stanley & Co. International Limited ("MSIL"). DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Demeter, Morgan Stanley DW, MS & Co., and MSIL are wholly-owned subsidiaries of Morgan Stanley. The trading advisor to the Partnership is SSARIS Advisors, LLC (the "Trading Advisor"). 2. Revenue Recognition The Yield Pool was valued at cost plus accreted interest with the accumulated unrealized gain on the zero-coupon U.S. Treasury Securities separately disclosed. The quarter-to-date change in the Yield Pool's market value is reflected in the consolidated statements of operations. The consolidated statements of financial condition and the consolidated statements of operations have been reconciled to reflect net assets, net asset value per unit and a net loss in accordance with the terms of the Limited Partnership Agreement. 3. Related Party Transactions The Partnership's cash is on deposit with Morgan Stanley DW, MS & Co., and MSIL in futures, forwards, and options trading accounts to meet margin requirements as needed. Morgan Stanley DW pays interest on these funds based on a prevailing rate on U.S. Treasury bills. The Partnership pays brokerage fees to Morgan Stanley DW. DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Financial Instruments The Partnership trades futures contracts, options on futures contracts, and forward contracts on physical commodities and other commodity interests. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the market value of these contracts, including interest rate volatility. The market value of contracts is based on closing prices quoted by the exchange, bank or clearing firm through which the contracts are traded. The Partnership's contracts are accounted for on a trade-date basis and marked to market on a daily basis. The Partnership accounts for its derivative investments in accordance with the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics: DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1) One or more underlying notional amounts or payment provisions; 2) Requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors; 3) Terms require or permit net settlement. Generally, derivatives include futures, forward, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars. The net unrealized gains (losses) on open contracts, reported as a component of "Equity in futures interests trading accounts" on the consolidated statements of financial condition, and their longest contract maturities were as follows: Net Unrealized Gains (Losses) on Open Contracts Longest Maturities Off- Off- Exchange- Exchange- Exchange- Exchange- Date Traded Traded Total Traded Traded $ $ $ Jun. 30, 2004 122,634 (3,315) 119,319 Dec. 2004 Sep. 2004 Dec. 31, 2003 816,989 20,037 837,026 Mar. 2004 Mar. 2004 The Partnership has credit risk associated with counterparty non- performance. The credit risk associated with the instruments in DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) which the Partnership is involved is limited to the amounts reflected in the Partnership's consolidated statements of financial condition. The Partnership also has credit risk because Morgan Stanley DW, MS & Co., and MSIL act as the futures commission merchants or the counterparties, with respect to most of the Partnership's assets. Exchange-traded futures, forward, and futures-styled options contracts are marked to market on a daily basis, with variations in value settled on a daily basis. Morgan Stanley DW, MS & Co., and MSIL, each as a futures commission merchant for the Partnership's exchange-traded futures, forward, and futures-styled options 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, forward, and futures-styled options contracts, including an amount equal to the net unrealized gains (losses) on all open futures, forward, and futures-styled options contracts, which funds, in the aggregate, totaled $24,994,550 and $27,292,752 at June 30, 2004 and December 31, 2003, respectively. With respect to the Partnership's off-exchange-traded forward currency contracts, there are no daily exchange-required settlements of variations in DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) value nor is there any requirement that an amount equal to the net unrealized gains (losses) on open forward contracts be segregated, however, MS & Co. and Morgan Stanley DW will make daily settlements of losses as needed. 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 such contracts, to perform. The Partnership has a netting agreement with MS & Co. This agreement, which seeks to reduce both the Partnership's and MS & Co.'s exposure to off-exchange-traded forward currency contracts, should materially decrease the Partnership's credit risk in the event of MS & Co.'s bankruptcy or insolvency. