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 September 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________to_____________
Commission file 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
September 30, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statementsd
Statements of Financial Condition
September 30, 2000 (Unaudited) and December 31, 1999......2
Statements of Operations for the Quarters Ended
September 30, 2000 and 1999 (Unaudited)...................3
Statements of Operations for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited)...................4
Statements of Changes in Partners' Capital for
the Nine Months Ended September 30, 2000 and 1999
(Unaudited)...............................................5
Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited)...................6
Notes to Financial Statements (Unaudited)..............7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............13-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .....................................23-36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................37
Item 5. Other Information...................................37
Item 6. Exhibits and Reports on Form 8-K.................37-38
</TABLE>
<page
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
September 30, December 31
,
2000 1999 $
$
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 21,234,248 25,804,088
Net unrealized loss on open contracts (MS & Co.)
(174,629) -
Net unrealized gain (loss) on open contracts (Carr)
(14,582) 1,156,415 Net
unrealized loss on open contracts (MSIL)
(6,750) ______-____
Total net unrealized gain (loss) on open contracts (195,961)
1,156,415
Total Trading Equity 21,038,287 26,960,503
Interest receivable (DWR) 89,611 94,764
Due from DWR 74,801 11,715
Total Assets 21,202,699 27,066,982
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 259,985 225,282
Accrued management fees 70,251 89,781
Accrued administrative expenses 57,300 42,938
Total Liabilities 387,536 358,001
Partners' Capital
Limited Partners (5,702.850 and
6,619.006 Units, respectively) 20,395,301 26,243,505
General Partner (117.400 Units) 419,862 465,476
Total Partners' Capital 20,815,163 26,708,981
Total Liabilities and Partners' Capital 21,202,699 27,066,982
NET ASSET VALUE PER UNIT 3,576.33 3,964.87
<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 September 30,
2000 1999
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized 354,603 545,905
Net change in unrealized (901,496) (755,062)
Total Trading Results (546,893) (209,157)
Interest Income (DWR) 268,015 287,213
Total Revenues (278,878) 78,056
EXPENSES
Brokerage commissions (DWR) 301,393 431,856
Management fees 217,382 299,483
Transaction fees and costs 25,085 40,421
Administrative expenses 10,069 12,753
Incentive fees
- (26,784)
Total Expenses 553,929
757,729
NET LOSS (832,807) (679,673)
NET LOSS ALLOCATION
Limited Partners (816,316) (668,436)
General Partner (16,491) (11,237)
NET LOSS PER UNIT
Limited Partners (140.48) (95.71)
General Partner (140.48) (95.71)
<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 Nine Months Ended September 30,
2000 1999
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized 55,384 2,380,942
Net change in unrealized (1,352,376) (913,771)
Total Trading Results (1,296,992) 1,467,171
Interest Income (DWR) 843,878 832,238
Total Revenues (453,114) 2,299,409
EXPENSES
Brokerage commissions (DWR) 1,035,967 1,214,520
Management fees 722,112 912,017
Transaction fees and costs 99,131 120,225
Administrative expenses 32,890 35,519
Total Expenses 1,890,100 2,282,281
NET INCOME (LOSS) (2,343,214) 17,128
NET INCOME (LOSS) ALLOCATION
Limited Partners (2,297,600) 16,818
General Partner (45,614) 310
NET INCOME (LOSS) PER UNIT
Limited Partners (388.54) 2.64
General Partner (388.54) 2.64
<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 Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<CAPTION>
Units of
PartnershipLimited General
Interest Partners Partner Total
<S> <C> <C> <C> <C>
Partners' Capital,
December 31, 1998 7,489.611 $30,904,584 $492,145
$31,396,729
Net Income - 16,818
310 17,128
Redemptions (482.009) (2,019,230)
- (2,019,230)
Partners' Capital,
September 30, 1999 7,007.602 $28,902,172 $492,455 $29,394,627
Partners' Capital,
December 31, 1999 6,736.406$26,243,505 $465,476$26,708,981
Net Loss - (2,297,600)(45,614)(2,343,214)
Offering of Units 2.369 9,330 - 9,330
Redemptions (918.525) (3,559,934)
- (3,559,934)
Partners' Capital,
September 30, 2000
5,820.250 $20,395,301 $419,862 $20,815,163
<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 Nine Months Ended September 30,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) (2,343,214) 17,128
Noncash item included in net income (loss):
Net change in unrealized 1,352,376 913,771
(Increase) decrease in operating assets:
Interest receivable (DWR) 5,153 (3,882)
Due from DWR (63,086) (48,163)
Increase (decrease) in operating liabilities:
Accrued management fees (19,530) (8,802)
Accrued administrative expenses 14,36235,519
Accrued incentive fees ______-___ (413,951)
Net cash provided by (used for) operating activities
(1,053,939) 491,620
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of Units
9,330 -
Increase in redemptions payable 34,703 9,722
Redemptions of Units (3,559,934) (2,019,230)
Net cash used for financing activities (3,515,901) (2
,009,508)
Net decrease in cash (4,569,840) (1,517,888)
Balance at beginning of period 25,804,088 29,949,571
Balance at end of period 21,234,248 28,431,683
<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 unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Dean Witter Cornerstone Fund II (the "Partnership"). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership's December 31, 1999 Annual
Report on Form 10-K.
