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 March 31, 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
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<TABLE>
DEAN WITTER CORNERSTONE FUND II
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
March 31, 2000 (Unaudited) and December 31, 1999 2
Statements of Operations for the Quarters Ended
March 31, 2000 and 1999 (Unaudited) 3
Statements of Changes in Partners' Capital for
the Quarters Ended March 31, 2000 and 1999
(Unaudited) 4
Statements of Cash Flows for the Quarters Ended
March 31, 2000 and 1999 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18-31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32-33
Item 5. Other Information 33-34
Item 6. Exhibits and Reports on Form 8-K 34
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
March 31, December 31,
2000 1999
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 24,072,231 25,804,088
Net unrealized gain on open contracts 1,524,848 1,156,415
Total Trading Equity 25,597,079 26,960,503
Interest receivable (DWR) 100,036 94,764
Due from DWR 67,241 11,715
Total Assets 25,764,356 27,066,982
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 845,168 225,282
Accrued management fees 85,466 89,781
Accrued administrative expenses 39,154 42,938
Total Liabilities 969,788 358,001
Partners' Capital
Limited Partners (6,178.328 and
6,619.006 Units, respectively) 24,332,210 26,243,505
General Partner (117.400 Units) 462,358 465,476
Total Partners' Capital 24,794,568 26,708,981
Total Liabilities and Partners' Capital25,764,35627,066,982
NET ASSET VALUE PER UNIT 3,938.32 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 March 31,
2000 1999
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized (97,440)
195,940
Net change in unrealized 368,433 (505,220)
Total Trading Results 270,993 (309,280)
Interest Income (DWR) 293,544 270,868
Total Revenues 564,537 (38,412)
EXPENSES
Brokerage commissions (DWR) 398,322 377,294
Management fees 266,663 302,607
Transaction fees and costs 39,398 39,351
Administrative expenses 11,375 11,201
Total Expenses 715,758 730,453
NET LOSS (151,221)
(768,865)
NET LOSS ALLOCATION
Limited Partners (148,103) (756,874)
General Partner (3,118) (11,991)
NET LOSS PER UNIT
Limited Partners (26.55) (102.14)
General Partner (26.55) (102.14)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>-
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Quarters Ended March 31, 2000 and 1999
(Unaudited)
<CAPTION>
Units of
Partnership Limited 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 Loss - (756,874) (11,991) (768,8
65)
Redemptions
(157.808) (641,517) - (641,517)
Partners' Capital,
March 31, 1999
7,331.803 $29,506,193 $480,154 $29,986,347
Partners' Capital,
December 31, 1999
6,736.406 $26,243,505 $465,476 $26,708,981
Net Loss
- - (148,103) (3,118) (15
1,221)
Redemptions
(440.678) (1,763,192) - (1,763,192)
Partners' Capital,
March 31, 2000
6,295.728 $24,332,210 $462,358 $24,794,568
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Quarters Ended March 31,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss (151,221) (768,865)
Noncash item included in net loss:
Net change in unrealized (368,433) 505,220
(Increase) decrease in operating assets:
Interest receivable (DWR) (5,272) 1,810
Due from DWR (55,526) (44,157)
Increase (decrease) in operating liabilities:
Accrued management fees (4,315) (5,870)
Accrued administrative expenses (3,784) 11,200
Accrued incentive fees - (413,951)
Net cash used for operating activities (588,551) (714,613)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in redemptions payable619,886 63,032
Redemptions of Units (1,763,192) (641,517)
Net cash used for financing activities (1,143,306) (578,485)
Net decrease in cash (1,731,857) (1,293,098)
Balance at beginning of period 25,804,088 29,949,571
Balance at end of period 24,072,231 28,656,473
<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") and an unaffiliated clearing commodity
broker, Carr Futures Inc. ("Carr"), provides clearing and
execution services. Both Demeter and DWR are wholly-owned
subsidiaries of Morgan Stanley Dean Witter & Co. The
trading managers to the
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and Carr in futures
interests trading accounts to meet margin requirements as needed.
DWR pays interest on these funds based on current 13-week U.S.
Treasury bill rates. The Partnership pays brokerage commissions
to DWR.