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Partnership deposits its assets with Morgan Stanley DW as non-clearing broker, and MS & Co., and MSIL as clearing brokers in separate futures, forwards, and options trading accounts established for the Trading Advisor, which assets are used as margin to engage in trading and may be used as margin solely for the Partnership's 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. Since the Partnership's sole purpose is to trade in futures, forwards, and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership's investment in futures, forwards, and options 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 or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating its futures or options contracts and result in restrictions on redemptions. 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, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership's assets. There are no known material trends, demands, commitments, events or uncertainties at the present time that will result in, or that are reasonably likely to result in, the Partnership's liquidity increasing or decreasing in any material way. Capital Resources. The Partnership does not have, nor 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, forwards, and options in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future redemptions of Units. There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership's capital resource arrangements at the present time. Off-Balance Sheet Arrangements and Contractual Obligations. The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments that would affect its liquidity or capital resources. Results of Operations General. The Partnership's results depend on the Trading Advisor and the ability of the Trading Advisor's trading program to take advantage of price movements in the futures, forwards, and options markets. The following presents a summary of the Partnership's operations for the three and six month periods ended June 30, 2004 and 2003, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisor 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 Advisor 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 the Trading Advisor's trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results. The Partnership's results of operations set forth in the financial statements on pages 2 through 12 of this report were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: The contracts the Partnership trades are accounted for on a trade- date basis and marked to market on a daily basis. The difference between their cost and market value is recorded on the Consolidated Statements of Operations as "Net change in unrealized trading profit/loss" for open (unrealized) contracts, and recorded as "Realized trading profit/loss" when open positions are closed out, and the sum of these amounts constitutes the Partnership's trading results. The market value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of foreign currency forward contracts is based on the spot rate as of the close of business, New York City time, on a given day. Interest income revenue, as well as management fees, incentive fees and brokerage fees expenses of the Partnership are recorded on an accrual basis. Demeter believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts. For the Quarter and Six Months Ended June 30, 2004 The Partnership recorded losses net of interest income totaling $537,589, expenses totaling $345,346, and minority interest of $9,558, resulting in a net loss of $873,377 for the quarter ended June 30, 2004. The Partnership's net asset value per Unit decreased from $2,048.93 at March 31, 2004 to $1,979.95 at June 30, 2004. The most significant trading losses of approximately 1.4% were incurred in the global interest rate markets, primarily during April, from long U.S., European, and Australian interest rate futures positions as global fixed income prices tumbled following the release of stronger-than-expected U.S. economic data. Losses were also recorded during June from long positions in Japanese government bond futures as prices decreased due to rising yields and an improving Japanese economy. Additional losses of approximately 0.5% resulted in the currency markets during April from long positions in the Japanese yen against the U.S. dollar as the dollar surged during the month following the above- mentioned U.S. jobs data report. The yen also came under pressure following efforts by the Japanese government to weaken the yen by intervening in the currency markets. Additional losses were recorded from long positions in the Singapore dollar versus the U.S. dollar as the value of the Singapore dollar moved lower in tandem with the value of the Japanese yen. Smaller currency losses were incurred on short U.S. dollar positions against the South African rand during April as the dollar benefited from rising U.S. interest rates and the perception that the U.S. economy was experiencing a sustainable recovery. During May, long positions in the U.S. dollar versus the South African rand resulted in additional losses as the commodity-linked rand reversed higher in response to rising gold prices. Partnership losses of approximately 0.3% stemmed from the agricultural markets as long futures positions in corn experienced losses during April due to a price decline spurred by news of lower U.S. exports and increased plantings in the U.S. Corn Belt. During May, newly established short positions in corn also incurred losses as prices