1. Organization
Dean Witter Cornerstone Fund II is a New York limited partnership
organized to engage primarily 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 general partner is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Dean Witter
Reynolds Inc. ("DWR"). Morgan Stanley & Co., Inc. ("MS & Co.")
and Morgan Stanley & Co. International Limited ("MSIL") provide
clearing and execution services. Demeter, DWR, MS & Co. and MSIL
are wholly-
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
owned subsidiaries of Morgan Stanley Dean Witter & Co. The
trading managers to the Partnership are Northfield Trading L.P.
and John W. Henry & Company, Inc. (collectively, the "Trading
Managers").
2. Related Party Transactions
The Partnership's cash is on deposit with DWR, MS & Co., and MSIL
in futures interests trading accounts to meet margin requirements
as needed. DWR pays interest on these funds based on current 13-
week U.S. Treasury 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.
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging
Activities" effective for fiscal years beginning after June 15,
2000, as amended by SFAS No. 137. The Partnership adopted the
provisions of SFAS No. 133 beginning with the fiscal year ended
December 31, 1998. SFAS No. 133 superceded SFAS Nos. 119 and
105, which required the disclosure of average aggregate fair
values and contract/notional values, respectively, of derivative
financial instruments for an entity that carries its assets at
fair value. SFAS No. 133 was further amended by SFAS No. 138,
which clarifies issues surrounding interest rate risk, foreign
currency denominations, normal purchases and sales and net
hedging. The application of SFAS No. 133, as amended by SFAS No.
137, did not have a significant effect on the Partnership's
financial statements, nor will the application of the provisions
of SFAS No. 138 have a significant effect on the Partnership's
financial statements.
SFAS No. 133 defines a derivative as a financial instrument or
other contract that has all three of the following
characteristics:
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in market
factors;
3) Terms require or permit net settlement.
Generally derivatives include futures, forwards, swaps or option
contracts, or other financial instruments with similar
characteristics such as caps, floors and collars.
The net unrealized gains (losses) on open contracts are reported
as a component of "Equity in futures interests trading accounts"
on the statements of financial condition and totaled $(195,961)
and $1,156,415 at September 30, 2000 and December 31, 1999,
respectively.
Of the $195,961 net unrealized loss on open contracts at
September 30, 2000, $201,932 related to exchange-traded futures
contracts and $(397,893) related to off-exchange-traded forward
currency contracts.
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the $1,156,415 net unrealized gain on open contracts at
December 31, 1999, $1,130,189 related to exchange-traded futures
contracts and $26,226 related to off-exchange-traded forward
currency contracts.
Exchange-traded futures contracts held by the Partnership at
September 30, 2000 and December 31, 1999 mature through September
2001 and December 2000, respectively. Off-exchange-traded
forward currency contracts held by the Partnership at September
30, 2000 and December 31, 1999 mature through December 2000 and
March 2000, respectively.
The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership is involved is limited to the amounts
reflected in the Partnership's statements of financial condition.
The Partnership also has credit risk because DWR, MS & Co., and
MSIL act as the futures commission merchants or the
counterparties, with respect to most of the Partnership's assets.