3. Financial Instruments
The Partnership trades futures and forward contracts on foreign
currencies and other commodity interests. Futures and forwards
represent contracts for delayed delivery of an instrument at a
specified date and price. Risk arises from changes in the value
of these contracts and the potential inability of counterparties
to perform under the terms of the contracts. There are numerous
factors which may significantly influence the market value of
these contracts, including interest rate volatility.
In June 1998, the Financial Accounting Standards Board ("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,
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $1,524,848 and
$1,156,415 at March 31, 2000 and December 31, 1999, respectively.
Of the $1,524,848 net unrealized gain on open contracts at March
31, 2000, $1,223,070 related to exchange-traded futures contracts
and $301,778 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
March 31, 2000 and December 31, 1999 mature through December
2000. Off-exchange-traded forward currency contracts held by the
Partnership at March 31, 2000 and December 31, 1999 mature
through June 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 and Carr act as
the futures commission merchants or the counterparties, with
respect to most of the Partnership's assets. Exchange-traded
futures contracts are marked to market on a daily basis, with
variations in value settled on a daily basis. Each of DWR and
Carr, as a futures commission merchant for all of the
Partnership's exchange-traded futures contracts, are required,
pursuant to regulations of the Commodity Futures
Trading
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $25,295,301 and
$26,934,277 at March 31, 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
Carr, the sole counterparty on all of such contracts, to perform.
The Partnership has a netting agreement with Carr. This
agreement, which seeks to reduce both the Partnership's and
Carr's exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership's credit
risk in the event of Carr's bankruptcy or insolvency. Carr's
parent, Credit Agricole Indosuez, has guaranteed to the
Partnership payment of the net liquidating value of the
transactions in the Partnership's account with Carr (including
foreign currency contracts).
<PAGE>
DEAN WITTER CORNERSTONE FUND II
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
4. Subsequent Event
The current exchange privilege among the Cornerstone funds (a
"Series Exchange") will be terminated effective with the April
30,2000 monthly closing. Limited partners will retain the ability
to execute an exchange from a Cornerstone fund into other funds
outside the Cornerstone Series (a "Non-Series Exchange") subject
to certain restrictions set forth in the applicable limited
partnership agreements.
<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 Carr as clearing broker 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 days with little or no
trading. These market conditions could
<PAGE>
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 and exchanges of
additional units of limited partnership interest ("Unit(s)") in
the future will affect the amount of funds available for
investments in futures interests in subsequent periods. It is
not possible to estimate the amount and therefore, the impact of
future redemptions of Units.
Results of Operations
General. The Partnership's results depend on its Trading
Managers and the ability of the Trading Managers' trading
programs to take
<PAGE>
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 three months ended March
31, 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 Ended March 31, 2000
For the quarter ended March 31, 2000, the Partnership recorded
trading revenues, including interest income, of $564,537 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 1.6% were recorded in the
metals markets from short gold futures positions as prices spiked
sharply higher earlier in February following an announcement by
Placer Dome, a large producer, that it was suspending gold
hedging activities. Newly established long gold futures
positions resulted in additional losses later in February as gold
prices fell from weakness in the Australian dollar and the sale
of tons of gold by the Dutch central bank. During March,
<PAGE>
additional losses were incurred from long gold futures positions
as prices continued to fall on speculation of gold sales from the
Bank of France. Additional losses of approximately 1.0% were
experienced in the global stock index futures markets from long
Hang Seng Index futures positions as Hong Kong's benchmark index
moved lower during February and March as the market reacted to
U.S. Federal Reserve chairman Alan Greenspan's indications of
tightening of U.S. monetary policy. In the global interest rate
futures markets, losses of approximately 0.9% were incurred from
long Japanese government bond futures positions as prices slid
lower in reaction to the yen's weakness and a higher Nikkei 225
Index during February. In the agricultural markets, losses of
approximately 0.6% resulted from short positions in corn and
soybean futures as prices in these markets increased during the
first half of January after the USDA made a surprise cut to 1999-
2000 ending stocks amid increasing concerns about dryness in
Brazil and subsequent crop damage. Newly established long corn
futures positions produced additional losses during February as
prices declined as a result of insufficient demand and heavy rain
in the U.S. production area. A portion of overall Partnership
losses was offset by gains recorded in the energy markets of
approximately 2.5% from long crude oil futures positions as oil
prices increased during January on growing speculation that the
market monitoring committee of OPEC would recommend that oil
production ceilings be extended beyond the March 2000 deadline.