moved higher during the final week of the month due to delayed planting caused by inclement weather. The Partnership recorded losses net of interest income totaling $222,727, expenses totaling $713,213, and minority interest of $10,365, resulting in a net loss of $925,575 for the six months ended June 30, 2004. The Partnership's net asset value per Unit decreased from $2,053.17 at December 31, 2003 to $1,979.95 at June 30, 2004. The most significant trading losses of approximately 1.3% were experienced in the currency markets, primarily during March. Short cross-rate positions in the Japanese yen versus the Swiss franc resulted in losses as the yen's value reversed higher due to speculation that the Bank of Japan was relaxing its efforts to weaken the yen. Long positions in the U.S. dollar Index futures were also unprofitable as the dollar's value declined due to the reduction in the Bank of Japan intervention activity. During April, losses were incurred from newly established long positions in the Japanese yen and Singapore dollar versus the U.S. dollar as the U.S. dollar surged following the release of stronger-than-expected U.S. jobs data and efforts by the Japanese government to weaken the yen by intervening in the currency markets. In June, losses were incurred from short positions in the yen against the Swiss franc and the U.S. dollar as the value of the yen moved lower due to investor concern regarding a possible interest rate hike by the Bank of Japan. Losses were also incurred on short U.S. dollar positions against the South African rand, as the dollar benefited from rising U.S. interest rates and the perception that the U.S. economy was experiencing a sustainable recovery. In the global interest rate markets, losses of approximately 0.6% were incurred during January from long positions in Australian interest rate futures as prices moved lower in sympathy with U.S. fixed income prices after the U.S. Federal Reserve hinted at possible rate increases. Further losses were experienced in April from long Australian interest rate futures positions as prices tumbled following the release of stronger-than-expected U.S. jobs data. Additional losses stemmed from positions in Japanese government bond futures during June as prices first decreased due to rising yields and an improving Japanese economy and then increased sharply after the Bank of Japan voted to maintain interest rates close to zero. A portion of the Partnership's losses for the first six months of the year was offset by gains of approximately 0.6% achieved in the global stock index markets. Long positions in S&P 500 Index futures recorded gains as equity prices moved higher in response to positive company earnings reports, in addition to signs of growing U.S. consumer confidence during January. Further gains were recorded from long positions during February as global equity prices advanced amid upbeat corporate profit reports, merger and acquisition activity and a low-interest rate environment. For the Quarter and Six Months Ended June 30, 2003 The Partnership recorded revenues including interest income and change in the value of the Yield Pool totaling $730,869, expenses totaling $457,562, and minority interest of $11,594, resulting in net income of $261,713 for the quarter ended June 30, 2003. The Partnership's net asset value per Unit increased from $2,029.91 at March 31, 2003 to $2,069.12 at June 30, 2003. The most significant trading gains of approximately 1.1% were recorded in the global stock index markets from long positions in S&P 500 Index futures during April, May, and June as equity prices rallied in response to positive earnings announcements, the conclusion of the war in Iraq, and the prospect of lower interest rates. Additional gains of approximately 0.9% were provided in the global interest rate markets from long positions in U.S. and European interest rate futures during May and early June as prices trended higher amid speculation of an interest rate cut by the U.S. Federal Reserve and lingering doubts concerning a global economic recovery. A portion of the Partnership's overall gains for the quarter was offset by losses of approximately 0.1% in the metals markets from long positions in nickel futures as prices declined amid easing supply concerns. The Partnership recorded revenues including interest income and change in the value of the Yield Pool totaling $771,913 and expenses totaling $921,639, and minority interest of $21,074, resulting in a net loss of $128,652 for the six months ended June 30, 2003. The Partnership's net asset value per Unit increased from $2,031.46 at December 31, 2002 to $2,069.12 at June 30, 2003. The most significant trading gains of approximately 1.4% were recorded in the global interest rate markets, during February, May, and early June from long positions in U.S. and European interest rate futures as prices trended higher amid anticipation of lower interest rates in the U.S., lingering doubts concerning a global economic recovery, and investor preference for fixed income investments. Additional gains of approximately 0.3% in the energy markets were recorded