Exchange-traded futures contracts are marked to market on a daily
basis, with variations in value settled on a daily basis. DWR, MS
& Co., and MSIL each as a futures commission merchant for all of
the Partnership's exchange-traded futures contracts, are
required,
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
pursuant to regulations of the Commodity Futures Trading
Commission ("CFTC"), to segregate from their own assets, and for
the sole benefit of their commodity customers, all funds held by
them with respect to exchange-traded futures contracts, including
an amount equal to the net unrealized gain (loss) on all open
futures contracts, which funds, in the aggregate, totaled
$21,436,180 and $26,934,277 at September 30, 2000 and December
31, 1999, respectively. With respect to the Partnership's off-
exchange-traded forward currency contracts, there are no daily
settlements of variations in value nor is there any requirement
that an amount equal to the net unrealized gain (loss) on open
forward contracts be segregated. With respect to those off-
exchange-traded forward currency contracts, the Partnership is at
risk to the ability of MS & Co., the sole counterparty on all of
such contracts, to perform. The Partnership has a netting
agreement with MS & Co. This agreement, which seeks to reduce
both the Partnership's and MS & Co.'s exposure on off-exchange-
traded forward currency contracts, should materially decrease the
Partnership's credit risk in the event of MS & Co.'s bankruptcy
or insolvency.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with DWR as non-
clearing broker and MS & Co. and MSIL as clearing brokers in
separate futures trading accounts established for each Trading
Manager, which assets are used as margin to engage in trading.
The assets are held in either non-interest-bearing bank accounts
or in securities and instruments permitted by the CFTC for
investment of customer segregated or secured funds. The
Partnership's assets held by the commodity brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures and forwards,
it is expected that the Partnership will continue to own such
liquid assets for margin purposes.
The Partnership's investment in futures and forwards may, from
time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations
referred to as "daily price fluctuations limits" or "daily
limits". Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive
<PAGE>
days with little or no trading. These market conditions could
prevent the Partnership from promptly liquidating its futures
contracts and result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currency. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets and subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources - The Partnership does not have, or expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest ("Unit(s)") in the future will
affect the amount of funds available for investment in futures
interests in subsequent periods. It is not possible to estimate
the amount and therefore, the impact of future redemptions of
Units.
<PAGE>
Results of Operations
General. The Partnership's results depend on its Trading
Managers and the ability of the Trading Managers' trading
programs to take advantage of price movements or other profit
opportunities in the futures and forwards markets. The following
presents a summary of the Partnership's operations for the
quarter and nine months ended September 30, 2000 and 1999,
respectively, and a general discussion of its trading activities
during each period. It is important to note, however, that the
Trading Managers trade in various markets at different times and
that prior activity in a particular market does not mean that
such market will be actively traded by the Trading Managers or
will be profitable in the future. Consequently, the results of
operations of the Partnership are difficult to discuss other than
in the context of its Trading Managers' trading activities on
behalf of the Partnership as a whole and how the Partnership has
performed in the past.
For the Quarter and Nine Months Ended September 30, 2000
For the quarter ended September 30, 2000, the Partnership
recorded total trading losses net of interest income of $278,878
and posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 2.7% were recorded in the
global interest rate futures markets primarily from long Japanese
interest rate futures positions as the Bank of Japan raised
interest rates for the first time in 10 years, ending its zero
interest rate policy
<PAGE>
during August. Short Japanese bond futures positions resulted in
additional losses during September as prices surged and long-term
interest rates dropped as investors sought refuge from falling
U.S. and Japanese stock prices. In the global stock index
futures markets, losses of approximately 1.8% were incurred
primarily from long DAX Index futures positions during July and
August as prices declined amid weakness in European technology
stocks. In the currency markets, losses of approximately 1.3%
were experienced primarily during August from short Japanese yen
positions as the value of the yen strengthened versus the U.S.
