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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the year ended December 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from
________________to___________________
Commission File Number 0-13298
DEAN WITTER CORNERSTONE FUND II
(Exact name of registrant as specified in its Limited Partnership
Agreement)
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, - 62nd Flr., New York, N.Y.
10048 (Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code (212)
392-5454
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which
registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
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 _____
Indicate by check-mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10-K. [X]
State the aggregate market value of the Units of Limited
Partnership Interest held by non-affiliates of the registrant.
The aggregate market value shall be computed by reference to the
price at which units were sold as of a specified date within 60
days prior to the date of filing: $23,504,757 at January 31,
2001.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
DEAN WITTER CORNERSTONE FUND II
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2000
Page No.
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . .
. . . . . 1
Part I .
Item 1.Business. . . . . . . . . . . . . . . . . . . . . . . .
2-4
Item 2.Properties. . . . . . . . . . . . . . . . . . . . . . .
. 5
Item 3.Legal Proceedings. . . . . . . . . . . . . . . . . . .
5-6
Item 4.Submission of Matters to a Vote of Security Holders. .
. .6
Part II.
Item 5. Market for the
Registrant's Partnership Units
and Related Security Holder Matters . . . . . . . .
. 7-8
Item 6. Selected Financial Data. .. . . . . . . . . . . . . .
. .9
Item 7.Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . .
10-21
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . .
.21-34
Item 8. Financial Statements and Supplementary Data. . . . . .
. .34
Item 9.Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . .
. 34
Part III.
Item 10.Directors and Executive Officers of the Registrant .
35-39
Item 11. Executive Compensation . . . . . . . . . . . . . . . .
. 39
Item 12.Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . .
. 39
Item 13.Certain Relationships and Related Transactions . . . .
39-40
Part IV.
Item 14. Exhibits,
Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . .
. 41
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
as follows:
Documents Incorporated Part of Form 10-
K
Partnership's Prospectus dated
August 28, 1996, together with
the Supplement to the Prospectus
dated May 14, 1999 I
Annual Report to the Dean Witter
Cornerstone Funds II, III and IV
Limited Partners for the year
ended December 31, 2000 II, III and
IV
PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter Cornerstone Fund
II (the "Partnership") is a New York limited partnership
organized to engage in the speculative trading of futures and
forward contracts on foreign currencies and other commodity
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"). The clearing commodity brokers are
Morgan Stanley & Co. Incorporated ("MS & Co.") and Morgan Stanley
& Co. International Limited ("MSIL") which provide clearing and
execution services. Prior to May 2000, Carr Futures Inc.
provided clearing and execution services to the Partnership.
Demeter, DWR, MS & Co. and MSIL are wholly-owned subsidiaries of
Morgan Stanley Dean Witter & Co. ("MSDW"). The trading managers
to the Partnership are Northfield Trading L.P. and John W. Henry
& Company, Inc. (collectively, the "Trading Managers").
The Partnership's net asset value per unit of limited partnership
interest ("Unit(s)") at December 31, 2000, was $4,419.13,
representing an increase of 11.5 percent from the net asset value
per Unit of $3,964.87 at December 31, 1999. For a more detailed
description of the Partnership's business see subparagraph (c).
(b) Financial Information about Segments. For financial
information reporting purposes the Partnership is deemed to
engage in one industry segment, the speculative trading of
futures and forwards. The relevant financial information is
presented in Items 6 and 8.
(c) Narrative Description of Business. The Partnership is in the
business of speculative trading of futures and forwards, pursuant
to trading instructions provided by the Trading Managers. For a
detailed description of the different facets of the Partnership's
business, see those portions of the Partnership's prospectus,
dated August 28, 1996, (the "Prospectus") together with the
supplement to the Prospectus dated May 14, 1999, (the
"Supplement") incorporated by reference in this Form 10-K, set
forth below.
Facets of Business
1. Summary 1. "Summary of the Prospectus"
(Pages 1-9 of the Prospectus
and Page S-19 of the
Supplement).
2. Commodities Market 2. "The Commodities Market"
(Pages 80-84 of the
Prospectus).
3. Partnership's Commodity 3. "Investment Program, Use
Trading Arrangements and of Proceeds and Trading
Policies Policies" (Pages 45-47
of the Prospectus) and
"The Trading Managers"
(Pages 51-74 of the
Prospectus and Pages
S-20 - S-32 of the
Supplement).
4. Management of the Part- 4. "The Cornerstone Funds"
nership (Pages 19-24 of the
Prospectus and Pages
S-2 - S-5 of the
Supplement). "The
General Partner"
(Pages 77-79 of the
Prospectus and Pages
S-32 - S-34 of the
Supplement) and "The
Commodity Brokers"
(Pages 79-80 of the
Prospectus and Pages
S-34 - S-36 of the
Supplement). "The
Limited Partnership
Agreements" (Pages 86-
90 of the Prospectus).
5. Taxation of the Partner- 5. "Material Federal
Income ship's Limited Partners
Tax Considerations" and "State and
Local Income Tax Aspects" (Pages
96-
102 of the Prospectus).
(d) Financial Information about Geographic Ares
The Partnership has not engaged in any operations in foreign
countries; however, the Partnership (through the commodity
brokers) enters into forward contract transactions where foreign
banks are the contracting party and trades in futures and
forwards on foreign exchanges.
Item 2. PROPERTIES
The executive and administrative offices are located within the
offices of DWR. The DWR offices utilized by the Partnership are
located at Two World Trade Center, 62nd Floor, New York, NY
10048.
Item 3. LEGAL PROCEEDINGS
Similar class actions were filed in 1996 in California and New
York State courts. Each of these actions were dismissed in 1999.
However, the New York State class action discussed below is still
pending because plaintiffs appealed the trial court's dismissal
of their case on March 3, 2000.
On September 18 and 20, 1996, purported class actions were filed
in the Supreme Court of the State of New York, New York county,
on behalf of all purchasers of interests in limited partnership
commodity pools sold by DWR. Named defendants include DWR,
Demeter, MSDW, the Partnership, certain limited partnership
commodity pools of which Demeter is the general partner and
certain trading managers to those pools. A consolidated and
amended complaint in the action pending in the Supreme Court of
the State of New York was filed on August 13, 1997, alleging that
the defendants committed fraud, breach of fiduciary duty, and
negligent misrepresentation in the sale and operation of the
various limited partnership commodity pools. The complaints
sought unspecified amounts of compensatory and punitive damages
and other relief. The New York Supreme Court dismissed the New
York action in November 1998, but granted plaintiffs leave to
file an amended complaint, which they did in early December 1998.