primarily during February from long positions in crude oil futures as prices trended higher amid the increasing likelihood of military action against Iraq. Additional gains were recorded from long positions in natural gas futures as prices jumped sharply higher amid fears that extremely cold weather in the U.S. northeast and midwest could further deplete already diminished supplies. In the currency markets, gains of approximately 0.2% were provided by long positions in the Australian dollar versus the Japanese yen as the yen's value declined amid SARS-related fears primarily during April. Long positions in the euro versus the U.S. dollar during January and May provided gains amid uncertainty regarding the Bush Administration's economic policy, the war in Iraq, and investor preference for non-U.S. dollar denominated assets. A portion of the Partnership's overall gains for the first half of the year was offset by losses of approximately 0.1% in the agricultural markets from short corn futures positions during January as the price of corn moved higher, elevated by strong prices in wheat futures. In April, long positions in corn futures experienced losses as prices reversed lower amid news of increased supply. Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction The Partnership is a commodity pool engaged primarily in the speculative trading of futures, forwards, and options. 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 inherent to the primary business activity of the Partnership. The futures, forwards, and options 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, factors that result in frequent changes in the fair value of the Partnership's open positions, and consequently in its earnings, whether realized or unrealized, and cash flow. Gains and losses on open positions of exchange- traded futures, forwards, and options are settled daily through variation margin. Gains/losses on off-exchange-traded forward currency contracts are settled at the termination of the contract or more frequently, as agreed upon with each counterparty. The Partnership's total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership's open positions, the volatility present within the markets, and the liquidity of the markets. The Partnership's past performance is no guarantee of its future results. Any attempt to numerically quantify the Partnership's market risk is limited by the uncertainty of its speculative trading. The Partnership's speculative trading may cause future losses and volatility (i.e., "risk of ruin") that far exceed the Partnership's experience to date or any reasonable expectations based upon historical changes in market value. Limited partners will not be liable for losses exceeding the current net asset value of their investment. Quantifying the Partnership's Trading Value at Risk The following quantitative disclosures regarding the Partner- ship'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 on the basis of mark to market accounting principles. Any loss in the market value of the Partnership's open positions is directly reflected in the Partnership's earnings and cash flow. The Partnership's risk exposure in the market sectors traded by the Trading Advisor is estimated below in terms of Value at Risk ("VaR"). The Partnership estimates VaR using a model based upon historical simulation (with a confidence level of 99%) which involves constructing a distribution of hypothetical daily changes in the value of a trading portfolio. The VaR model takes into account linear exposures to risk including equity and commodity prices, interest rates, foreign exchange rates, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors ("market risk factors") to which the portfolio is sensitive. The 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, or one day in 100. VaR typically does not represent the worst case outcome. Demeter uses approximately four years of daily market data (1,000 observations) and revalues its portfolio (using delta-gamma approximations) for each of the historical market moves that occurred over this time period. This generates a probability distribution of daily "simulated profit and loss" outcomes. The VaR is the appropriate percentile of this distribution. For example, the 99% one-day VaR would represent the 10th worst outcome from Demeter's simulated profit and loss series. The Partnership's VaR computations are based on the risk representation of the underlying benchmark for each instrument or contract and do not distinguish between exchange and non-exchange dealer-based instruments. They are also not based on exchange and/or dealer-based maintenance margin requirements. VaR models, including the Partnership's, are continually 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 Advisor in their daily risk management activities. Please further note that VaR as described above may not be comparable to similarly-titled measures used by other entities. The Partnership's Value at Risk in Different Market Sectors The following table indicates the VaR associated with the Partnership's open positions as a percentage of total net assets by primary