dollar on fears that the Bank of Japan could raise interest rates
further by December. In soft commodities, losses of approximately
0.3% were recorded primarily from short cotton futures positions
as prices jumped higher during July amid dryness and heat in
Texas. Newly established long cotton futures positions resulted
in additional losses during late August as prices moved lower on
rain-related quality concerns in the U.S. Southeast. A portion
of overall Partnership losses was offset by gains of
approximately 1.5% recorded in the energy markets primarily
during August from long futures positions in crude oil and its
related products as prices spiked higher as U.S. stock levels
remained around 24-year lows. Ongoing supply concerns outweighed
signals from Saudi Arabia that it would seek a suitable
production increase to ease the crunch. While the energy markets
contributed gains overall during the quarter, the magnitude of
the profits was reduced by the intervention in the crude oil
market that took place toward the
<PAGE>
end of September. Specifically, the Clinton administration
announced the release of 30 million barrels of oil from the
Strategic Petroleum Reserve, which caused a sharp reversal in the
previously established upward trend in crude oil futures and
other energy markets. However, the reversal was not enough to
completely offset gains made earlier in the quarter and, as a
result, allowed the energy complex to record net gains for the
quarter. Additional gains of approximately 0.2% were recorded in
the agricultural markets primarily from short corn futures
positions during July as prices declined on favorable U.S. crop
weather forecasts. Total expenses for the three months ended
September 30, 2000 were $553,929, resulting in a net loss of
$832,807. The value of a Unit decreased from $3,716.81 at June
30, 2000 to $3,576.33 at September 30, 2000.
For the nine months ended September 30, 2000, the Partnership
recorded total trading losses net of interest income of $453,114
and posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 7.8% were recorded in the
global interest rate futures markets primarily from long German
bund futures positions during the second quarter as prices
declined on weakness in U.S. bonds and the sharp decline in the
euro. Long Japanese interest rate futures positions also
incurred losses as prices slid on the yen's weakness and a higher
Nikkei 225 Index during February and as the Bank of Japan ended
its zero
<PAGE>
interest rate policy during August. Short Japanese bond futures
positions resulted in losses during September as prices surged as
investors sought refuge from falling U.S. and Japanese stock
prices. In currencies, losses of approximately 3.4% were
incurred primarily from short Japanese yen positions as its value
strengthened versus the U.S. dollar during May amid positive
economic data out of Japan and expectations of a rise in Japanese
interest rates. Newly established long Japanese yen positions
incurred losses during late June as the yen's value gave back
earlier month gains versus the U.S. dollar due to repositioning
ahead of the tankan survey. During August, short Japanese yen
positions were unprofitable as the yen's value strengthened
versus the U.S. dollar on fears that the Bank of Japan could
raise interest rates further by December. In the metals markets,
losses of approximately 2.1% were recorded primarily from short
gold futures positions as prices spiked higher during early
February following an announcement by a large producer that it
was suspending gold hedging activities. Long gold futures
positions resulted in additional losses as prices fell later in
February and March on speculation of gold sales from the Bank of
France and during July after the Bank of England announced its
gold auction had concluded at a lower price than most dealers
expected. Short gold futures positions during September were
also unprofitable as prices experienced pressure as the UK's
September 19 gold auction approached. Smaller losses of
approximately 1.9% were experienced in the global stock index
futures markets primarily from short
<PAGE>
Nikkei Index futures positions as Japanese equity prices reversed
higher due to optimism regarding the Japanese economy and the
strength in technology stocks. A portion of overall Partnership
losses was offset by gains of approximately 3.9% recorded in the
energy markets primarily from long futures positions in crude oil
and its refined products as prices powered to nine-year highs
during the first quarter on concerns about future output levels
amid dwindling stockpiles and increasing demand. While the
energy markets contributed gains overall during the second
quarter, the magnitude of the profits was reduced by the
intervention in the crude oil market that took place toward the
end of September. Specifically, the Clinton administration
announced the release of 30 million barrels of oil from the
Strategic Petroleum Reserve, which caused a sharp reversal in the
previously established upward trend in crude oil futures and
other energy markets. However, the reversal was not enough to
completely offset gains made earlier in the year and, as a
result, allowed the energy complex to record net gains for the
year. Additional gains of approximately 0.8% were recorded in
the soft commodities markets primarily from long sugar futures
positions as prices trended to 22-month highs during the second
quarter on reports of lower plantings and speculation that the
world's surplus could shrink. Total expenses for the nine
months ended September 30, 2000 were $1,890,100, resulting in
<PAGE>
a net loss of $2,343,214. The value of a Unit decreased from
$3,964.87 at December 31, 1999 to $3,576.33 at September 30,
2000.