The defendants filed a motion to dismiss the amended complaint
with prejudice on February 1, 1999. By decision dated December
21, 1999, the New York Supreme Court dismissed the case with
prejudice. However, on March 3, 2000, plaintiffs appealed the
trial court's dismissal of their case.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND
RELATED
SECURITY HOLDER MATTERS
(a) Market Information
There is no established public trading market for Units of the
Partnership.
(b) Holders
The number of holders of Units at December 31, 2000 was
approximately 2,042.
(c) Distributions
No distributions have been made by the Partnership since it
commenced trading operations on January 2, 1985. Demeter has sole
discretion to decide what distributions, if any, shall be made to
investors in the Partnership. Demeter currently does not intend
to make any distribution of Partnership profits.
(d) Use of Proceeds
The offering for the Partnership originally commenced on May 31,
1984. Effective September 30, 1994, the Partnership, Dean Witter
Cornerstone Fund III and Dean Witter Cornerstone Fund IV were
closed to new investors. Units were sold since then solely
through "Exchanges" between existing investors within the
Cornerstone Series at 100% of net asset value per Unit.
Effective
with the April 30, 2000 monthly closing, the exchange privilege
among the Partnership, Cornerstone Fund III and Cornerstone Fund
IV ("Series Exchanges") was terminated. However, Limited
Partners retained the ability to execute exchanges from a
Cornerstone fund into other funds outside the Cornerstone Series
("Non-Series Exchanges"), subject to certain restrictions set
forth in the applicable limited partnership agreements. DWR paid
all expenses in connection with the offering of Units without
reimbursement. Therefore, 100% of the proceeds of Exchanges have
been applied to working capital of the Partnership in accordance
with the "Investment Programs, Use of Proceeds and Trading
Policies" section of the prospectus. Through December 31, 2000
the Partnership has sold 41,708.375 Units and the Cornerstone
Funds have sold an aggregate of 235,440.601 Units. The aggregate
price of Units sold through December 31, 2000 with respect to the
Partnership is $65,662,599.
Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
2000 1999 1998 1997 1996
Total Revenues
(including interest) 4,963,877 1,381,603 6,826,329 8,279,346
6,449,790
Net Income (Loss) 2,490,547 (1,597,851)3,596,543 4,916,164
3,047,462
Net Income (Loss)
Per Unit (Limited
& General Partners) 454.26 (227.17)467.12 569.56
324.71
Total Assets 25,149,757 27,066,982 32,113,096 31,431,023
30,046,842
Total Limited Partners'
Capital 24,168,885 26,243,505 30,904,584 29,677,943
28,360,195
Net Asset Value Per
Unit 4,419.13 3,964.87 4,192.04 3,724.92
3,155.36
Item 7. 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 and forwards 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
Commodity Futures Trading Commission ("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
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 currencies. 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 Units in the future
will affect the amount of funds available for investments in
futures and forwards 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 each Trading Manager's 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 three
years ended December 31, 2000 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 and how
the Partnership has performed in the past.
At December 31, 2000, the Partnership's total capital was
$24,687,691, a decrease of $2,021,290 from the Partnership's
total capital of $26,708,981 at December 31, 1999. For the year
ended December 31, 2000, the Partnership generated net income of
$2,490,547, total subscriptions aggregated $9,330 and total
redemptions aggregated $4,521,167.
For the year ended December 31, 2000, the Partnership recorded
total trading revenues, including interest income, of $4,963,877
and posted an increase in net asset value. The Partnership
recorded its most significant gains of approximately 4.8% in the
energy markets as long positions in both crude oil and its
refined products proved profitable despite the Clinton
Administration's release of 30 million barrels of oil from the
Strategic Petroleum Reserve in September. Additional gains of
approximately 1.2% resulted from long positions in natural gas
futures as prices skyrocketed to all-time highs during the fourth
quarter on cold winter weather across much of the U.S. and
continued concerns regarding supply. Gains of approximately 4.5%
were also experienced in the currency markets, primarily during
the fourth quarter. Long positions in the euro proved profitable
as the value of the European common currency climbed higher
versus the U.S. dollar, Japanese yen and British pound,
reflecting renewed skepticism regarding the prospects of the
U.S., Japanese and British economies relative to that of the
European economy. A portion of the Partnership's gains was
offset by losses of approximately 2.2% recorded in the metals
markets as erratic price activity resulted in the predominance of
trendless markets. Additional losses of approximately 1.3% were
experienced from trading cotton futures, particularly from long
positions held during the fourth quarter, as prices moved lower
on reports of a bearishly construed U.S. consumption report.
Total expenses for the year were $2,473,330, resulting in net
income of $2,490,547. The net asset value of a Unit increased
from $3,964.87 at December 31, 1999 to $4,419.13 at December 31,
2000.
At December 31, 1999, the Partnership's total capital was
$26,708,981, a decrease of $4,687,748 from the Partnership's
total capital of $31,396,729 at December 31, 1998. For the year
ended December 31, 1999, the Partnership generated a net loss of
$1,597,851, total subscriptions aggregated $10,614 and total
redemptions aggregated $3,100,511.
For the year ended December 31, 1999, the Partnership recorded
total trading revenues, including interest income, of $1,381,603
and, after expenses, posted a decrease in net asset value per
Unit. Overall, the Partnership experienced a net loss for 1999.
Losses of approximately 7.19% resulted primarily from the lack of
sustained price trends and short-term volatility in global
interest rate futures particularly Japanese government bond
futures. Short positions in Japanese government bond futures
were particularly unprofitable during March as prices surged
higher in response to the Bank of Japan's aggressive easing of
monetary policy and again during September as prices rallied on
the strength of the Japanese yen and expectations of additional
monetary easing in that country. In the metals markets, losses
of approximately 5.84% were recorded primarily during the third
quarter from short positions in gold futures as gold prices
reversed sharply higher following the Bank of England's second
gold auction and an announcement by several European central
banks of their plans to restrict sales of their gold reserves for
five years. A portion of these losses was offset by profits of
approximately 8.09% recorded in the energy markets as the
Partnership's Advisors were able to take advantage of price
trends in markets such as crude oil. Long futures positions in
crude oil proved profitable as oil prices trended higher from $12
a barrel in February to over $25 a barrel in November.