market risk category at June 30, 2004 and 2003. At June 30, 2004 and 2003, the Partnership's total capitalization was approximately $24 million and $32 million, respectively. Primary Market June 30, 2004 June 30, 2003 Risk Category Value at Risk Value at Risk Equity (1.54)% (0.20)% Interest Rate (0.32) (0.18) Currency (0.11) (0.05) Commodity (0.02) (0.03) Aggregate Value at Risk (1.39)% (0.23)% The VaR for a market category represents the one-day downside risk for the aggregate exposures associated with this market category. The Aggregate Value at Risk listed above represents the VaR of the Partnership's open positions across all market categories, and is less than the sum of the VaRs for all such market categories due to the diversification benefit across asset classes. Because the business of the Partnership is the speculative trading of futures, forwards, and options, the composition of its trading portfolio can change significantly over any given time period, or even within a single trading day, which could positively or negatively materially impact market risk as measured by VaR. The table below supplements the quarter-end VaR set forth above by presenting the Partnership's high, low, and average VaR, as a percentage of total net assets for the four quarter-end reporting periods from July 1, 2003 through June 30, 2004. Primary Market Risk Category High Low Average Equity (1.54)% (0.70)% (1.18)% Interest Rate (0.73) (0.32) (0.54) Currency (0.38) (0.11) (0.23) Commodity (0.20) (0.02) (0.12) Aggregate Value at Risk (1.39)% (0.90)% (1.18)% Limitations on Value at Risk as an Assessment of Market Risk The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership to typically be many times the total capitalization of the Partnership. The value of the Partnership's open positions thus creates a "risk of ruin" not typically found in other investments. The relative size of the positions held may cause the Partnership to incur losses greatly in excess of VaR within a short period of time, given the effects of the leverage employed and market volatility. The VaR tables above, as well as the past performance of the Partnership, give no indication of such "risk of ruin". In addition, VaR risk measures should be viewed in light of the methodology's limitations, which include the following: ? past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements; ? changes in portfolio value caused by market movements may differ from those of the VaR model; ? VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions; ? VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and ? the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements. The VaR tables provided 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, 2004 and 2003, and for the four quarter-end reporting periods from July 1, 2003 through June 30, 2004. VaR is not necessarily representative of the Partnership's historic risk, nor should it be used to predict the Partnership's future financial performance or its ability to manage or monitor risk. There can be no assurance that the Partnership's actual losses on a particular day will not exceed the VaR amounts indicated above or that such losses will not occur more than once in 100 trading days. Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances not needed for margin. These balances and any market risk they may represent are immaterial. The Partnership also maintains a substantial portion (approximately 99% as of June 30, 2004) of its available assets in cash at Morgan Stanley DW. A decline in short-term interest rates would result in a decline in the Partnership's cash management income. This cash flow risk is not considered to be material. Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Partnership's market- sensitive instruments, in relation to the Partnership's net assets. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership's market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership's primary market risk exposures, as well as the strategies used and to be used by Demeter and the Trading Advisor for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership's risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership. Investors must be prepared to lose all or substantially all of their investment in the Partnership. The following were the primary trading risk exposures of the Partnership at June 30, 2004 by market sector. It may be anticipated, however, that these market exposures will vary materially over time. Equity. The primary market exposure of the Partnership at June 30, 2004 was to the global stock index sector, primarily to equity price risk in the G-7 countries. The G-7 countries consist of France, the U.S., Britain, Germany, Japan, Italy, and Canada. The stock index futures traded by the Partnership are by law limited to futures on broadly-based indices. At June 30, 2004, the Partnership's primary exposure was to the S&P 500 (U.S.) stock indices. The Partnership is exposed to the risk of adverse price trends or static markets in the U.S. stock indices. Static markets would not cause major market changes, but would make it difficult