For the Quarter and Nine Months Ended September 30, 1999
For the quarter ended September 30, 1999, the Partnership
recorded total trading revenues including interest income of
$78,056 and, after expenses, posted a decrease in Net Asset Value
per Unit. The most significant net losses of approximately 3.5%
were recorded in the global interest rate futures markets
primarily from short positions in Japanese government bond
futures as prices increased during July and September due to the
strength in the Japanese yen and expectations that monetary
easing in that country will eventually come. Losses were also
recorded from trading U.S. interest rate futures during August
and September as domestic bond prices moved in a short-term
volatile pattern amid inflationary concerns and questions
regarding the future direction of U.S. interest rates. In
metals, losses of approximately 1.8% were incurred primarily
during September from previously established short positions in
gold futures as gold prices reversed suddenly higher following
the Bank of England's second gold auction and an announcement by
several European central banks of their plans to restrict sales
of gold reserves for five years. Smaller losses were recorded in
this market complex from short silver futures positions as silver
prices climbed higher during late July on technically based
buying. A portion of the Partnership's overall losses for the
<PAGE>
quarter was offset by gains of approximately 5.0% recorded in the
energy markets primarily from long positions in crude oil futures
as oil prices climbed higher throughout the quarter due to a
perceived tightness in supplies, an increase in demand and an
announcement by OPEC ministers stating that they would continue
to adhere to agreed upon output cuts through the first quarter of
2000. Additional profits of approximately 0.4% were recorded in
the soft commodities markets primarily from short coffee futures
positions as coffee prices slid lower during July due to an
increase in supplies, diminishing fears of impending frost damage
to Brazilian crops and on predictions of record harvests in
Brazil next year. Total expenses for the three months ended
September 30, 1999 were $757,729, resulting in a net loss of
$679,673. The value of a Unit decreased from $4,290.39 at June
30, 1999 to $4,194.68 at September 30, 1999.
For the nine months ended September 30, 1999, the Partnership
recorded total trading revenues including interest income of
$2,299,409 and posted an increase in Net Asset Value per Unit.
The most significant gains of approximately 7.0% were recorded in
the energy markets primarily from long positions in crude oil
futures as oil prices climbed during the first nine months of the
year. During the first quarter, oil prices rose 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
<PAGE>
quarter as prices climbed higher amid declining inventory levels
and increasing demand. The Partnership's long crude oil
positions continued to profit during the third quarter as a
result of declining inventories, increasing demand and adherence
to agreed upon output cuts. Additional gains of approximately
1.1% were recorded in the currency markets primarily from short
positions in 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 an economic slowdown in Europe, fears that
the European Central Bank would cut interest rates and the crisis
in Yugoslavia. Currency gains were also recorded from long
Japanese yen positions as the value of the yen strengthened
versus the U.S. dollar during the third quarter on optimism
regarding the Japanese economy. Smaller profits of approximately
0.3% were recorded in the global stock index futures markets
primarily 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. A majority of these gains
were offset by losses of approximately 3.5% experienced in the
metals markets primarily from long silver futures positions as
silver prices retreated during March after Berkshire Hathaway's
annual report failed to provide any new information on the
company's silver positions. Smaller losses were recorded during
July from short positions in this market as prices moved higher
<PAGE>
as a result of technically based buying. In global interest rate
futures, losses of approximately 3.3% were recorded primarily
during the first and third quarters from short positions in
Japanese government bond futures as prices moved higher on
expectations for monetary easing in Japan. Total expenses for the
nine months ended September 30, 1999 were $2,282,281, resulting
in net income of $17,128. The value of a Unit increased from
$4,192.04 at December 31, 1998 to $4,194.68 at September 30,
1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. The market-sensitive instruments
held by the Partnership are acquired for speculative
trading purposes only and, as a result, all or substantially all
of the Partnership's assets are at risk of trading loss. Unlike
an operating company, the risk of market-sensitive instruments is
central, not incidental, to the Partnership's main business
activities.
The futures interests traded by the Partnership involve varying
degrees of market risk. Market risk is often dependent upon
changes in the level or volatility of interest rates, exchange
rates, and prices of financial instruments and commodities.
