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, 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
June 30, 1999
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
June 30, 1999 (Unaudited) and December 31, 1998...........2
Statements of Operations for the Quarters Ended
June 30, 1999 and 1998 (Unaudited)........................3
Statements of Operations for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)........................4
Statements of Changes in Partners' Capital for
the Six Months Ended June 30, 1999 and 1998
(Unaudited)...............................................5
Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)........................6
Notes to Financial Statements (Unaudited)..............7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............12-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .....................................20-32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................33
Item 2. Changes in Securities and Use of Proceeds.......33-34
Item 6. Exhibits and Reports on Form 8-K...................
34
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
June 30, December 31,
1999 1998
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 29,205,910 29,949,571
Net unrealized gain on open contracts 1,897,443 2,056,152
Total Trading Equity 31,103,353 32,005,723
Interest receivable (DWR) 93,282 91,948
Due from DWR 59,036 15,425
Total Assets 31,255,671 32,113,096
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 461,143 173,375
Accrued management fees 103,689 106,613
Accrued administrative expenses 45,194 22,428
Accrued incentive fees 26,402 413,951
Total Liabilities 636,428 716,367
Partners' Capital
Limited Partners (7,019.304 and
7,372.211 Units, respectively) 30,115,551 30,904,584
General Partner (117.400 Units) 503,692 492,145
Total Partners' Capital 30,619,243 31,396,729
Total Liabilities and Partners' Capital 31,255,671 32,113,096
NET ASSET VALUE PER UNIT 4,290.39 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 June 30,
1999 1998
$ $
<S> <C> <C>
REVENUES
Trading profit:
Realized 1,639,097 2,057,290
Net change in unrealized 346,511 715,897
Total Trading Results 1,985,608 2,773,187
Interest Income (DWR) 274,157 290,794
Total Revenues 2,259,765 3,063,981
EXPENSES
Brokerage commissions (DWR) 405,370 357,353
Management fees 309,927 292,182
Transaction fees and costs 40,453 32,267
Incentive fees 26,784 78,138
Administrative expenses 11,565 11,152
Total Expenses 794,099
771,092
NET INCOME 1,465,666 2,292,889
NET INCOME ALLOCATION
Limited Partners 1,442,128 2,229,930
General Partner 23,538 62,959
NET INCOME PER UNIT
Limited Partners 200.49 289.60
General Partner 200.49 289.60
<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 Six Months Ended June 30,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized 1,835,037 2,139,556
Net change in unrealized (158,709) (240,295)
Total Trading Results 1,676,328 1,899,261
Interest Income (DWR) 545,025 598,276
Total Revenues 2,221,353 2,497,537
EXPENSES
Brokerage commissions (DWR) 782,664 706,483
Management fees 612,534 587,455
Transaction fees and costs 79,804 65,144
Incentive fees 26,784 78,138
Administrative expenses 22,766 19,256
Total Expenses 1,524,552 1,456,476
NET INCOME 696,801 1,041,061
NET INCOME ALLOCATION
Limited Partners 685,254 1,011,446
General Partner 11,547 29,615
NET INCOME PER UNIT
Limited Partners 98.35 136.23
General Partner 98.35 136.23
<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 Six Months Ended June 30, 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
$30,487,741
Offering of Units 8.044 29,966 -
29,966
Net Income - 1,011,446 29,615 1,041,0
61
Redemptions (317.811) (1,152,100) -
(1,152,100)
Partners' Capital,
June 30, 1998 7,875.034 $29,567,255 $839,413 $30
,406,668
Partners' Capital,
December 31, 1998 7,489.611 $30,904,584 $492,145
$31,396,729
Net Income - 685,254 11,547 696,801
Redemptions (352.907) (1,474,287) -
(1,474,287)
Partners' Capital,
June 30, 1999 7,136.704 $30,115,551 $503,692
$30,619,243
<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 Six Months Ended June 30,
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income 696,801 1,041,061
Noncash item included in net income:
Net change in unrealized 158,709 240,295
(Increase) decrease in operating assets:
Interest receivable (DWR) (1,334) 5,367
Due from DWR (43,611) (45,888)
Increase (decrease) in operating liabilities:
Accrued management fees (2,924) (1,999)
Accrued administrative expenses 22,766 15,837
Accrued incentive fees (387,549) (540,132)
Net cash provided by operating activities 442,858
714,541
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units - 29,966
Increase in redemptions payable 287,768 21,465
Redemptions of units (1,474,287) (1,152,100)
Net cash used for financing activities (1,186,519) (1,100,669)
Net decrease in cash (743,661) (386,128)
Balance at beginning of period 29,949,571 29,293,294
Balance at end of period 29,205,910 28,907,166
<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 futures and
forward contracts on foreign currencies and other commodity
interests (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 Partnership's 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 managers to the Partnership
are Northfield Trading L.P. and John W. Henry & Company, Inc.