for the Partnership to avoid trendless price movements resulting in numerous small losses. Interest Rate. The second largest market exposure at June 30, 2004 was to the global interest rate futures sector. Exposure was primarily spread across the U.S., European, Japanese, and Australian 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 interest rate exposure is generally to interest rate fluctuations in the U.S. and the other G-7 countries. However, the Partnership also takes futures positions in the government debt of smaller countries - e.g., Australia. Demeter anticipates that the G-7 countries and Australian interest rates will remain the primary interest rate exposure of the Partnership for the foreseeable future. The speculative futures positions held by the Partnership range from short to long-term instruments. Consequently, changes in short, medium or long-term interest rates may have an effect on the Partnership. Currency. The Partnership's currency market exposure at June 30, 2004 was to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. Interest rate changes, as well as political and general economic conditions influence these fluctuations. The Partnership trades a large number of currencies, including cross-rates - i.e., positions between two currencies other than the U.S. dollar. At June 30, 2004, the Partnership's major exposures were to the euro, Canadian dollar, Australian dollar, and Japanese yen currency cross-rates, as well as to outright U.S. dollar positions. Outright positions consist of the U.S. dollar vs. other currencies. These other currencies include major and minor currencies. Demeter does not anticipate that the risk profile of the Partnership's currency sector will change significantly in the future. Commodity Energy. The Partnership's energy exposure at June 30, 2004, was primarily to futures contracts in crude oil and its related products. Price movements in these markets result from geopolitical developments, particularly in the Middle East, as well as weather patterns and other economic fundamentals. Significant profits and losses, which have been experienced in the past, are expected to continue to be experienced in the future. Metals. The Partnership's metals exposure at June 30, 2004 was to fluctuations in the price of base metals, such as copper and nickel. Economic forces, supply and demand inequalities, geopolitical factors, and market expectations influence price movements in these markets. The Trading Advisor, from time to time, takes positions when market opportunities develop, and Demeter anticipates that the Partnership will continue to do so. Soft Commodities and Agriculturals. At June 30, 2004, the Partnership had exposure to the markets that comprise these sectors. All of the exposure was to the cocoa and corn markets. Supply and demand inequalities, severe weather disruptions, and market expectations affect price movements in these markets. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following was the only non-trading risk exposures of the Partnership at June 30, 2004: Foreign Currency Balances. The Partnership's primary foreign currency balances at June 30, 2004 were in Japanese yen, Australian dollars, and euros. The Partnership controls the non-trading risk of foreign currency balances by regularly converting them back into U.S. dollars upon liquidation of their respective positions. Qualitative Disclosures Regarding Means of Managing Risk Exposure The Partnership and the Trading Advisor, 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 by monitoring the performance of the Trading Advisor daily. In addition, the Trading Advisor 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 instruments cash. Cash is the only Partnership investment directed by Demeter, rather than the Trading Advisor. Item 4. CONTROLS AND PROCEDURES (a) As of the end of the period covered by this quarterly report, the President and Chief Financial Officer of Demeter, the general partner of the Partnership, have evaluated the effectiveness of the Partnership's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), and have judged such controls and procedures to be effective. (b) There have been no significant changes during the period covered by this quarterly report in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II. OTHER INFORMATION Item 5. OTHER INFORMATION Management. Effective June 21, 2004, the following changes have been made to the Board of Directors and Officers of Demeter: Mr. Jeffrey D. Hahn resigned the position of Chief Financial Officer and Director of Demeter. Mr. Todd Taylor, age 41, is a Director of Demeter. Mr. Taylor began his career with Morgan Stanley in June 1987 as a Financial Advisor in the Dallas office. In 1995, he joined the Management Training Program in New York and was appointed Branch Manager in St. Louis in 1997. Three years later, in 2000, Mr. Taylor was appointed to a newly created position, Director of Individual Investor Group ("IIG") Learning and Development, before becoming the Director of IIG Strategy in 2002. Most recently, Mr. Taylor has taken on a new role as the High Net Worth