Additional gains of approximately 2.60% in the euro and 0.98% in
the Swiss franc were recorded primarily from short positions in
these currencies as their values weakened relative to the U.S.
dollar during the first six months of the year and again during
the fourth quarter. Additional profits of approximately 4.91%
were recorded from the Japanese yen, primarily long positions as
the value of the yen strengthened versus the U.S. dollar during
the latter half of 1999 on increased optimism regarding the
Japanese economy. Total expenses for the year were $2,979,454,
resulting in a net loss of $1,597,851. The net asset value of a
Unit decreased from $4,192.04 at December 31, 1998 to $3,964.87
at December 31, 1999.
At December 31, 1998, the Partnership's total capital was
$31,396,729, an increase of $908,988 from the Partnership's total
capital of $30,487,741 at December 31, 1997. For the year ended
December 31, 1998, the Partnership generated net income of
$3,596,543, total subscriptions aggregated $38,137 and total
redemptions aggregated $2,725,692.
For the year ended December 31, 1998, the Partnership recorded
total trading revenues, including interest income, of $6,826,329
and posted an increase in net asset value per Unit. The
Partnership recorded its fourth consecutive year of double-digit
returns with the most significant gains of approximately 10.39%
being recorded in the global bond futures markets as long
positions profited from a "flight-to-quality" during the third
quarter as stock prices plunged and uncertainty plagued the
global economic community. The Partnership also profited
significantly in the interest rate futures markets primarily
during December from short positions in Japanese government bond
futures as prices declined sharply following a spike higher in
Japanese interest rates. Additional gains of approximately 4.65%
were recorded in the energy markets primarily during July from
short futures positions in crude oil as prices fell on
speculation that further production cuts would not occur.
Trading in currencies was also profitable for the Partnership as
gains of approximately 3.33% were recorded primarily from short
positions in the South African rand during June due to a
devaluation in that nation's currency versus the U.S. dollar and
from long Japanese yen positions during October as the yen's
value strengthened amid optimism for economic reform in Japan.
Total expenses for the year were $3,229,786, resulting in net
income of $3,596,543. The net asset value of a Unit increased
from $3,724.92 at December 31, 1997 to $4,192.04 at December 31,
1998.
The Partnership's overall performance record represents varied
results of trading in different futures and forwards markets.
For a further description of 2000 trading results, refer to the
letter to the Limited Partners in the accompanying Annual Report
to Limited Partners for the year ended December 31, 2000, which
is incorporated by reference to Exhibit 13.01 of this Form 10-K.
The Partnership's gains and losses are allocated among its
partners for income tax purposes.
Credit Risk.
Financial Instruments. The Partnership is a party to financial
instruments with elements of off-balance sheet market and credit
risk. The Partnership may trade futures and forwards to gain
long biased exposure to global stock markets and global bond
markets, as well as long and short exposure to a component of
managed futures contracts in agricultural commodities, energy
products, foreign currencies, precious and base metals, and soft
commodities. In entering into these contracts, the Partnership
is subject to the market risk that such contracts may be
significantly influenced by market conditions, such as interest
rate volatility, resulting in such contracts being less valuable.
If the markets should move against all of the positions held by
the Partnership at the same time, and if the Trading Managers
were unable to offset positions of the Partnership, the
Partnership could lose all of its assets and investors would
realize a 100% loss.
In addition to the Trading Managers' internal controls, the
Trading Managers must comply with the trading policies of the
Partnership. These trading policies include standards for
liquidity and leverage with which the Partnership must comply.
The Trading Managers and Demeter monitor the Partnership's
trading activities to ensure compliance with the trading
policies. Demeter may require the Trading Managers to modify
positions of the Partnership if Demeter believes they violate the
Partnership's trading policies.
In addition to market risk, in entering into futures and forwards
contracts there is a credit risk to the Partnership that the
counterparty on a contract will not be able to meet its
obligations to the Partnership. The ultimate counterparty or
guarantor of the Partnership for futures contracts traded in the
United States and the foreign exchanges on which the Partnership
trades is the clearinghouse associated with such exchange. In
general, a clearinghouse is backed by the membership of the
exchange and will act in the event of non-performance by one of
its members or one of its member's customers, which should
significantly reduce this credit risk. For example, a
clearinghouse may cover a default by drawing upon a defaulting
member's mandatory contributions and/or non-defaulting members'
contributions to a clearinghouse guarantee fund, established
lines or letters of credit with banks, and/or the clearinghouse's
surplus capital and other available assets of the exchange and
clearinghouse, or assessing its members. In cases where the
Partnership trades off-exchange forward contracts with a
counterparty, the sole recourse of the Partnership will be the
forward contracts counterparty.
There is no assurance that a clearinghouse or exchange will meet
its obligations to the Partnership, and Demeter and the commodity
brokers will not indemnify the Partnership against a default by
such parties. Further, the law is unclear as to whether a
commodity broker has any obligation to protect its customers from
loss in the event of an exchange or clearinghouse defaulting on
trades effected for the broker's customers. Any such obligation
on the part of a broker appears even less clear where the default
occurs in a non-U.S. jurisdiction.
Demeter deals with these credit risks of the Partnership in
several ways. First, it monitors the Partnership's credit
exposure to each exchange on a daily basis, calculating not only
the amount of margin required for it but also the amount of its
unrealized gains at each exchange, if any. The commodity brokers
inform the Partnership, as with all their customers, of its net
margin requirements for all its existing open positions, but do
not break that net figure down, exchange by exchange. Demeter,
however, has installed a system which permits it to monitor the
Partnership's potential margin liability, exchange by exchange.
As a result, Demeter is able to monitor the Partnership's
potential net credit exposure to each exchange by adding the
unrealized trading gains on that exchange, if any, to the
Partnership's margin liability thereon.
Second, the Partnership's trading policies limit the amount of
its net assets that can be committed at any given time to futures
contracts and require, in addition, a minimum amount of
diversification in the Partnership's trading, usually over
several different products. One of the aims of such trading
policies has been to reduce the credit exposure of the
Partnership to a single exchange and, historically, the
Partnership's exposure to any one exchange has typically amounted
to only a small percentage of its total net assets. On those
relatively few occasions where the Partnership's credit exposure
may climb above that level, Demeter deals with the situation on a
case by case basis, carefully weighing whether the increased
level of credit exposure remains appropriate. Material changes
to the trading policies may be made only with the prior written
approval of the Limited Partners owning more than 50% of Units
then outstanding.
