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 period ended March 31, 1999 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 0-13298
DEAN WITTER CORNERSTONE FUND II
(Exact name of registrant as specified in its charter)
New York 13-3212871
(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 CORNERSTONE FUND II
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 1999
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition March 31, 1999
(Unaudited) and December 31, 1998..........................2
Statements of Operations for the Quarters Ended
March 31, 1999 and 1998 (Unaudited)........................3
Statements of Changes in Partners' Capital for the
Quarters Ended March 31, 1999 and 1998
(Unaudited)................................................4
Statements of Cash Flows for the Quarters Ended
March 31, 1999 and 1998 (Unaudited)........................5
Notes to Financial Statements (Unaudited)...............6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 11-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . .. 17-28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 29
Item 2. Changes in Securities and Use of Proceeds........29-30
Item 6. Exhibits and Reports on Form 8-K...................
.30
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
March 31, December 31,
1999 1998
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 28,656,473 29,949,571
Net unrealized gain on open contracts 1,550,932 2,05
6,152
Total Trading Equity 30,207,405 32,005,723
Interest receivable (DWR) 90,138 91,948
Due from DWR 59,582 15,425
Total Assets 30,357,125 32,113,096
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 236,407 173,375
Accrued management fees 100,743 106,613
Accrued administrative expenses 33,628 22,428
Accrued incentive fees - 413,951
Total Liabilities 370,778 716,367
Partners' Capital
Limited Partners (7,214.403 and
7,372.211 Units, respectively) 29,506,193 30,904,584
General Partner (117.400 Units) 480,154 492,145
Total Partners' Capital 29,986,347 31,396,729
Total Liabilities and Partners' Capital 30,357,125 32,11
3,096
NET ASSET VALUE PER UNIT 4,089.90 4,192.04
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended March 31,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized 195,940 82,266
Net change in unrealized (505,220) (956,192)
Total Trading Results (309,280) (873,926)
Interest Income (DWR) 270,868 307,482
Total Revenues (38,412) (566,444)
EXPENSES
Brokerage commissions (DWR) 377,294 349,130
Management fees 302,607 295,273
Transaction fees and costs 39,351 32,877
Administrative expenses 11,201 8,104
Total Expenses 730,453 685,384
NET LOSS (768,865) (1,251,828)
NET LOSS ALLOCATION
Limited Partners (756,874) (1,218,484)
General Partner (11,991) (33,344)
NET LOSS PER UNIT
Limited Partners (102.14) (153.37)
General Partner (102.14) (153.37)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Quarters Ended March 31, 1999 and 1998
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S> <C> <C> <C> <C>
Partners' Capital
December 31, 1997 8,184.801$29,677,943 $809,798 $30,48
7,741
Offering of Units 8.044 29,966 - 29,966
Net Loss - (1,218,484) (33,344) (1,251,82
8)
Redemptions (123.706) (446,566) -
(446,566)
Partners' Capital
March 31, 1998 8,069.139 $28,042,859 $776,454
$28,819,313
Partners' Capital
December 31, 1998 7,489.611$30,904,584 $492,145 $31,39
6,729
Net Loss - (756,874) (11,991) (768,86
5)
Redemptions (157.808) (641,517) -
(641,517)
Partners' Capital
March 31, 1999 7,331.803 $29,506,193 $480,
154 $29,986,347
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Quarters Ended March 31,
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss (768,865) (1,251,828)
Noncash item included in net loss:
Net change in unrealized 505,220 956,192
(Increase) decrease in operating assets:
Interest receivable (DWR) 1,810 8,441
Due from DWR (44,157) (43,523)
Increase (decrease) in operating liabilities:
Accrued management fees (5,870) (7,563)
Accrued administrative expenses 11,200 8,104
Accrued incentive fees (413,951) (618,270)
Net cash used for operating activities (714,613) (948,447)
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units - 29,966
Increase in redemptions payable 63,032 17,638
Redemptions of units (641,517) (446,566)
Net cash used for financing activities (578,485) (398,962)
Net decrease in cash (1,293,098) (1,347,409)
Balance at beginning of period 29,949,571 29,293,294
Balance at end of period 28,656,473 27,945,885
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
DEAN WITTER CORNERSTONE FUND II
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 Cornerstone
Fund II (the "Partnership"). The financial statements and
condensed notes herein should be read in conjunction with the
Partnership's December 31, 1998 Annual Report on Form 10-K.