Oil prices powered to nine-year highs during February on concerns
<PAGE>
about future output levels amid dwindling stockpiles and
increasing demand, resulting in additional gains for long
positions. Additional gains of approximately 0.6% were produced
in the currency markets during February from short Japanese yen
positions as the value of the yen sank to a 5-month low versus
the U.S. dollar following an interest rate increase by the U.S.
Federal Reserve and a larger-than-expected rise in Australian
interest rates. Total expenses for the three months ended March
31, 2000 were $715,758, resulting in a net loss of $151,221. The
value of a Unit decreased from $3,964.87 at December 1999 to
$3,938.12 at March 31, 2000.
For the Quarter Ended March 31, 1999
For the quarter ended March 31, 1999, the Partnership recorded
total trading losses net of interest income of $38,412 and posted
a decrease in Net Asset Value per Unit. The most significant
losses of 3.4% were experienced in the global interest rate
futures markets primarily from short positions in Japanese
government bond futures as prices moved higher during a majority
of the quarter. Early in the quarter, Japanese government bond
prices moved higher in a "flight-to-quality" due to renewed
financial market turmoil in Brazil. Prices in this market were
also boosted higher following an announcement by the Japanese
Ministry of Finance during February that they would resume
outright purchases of JGBs. Later in the first quarter, prices
in this market surged higher in response to the Bank of Japan's
<PAGE>
aggressive easing of monetary policy which brought short-term
interest rates down to virtually zero. In metals, losses of
approximately 1.0% were experienced during March from long silver
futures positions as silver prices retreated after Berkshire
Hathaway's annual report failed to provide any new information on
the company's silver positions. In soft commodities, losses of
approximately 0.4% were recorded from long coffee futures
positions during January, as prices fell amid fears that
Brazilian exports will flood the market, and from short coffee
futures positions during March as options-related buying
triggered waves of buy-stops at several key resistance levels,
attracting fund short-covering and pushing prices higher. Smaller
losses of approximately 0.4% were recorded in global stock index
futures during February from short positions in Hang Seng Index
futures as Hong Kong stock prices rose on short-covering and
reports that Walt Disney may open a theme park in that region.
These losses were mitigated by gains of approximately 1.3%
recorded in currencies from short euro positions as the value of
the new European common currency declined relative to the U.S.
dollar throughout the quarter due to a recent economic slowdown
in Europe and on fears that the European Central Bank would cut
interest rates. During March, additional gains were recorded
from short positions in the euro, as well as the Swiss franc, as
the value of most European currencies dropped due to the growing
uncertainty regarding military action in Yugoslavia. In
energies, gains of approximately 1.3% were recorded from long
<PAGE>
crude oil futures positions as oil prices climbed on news that
both OPEC and non-OPEC countries had reached an agreement to cut
total output by approximately two million barrels a day beginning
April 1, 1999. Total expenses for the three months ended March
31, 1999 were $730,453, resulting in a net loss of $768,865. The
value of a Unit decreased from $4,192.04 at December 31, 1998 to
$4,089.90 at March 31, 1999.
Risks Associated With the Euro. On January 1, 1999, eleven
countries in the European Union established fixed conversion
rates on their existing sovereign currencies and converted to a
common single currency (the euro). During a three-year
transition period, the sovereign currencies will continue to
exist but only as a fixed denomination of the euro. Conversion
to the euro prevents the Trading Managers from trading those
sovereign currencies and thereby limits their ability to take
advantage of potential market opportunities that might otherwise
have existed had separate currencies been available to trade.
This could adversely affect the performance results of the
Partnership.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. The market-sensitive instruments
held by the Partnership are acquired for speculative
trading
<PAGE>
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.
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
<PAGE>
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.
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
<PAGE>
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%
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.
<PAGE>
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 March 31, 2000 and 1999. At
March 31, 2000 and 1999, the Partnership's total capitalization
was approximately $25 million and $30 million, respectively.