(collectively, the "Trading Managers").
<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 futures and forward contracts on foreign
currencies and other commodity interests. Futures and forwards
represent contracts for delayed delivery of an instrument at a
specified date and price. Risk arises from changes in the value
of these contracts and the potential inability of counterparties
to perform under the terms of the contracts. There are numerous
factors which may significantly influence the market value of
these contracts, including interest rate volatility.
In June 1998, the Financial Accounting Standards Board 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 elected to adopt the provisions of SFAS No. 133
beginning with the fiscal year that 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 $1,897,443 and
$2,056,152 at June 30, 1999 and December 31, 1998, respectively.
Of the $1,897,443 net unrealized gain on open contracts at June
30, 1999, $1,913,324 related to exchange-traded futures contracts
and $(15,881) 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 June
30, 1999 and December 31, 1998 mature through June 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 June 30, 1999 and December
31, 1998 mature through September 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 $31,119,234 and $32,371,440 at June 30,
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.
Results of Operations
For the Quarter and Six Months Ended June 30, 1999
For the quarter ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $2,259,765
and posted an increase in Net Asset Value per Unit. The most
significant gains were recorded from long positions in Japanese
government bond futures as prices rallied higher during April and
May as investors flooded into higher yielding long-term debt
instruments after the Japanese government failed to propose a new
economic spending plan. Additional profits were recorded from
<PAGE>
short positions in U.S. interest rate futures as domestic bond
prices moved lower during May and June amid inflationary concerns
and fears of an interest rate hike by the Federal Reserve.
Profits were also recorded from long positions in Nikkei Index
futures as Japanese equity prices moved higher during April, on
hopes that the Japanese government may take more measures to
stimulate their economy, and during June due to the release of
encouraging economic data out of that country. In the energy
markets, gains were recorded during June from long positions in
crude oil futures as oil prices surged to a 19-month high amid
signs of declining inventories and a growth in global demand. In
currencies, profits recorded from short positions in the European
common currency, as the value of the euro weakened versus the
U.S. dollar throughout a majority of the quarter, more than
offset losses from short Singapore dollar positions. These gains
were partially offset by losses incurred in the soft commodities
markets from long positions in coffee futures as prices dropped
during June on forecasts for warmer weather in Brazil and ample
warehouse supplies. Total expenses for the three months ended
June 30, 1999 were $794,099, resulting in net income of
$1,465,666. The value of a Unit increased from $4,089.90 at
March 31, 1999 to $4,290.39 at June 30, 1999.