1. Organization
Dean Witter Cornerstone Fund II is a limited partnership
organized to engage in the speculative trading of commodity
futures contracts and forward contracts on foreign currencies
(collectively, "futures interests"). The Partnership is one of
the Dean Witter Cornerstone Funds, comprised of the Partnership,
Dean Witter Cornerstone Fund III, and Dean Witter Cornerstone
Fund IV. The general partner is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Dean Witter
Reynolds Inc. ("DWR"), and an unaffiliated clearing commodity
broker, Carr Futures Inc. ("Carr"), provides clearing and
execution services. Both Demeter and DWR are wholly-owned
subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW"). The
Trading Advisors to the Partnership are Northfield Trading L.P.
and John W. Henry & Company, Inc. (collectively, the "Trading
Advisors").
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Related Party Transactions
The Partnership's cash is on deposit with DWR and Carr 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 bill rates. The Partnership pays brokerage commissions
to DWR.
3. Financial Instruments
The Partnership trades commodity futures contracts and forward
contracts on foreign currencies. 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 issued
Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999. The
Partnership has 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
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 on open contracts is reported as a
component of "Equity in futures interests trading accounts" on
the Statements of Financial Condition and totaled $1,550,932 and
$2,056,152 at March 31, 1999 and December 31, 1998, respectively.
Of the $1,550,932 net unrealized gain on open contracts at March
31, 1999 $1,265,056 related to exchange-traded futures contracts
and $285,876 related to off-exchange-traded forward currency
contracts.
Of the $2,056,152 net unrealized gain on open contracts at
December 31, 1998, $2,421,869 related to exchange-traded futures
contracts and $(365,717) related to off-exchange-traded forward
currency contracts.
Exchange-traded futures contracts held by the Partnership at
March 31, 1999 and December 31, 1998 mature through March 2000
and December 1999, respectively. Off-exchange-traded forward
currency
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
contracts held by the Partnership at March 31, 1999 and December
31, 1998 mature through June 1999 and March 1999, respectively.
The Partnership is subject to the 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. DWR and Carr 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. Each of DWR and Carr, 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 on all open futures contracts, which funds, in
the aggregate, totaled $29,921,529 and $32,371,440 at March 31,
1999 and December 31, 1998, 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
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
net unrealized gain on open forward contracts be segregated.
With respect to those off-exchange-traded forward currency
contracts, the Partnership is at risk to the ability of Carr, the
sole counterparty on all of such contracts, to perform. Carr's
parent, Credit Agricole Indosuez, has guaranteed to the
Partnership payment of the net liquidating value of the
transactions in the Partnership's account with Carr (including
foreign currency contracts).
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - Assets of the Partnership are deposited with DWR as
non-clearing broker and Carr as clearing broker in separate
futures interest trading accounts. Such assets are held in either
non-interest bearing bank accounts or in securities approved by
the CFTC for investment of customer funds. The Partnership's
assets held by DWR and Carr may be used as margin solely for the
Partnership's trading. Since the Partnership's sole purpose is
to trade in futures interests, it is expected that the
Partnership will continue to own such liquid assets for margin
purposes.
The Partnership's investment in futures interests may, from
time to time, be illiquid. Most United States futures exchanges
limit fluctuations in certain futures interest prices during a
single day by regulations referred to as "daily price
fluctuations limits" or "daily limits". Pursuant to such
regulations, during a single trading day no trades may be
executed at prices beyond the daily limit. If the price for a
particular futures interest has increased or decreased by an
amount equal to the daily limit, positions in such futures
interest can neither be taken nor liquidated unless traders are
willing to effect trades at or within the limit. Futures
interests prices have occasionally moved the daily limit for
several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly
liquidating its futures interests and result in restrictions on
redemptions.