Primary Market March 31, 2000 March 31, 1999
Risk Category Value at Risk Value at Risk
Currency (1.73)% (2.41)%
Interest Rate (1.34) (0.88)
Equity (0.57) (0.65)
Commodity (0.64)
(0.65)
Aggregate Value at Risk (2.42)% (2.57)%
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 March 31, 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
<PAGE>
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 April 1,
1999 through March 31, 2000.
Primary Market Risk Category High Low Average
Currency (2.41)% (1.73)% (2.06)%
Interest Rate (1.34) (0.88) (1.11)
Equity (0.65) (0.28) (0.50)
Commodity (0.98) (0.64) (0.75)
Aggregate Value at Risk (2.72)% (2.38)% (2.52)%
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
<PAGE>
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, gives 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;
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 March 31, 2000 and for the end of the four
quarterly reporting periods from April 1, 1999 through March 31,
2000. Since VaR is based on historical data, VaR should
not
<PAGE>
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. The Partnership also
maintains a substantial portion (approximately 84%) of its
available assets in cash at DWR. A decline in short-term
interest rates will result in a decline in the Partnership's cash
management income. This cash flow risk is not considered
material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and 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
- -
<PAGE>
constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. The Partnership's primary market risk
exposures as well as the strategies used and to be used by
Demeter and the Trading Managers for managing such exposures are
subject to numerous uncertainties, contingencies and risks, any
one of which could cause the actual results of the Partnership's
risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and
expropriations, illiquid markets, the emergence of dominant
fundamental factors, political upheavals, changes in historical
price relationships, an influx of new market participants,
increased regulation and many other factors could result in
material losses as well as in material changes to the risk
exposures and the risk management strategies of the Partnership.
Investors must be prepared to lose all or substantially all of
their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership as of March 31, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency - The primary market exposure at March 31, 2000 in the
Partnership was in the currency sector. The Partnership's
currency exposure is to exchange rate fluctuations, primarily
<PAGE>
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 first
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
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 March 31,
2000 was in the interest rate complex. Exposure was spread
across the U.S., German and Japanese 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
<PAGE>
primary interest rate exposure is generally to interest rate
fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions in the
government debt of smaller nations - e.g. Australia. Demeter
anticipates that G-7 and Australian interest rates will remain
the primary interest rate exposure of the Partnership for the
foreseeable future. The changes in interest rates, which have
the most effect on the Partnership, are changes in long-term, as
opposed to short-term, rates. Most of the speculative futures
positions held by the Partnership are in medium- to long-term
instruments. Consequently, even a material change in short-term
rates would have little effect on the Partnership, were the
medium- to long-term rates to remain steady.
Equity - The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded
by the Partnership are by law limited to futures on broadly based
indices. As of March 31, 2000, the Partnership's primary
exposures were in the Hang Seng (China), DAX (Germany), All
Ordinaries (Australia) and Nikkei (Japan) stock indices. The
Partnership is primarily exposed to the risk of adverse price
trends or static markets in the U.S. and Japanese indices.
(Static markets would not cause major market changes but would
make it difficult for the Partnership to avoid being "whipsawed"
into numerous small losses).
<PAGE>
Commodity
Soft Commodities and Agriculturals - On March 31, 2000, the
Partnership had a reasonable amount of exposure in the markets
that comprise these sectors. Most of the exposure, however, was
in the coffee, soybeans and sugar markets. Supply and demand
inequalities, severe weather disruption and market expectations
affect price movements in these markets.
Energy - On March 31, 2000, the Partnership's energy exposure was
shared by futures contracts in the oil and natural gas markets.
Price movements in these markets result from political
developments in the Middle East, weather patterns, and other
economic fundamentals. It is possible that volatility will
remain high and that 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 is expected to continue in this choppy pattern.
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. A reasonable amount of exposure was evident in the gold
market as gold prices were volatile during the quarter. Silver
<PAGE>
prices have remained volatile over this period, and the Trading
Managers have, from time to time, taken positions as they have
perceived market opportunities to develop. Demeter anticipates
that gold and silver will remain the primary metals market
exposure for the Partnership.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of March 31, 2000:
Foreign Currency Balances - The Partnership's primary foreign
currency balances are in Australian and Canadian 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
<PAGE>
one market sector or market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership's non-
trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Managers.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 3, 2000, the plaintiffs in the New York action filed an
appeal of the order dismissing the consolidated complaint.