Third, with respect to forward contract trading, the Partnership
trades with only those counterparties which Demeter, together
with DWR, have determined to be creditworthy. The Partnership
presently deals with MS & Co. as the sole counterparty on forward
contracts.
See "Financial Instruments" under Notes to Financial Statements
in the Partnership's Annual Report to Limited Partners for the
year ended December 31, 2000, which is incorporated by reference
to Exhibit 13.01 of this Form 10-K.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures and forwards. 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 and forwards traded by the Partnership involve
varying degrees of related 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
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 its
cash flow. Profits and losses on open positions of exchange-
traded futures and forwards 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
Partnership's VaR is approximately four years. The one-day 99%
confidence level of the Partnership's VaR corresponds to the
negative change in portfolio value that, based on observed market
risk factors, would have been exceeded once in 100 trading days.
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Managers in their daily risk management
activities.
The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership's open positions as a percentage of total net assets
by primary market risk category at December 31, 2000 and 1999.
At December 31, 2000 and 1999, the Partnership's total
capitalization was approximately $25 million and $27 million,
respectively.
Primary Market December 31, 2000 December 31, 1999
Risk Category Value at Risk Value at Risk
Interest Rate (1.98)% (0.54)%
Currency (1.86) (1.04)
Equity (0.39) (0.36)
Commodity (0.78) (0.58)
Aggregate Value at Risk (3.06)% (1.32)%
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 December 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 and forwards,
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 December 31, 2000 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 January 1, 2000 through December 31, 2000.
Primary Market Risk Category High Low Average
Interest Rate (1.98)% (0.48)% (1.24)%
Currency (1.88) (1.05) (1.63)
Equity (1.07) (0.39) (0.72)
Commodity (1.03) (0.64) (0.83)
Aggregate Value at Risk (3.06)% (2.06)% (2.47)%
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
usually 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;
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 December 31, 2000 and 1999, and for the end of
the four quarterly reporting periods during calendar year 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 once 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 December 31, 2000, the
Partnership's cash balance at DWR was approximately 88% of its
total net asset value. A decline in short-term interest rates
will result in a decline in the Partnership's cash management
income. This cash flow risk is not considered to be 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 expro-
priations, 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 December 31, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Interest Rate. The primary market exposure at December 31, 2000
was in the global interest rate complex. Exposure was primarily
spread across the German, U.S., 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
primary interest rate exposure is generally to interest rate
fluctuations in the United States and the other G-7 countries.
The G-7 countries consists of France, U.S., Britain, Germay,
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 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.
Currency. The second largest market exposure in the Partnership
at December 31, 2000 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. For the fourth quarter
of 2000, the Partnership's major exposures were to outright U.S.
dollar positions. Outright positions consist of the U.S. dollar
vs. other currencies. These other currencies include major and
minor currencies. Demeter does not anticipate that the risk
profile of the Partnership's currency sector will change
significantly in the future. The currency trading VaR figure
includes foreign margin amounts converted into U.S. dollars with
an incremental adjustment to reflect the exchange rate risk
inherent to the dollar-based Partnership in expressing VaR in a
functional currency other than U. S. dollars.
Equity. The Partnership's primary equity exposure at December
31, 2000 was to equity price risk in the G-7 countries. The
stock index futures traded by the Partnership are by law limited
to futures on broadly based indices. At December 31, 2000, the
Partnership's primary exposures were to the NASDAQ (U.S.), DAX
(Germany), and Taiwan stock indices. The Partnership is
primarily exposed to the risk of adverse price trends or static
markets in the U.S., European, and Japanese indices. Static
markets would not cause major market changes but would make it
difficult for the Partnership to avoid being "whipsawed" into
numerous small losses.
Commodity.
Energy. At December 31, 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 and that significant profits and losses, which
have been experienced in the past, are expected to continue to be
experienced in this market.
Soft Commodities and Agriculturals. At December 31, 2000, the
Partnership had exposure to the markets that comprise these
sectors. Most of the exposure, however, was to the sugar, corn,
soybean meal, and soybean oil 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 at
December 31, 2000 was to fluctuations in the price of gold and
silver. Although certain Trading Managers will, from time to
time, trade base metals such as copper and aluminum, the
principal market exposures of the Partnership have consistently
been to precious metals, such as gold and silver. Market
exposure to precious metals was evident, as gold prices continued
to be volatile during the quarter. Silver prices remained
volatile over this period as well. The Trading Managers' have,
from time to time, taken positions when market opportunities
developed.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership at December 31, 2000:
Foreign Currency Balances. The Partnership's primary
foreign currency balances at December 31, 2000 were in
euros, Australian dollars, and British pounds. The
Partnership controls the non-trading risk of these balances
by regularly converting these balances back into U. S.
dollars upon liquidation of the respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Managers, 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 the Trading
Managers 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 section 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated by reference to the
Partnership's Annual Report which is filed as Exhibit 13.01
hereto.
Supplementary data specified by Item 302 of Regulation S-K:
Summary of Quarterly Results (Unaudited)
Net
Income/
(Loss) Per
Quarter Net Unit of Limited
Ended Revenue Income/(Loss)
Partnership Interest
2000
March 31 $ 564,537 $ (151,221) $ (26.55)
June 30 (738,773) (1,359,186) (221.51)
September 30 (278,878) (832,807) (140.48)
December 31 5,416,991 4,833,761 842.80
Total $ 4,963,877 $ 2,490,547 $ 454.26
1999
March 31 $ (38,412) $ (768,865) $(102.14)
June 30 2,259,765 1,465,666 200.49
September 30 78,056 (679,673) (95.71)
December 31 (917,806) (1,614,979) (229.81)
Total $ 1,381,603 $ (1,597,851) $(227.17)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no directors or executive officers of the Partnership.
The Partnership is managed by Demeter.
Directors and Officers of the General Partner
The directors and officers of Demeter are as follows:
Robert E. Murray, age 40, is Chairman of the Board, President and
a Director of Demeter. Mr. Murray is also Chairman of the Board,
President and a Director of Dean Witter Futures & Currency
Management Inc. ("DWFCM"). Mr. Murray is currently a Senior Vice
President of DWR's Managed Futures Department. Mr. Murray began
his career at DWR in 1984 and is currently the Director of the
Managed Futures Department. In this capacity, Mr. Murray is
responsible for overseeing all aspects of the firm's Managed
Futures Department. Mr. Murray previously served as Vice
Chairman and a Director of the Managed Funds Association, an
industry association for investment professionals in futures,
hedge funds and other alternative investments. Mr. Murray
graduated from Geneseo State University in May 1983 with a B.A.
degree in Finance.