<PAGE>
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 from promptly liquidating unfavorable
positions, subjecting it to substantial losses. Either of these
market conditions could result in restrictions on redemptions.
Capital Resources. The Partnership does not have, nor does it
expect to have, any capital assets. Future redemptions and
exchanges of Units of Limited Partnership Interest ("Unit(s)")
will affect the amount of funds available for investment in
futures interests in subsequent periods. Since they are at the
discretion of Limited Partners, it is not possible to estimate
the amount and therefore, the impact of future redemptions and
exchanges of Units.
Results of Operations
For the Quarter Ended March 31, 1999
For the quarter ended March 31, 1999, the Partnership recorded
total trading losses net of interest income of $38,412 and posted
a decrease in net Asset Value per Unit. The most significant
losses were experienced from short positions in Japanese
government bond futures as prices moved higher during a majority
of the quarter. Early in the quarter, Japanese government bond
prices moved higher in a "flight-to-quality" due to renewed
financial market turmoil in Brazil. Prices in this market were
<PAGE>
also boosted higher following an announcement by the Japanese
Ministry of Finance during February that they would resume
outright purchases of JGBs. Later in the first quarter, prices
in this market surged higher in response to the Bank of Japan's
aggressive easing of monetary policy which brought short-term
interest rates down to virtually zero. In metals, losses were
experienced during March from long silver futures positions as
silver prices retreated after Berkshire Hathaway's annual report
failed to provide any new information on the company's silver
positions. In soft commodities, losses were recorded from long
coffee futures positions during January, as prices fell amid
fears that Brazilian exports will flood the market, and from
short coffee futures positions during March as options-related
buying triggered waves of buy-stops at several key resistance
levels, attracting fund short-covering and pushing prices higher.
Smaller losses were recorded in global stock index futures during
February from short positions in Hang Seng Index futures as Hong
Kong stock prices rose on short-covering and reports that Walt
Disney may open a theme park in that region. These losses were
mitigated by gains recorded in currencies from short euro
positions as the value of the new European common currency
declined relative to the U.S. dollar throughout the quarter due
to a recent economic slowdown in Europe and on fears that the
European Central Bank would cut interest rates. During March,
additional gains were recorded from short positions in the euro,
as well as the Swiss franc, as the value of most European
currencies dropped due to the growing uncertainty regarding
<PAGE>
military action in Yugoslavia. In energies, gains were recorded
from long crude oil futures positions as oil prices climbed 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 three
months ended March 31, 1999 were $730,453, resulting in a net
loss of $768,865. The value of a Unit decreased from $4,192.04
at December 31, 1998 to $4,089.90 at March 31, 1999.
For the Quarter Ended March 31, 1998
For the quarter ended March 31, 1998, the Partnership recorded
total trading losses net of interest income of $566,444 and
posted a decrease in Net Asset Value per Unit. The most
significant losses were experienced from short Japanese yen
positions as the value of the yen reversed higher versus the U.S.
dollar during January and early February after trending lower
previously. Smaller currency losses were recorded from
inconsistent movement in the value of the South African rand
during January and March. Currency gains recorded during March
from short Swiss franc and German mark positions, as the value of
these currencies weakened versus the U.S. dollar, offset a
portion of these losses. In financial futures, losses were
recorded from trading Nikkei Index futures as Japanese equity
prices moved in a short-term volatile pattern throughout the
quarter amid uncertainty regarding an economic stimulus package.
These losses were partially offset by gains from long European
bond futures as prices in these markets trended higher during a
majority of the quarter. Smaller losses were recorded in metals
<PAGE>
from short gold futures positions during January as gold prices
reversed higher after trending lower in previous months. A
portion of the Partnership's overall losses for the quarter were
offset by gains from short crude oil futures positions as oil
prices trended lower during January, February and early March.