(Please refer to Legal Proceedings previously disclosed in the
Partnership's Form 10-K for the year ended December 31, 1999 for
a more detailed discussion.)
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Dean Witter Cornerstone Fund I ("Cornerstone I"), the
Partnership, and Dean Witter Cornerstone III ("Cornerstone III")
collectively registered 250,000 Units pursuant to a Registration
Statement on Form S-1, which became effective on May 31, 1984
(the "Registration Statement") (SEC File Numbers 2-88587; 88587-
01; 88587-02). As contemplated in the Registration Statement, an
additional fund, Dean Witter Cornerstone Fund IV ("Cornerstone
IV" and collectively with Cornerstone I, the Partnership and
Cornerstone III, the "Cornerstone Funds") was registered pursuant
to Post-Effective Amendment No. 5 to the Registration Statement,
which became effective on February 6, 1987.
The managing underwriter for the Cornerstone Funds is DWR.
The offering for the Partnership originally commenced on May
<PAGE>
31, 1984 and currently continues with 41,706.006 Units sold
through April 1, 2000. The aggregate price of Units sold through
April 1, 2000 was $65,653,270.
For the Cornerstone Funds in aggregate, 235,435.933 Units have
been sold through April 1, 2000, leaving 14,564.067 Units
remaining available for sale as of April 1, 2000.
Effective September 30, 1994, the Partnership, Cornerstone III
and Cornerstone IV were closed to new investors; Units have been
sold since then solely in "Exchanges" with existing investors, at
100% of Net Asset Value per Unit. DWR has been paying all
expenses in connection with the offering of Units since September
30, 1994, without reimbursement.
Effective April 30, 2000, the current exchange privilege among the
Cornerstone funds (a "Series Exchange") will be terminated.
Limited partners will retain the ability to execute an exchange
from a Cornerstone fund into other funds outside the Cornerstone
Series (a "Non-Series Exchange") subject to certain restrictions
set forth in the applicable limited partnership agreements.
Item 5. OTHER INFORMATION
Effective January 31, 2000, Mark J. Hawley resigned as Chairman
of the Board and a Director of Demeter and Dean Witter Futures
and Currency Management, Inc. ("DWFCM") and Robert E. Murray
replaced him as Chairman of the Board of Demeter and DWFCM.
<PAGE>
Demeter has determined, commencing in May 2000, to transfer the
Partnership's futures and options clearing from Carr to Morgan
Stanley & Co. Incorporated ("MS & Co."), an affiliate of Demeter,
while trades on the London Metal Exchange will be cleared by
Morgan Stanley & Co. International Limited ("MSIL"), also an
affiliate of Demeter. In addition, MS & Co. and MSIL, rather
than Carr, will act as the counterparty on all of the
Partnership's foreign currency forward trades. Dean Witter
Reynolds Inc. will continue to act as the non-clearing commodity
broker for the Partnership.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits. - None.
B) Reports on Form 8-K. - None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dean Witter Cornerstone Fund II
Registrant)
By: Demeter Management Corporation
(General Partner)
May 12, 2000 By:
Lewis A. Raibley, III
Director and Chief Financial
Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Dean
Witter Cornerstone Fund II and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 24,072,231
<SECURITIES> 0
<RECEIVABLES> 167,277<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,764,356<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,764,356<F3>
<SALES> 0
<TOTAL-REVENUES> 564,537<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 715,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (151,221)
<INCOME-TAX> 0
<INCOME-CONTINUING> (151,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (151,221)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include interest receivable of $100,036 and due
from DWR of $67,241.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $1,524,848.
<F3>Liabilities include redemptions payable of $845,168, accrued
management fees of $85,466 and accrued administrative expenses
of $39,154.
<F4>Total revenue includes realized trading revenue of $(97,440), net
change in unrealized of $368,433 and interest income of $293,544.
</FN>
</TABLE>