Segment Director. Currently a member of the firm's E-Learning Council, Mr. Taylor is also a current member of the Securities Industry/Regulatory Council on Continuing Education. Mr. Taylor graduated from Texas Tech University with a B.B.A. in Finance. Mr. William D. Seugling, age 34, will become a Director of Demeter once he has registered with the National Futures Association ("NFA") as a principal, which registration is currently pending. Mr. Seugling is an Executive Director at Morgan Stanley and currently serves as Director of Client Solutions for US Private Wealth Management. Mr. Seugling joined Morgan Stanley in June 1993 as an Associate in Equity Structured Products having previously worked in research and consulting for Greenwich Associates from October 1991 to June 1993. Since 1994, he has focused broadly on analysis and solutions for wealthy individuals and families culminating in his current role within the division. He was named Vice President in 1996 and an Executive Director in 1999. Mr. Seugling graduated cum laude from Bucknell University with a B.S. in Management and a concentration in Chemistry. Mr. Kevin Perry, age 35, is the Chief Financial Officer of Demeter. His registration with the NFA as a principal is currently pending. He currently serves as an Executive Director and Controller of Client Solutions at Morgan Stanley. Mr. Perry joined Morgan Stanley in October 2000 and is also Chief Financial Officer of Morgan Stanley Trust National Association, Van Kampen Funds Inc. and Morgan Stanley Distribution, Inc. Prior to joining Morgan Stanley, Mr. Perry worked as an auditor and consultant in the financial services practice of Ernst & Young from October 1991 to October 2000. Mr. Perry received a B.S. degree in Accounting from the University of Notre Dame in 1991 and is a Certified Public Accountant. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 3.01 Amended and Restated Limited Partnership Agreement of the Partnership, dated as of August 29, 1995, is incorporated by reference to Exhibit 3.01 and Exhibit 3.02 of the Partnership's Registration Statement (File No. 33-95414) on Form S-1. 10.01 Amended and Restated Management Agreement among the Partnership, Demeter and RXR, Inc., dated as of December 29, 1995, is incorporated by reference to Exhibit 10.02 of the Partnership's Registration Statement (File No. 33-95414) on Form S-1. 10.02 Amended and Restated Management Agreement between the Partnership and Dean Witter Reynolds Inc., dated as of December 29, 1995, is incorporated by reference to Exhibit 10.01 of the Partnership's Registration Statement (File No. 33-95414) on Form S-1. 10.03 Amended and Restated Customer Agreement between the Partnership and Morgan Stanley DW, dated as of June 22, 2000, is incorporated by reference to Exhibit 10.01 of the Partnership's Form 8-K (File No. 0-18314) filed with the Securities and Exchange Commission on November 13, 2001. 10.04 Commodity Futures Customer Agreement between MS & Co. and the Partnership, and acknowledged and agreed to by Morgan Stanley DW, dated as of May 1, 2000, is incorporated by reference to Exhibit 10.02 of the Partnership's Form 8-K (File No. 0-18314) filed with the Securities and Exchange Commission on November 13, 2001. 10.05 Customer Agreement between the Partnership and MS & Co., dated as of May 1, 2000, is incorporated by reference to Exhibit 10.04 of the Partnership's Form 8-K (File No. 0-18314) filed with the Securities and Exchange Commission on November 13, 2001. 10.06 Foreign Exchange and Options Master Agreement between MS & Co. and the Partnership, dated as of April 30, 2000, is incorporated by reference to Exhibit 10.05 of the Partnership's Form 8-K (File No. 0-18314) filed with the Securities and Exchange Commission on November 13, 2001. 10.07 Securities Account Control Agreement among the Partnership, MS & Co. and Morgan Stanley DW dated as of May 1, 2000, is incorporated by reference to Exhibit 10.03 of the Partnership's Form 8-K (File No. 0-18314) filed with the Securities and Exchange Commission on November 13, 2001. 31.01 Certification of President of Demeter Management Corporation, the general partner of the Partnership, pursuant to rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Certification of Chief Financial Officer of Demeter Management Corporation, the general partner of the Partnership, pursuant to rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.01 Certification of President of Demeter Management Corporation, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Certification of Chief Financial Officer of Demeter Management Corporation, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (B) Reports on Form 8-K - None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dean Witter Principal Plus Fund L.P. (Registrant) By: Demeter Management Corporation (General Partner) August 16, 2004 By: /s/Kevin Perry Kevin Perry 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. DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 DEAN WITTER PRINCIPAL PLUS FUND L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) - 12 -

WITTER DEAN PRINCIPAL PLUS FUND L P 10-Q