Total expenses for the three months ended March 31, 1998 were
$685,384, resulting in a net loss of $1,251,828. The value of a
Unit decreased from $3,724.92 at December 31, 1997 to $3,571.55
at March 31, 1998.
Year 2000 Problem. Commodity pools, like financial and business
organizations and individuals around the world, depend on the
smooth functioning of computer systems. Many computer systems in
use today cannot recognize the computer code for the year 2000,
but revert to 1900 or some other date. This is commonly known as
the "Year 2000 Problem". The Partnership could be adversely
affected if computer systems used by it or any third party with
whom it has a material relationship do not properly process and
calculate date-related information and data concerning dates on
or after January 1, 2000. Such a failure could adversely affect
the handling or determination of futures trades and prices and
other services.
MSDW began its planning for the Year 2000 Problem in 1995,
and currently has several hundred employees working on the
matter. It has developed its own Year 2000 compliance plan to
deal with the problem and had the plan approved by the company's
executive management, Board of Directors and Information
Technology Department. Demeter is coordinating with MSDW to
<PAGE>address the Year 2000 Problem with respect to
Demeter's computer systems that affect the Partnership. This
includes hardware and software upgrades, systems consulting and
computer maintenance.
Beyond the challenge facing internal computer systems, the
systems failure of any of the third parties with whom the
Partnership has a material relationship - the futures exchanges
and clearing organizations through which it trades, Carr, or the
Trading Advisors - could result in a material financial risk to
the Partnership. All U.S. futures exchanges are subject to
monitoring by the CFTC of their Year 2000 preparedness and the
major foreign futures exchanges are also expected to be subject
to market-wide testing of their Year 2000 compliance during 1999.
Demeter intends to monitor the progress of Carr and the Trading
Advisors throughout 1999 in their Year 2000 compliance and, where
applicable, to test its external interface with Carr and the
Trading Advisors.
A worst case scenario would be one in which trading of
contracts on behalf of the Partnership becomes impossible as a
result of the Year 2000 problem encountered by any third parties.
A less catastrophic but more likely scenario would be one in
which trading opportunities diminish as a result of technical
problems resulting in illiquidity and fewer opportunities to make
profitable trades. MSDW has begun developing various "contingency
plans" in the event that the systems of such third parties fail.
Demeter intends to consult closely with MSDW in implementing
those plans. Despite the best efforts of both Demeter and MSDW,
however, it is possible that these steps will not be sufficient
to avoid any adverse impact to the Partnership.
<PAGE>
Risks Associated With the Euro. On January 1, 1999, eleven
countries in the European Union established fixed conversion
rates on their existing sovereign currencies and converted to a
common single currency (the "euro"). During a three-year
transition period, the sovereign currencies will continue to
exist but only as a fixed denomination of the euro. Conversion
to the euro prevents the Trading Advisors from trading in certain
currencies and thereby limits their ability to take advantage of
potential market opportunities that might otherwise have existed
had separate currencies been available to trade. This could
adversely affect the performance results of the Partnership.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures interests. The market sensitive
instruments held by the Partnership are acquired solely for
speculative trading purposes and, as a result, all or
substantially all of the Partnership's assets are subject to the
risk of trading loss. Unlike an operating company, the risk of
market sensitive instruments is integral, not incidental, to the
Partnership's primary business activities.
The futures interests traded by the Partnership involve varying
degrees of related market risk. Such market risk is often
dependent upon changes in the level or volatility of interest
rates, exchange rates, and/or market values of financial
<PAGE>
instruments and commodities. Fluctuations in related market risk
based upon the aforementioned 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 effects among
the Partnership's existing open positions, the volatility present
within the market(s), and the liquidity of the market(s). At
varying times, each of these factors may act to exacerbate or
mute the market risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt at quantifying the
Partnership's market risk must be qualified by the inherent
uncertainty of its speculative trading, which may cause future
losses and volatility (i.e. "risk of ruin") far in excess of the
Partnership's experience to date and/or any reasonable
expectation premised upon historical changes in the fair value of
its market sensitive instruments.