For the six months ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $2,221,353
and posted an increase in Net Asset Value per Unit. The most
significant gains were recorded in the energy markets from long
positions in crude oil futures as oil prices climbed during the
<PAGE>
first quarter 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. Oil prices received
an added boost during the second quarter as prices reached a 19-
month high due to declining inventory levels and increasing
demand. Additional gains were recorded in the currency markets
from short positions in the European common currency, the euro,
and the Swiss franc as the value of these currencies weakened
versus the U.S. dollar throughout the first half of 1999 due to a
recent economic slowdown in Europe, fears that the European
Central Bank would cut interest rates, the crisis in Yugoslavia
and strong economic data out of the U.S. Profits were also
recorded from long positions in Nikkei Index futures as Japanese
equity prices moved higher during April, on hopes that the
Japanese government may take more measures to stimulate their
economy, and during June due to the release of encouraging
economic data out of that country. These gains were partially
offset by losses experienced in the metals markets 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. Smaller
losses were incurred from long coffee futures positions during
January and June, as prices fell amid warmer weather in Brazil
and fears that Brazilian exports will flood the market, and from
short coffee futures positions during March as prices were pushed
higher due to speculative short-covering. In global interest
rate futures, gains from short positions in U.S. interest rate
<PAGE>
futures, as prices fell during February, May and June, due to
fears of inflation, offset losses from short positions in
Japanese government bond futures as prices moved higher during a
majority of the first quarter. Total expenses for the six months
ended June 30, 1999 were $1,524,552, resulting in net income of
$696,801. The value of a Unit increased from $4,192.04 at
December 31, 1998 to $4,290.39 at June 30, 1999.
For the Quarter and Six Months Ended June 30, 1998
For the quarter ended June 30, 1998, the Partnership recorded total
trading revenues including interest income of $3,063,981 and posted
an increase in Net Asset Value per Unit. The most significant
gains were recorded in the currency markets from short positions in
the South African rand as its value declined significantly relative
to the U.S. dollar during May and June, despite intervention by the
South African government during late June. Additional currency
gains were recorded from short Japanese yen positions during May
and June as the value of the yen trended sharply lower versus other
major currencies as questions remained regarding the stability of
the Japanese economy. In the energy markets, profits were recorded
from short crude oil futures positions as oil prices declined
throughout a majority of the quarter on reports of increasing
supplies. Additional gains were recorded in the soft commodities
markets from short positions in coffee futures as coffee prices
declined during all three months of the quarter. Smaller profits
were recorded from short sugar and corn futures positions as prices
in these markets moved lower during April and May. These gains
were partially offset by losses recorded in the financial futures
markets
<PAGE>
due to short-term price volatility in U.S. interest rate futures
during April and May and in Australian interest rate futures during
June. Smaller losses were recorded from long gold futures
positions during May as precious metals prices moved lower. Total
expenses for the three months ended June 30, 1998 were $771,092,
resulting in net income of $2,292,889. The value of a Unit
increased from $3,571.55 at March 31, 1998 to $3,861.15 at June 30,
1998.
For the six months ended June 30, 1998, the Partnership recorded
total trading revenues including interest income of $2,497,537
and posted an increase in Net Asset Value per Unit. The most
significant gains were recorded in the currency markets from
short positions in the South African rand as its value declined
significantly relative to the U.S. dollar during May and June.
Additional currency gains were recorded from short Japanese yen
positions as the value of the yen also moved sharply lower versus
the U.S. dollar during May and June amid concerns about the
Japanese economy. Additional profits were recorded in the energy
markets from short positions in crude oil futures as oil prices
moved lower throughout a majority of the first half of the year.
Smaller gains were recorded in soft commodities from short
positions in coffee and sugar futures as prices in these markets
moved downward during the second quarter. These gains were
partially offset by losses incurred in the financial futures
markets primarily from trading Nikkei Index futures as Japanese
equity prices moved in a short-term volatile pattern throughout
<PAGE>
the first quarter amid uncertainty regarding an economic stimulus
package. Losses were also recorded from choppy price movement in
U.S. bond futures as domestic bond prices experienced trendless
movement throughout a majority of the first six months of the
year. Smaller losses were recorded in metals during January from
short gold futures positions as gold prices reversed higher after
trending lower in previous months. Losses were also recorded
from long gold futures positions during May as precious metals
prices moved lower. Total expenses for the six months ended June
30, 1998 were $1,456,476, resulting in net income of $1,041,061.