Fluctuations in market risk based upon these factors result in
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frequent changes in the fair value of the Partnership's open
positions, and, consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the
Partnership's market risk exposures contain "forward-looking
statements" within the meaning of the safe harbor from civil
liability provided for such statements by the Private Securities
Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934). All
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quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions using mark-to-market
accounting principles. Any loss in the market value of the
Partnership's open positions is directly reflected in the
Partnership's earnings, whether realized or unrealized, and cash
flow. Profits and losses on open positions of exchange-traded
futures interests are settled daily through variation margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Managers is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the
VaR model include equity and commodity prices, interest rates,
foreign exchange rates, and correlation among these variables.
The hypothetical changes in portfolio value are based on daily
percentage changes observed in key market indices or other market
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factors ("market risk factors") to which the portfolio is
sensitive. The historical observation period of the Partner-
ship's VaR is approximately four years. The one-day 99%
confidence level of the Partnership's VaR corresponds to the
negative change in portfolio value that, based on observed market
risk factors, would have been exceeded once in 100 trading days.
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading 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 primary market risk category at September 30, 2000 and 1999.
At September 30, 2000 and 1999, the Partnership's total
capitalization was approximately $21 million and $29 million,
respectively.
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Primary Market September 30, 2000 September 30,
1999
Risk Category Value at Risk Value at Risk
Currency (1.88)% (1.91)%
Interest Rate (0.48) (1.11)
Equity (1.07) (0.52)
Commodity (0.87) (0.98)
Aggregate Value at Risk (2.35)% (2.38)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual Market Categories listed above. Aggregate VaR will be
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 September 30, 2000 and 1999 only and is not
necessarily representative of either the historic or future risk
of an investment in the Partnership. Because the Partnership's
only business is the speculative trading of futures interests,
the composition of its trading portfolio can change
significantly over any given time period, or even within a single
trading day. Any changes in open positions could positively or
negatively materially impact market risk as measured by VaR.
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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 October
1, 1999 through September 30, 2000.
Primary Market Risk Category High Low Average
Currency (1.88)% (1.04)% (1.43)%
Interest Rate (1.34) (0.48) (0.88)
Equity (1.07) (0.36) (0.71)
Commodity (1.03) (0.58) (0.78)
Aggregate Value at Risk (2.42)% (1.32)% (2.04)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses
greatly in excess of VaR within a short period of time, given
the effects of the leverage employed and market volatility. The
VaR tables above, as well as the past performance of the
Partnership, give no indication of such "risk
<PAGE>
of ruin". In addition, VaR risk measures should be viewed in
light of the methodology's limitations, which include the
following:
past changes in market risk factors will not always result
in accurate predictions of the distributions and correlations of
future market movements;
changes in portfolio value in response to market movements
may differ from those of the VaR model;
VaR results reflect past trading positions while future risk
depends on future positions;
VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
the historical market risk factor data used for VaR
estimation may provide only limited insight into losses that
could be incurred under certain unusual market movements.
The VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at September 30, 2000 and for the end of the four
quarterly reporting periods from October 1, 1999 through
September 30, 2000. Since VaR is based on historical data,
VaR should not be viewed as predictive of the Partnership's
future financial performance or its ability to manage or monitor
risk. There can be no assurance that the Partnership's actual
losses on a
<PAGE>
particular day will not exceed the VaR amounts indicated above or
that such losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market
risk they may represent are immaterial. At September 30, 2000
the Partnership's cash balance at DWR was approximately 91% of
its total Net Asset Value. A decline in short-term interest
rates will result in a decline in the Partnership's cash
management income. This cash flow risk is not considered
material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality and multiplier features of the Partnership's market-
sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures -
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act.
<PAGE>
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.
The following were the primary trading risk exposures of the
Partnership as of September 30, 2000, 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.
<PAGE>
The Partnership trades in a large number of currencies, including
cross-rates - i.e., positions between two currencies other than
the U.S. dollar. At September 30, 2000, 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 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 at September
30, 2000 was in the interest rate complex. Exposure was
primarily spread across the U.S., Japanese, and German interest
rate sectors. Interest rate movements directly affect the price
of the sovereign bond futures positions held by the Partnership
and indirectly affect the value of its stock index and currency
positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially
impact the Partnership's profitability. The Partnership's
primary interest rate exposure is generally to interest rate
fluctuations in the United States and the other G-7 countries.