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
<PAGE>
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. As such, any loss in the fair
value of the Partnership's open positions is directly reflected
in the Partnership's earnings, whether realized or unrealized,
and the Partnership's cash flow, as profits and losses on open
positions of exchange-traded futures interests are settled daily
through variation margin.
The Partnership's risk exposure in the various market sectors
traded by the Trading Advisors is estimated below in terms of
Value at Risk ("VaR"). The VaR model employed by the Partnership
incorporates numerous variables that could impact the fair 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
trading portfolio value. The VaR model generally 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, as well
as correlation that exists among these variables. The
hypothetical changes in portfolio value are based on daily
<PAGE>
observed percentage changes in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. In the case of the Partnership's VaR, the historical
observation period is approximately four years. The Partnership's
one-day 99% VaR corresponds to the negative change in portfolio
value that, based on observed market risk factor moves, would
have been exceeded once in 100 trading days.
VaR models such as the Partnership's are continually evolving as
trading portfolios become more diverse and modeling techniques
and systems capabilities improve. It must also be noted that the
VaR model is used to quantify market risk for historic reporting
purposes only and is not utilized by either Demeter or the
Trading Advisors in their daily risk management activities.
The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by market category as of March 31, 1999. As of March 31, 1999,
the Partnership's total capitalization was approximately $30
million.
Primary Market March 31, 1999
Risk Category Value at Risk
Interest Rate (0.88)%
Currency (2.41)
Equity (0.65)
Commodity (0.65)
Aggregate Value at Risk (2.57)%
<PAGE>
Aggregate value at risk represents the aggregate VaR of the
Partnership's open positions and not the sum of the VaR of the
individual categories listed above. Aggregate VaR will be 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 March 31, 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. As the Partnership's sole business
is the speculative trading of primarily futures interests, the
composition of its portfolio of open positions can change
significantly over any given time period or even within a single
trading day. Such changes in open positions could materially
impact market risk as measured by VaR either positively or
negatively.
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 April 1,
1998 through March 31, 1999.
Primary Market Risk Category High Low Average
Interest (1.21)% (0.87)% (1.04)%
Currency (2.41) (0.85)
(1.65)
Equity (0.65) (0.22)
(0.35)
Commodity (0.73) (0.58) (0.64)
Aggregate Value at Risk (2.57)% (1.34)% (2.02)%
<PAGE>
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 require-
ments, as such margin requirements generally range between 2% and
15% of contract face value. Additionally, due to the use of
leverage, the face value of the market sector instruments held by
the Partnership is typically many times the total capitalization of
the Partnership. The financial magnitude of the Partnership's open
positions thus creates a "risk of ruin" not typically found in
other investment vehicles. Due to the relative size of the
positions held, certain market conditions may cause the Partnership
to incur losses greatly in excess of VaR within a short period of
time. The foregoing VaR tables, as well as the past performance of
the Partnership, gives no indication of such "risk of ruin". In
addition, VaR risk measures should be interpreted in light of the
methodology's limitations, which include the following: past
changes in market risk factors will not always yield accurate
predictions of the distributions and correlations of future market
movements; changes in portfolio value in response to market
movements may differ from the responses implicit in a VaR model;
published VaR results reflect past trading positions while future
risk depends on future positions; VaR using a one-day time horizon
does not fully capture the market risk of positions that cannot be
liquidated or hedged within one day; and the historical market risk
factor data used for VaR estimation may provide only limited
insight into losses that could be incurred under certain unusual
market movements.