Mitchell M. Merin, age 47, is a Director of Demeter. Mr. Merin
is also a Director of DWFCM. Mr. Merin was appointed the Chief
Operating Officer of Individual Asset Management for MSDW in
December 1998 and the President and Chief Executive Officer of
Morgan Stanley Dean Witter Advisors in February 1998. He has
been an Executive Vice President of DWR since 1990, during which
time he has been Director of DWR's Taxable Fixed Income and
Futures divisions, Managing Director in Corporate Finance and
Corporate Treasurer. Mr. Merin received his Bachelor's degree
from Trinity College in Connecticut and his M.B.A. degree in
Finance and Accounting from the Kellogg Graduate School of
Management of Northwestern University in 1977.
Joseph G. Siniscalchi, age 55, is a Director of Demeter. Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President,
Director of General Accounting and served as a Senior Vice
President and Controller for DWR's Securities Division through
1997. He is currently Executive Vice President and Director of
the Operations Division of DWR. From February 1980 to July 1984,
Mr. Siniscalchi was Director of Internal Audit at Lehman Brothers
Kuhn Loeb, Inc.
Edward C. Oelsner, III, age 59, is a Director of Demeter. Mr.
Oelsner is currently an Executive Vice President and head of the
Product Development Group at Morgan Stanley Dean Witter Advisors,
an affiliate of DWR. Mr. Oelsner joined DWR in 1981 as a
Managing Director in DWR's Investment Banking Department
specializing in coverage of regulated industries and,
subsequently, served as head of the DWR Retail Products Group.
Prior to joining DWR, Mr. Oelsner held positions at The First
Boston Corporation as a member of the Research and Investment
Banking Departments from 1967 to 1981. Mr. Oelsner received his
M.B.A. in Finance from the Columbia University Graduate School of
Business in 1966 and an A.B. in Politics from Princeton
University in 1964.
Richard A. Beech, age 49, is a Director of Demeter. Mr. Beech
has been associated with the futures industry for over 23 years.
He has been at DWR since August 1984 where he is presently Senior
Vice President and head of Branch Futures. Mr. Beech began his
career at the Chicago Mercantile Exchange, where he became the
Chief Agricultural Economist doing market analysis, marketing and
compliance. Prior to joining DWR, Mr. Beech also had worked at
two investment banking firms in operations, research, managed
futures and sales management.
Raymond A. Harris, age 44, is a Director of Demeter. Mr. Harris
is currently Executive Vice President, Planning and Admin-
istration for Morgan Stanley Dean Witter Asset Management and has
worked at DWR or its affiliates since July 1982, serving in both
financial and administrative capacities. From August 1994 to
January 1999, he worked in two separate DWR affiliates, Discover
Financial Services and Novus Financial Corp., culminating as
Senior Vice President. Mr. Harris received his B.A. degree from
Boston College and his M.B.A. in finance from the University of
Chicago.
Anthony J. DeLuca, age 38, became a Director of Demeter on
September 14, 2000. Mr. DeLuca is also a Director of DWFCM. Mr.
DeLuca was appointed the Controller of Asset Management for MSDW
in June 1999. Prior to that, Mr. DeLuca was a partner at the
accounting firm of Ernst & Young LLP, where he had MSDW as a
major client. Mr. DeLuca had worked continuously at Ernst &
Young LLP ever since 1984, after he graduated from Pace
University with a B.B.A. degree in Accounting.
Raymond E. Koch, age 45, is Chief Financial Officer of Demeter.
Effective July 10, 2000, Mr. Koch replaced Mr. Raibley as Chief
Financial Officer of Demeter. Mr. Koch began his career at MSDW
in 1988, has overseen the Managed Futures Accounting function
since 1992, and is currently First Vice President, Director of
Managed Futures and Realty Accounting. From November 1979 to
June 1988, Mr. Koch held various positions at Thomson McKinnon
Securities, Inc. culminating as Manager, Special Projects in the
Capital Markets Division. From August 1977 to November 1979 he
was an auditor, specializing in financial services at Deloitte
Haskins and Sells. Mr. Koch received his B.B.A. in accounting
from Iona College in 1977, an M.B.A. in finance from Pace
University in 1984 and is a Certified Public Accountant.
Lewis A. Raibley, III, age 38, served as Vice President, Chief
Financial Officer, and a Director of Demeter and DWFCM until his
resignation from MSDW on July 1, 2000.
All of the foregoing directors have indefinite terms.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers. As a
limited partnership, the business of the Partnership is managed
by Demeter, which is responsible for the administration of the
business affairs of the Partnership but receives no compensation
for such services.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - At
December 31, 2000, there were no persons known to be beneficial
owners of more than 5 percent of the Units.
(b) Security Ownership of Management - At December 31, 2000,
Demeter owned 117.400 Units of General Partnership Interest
representing a 2.10 percent interest in the Partnership.
(c) Changes in Control - None
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of "Notes to
Financial Statements", in the accompanying Annual Report to
Limited Partners for the year ended December 31, 2000, which is
incorporated by reference to Exhibit 13.01 of this Form 10-K. In
its capacity as the Partnership's retail commodity broker, DWR
received commodity brokerage commissions (paid and accrued by the
Partnership) of $1,361,674 for the year ended December 31, 2000.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and reports of
independent auditors, all appearing in the accompanying
Annual Report to Limited Partners for the year ended
December 31, 2000 are incorporated by reference to Exhibit
13.01 of this Form 10-K:
- - Report of Deloitte & Touche LLP, independent auditors,
for the years ended December 31, 2000, 1999 and 1998.
- - Statements of Financial Condition as of December 31,
2000 and 1999.
- - Statements of Operations, Changes in Partners' Capital,
and Cash Flows for the years ended December 31, 2000,
1999 and 1998.
- - Notes to Financial Statements.
With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the Annual
Report to Limited Partners for the year ended December 31,
2000 is not deemed to be filed with this report.
2. Listing of Financial Statement Schedules
No financial statement schedules are required to be filed
with this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Partnership
during the last quarter of the period covered by this
report.
(c) Exhibits
Refer to Exhibit Index on Page E-1 to E-2.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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
March 30, 2001 BY: /s/ Robert E. Murray .
Robert E. Murray, Director,
Chairman of the Board and
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Demeter Management Corporation.