The value of a Unit increased from $3,724.92 at December 31, 1997
to $3,861.15 at June 30, 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.
<PAGE>
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 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 Managers - 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
Managers throughout 1999 in their Year 2000 compliance and, where
applicable, to test its external interface with Carr and the
Trading Managers.
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
<PAGE>
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.
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 Managers 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
<PAGE>
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
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
<PAGE>
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
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 Managers 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
<PAGE>
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
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 Managers 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 June 30, 1999. As of June 30, 1999, the
<PAGE>
Partnership's total capitalization was approximately $31 million.
Primary Market June 30, 1999
Risk Category Value at Risk
Currency (2.16)%
Interest Rate (1.09)
Equity (0.28)
Commodity (0.72)
Aggregate Value at Risk (2.72)%
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 June 30, 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
<PAGE>
Net Assets for the four quarterly reporting periods from July 1,
1998 through June 30, 1999.
Primary Market Risk Category High Low Average
Currency (2.41)% (0.85)% (1.73)%
Interest Rate (1.19) (0.87)
(1.01)
Equity (0.65) (0.22)
(0.35)
Commodity (0.72) (0.58) (0.64)
Aggregate Value at Risk (2.72)% (1.34)% (2.10)%
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;
<PAGE>
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.
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 June 30, 1999 and for the end of the four
quarterly reporting periods from July 1, 1998 through June 30,
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.
<PAGE>
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
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 Managers
for managing such exposures are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual
results of the Partnership's risk controls to differ materially
from the objectives of such strategies. Government interventions,
defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in
historical price relationships, an influx of new market
participants, increased regulation and many other factors could
result in material losses as well as in material changes to the
risk exposures and the risk management strategies of the
Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
<PAGE>
The following were the primary trading risk exposures of the
Partnership as of June 30, 1999, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency. The primary market exposure in the Partnership is
in the currency sector. The Partnership's currency exposure is
to exchange rate fluctuations, primarily fluctuations which
disrupt the historical pricing relationships between different
currencies and currency pairs. Interest rate changes as well as
political and general economic conditions influence these
fluctuations. The Partnership trades in a large number of
currencies, including cross-rates - i.e., positions between two
currencies other than the U.S. dollar. For the second quarter of
1999, the Partnership's major exposures were in outright U.S.
dollar positions. (Outright positions consist of the U.S. dollar
vs. other currencies. These other currencies include the major
and minor currencies). Demeter does not anticipate that the risk
profile of the Partnership's currency sector will change
significantly in the future. The currency trading VaR figure
includes foreign margin amounts converted into U.S. dollars with
an incremental adjustment to reflect the exchange rate risk
inherent to the dollar-based Partnership in expressing VaR in a
functional currency other than dollars.
Interest Rate. The second largest market exposure this
quarter was in the interest rate complex. Exposure was spread
across the U.S., Japanese, German, European and British interest
<PAGE>
rate sectors. Interest rate movements directly affect the price
of the sovereign bond futures positions held by the Partnership
and indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially
impact the Partnership's profitability. The Partnership's
primary interest rate exposure is generally to interest rate
fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions in the
government debt of smaller nations - e.g. Australia. Demeter
anticipates that G-7 and Australian interest rates will remain
the primary interest rate exposure of the Partnership for the
foreseeable future. The changes in interest rates, which have
the most effect on the Partnership, are changes in long-term, as
opposed to short-term, rates. Most of the speculative futures
positions held by the Partnership are in medium-to-long term
instruments. Consequently, even a material change in short-term
rates would have little effect on the Partnership, were the
medium-to-long term rates to remain steady.