<PAGE>
The foregoing VaR tables present the results of the Partnership's
VaR for each of the Partnership's market risk exposures and on an
aggregate basis at March 31, 1999 and for the end of the four
quarterly reporting periods from April 1, 1998 through March 31,
1999. 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 and monitor risk and there can
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated 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. However, such balances, as well as
any market risk they may represent, are immaterial. The
Partnership also maintains a substantial portion (approximately
87%) of its available assets in cash at DWR. 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 the
potential losses caused by such movements, 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
<PAGE>
market risk exposures - except for (i) those disclosures that are
statements of historical fact and (ii) 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 Advisors
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 as of March 31, 1999, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Interest Rate. Interest rate risk is the principal market
exposure of the Partnership. Interest rate movements directly
affect the price of the sovereign bond futures positions held by
the
<PAGE>
Partnership and indirectly 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 to interest rate fluctuations in the
United States and the other G-7 countries. However, the
Partnership also takes futures positions in the government debt of
smaller nations - e.g. Australia. Demeter anticipates that G-7
interest rates will remain the primary market exposure of the
Partnership for the foreseeable future. The changes in interest
rates which have the most effect on the Partnership are changes in
long-term, as opposed to short-term, rates. Most of the
speculative futures positions held by the Partnership are in medium-
to-long term instruments. Consequently, even a material change in
short-term rates would have little effect on the Partnership if the
medium-to-long term rates were to remain steady.
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. These fluctuations are influenced by interest rate
changes as well as political and general economic conditions. The
Partnership trades in a large number of currencies, including cross-
rates - i.e., positions between two currencies other than the U.S.
dollar. However, the Partnership's major exposures have typically
been in the dollar/euro, dollar/yen, dollar/mark and dollar/pound
positions. Demeter does not anticipate that the risk profile of
the Partnership's currency sector will change significantly in the
<PAGE>
future, although it is difficult at this point to predict the
effect of the introduction of the Euro on the Trading Advisors'
currency trading strategies.
Equity. The Partnership's primary equity exposure is to
equity price risk in the G-7 countries. The stock index futures
traded by the Partnership are by law limited to futures on broadly
based indices. As of March 31, 1999, the Partnership's primary
exposures were in the Nikkei (Japan) and All Ordinaries
(Australia), stock indices. The Partnership is primarily exposed
to the risk of adverse price trends or static markets in the major
U.S., European and Japanese indices. (Static markets would not
cause major market changes but would make it difficult for the
Partnership to avoid being "whipsawed" into numerous small losses).
Commodity.
Metals. The Partnership's primary metals market exposure is
to fluctuations in the price of gold and silver. Although certain
Trading Advisors will from time to time trade base metals such as
copper, the principal market exposures of the Partnership have
consistently been in the precious metals, gold and silver. The
Trading Advisors' gold trading has been increasingly limited due to
the long-lasting and mainly non-volatile decline in the price of
gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Trading Advisors have
from time to time taken substantial positions as they have
perceived market opportunities to develop. Demeter anticipates
that gold and
<PAGE>
silver will remain the primary metals market exposure for the
Partnership.
Soft Commodities and Agriculturals. The Partnership's primary
commodities exposure is to fluctuations in the price of soft
commodities and agriculturals which are often directly affected by
severe or unexpected weather conditions. Corn, sugar and coffee
accounted for the substantial bulk of the Partnership's commodities
exposure as of March 31, 1999. The Partnership also had material
market exposure to live cattle, currently does and may do so again
in the future. However, Demeter anticipates that the Trading
Advisors will maintain an emphasis on corn, sugar and coffee in
which the Partnership has historically taken its largest positions.
Energy. The Partnership's primary energy market exposure is
to gas and oil price movements, often resulting from political
developments in the Middle East. Although the Trading Advisors
trade natural gas to a limited extent, oil is by far the dominant
energy market exposure of the Partnership. Oil prices are
currently depressed, but they can be volatile and substantial
profits and losses have been and are expected to continue to be
experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of March 31, 1999:
<PAGE>
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in euros, British pounds, Japanese yen,
Singapore dollars and Swiss francs. The Partnership controls the
non-trading risk of these balances by regularly converting these
balances back into dollars (no less frequently than twice a month,
and more frequently if a particular foreign currency balance
becomes unusually high).
