UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________to_____________
Commission file 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, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
June 30, 2000 (Unaudited) and December 31, 1999...........2
Statements of Operations for the Quarters Ended
June 30, 2000 and 1999 (Unaudited)........................3
Statements of Operations for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)........................4
Statements of Changes in Partners' Capital for
the Six Months Ended June 30, 2000 and 1999
(Unaudited)...............................................5
Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)........................6
Notes to Financial Statements (Unaudited)..............7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............13-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .....................................22-34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................35-36
Item 5 Other Information................................36-37
Item 6. Exhibits and Reports on Form 8-K.................37-38
</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,
2000 1999 $
$
(Unaudited)
ASSETS
<S>
<C> <C>
Equity in futures interests trading accounts:
Cash 21,954,031 25,804,088
Net unrealized gain on open contracts (MS & Co.)
876,447 -
Net unrealized loss on open contracts (MSIL)
(9,362) - Net unrealized
gain (loss) on open contracts (Carr)
(161,550) 1,156,415
Total net unrealized gain on open contracts 705,535
1,156,415
Total Trading Equity 22,659,566 26,960,503
Interest receivable (DWR) 88,382 94,764
Due from DWR 86,500 11,715
Total Assets 22,834,448 27,066,982
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 290,622 225,282
Accrued management fees 75,705 89,781
Accrued administrative expenses 47,232 42,938
Total Liabilities 413,559 358,001
Partners' Capital
Limited Partners (5,914.899 and
6,619.006 Units, respectively) 21,984,536 26,243,505
General Partner (117.400 Units) 436,353 465,476
Total Partners' Capital 22,420,889 26,708,981
Total Liabilities and Partners' Capital 22,834,448 27
,066,982
NET ASSET VALUE PER UNIT 3,716.81 3,964.87
<FN>
The accompanying notes are an integral part
</TABLE> of these financial statements.
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended June 30,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized (201,779) 1,639,097
Net change in unrealized (819,313) 346,511
Total Trading Results (1,021,092) 1,985,608
Interest Income (DWR) 282,319 274,157
Total Revenues (738,773) 2,259,765
EXPENSES
Brokerage commissions (DWR) 336,252 405,370
Management fees 238,067 309,927
Transaction fees and costs 34,648 40,453
Administrative expenses 11,446 11,565
Incentive fees ______-___ 26,784
Total Expenses 620,413
794,099
NET INCOME (LOSS) (1,359,186) 1,465,666
NET INCOME (LOSS) ALLOCATION
Limited Partners (1,333,181) 1,442,128
General Partner (26,005) 23,538
NET INCOME (LOSS) PER UNIT
Limited Partners (221.51) 200.49
General Partner (221.51) 200.49
<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,
2000 1999
$ $
<S>
<C> <C>
REVENUES
Trading profit (loss):
Realized (299,219) 1,835,037
Net change in unrealized (450,880) (158,709)
Total Trading Results (750,099) 1,676,328
Interest Income (DWR) 575,863 545,025
Total Revenues (174,236) 2,221,353
EXPENSES
Brokerage commissions (DWR) 734,574 782,664
Management fees 504,730 612,534
Transaction fees and costs 74,046 79,804
Administrative expenses 22,821 22,766
Incentive fees ______-___ 26,784
Total Expenses 1,336,171 1,524,552
NET INCOME (LOSS) (1,510,407) 696,801
NET INCOME (LOSS) ALLOCATION
Limited Partners (1,481,284) 685,254
General Partner (29,123) 11,547
NET INCOME (LOSS) PER UNIT
Limited Partners (248.06) 98.35
General Partner (248.06) 98.35
<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, 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 - 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
Partners' Capital,
December 31, 1999 6,736.406$26,243,505 $465,476$26,708,981
Net Loss - (1,481,284)(29,123)(1,510,407)
Offering of Units 2.369 9,330 - 9,330
Redemptions (706.476) (2,787,015)____-___(2,787,015)
Partners' Capital,
June 30, 2000 6,032.299 $21,984,536 $436,353$22,420,889
<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,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S>
<C> <C>
Net income (loss) (1,510,407) 696,801
Noncash item included in net income (loss):
Net change in unrealized 450,880 158,709
(Increase) decrease in operating assets:
Interest receivable (DWR) 6,382 (1,334)
Due from DWR (74,785) (43,611)
Increase (decrease) in operating liabilities:
Accrued management fees (14,076) (2,924)
Accrued administrative expenses 4,29422,766
Accrued incentive fees _______-__ (387,549)
Net cash provided by (used for) operating activities
(1,137,712) 442,858
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of Units
9,330 -
Increase in redemptions payable 65,340 287,768
Redemptions of Units (2,787,015) (1,474,287)
Net cash used for financing activities (2,712,345) (1,186,519)
Net decrease in cash (3,850,057) (743,661)
Balance at beginning of period 25,804,088 29,949,571
Balance at end of period 21,954,031 29,205,910
<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, 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. Prior to May 2000, Carr Futures
Inc. provided clearing and execution services. Demeter, DWR, MS
& Co.