BY: /s/ Robert E. Murray March 30,
2001
Robert E. Murray, Director,
Chairman of the Board and
President
/s/ Mitchell M. Merin March
30, 2001
Mitchell M. Merin, Director
/s/ Joseph G. Siniscalchi March
30, 2001
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March
30, 2001
Edward C. Oelsner III, Director
/s/ Richard A. Beech March
30, 2001
Richard A. Beech, Director
/s/ Raymond A. Harris March
30, 2001
Raymond A. Harris, Director
/s/ Anthony J. DeLuca March
30, 2001
Anthony J. DeLuca, Director
/s/ Raymond E. Koch _ March 30,
2001
Raymond E. Koch, Chief
Financial Officer and Principal
Accounting Officer
EXHIBIT INDEX
ITEM
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 of the Partnership's Annual Report on Form 10-K for
the fiscal year ended September 30, 1984 (File No. 0-
13298).
10.02 Dean Witter
Cornerstone Funds Exchange Agreement, dated as of May 31,
1984 is incorporated by reference to Exhibit 10.04 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended September 30, 1984 (File No. 0-13298).
10.03 Management
Agreement among the Partnership, Demeter and Northfield
Trading L.P. dated as of April 16, 1997 is incorporated by
reference to Exhibit 10.03 of the Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 (File No. 0-13298).
10.04Amended and Restated Customer Agreement, dated as of
December 1, 1997, between the Partnership and Dean Witter
Reynolds Inc. is incorporated by reference to Exhibit 10.04
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31 1998 (File No. 0-13298).
10.05Customer Agreement, dated as of December 1, 1997, among the
Partnership, Carr Futures, Inc. and Dean Witter Reynolds
Inc. is incorporated by reference to Exhibit 10.05 of the
Partnership's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (File No. 0-13298).
10.06International Foreign Exchange Master Agreement, dated as
of August 1, 1997, between the Partnership and Carr
Futures, Inc. is incorporated by reference to Exhibit 10.06
of the Partnership's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (File No. 0-13298).
10.07Customer Agreement, dated as of May 1, 2000 between Morgan
Stanley & Co. Incorporated, the Partnership and Dean Witter
Reynolds Inc. is incorporated by reference to exhibit 10.07
of the Partnership's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, (File No. 0-13298).
10.08 Amendment to Management Agreement between the
Partnership and John W. Henry & Company, Inc., dated
November 30, 2000, is incorporated by reference to the
Partnership's report on Form 8-K (File No. 0-13298), filed
with the SEC on January 3, 2001.
10.09Amendment to Management Agreement between the Partnership
and Northfield Trading L.P., dated November 30, 2000, is
incorporated by reference to the Partnership's report on
Form 8-K (File No. 0-13298), filed with the SEC on January
3, 2001.
13.01 Annual Report to Limited Partners for the year
ended December 31, 2000 is filed herewith.
Cornerstone
Funds
December 31, 2000
Annual Report
MORGAN STANLEY DEAN WITTER
Dean Witter Cornerstone Funds
Historical Fund Performance
Presented below is the percentage change in Net Asset Value per Unit from the
start of each calendar year each Fund has traded. Also provided is the incep-
tion-to-date return and the annualized return since inception for each Fund.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
CORNERSTONE FUND II
Year Return Year Return
- ---- ---------- -------- ------
1985 20.1% 1993 7.8%
1986 -17.5% 1994 -8.9%
1987 71.6% 1995 26.5%
1988 0.1% 1996 11.5%
1989 -15.1% 1997 18.0%
1990 47.9% 1998 12.5%
1991 11.0% 1999 -5.4%
1992 -1.3% 2000 11.5%
Inception-to-Date Return: 353.2%
Annualized Return: 9.9%
- ---------------------------------------------------------------------------------------------------------
CORNERSTONE FUND III
Year Return Year Return
- ---- ---------- -------- ------
1985 54.6% 1993 -4.8%
1986 -8.0% 1994 -10.0%
1987 32.5% 1995 27.5%
1988 19.4% 1996 8.2%
1989 -11.4% 1997 10.2%
1990 18.8% 1998 9.1%
1991 12.0% 1999 -6.8%
1992 -11.1% 2000 -0.3%
Inception-to-Date Return: 211.5%
Annualized Return: 7.4%
- ---------------------------------------------------------------------------------------------------------
CORNERSTONE FUND IV
Year Return Year Return
- ---- ---------- -------- ------
1987 (8 mos.) 10.6% 1994 -14.3%
1988 37.5% 1995 23.0%
1989 -14.1% 1996 13.0%
1990 57.8% 1997 38.4%
1991 33.5% 1998 6.7%
1992 10.4% 1999 -1.1%
1993 -9.1% 2000 14.7%
Inception-to-Date Return: 451.1%
Annualized Return: 13.3%
Demeter Management Corporation
Two World Trade Center
62nd Floor
New York, NY 10048
Telephone (212) 392-8899
Dean Witter Cornerstone Funds
Annual Report
2000
Dear Limited Partner:
This marks the sixteenth annual report for Cornerstone Funds II and III and the
fourteenth for Cornerstone Fund IV. The Net Asset Value per Unit for each of
the three Cornerstone Funds on December 31, 2000 was as follows:
% Change
Funds N.A.V. for 2000
----- --------- --------
Cornerstone Fund II $4,419.13 11.5%
Cornerstone Fund III $3,037.53 -0.3%
Cornerstone Fund IV $5,373.69 14.7%
Cornerstone Fund II
The Fund recorded its most significant gains in the energy markets as long po-
sitions in both crude oil and its refined products proved profitable despite
the Clinton Administration's release of 30 million barrels of oil from the
Strategic Petroleum Reserve in September. Additional gains resulted from long
positions in natural gas futures as prices skyrocketed to all-time highs dur-
ing the fourth quarter on cold winter weather across much of the U.S. and con-
tinued concerns regarding supply. Gains were also experienced in the currency
markets, primarily during the fourth quarter. Long positions in the euro
proved profitable as the value of the European common currency climbed higher
versus the U.S. dollar, Japanese yen, and British pound, reflecting renewed
skepticism regarding the prospects of the U.S., Japanese, and British econo-
mies relative to that of the European economy. A portion of the Fund's gains
was offset by losses recorded in the metals markets as erratic price activity
resulted in the predominance of trendless markets. Additional losses were ex-
perienced from trading cotton futures, particularly from long positions held
during the fourth quarter, as prices moved lower on reports of a bearishly
construed U.S. consumption report.