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Trading Advisors,
severally, attempt to manage the risk of the Partnership's open
positions is essentially the same in all market categories traded.
Demeter attempts to manage the Partnership's market exposure by (i)
diversifying the Partnership's assets among different Trading
Advisors, each of whose strategies focus on different market
sectors and trading approaches, and (ii), monitoring the
performance of the Trading Advisors on a daily basis. In addition,
the Trading Advisors establish diversification guidelines often set
in terms of the maximum margin to be committed to positions in any
one market sector or market sensitive instrument. One should be
aware that certain Trading Advisors treat their risk control
policies as strict rules, whereas others treat such policies as
general guidelines.
Demeter monitors and controls the risk of the Partnership's
non-trading instrument, cash which is the only Partnership
investment directed by Demeter rather than the Trading Advisors.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in Item 3. of the Partnership's 1998 Form 10-K:
On April 12, 1999, the defendants filed a motion in the
California action to oppose certification by the court of the
class in the California litigation.
With respect to JWH, the New York Supreme Court complaint was
dismissed with prejudice when the plaintiffs failed to replead
against JWH in December, 1998. Further, JWH has been dismissed
as a defendant in the California actions without prejudice
pursuant to a tolling agreement with plaintiffs executed in
January, 1999.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Dean Witter Cornerstone Fund ("Cornerstone I"), the Partnership,
and Dean Witter Cornerstone III ("Cornerstone III") collectively
registered 250,000 Units of Limited Partnership Interest
("Unit(s)") pursuant to a Registration Statement on Form S-1, which
became effective on May 31, 1984 (the "Registration Statement")
(SEC File Numbers 2-88587; 88587-01; 88587-02). As contemplated in
the Registration Statement, an additional fund, Dean Witter
Cornerstone Fund IV ("Cornerstone IV" and collectively with
Cornerstone I, the Partnership and Cornerstone III, the
"Cornerstone Funds") was registered pursuant to Post-Effective
Amendment No. 5 to the Registration Statement, which became
effective on February 6, 1987.
<PAGE>
The managing underwriter for the Cornerstone Funds is DWR.
The offering for the Partnership originally commenced on May 31,
1984 and 41,703.528 Units have been sold through April 1, 1999.
Through April 1, 1999, an aggregate of 235,422.053 Units have been
sold leaving 14,577.947 Units remaining available for sale as of
April 1, 1999.
The aggregate price of Units sold through April 1, 1999 with
respect to Cornerstone II is $65,642,656.
Effective September 30, 1984, Cornerstone II, Cornerstone III and
Cornerstone IV were closed to new investors; Units have been sold
since then solely through "Exchanges" between the Cornerstone Funds
only, by existing Cornerstone investors, at 100% of Net Asset Value
per Unit. DWR has been paying all expenses in connection with the
offering of Units since September 30, 1994, without reimbursement.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits. - None.
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 Cornerstone Fund II
(Registrant)
By: Demeter Management Corporation
(General Partner)
May 14, 1999 By:/s/ Lewis A. Raibley, III
Lewis A. Raibley, III
Director and 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Dean
Witter Cornerstone Fund II and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 28,656,473
<SECURITIES> 0
<RECEIVABLES> 149,720<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,357,125<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,357,125<F3>
<SALES> 0
<TOTAL-REVENUES> (38,412)<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 730,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (768,865)
<INCOME-TAX> 0
<INCOME-CONTINUING> (768,865)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (768,865)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include interest receivable of $90,138 and due
from DWR of $59,582.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $1,550,932.
<F3>Liabilities include redemptions payable of $236,407, accrued
management fees of $100,743, accrued administrative expenses payable
of $33,628, and accrued incentive fees of $0.
<F4>Total revenue includes realized trading revenue of $195,940, net
change in unrealized of $(505,220) and interest income of $270,868.
</FN>
</TABLE>