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and MSIL are wholly-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, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133," which defers the
required implementation of SFAS No. 133 until fiscal years
beginning after June 15, 2000. However, the Partnership had
previously elected to adopt the provisions of SFAS No. 133
beginning with the fiscal year ended December 31, 1998. SFAS No.
133 supersedes SFAS No. 119 and No. 105, which required the
disclosure of average aggregate fair values and contract/notional
values, respectively, of derivative financial instruments for an
entity which carries its assets at fair value. The application
of SFAS No. 133 does not have a significant effect on the
Partnership's financial statements.
The net unrealized gains on open contracts are reported as a
component of "Equity in futures interests trading accounts" on
the statements of financial condition and totaled $705,535 and
$1,156,415 at June 30, 2000 and December 31, 1999, respectively.
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the $705,535 net unrealized gain on open contracts at June 30,
2000, $783,804 related to exchange-traded futures contracts and
$(78,269) related to off-exchange-traded forward currency
contracts.
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 June
30, 2000 and December 31, 1999 mature through June 2001 and
December 2000, respectively. Off-exchange-traded forward
currency contracts held by the Partnership at June 30, 2000 and
December 31, 1999 mature through September 2000 and March 2000,
respectively.
The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership is involved is limited to the amounts
reflected in the Partnership's statements of financial condition.
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership also has credit risk because DWR, MS & Co., and
MSIL act as the futures commission merchants or the
counterparties, with respect to most of the Partnership's assets.
Exchange-traded futures contracts are marked to market on a daily
basis, with variations in value settled on a daily basis. DWR, MS
& Co., and MSIL each as a futures commission merchant for all of
the Partnership's exchange-traded futures contracts, are
required, pursuant to regulations of the Commodity Futures
Trading Commission ("CFTC"), to segregate from their own assets,
and for the sole benefit of their commodity customers, all funds
held by them with respect to exchange-traded futures contracts,
including an amount equal to the net unrealized gain on all open
futures contracts, which funds, in the aggregate, totaled
$22,737,835 and $26,934,277 at June 30, 2000 and December 31,
1999, respectively. With respect to the Partnership's off-
exchange-traded forward currency contracts, there are no daily
settlements of variations in value nor is there any requirement
that an amount equal to the net unrealized gain 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
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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 six months ended June 30, 2000 and 1999,
respectively, and a general discussion of its trading activities
during each period. It is important to note, however, that the
Trading 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 Six Months Ended June 30, 2000
For the quarter ended June 30, 2000, the Partnership recorded
total trading losses net of interest income of $738,773 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 4.9% were recorded in the
global interest rate futures markets primarily from trading U.S.
interest rate futures. Long U.S. interest rate futures positions
were unprofitable during April as prices declined amid fears of
higher interest rates and inflation. Newly established short
<PAGE>
U.S. interest rate futures positions incurred additional losses
during the remainder of the quarter as prices moved higher as
investors shed stock holdings for the safe haven of bonds amid
signs that U.S. economic growth had slowed. Losses were also
recorded throughout a majority of the quarter from long positions
in German bund futures as prices moved lower due to the weakness
in U.S. bonds and the sharp decline in the euro. Additional
losses of approximately 3.0% were experienced in the currency
markets primarily from short positions in the Japanese yen as the
value of the yen strengthened versus the U.S. dollar during May
amid positive economic data out of Japan and expectations of a
potential rise in Japanese interest rates. Newly established
long Japanese yen positions incurred additional losses during
late June as the value of the yen gave back earlier gains
relative to the U.S. dollar due to repositioning ahead of the
tankan survey. Smaller losses of approximately 0.4% were
recorded in the metals markets from trading copper futures as
prices moved inconsistently on technically based factors. A
portion of overall Partnership losses was offset by gains of
approximately 1.2% recorded in the soft commodities markets
primarily from long sugar futures positions as prices trended to
22-month highs later in the quarter on reports of lower plantings
and speculation that the world's surplus could shrink. Short
coffee futures positions were also profitable as prices declined
on technical factors early in the quarter. Additional gains of
approximately 0.6% were recorded in the global stock index
<PAGE>
futures markets primarily during June from short positions in DAX
Index futures as European stock index futures prices decreased
after the European Central Bank's aggressive interest rate hike.
Smaller gains of approximately 0.3% were recorded in the
agricultural markets primarily during June from short corn
futures positions as prices fell due to heavy rain and cooler
temperatures. Total expenses for the three months ended June 30,
2000 were $620,413, resulting in a net loss of $1,359,186. The
value of a Unit decreased from $3,938.32 at March 31, 2000 to
$3,716.81 at June 30, 2000.