Cornerstone Fund III
The Fund recorded losses primarily in the global stock index futures markets
from trading in S&P 500 Index futures as prices moved erratically amid fears
of inflation, a changing U.S. interest rate environment and uncertainty in eq-
uity prices. Losses were also experienced in the metals markets as gold
futures trading proved to be particularly difficult as prices fluctuated in
response to producer concerns, central bank policies and exchange rate fluctu-
ations. Similarly, trading in aluminum futures experienced price reversals due
to technical factors. Smaller losses were recorded in the soft commodities
markets, particularly in cotton and coffee futures, as erratic price activity
resulted in the predominance of trendless markets. A majority of the Fund's
losses was offset by gains recorded in the currency markets as short euro and
Swiss franc positions profited as their value weakened versus the U.S. dollar
and other major currencies amid an uncertain European interest rate environ-
ment. Currency gains were also recorded later in the year from long positions
in the euro as its value strengthened versus the U.S. dollar. Additional gains
resulted from long positions in natural gas futures as prices skyrocketed to
all-time highs during the fourth quarter on cold winter weather across much of
the U.S. and continued concerns regarding supply.
Cornerstone Fund IV
The Fund recorded gains primarily from trading in the euro. During the first
half of the year, short positions in the euro proved profitable as the value
of the European common currency weakened versus the U.S. dollar on uncertainty
regarding the European economy and speculation that European interest rates
would remain unchanged. In September, however, coordinated intervention among
the world's largest central banks stemmed the tide of the falling euro. Fol-
lowing the intervention, long positions in the euro proved profitable during
the fourth quarter as its value surged versus the U.S. dollar, Japanese yen,
and British pound, reflecting renewed skepticism regarding the prospects of
the U.S., Japanese and British economies relative to that of the European
economy. Gains were also recorded from positions in the Swiss franc as its
value often moved in line with that of the euro. Additional gains were experi-
enced throughout the year from short South African rand positions as its value
receded relative to the U.S. dollar
during April and May amid speculation that Zimbabwe was on the verge of deval-
uing its currency. A portion of the Fund's gains for the year was offset by
losses experienced in the British pound as long positions incurred losses ear-
ly in the year amid continued strength in the U.S. dollar. Short positions in-
curred additional losses late in the year on fresh evidence of a weakening
U.S. economy. Losses were also experienced in the Australian dollar as its
value fluctuated in response to weakness in the euro, the changing U.S. inter-
est rate environment and fading Australian interest rate expectations.
Should you have any questions concerning this report, please feel free to con-
tact Demeter Management Corporation at Two World Trade Center, 62nd Floor, New
York, NY 10048, or your Morgan Stanley Dean Witter Financial Advisor.
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is not a
guarantee of future results.
Sincerely,
/s/ Robert E. Murray
Robert E. Murray
Chairman
Demeter Management Corporation
General Partner
Dean Witter Cornerstone Funds
Independent Auditors' Report
The Limited Partners and the General Partner of
Dean Witter Cornerstone Fund II
Dean Witter Cornerstone Fund III
Dean Witter Cornerstone Fund IV:
We have audited the accompanying statements of financial condition of Dean
Witter Cornerstone Fund II, Dean Witter Cornerstone Fund III and Dean Witter
Cornerstone Fund IV (collectively, the "Partnerships") as of December 31, 2000
and 1999 and the related statements of operations, changes in partners' capi-
tal, and cash flows for each of the three years in the period ended Decem-
ber 31, 2000. These financial statements are the responsibility of the Part-
nerships' management. Our responsibility is to express an opinion on these fi-
nancial statements based on our audits.
We conducted our audits in accordance with auditing standards generally ac-
cepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the finan-
cial statements are free of material misstatement. An audit includes examin-
ing, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting princi-
ples used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits pro-
vide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material re-
spects, the financial position of Dean Witter Cornerstone Fund II, Dean Witter
Cornerstone Fund III and Dean Witter Cornerstone Fund IV at December 31, 2000
and 1999 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with ac-
counting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
February 16, 2001
Dean Witter Cornerstone Fund II
Statements of Financial Condition
December 31,
----------------------
2000 1999
---------- ----------
$ $
ASSETS
Equity in futures interests trading
accounts:
Cash 21,768,271 25,804,088
Net unrealized gain on open contracts (MS&Co.) 3,293,534 --
Net unrealized loss on open contracts (MSIL) (25,956) --
Net unrealized gain on open contracts (Carr) -- 1,156,415
---------- ----------
Total net unrealized gain on open contracts 3,267,578 1,156,415
---------- ----------
Total Trading Equity 25,035,849 26,960,503
Interest receivable (DWR) 92,590 94,764
Due from DWR 21,318 11,715
---------- ----------
Total Assets 25,149,757 27,066,982
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 361,946 225,282
Accrued management fees 73,275 89,781
Accrued administrative expenses 26,845 42,938
---------- ----------
Total Liabilities 462,066 358,001
---------- ----------
PARTNERS' CAPITAL
Limited Partners (5,469.148 and
6,619.006 Units, respectively) 24,168,885 26,243,505
General Partner (117.400 Units) 518,806 465,476
---------- ----------
Total Partners' Capital 24,687,691 26,708,981
---------- ----------
Total Liabilities and
Partners' Capital 25,149,757 27,066,982
========== ==========
NET ASSET VALUE PER UNIT 4,419.13 3,964.87
========== ==========
Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------- ---------- ---------
$ $ $
REVENUES
Trading profit (loss):
Realized 1,734,937 1,169,107 5,592,885
Net change in unrealized 2,111,163 (899,737) 52,473
--------- ---------- ---------
Total Trading Results 3,846,100 269,370 5,645,358