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 June 30, 1999, the Partnership's
primary exposures were in the All Ordinaries (Australia) and
Nikkei (Japan) stock indices. The Partnership is primarily
exposed to the risk of adverse price trends or static markets in
the U.S. and Japanese indices. (Static markets would not cause
<PAGE>
major market changes but would make it difficult for the
Partnership to avoid being "whipsawed" into numerous small
losses).
Commodity.
Energy. On June 30, 1999, the Partnership's energy exposure
was shared by futures contracts in the oil and natural gas
markets. Price movements in these markets result from political
developments in the Middle East, weather patterns, and other
economic fundamentals. As oil prices have broken out of low
price ranges achieved in 1998, it is possible that volatility
will increase as well. Significant profits and losses have been
and are expected to continue to be experienced in this market.
Natural gas, also a primary energy market exposure, has exhibited
more volatility than the oil markets on an intra-day and daily
basis and is expected to continue in this choppy pattern.
Soft Commodities and Agriculturals. On June 30, 1999, the
Partnership had a reasonable amount of exposure in the markets
that comprise these sectors. Most of the exposure, however, was
in the corn, sugar and cotton markets. Supply and demand
inequalities, severe weather disruption and market expectations
affect price movements in these markets.
Metals. The Partnership's primary metals market exposure
is to fluctuations in the price of gold and silver. Although
certain Trading Managers will, from time to time, trade base
metals such as copper and aluminum, the principal market
exposures of the Partnership have consistently been in precious
metals, gold and silver. The Trading Managers' gold trading has
<PAGE> 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
Managers have from time to time taken substantial positions as
they have perceived market opportunities to develop. Demeter
anticipates that gold and silver will remain the primary metals
market exposure for the Partnership.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of June 30, 1999:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in euros, Japanese yen, South African
rands, Swiss francs and British pounds. The Partnership controls
the non-trading risk of these balances by regularly converting
these balances back into dollars upon liquidation of the
respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Trading Managers,
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
Managers, each of whose strategies focus on different market
sectors and trading approaches, and (ii), monitoring the
performance of the
<PAGE>
Trading Managers on a daily basis. In addition, the Trading
Managers 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 Managers 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 Managers.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in the Partnership's 1998 Form 10-K:
With respect to the plaintiff's consolidated action in
California, on July 1, 1999, the Superior Court of the State of
California, ruling from the bench, denied the plaintiffs' motion
to have their lawsuit certified as a class action, stating, among
other things, that plaintiffs' lawsuit did not present common
questions of fact.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Dean Witter Cornerstone Fund I ("Cornerstone I"), the Partnership,
and Dean Witter Cornerstone III ("Cornerstone III") collectively
registered 250,000 Units 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 currently continues with 41,706.006 Units sold through
July 1, 1999. The aggregate price of Units sold through July 1,
1999 was $65,653,270.
For the Cornerstone Funds in aggregate, 235,430.680 Units have been
sold through July 1, 1999, leaving 14,569.320 Units remaining
available for sale as of July 1, 1999.
Effective September 30, 1984, the Partnership, Cornerstone III and
Cornerstone IV were closed to new investors; Units have been sold
since then solely in "Exchanges" with existing 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)
August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 29,205,910
<SECURITIES> 0
<RECEIVABLES> 152,318<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,255,671<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 31,255,671<F3>
<SALES> 0
<TOTAL-REVENUES> 2,221,353<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,524,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 696,801
<INCOME-TAX> 0
<INCOME-CONTINUING> 696,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 696,801
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include interest receivable of $93,282 and due
from DWR of $59,036.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $1,897,443.
<F3>Liabilities include redemptions payable of $461,143, accrued
management fees of $103,689, accrued administrative expenses
of $45,194 and accrued incentive fees of $26,402.
<F4>Total revenue includes realized trading revenue of $1,835,037, net
change in unrealized of $(158,709) and interest income of $545,025.
</FN>
</TABLE>