For the six months ended June 30, 2000, the Partnership recorded
total trading losses net of interest income of $174,236 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 5.5% were recorded in the
global interest rate futures markets primarily from long U.S.
interest rate futures positions as prices declined during April
amid fears of higher interest rates and inflation. Newly
established short U.S. interest rate futures positions incurred
losses later in the quarter as prices increased as investors
moved into the safe haven of bonds. Losses were also recorded
throughout a majority of the second quarter from long positions
in German bund futures 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.
<PAGE>
Additional losses of approximately 2.3% were recorded in the
currency markets 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
potential 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. In the
metals markets, losses of approximately 1.9% resulted primarily
from short gold futures positions as prices spiked higher in
early February following an announcement by a large producer that
it was suspending gold hedging activities. Newly established
long gold futures positions resulted in losses as prices fell
later in February and March on speculation of gold sales from the
Bank of France. A portion of overall Partnership losses was
offset by gains recorded in the energy markets of approximately
2.6% primarily from long crude oil futures positions as prices
powered to nine-year highs during the first quarter on concerns
about future output levels amid dwindling stockpiles and
increasing demand. Additional gains of approximately 1.0% were
recorded in the soft commodities markets primarily from long
sugar futures positions as sugar prices trended to 22-month highs
during the second quarter on reports of lower plantings and
speculation that the world's surplus could shrink. Short coffee
futures positions were also profitable as prices declined on
technical factors early in the second quarter. Total expenses
<PAGE>
for the six months ended June 30, 2000 were $1,336,171, resulting
in a net loss of $1,510,407. The value of a Unit decreased from
$3,964.87 at December 31, 1999 to $3,716.81 at June 30, 2000.
For the Quarter and Six Months Ended June 30, 1999
For the quarter ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $2,259,765
and posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 3.7% were recorded in the
global interest rate futures markets primarily 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 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 of approximately 1.5% 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. In the energy markets, gains of approximately 1.0% were
recorded primarily during June from long positions in crude oil
futures as oil prices surged to a 19-month high amid signs of
<PAGE>
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 of approximately 0.8% incurred in
the soft commodities markets primarily 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 of approximately 2.2% were recorded in the
energy markets primarily from long positions in crude oil futures
as oil prices climbed during the 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 of
<PAGE>
approximately 1.4% 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 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 of approximately 1.0% 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. These gains were partially offset by losses of
approximately 1.7% experienced in the metals markets primarily
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 of approximately 1.2% were recorded in soft
commodities primarily 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
futures, as prices fell during February, May and June, due to
fears of inflation, offset losses from short positions in
Japanese
<PAGE>
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.
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
frequent changes in the fair value of the Partnership's open
positions, and, consequently, in its earnings and cash flow.
<PAGE>
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 quantitative disclosures in this section are
deemed to be forward-looking statements for purposes of the safe
harbor, except for statements of historical fact.
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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
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%
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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 tables indicate the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category at June 30, 2000 and 1999. At
June 30, 2000 and 1999, the Partnership's total capitalization
was approximately $22 million and $31 million, respectively.
Primary Market June 30, 2000 June 30, 1999
Risk Category Value at Risk Value at Risk
Currency (1.05)% (2.16)%
Interest Rate (1.15) (1.09)
Equity (0.83) (0.28)
Commodity (1.03)
(0.72)
Aggregate Value at Risk (2.06)% (2.72)%
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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 June 30, 2000 and 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. Because the Partnership's only
business is the speculative trading of futures interests, the
composition of its trading portfolio can change
significantly over any given time period, or even within a single
trading day. Any changes in open positions could positively or
negatively materially impact market risk as measured by VaR.
The table below supplements the quarter-end VaR by presenting the
Partnership's high, low and average VaR, as a percentage of total
Net Assets for the four quarterly reporting periods from July 1,
1999 through June 30, 2000.
Primary Market Risk Category High Low Average
Currency (2.41)% (1.05)% (1.84)%
Interest Rate (1.34) (0.88) (1.12)
Equity (0.83) (0.28) (0.58)
Commodity (1.03) (0.64) (0.76)
Aggregate Value at Risk (2.72)% (2.06)% (2.44)%
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Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses
greatly in excess of VaR within a short period of time, given
the effects of the leverage employed and market volatility. The
VaR tables above, as well as the past performance of the
Partnership, give no indication of such "risk of ruin". In
addition, VaR risk measures should be viewed in light of the
methodology's limitations, which include the following:
past changes in market risk factors will not always result
in accurate predictions of the distributions and correlations of
future market movements;
changes in portfolio value 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;
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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 June 30, 2000 and for the end of the four
quarterly reporting periods from July 1, 1999 through June 30,
2000. Since VaR is based on historical data, VaR should
not be viewed as predictive of the Partnership's future financial
performance or its ability to manage or monitor risk. There can
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated above or
that such losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market
risk they may represent are immaterial. At June 30, 2000 the
Partnership's cash balance at DWR was approximately 88% of its
total Net Asset Value. A decline in short-term interest rates
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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. 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
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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 June 30, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency. The primary market exposure at June 30, 2000 in the
Partnership was 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 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 the major and minor currencies. Demeter does not
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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 June 30,
2000 was in the interest rate complex. Exposure was spread
across the Japanese, U.S. 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.