<PAGE>
The G-7 countries consist of France, U.S., Britain, Germany,
Japan, Italy and Canada. However, the Partnership also takes
futures positions in the government debt of smaller nations -
e.g. Australia. Demeter anticipates that G-7 and Australian
interest rates will remain the primary interest rate exposures 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. At September 30, 2000, the Partnership's primary
exposures were in the DAX (Germany), NASDAQ (U.S.) and S&P 500
(U.S.) stock indices. The Partnership is primarily exposed to
the risk of adverse price trends or static markets in the 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.
<PAGE>
Commodity
Energy. At September 30, 2000, the Partnership's energy exposure
was shared primarily by futures contracts in the crude oil and
natural gas markets. Price movements in these markets result
from political developments in the Middle East, weather patterns,
and other economic fundamentals. It is possible that volatility
will remain high. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in this market. Natural gas has exhibited volatility
in prices resulting from weather patterns and supply and demand
factors and may continue in this choppy pattern.
Soft Commodities and Agriculturals. At September 30, 2000, the
Partnership had exposure in the markets that comprise these
sectors. Most of the exposure was in the sugar, corn and soybean
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
aluminum and copper, the principal market exposures of the
Partnership have consistently been in precious metals, gold and
silver. Exposure was evident in the gold market as gold prices
continued to be volatile during the quarter. Silver prices have
<PAGE>
remained volatile and the Trading Managers have from time to time
taken positions as they have perceived market opportunities to
develop.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of September 30, 2000:
Foreign Currency Balances. The Partnership's primary foreign
currency balance at September 30, 2000 was in Hong Kong dollars.
The Partnership controls the non-trading risk of these balances
by regularly converting these balances back into dollars upon
liquidation of the respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and each Trading Manager, separately, attempt to
manage the risk of the Partnership's open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership's assets among different Trading Managers, each of
whose strategies focus on different market sectors and trading
approaches, and monitoring the performance of each Trading
Manager daily. 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.
<PAGE>
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
Please refer to Legal Proceedings previously disclosed in the
Partnership's Form 10-Q(s) for the quarters ended March 31, 2000
and June 30, 2000 and Form 10-K for the year ended December 31,
1999.
Item 5. OTHER INFORMATION
Commencing December 1, 2000, the management fee paid by the
Partnership to each Trading Manager will be reduced from a 4% to
a 3.5% annual rate.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.01 Limited Partnership Agreement of the Partnership, dated as
of December 7, 1983, as amended as of May 11, 1984 is
incorporated by reference to Exhibit 3.01 of the
Partnership's Annual Report on Form 10-K for the fiscal year
ended September 30, 1984 (File No. 0-13298).
10.01 Management Agreement among the Partnership, Demeter
and JWH dated November 15, 1983 is incorporated by reference to
Exhibit 10.03 of the Partnership's Annual Report on Form 10- K
for the fiscal year ended September 30, 1984 (File No. 0-
13298).
10.02 Dean Witter Cornerstone Funds Exchange Agreement,
dated as of May 31, 1984 is incorporated by reference to
Exhibit 10.04 of the Partnership's Annual Report on Form 10-
K for the fiscal year ended September 30, 1984 (File No. 0-
13298).
10.03 Management Agreement among the Partnership, Demeter
and Northfield Trading L.P. dated as of April 16, 1997 is
incorporated by reference to Exhibit 10.03 of the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (File No. 0-13298).
<PAGE>
10.04 Amended and Restated Customer Agreement, dated as of
December 1, 1997, between the Partnership and Dean Witter
Reynolds Inc. is incorporated by reference to Exhibit 10.04 of
the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (File No. 0-13298).
10.05 Customer Agreement, dated as of December 1, 1997,
among the Partnership, Carr Futures, Inc. and Dean Witter
Reynolds Inc. is incorporated by reference to Exhibit 10.05
of the Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (File No. 0-13298).
10.06 International Foreign Exchange Master Agreement, dated
as of August 1, 1997, between the Partnership and Carr Futures,
Inc. is incorporated by reference to Exhibit 10.06 of the
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (File No. 0-13298).
10.07 Customer Agreement, dated as of May 1, 2000 between
Morgan Stanley & Co. Incorporated, the Partnership and
Dean Witter Reynolds Inc. is incorporated by reference to
Exhibit 10.07 of the Partnership's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, (File No. 0-
13298).
(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)
November 14, 2000 By:
Raymond E. Koch
Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