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
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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, 2000, the Partnership's primary
exposures were in the DAX (Germany), Dow (U.S.) and Taiwan stock
indices. The Partnership is primarily exposed to the risk of
adverse price trends or static markets in the U.S. and European
indices. Static markets would not cause major market changes but
would make it difficult for the Partnership to avoid being
"whipsawed" into numerous small losses.
Commodity.
Energy. On June 30, 2000, the Partnership's energy exposure was
shared primarily by futures contracts in the crude and heating
oil 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
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experienced in the past, are expected to continue to be
experienced in this market.
Soft Commodities and Agriculturals. On June 30, 2000, the
Partnership had exposure in the sugar, coffee and corn 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
were volatile during the quarter. Silver prices have remained
volatile over this period, and the Trading Managers have from
time to time taken positions as market opportunities developed.
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, 2000:
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Foreign Currency Balances. The Partnership's primary foreign
currency balances at June 30, 2000 were in euros, Japanese yen
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 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.
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.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in the Partnership's Form 10-Q for the quarter ended March 31,
2000 and Form 10-K for the year ended December 31, 1999.
On October 25, 1996, the Market Surveillance Committee (the
"Committee") of the National Association of Securities Dealers
("NASD") filed a formal complaint against MS & Co. and seven
current and former traders, alleging violations of certain NASD
rules relating to manipulative and deceptive practices, locked
and crossed markets, and failure to supervise. Hearings were
held in June and July 1997. On April 13, 1998 the Committee
ruled that MS & Co. and the seven traders had engaged in
manipulative and deceptive practices and improperly locked or
crossed markets, but not that MS & Co. had failed to supervise
its traders. The Committee levied a fine of $1,000,000 on MS &
Co., a fine of $100,000 and a 90-day suspension on one of its
former traders, and fines of $25,000 and 30-day suspensions on
each of the remaining current and former traders. On January 18,
2000 the National Adjudicatory Council, which heard the appeal,
issued a ruling which upheld the Committee's April 1998 decision,
however, the National Adjudicatory Council reduced the firm's
fine to $495,000, reversed all previously imposed suspensions
against the traders,
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reduced the fine for each of six traders to $2,500 and dismissed
all charges against the seventh trader.
On January 11, 1999, the Securities and Exchange Commission
brought an action against 28 NASDAQ market makers, including MS &
Co., and 51 individuals, including one current and one former
trader employed by MS & Co., for certain conduct during 1994.
The core of the charges against MS & Co. concerns improper or
undisclosed coordination of price quotes with other broker-
dealers and related reporting, recordkeeping and supervisory
deficiencies in violation of Sections 15(b)(4)(E), 15(c)(1) and
(2) and 17(a) of the Securities Exchange Act and Rules 15c1-2,
15c2-7 and 17a-3 promulgated thereunder. Without admitting or
denying the charges, MS & Co. consented to the entry of a cease
and desist order and to the payment of a civil penalty of
$350,000, disgorgement of $4,170 and to submit certain of its
procedures to an independent consultant for review. In addition,
one current and one former trader employed by MS & Co. accepted
suspensions of less than two months each and were fined $25,000
and $30,000 respectively.
Item 5. OTHER INFORMATION
Effective July 1, 2000, Lewis A. Raibley, III resigned as Chief
Financial Officer and a Director of Demeter and Dean Witter
Futures Currency Management Inc. Effective July 10, 2000,
Raymond
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E. Koch replaced Lewis A. Raibley, III as Chief Financial Officer
of Demeter.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
3.01 Limited Partnership Agreement of the Partnership, dated as
of December 7, 1983, as amended as of May 11, 1984 is
incorporated by reference to Exhibit 3.01 to 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 to 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 to 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 to Partnership's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (File No. 0-13298).
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 to
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
to 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 to
Partnership's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (File No. 0-13298).
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10.07 Customer Agreement, dated as of May 1, 2000 between
Morgan Stanley & Co. Incorporated, the Partnership and
Dean Witter Reynolds Inc. is filed herewith.
(B) Reports on Form 8-K - None.
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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 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.