Interest income (DWR) 1,117,777 1,112,233 1,180,971
--------- ---------- ---------
Total Revenues 4,963,877 1,381,603 6,826,329
--------- ---------- ---------
EXPENSES
Brokerage commissions (DWR) 1,361,674 1,579,871 1,401,238
Management fees 946,410 1,184,505 1,224,365
Transaction fees and costs 124,990 151,330 133,569
Common administrative expenses 40,256 62,969 44,337
Incentive fees -- 779 426,277
--------- ---------- ---------
Total Expenses 2,473,330 2,979,454 3,229,786
--------- ---------- ---------
NET INCOME (LOSS) 2,490,547 (1,597,851) 3,596,543
========= ========== =========
Net Income (Loss) Allocation:
Limited Partners 2,437,217 (1,571,182) 3,514,833
General Partner 53,330 (26,669) 81,710
Net Income (Loss) per Unit:
Limited Partners 454.26 (227.17) 467.12
General Partner 454.26 (227.17) 467.12
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Fund III
Statements of Financial Condition
December 31,
----------------------
2000 1999
---------- ----------
$ $
ASSETS
Equity in futures interests trading
accounts:
Cash 24,902,313 32,268,788
Net unrealized gain on open contracts (MS&Co.) 3,944,253 --
Net unrealized gain on open contracts (Carr) -- 1,425,611
Net unrealized loss on open contracts (MSIL) (91,422) --
---------- ----------
Total net unrealized gain on open contracts 3,852,831 1,425,611
Net option premiums (32,422) 318,281
---------- ----------
Total Trading Equity 28,722,722 34,012,680
Interest receivable (DWR) 105,983 116,065
Due from DWR 38,685 --
---------- ----------
Total Assets 28,867,390 34,128,745
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 286,259 443,758
Accrued administrative expenses 106,179 138,661
Accrued management fees 83,887 112,924
---------- ----------
Total Liabilities 476,325 695,343
---------- ----------
PARTNERS' CAPITAL
Limited Partners (9,204.671 and
10,836.119 Units, respectively) 27,959,423 33,000,637
General Partner (142.103 Units) 431,642 432,765
---------- ----------
Total Partners' Capital 28,391,065 33,433,402
---------- ----------
Total Liabilities and
Partners' Capital 28,867,390 34,128,745
========== ==========
NET ASSET VALUE PER UNIT 3,037.53 3,045.43
========== ==========
Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ---------
$ $ $
REVENUES
Trading profit (loss):
Realized (1,348,698) 348,156 5,912,923
Net change in unrealized 2,427,220 (677,199) 164,515
---------- ---------- ---------
Total Trading Results 1,078,522 (329,043) 6,077,438
Interest income (DWR) 1,343,823 1,361,828 1,640,345
---------- ---------- ---------
Total Revenues 2,422,345 1,032,785 7,717,783
---------- ---------- ---------
EXPENSES
Brokerage commissions (DWR) 1,554,203 2,027,980 2,088,096
Management fees 1,128,381 1,441,758 1,682,394
Transaction fees and costs 93,403 167,905 212,795
Common administrative expenses 66,352 103,046 76,892
---------- ---------- ---------
Total Expenses 2,842,339 3,740,689 4,060,177
---------- ---------- ---------
NET INCOME (LOSS) (419,994) (2,707,904) 3,657,606
========== ========== =========
Net Income (Loss) Allocation:
Limited Partners (418,871) (2,676,422) 3,564,790
General Partner (1,123) (31,482) 92,816
Net Income (Loss) per Unit:
Limited Partners (7.90) (221.54) 273.45
General Partner (7.90) (221.54) 273.45
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Fund IV
Statements of Financial Condition
December 31,
-----------------------
2000 1999
----------- -----------
$ $
ASSETS
Equity in futures interests trading
accounts:
Cash 98,123,780 104,055,664
Net unrealized gain on open contracts (MS&Co.) 3,996,007 --
Net unrealized gain on open contracts (Carr) -- 281,510
----------- -----------
Total net unrealized gain on open contracts 3,996,007 281,510
----------- -----------
Total Trading Equity 102,119,787 104,337,174
Interest receivable (DWR) 375,740 357,520
----------- -----------
Total Assets 102,495,527 104,694,694
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 1,643,542 1,225,890
Accrued incentive fees 842,617 --
Accrued management fees 298,676 347,338
Accrued administrative expenses 92,137 145,813
----------- -----------
Total Liabilities 2,876,972 1,719,041
----------- -----------
PARTNERS' CAPITAL
Limited Partners (18,324.325 and
21,718.366 Units, respectively) 98,469,183 101,716,331
General Partner (213.889 and 268.889 Units,
respectively) 1,149,372 1,259,322
----------- -----------
Total Partners' Capital 99,618,555 102,975,653
----------- -----------
Total Liabilities and
Partners' Capital 102,495,527 104,694,694
=========== ===========
NET ASSET VALUE PER UNIT 5,373.69 4,683.42
=========== ===========
Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------- ---------- ----------
$ $ $
REVENUES
Trading profit (loss):
Realized 12,978,051 (766,917) 15,855,401
Net change in unrealized 3,714,497 3,108,762 (4,642,364)
---------- ---------- ----------
Total Trading Results 16,692,548 2,341,845 11,213,037
Interest income (DWR) 4,492,710 4,030,878 4,462,904
---------- ---------- ----------
Total Revenues 21,185,258 6,372,723 15,675,941
---------- ---------- ----------
EXPENSES
Management fees 3,929,070 4,360,961 4,817,623
Brokerage commissions (DWR) 2,755,463 3,263,260 2,170,551
Incentive fees 843,220 (210,051) 594,331
Common administrative expenses 132,392 204,985 147,731
Transaction fees and costs 50,557 120,601 114,925
---------- ---------- ----------
Total Expenses 7,710,702 7,739,756 7,845,161
---------- ---------- ----------
NET INCOME (LOSS) 13,474,556 (1,367,033) 7,830,780
========== ========== ==========
Net Income (Loss) Allocation:
Limited Partners 13,324,073 (1,352,664) 7,611,778
General Partner 150,483 (14,369) 219,002
Net Income (Loss) per Unit:
Limited Partners 690.27 (53.44) 301.39
General Partner 690.27 (53.44) 301.39
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Funds
Statements of Changes in Partners' Capital
For the Years Ended December 31, 2000, 1999 and 1998
Units of
Partnership Limited General
Interest Partners Partner Total
----------- ---------- --------- ----------
$ $ $
Dean Witter Cornerstone Fund II
Partners' Capital,
December 31, 1997 8,184.801 29,677,943 809,798 30,487,741
Offering of Units 9.990 38,137 -- 38,137
Net income -- 3,514,833 81,710 3,596,543
Redemptions (705.180) (2,326,329) (399,363) (2,725,692)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 1998 7,489.611 30,904,584 492,145 31,396,729
Offering of Units 2.478 10,614 -- 10,614
Net loss -- (1,571,182) (26,669) (1,597,851)
Redemptions (755.683) (3,100,511) -- (3,100,511)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 1999 6,736.406 26,243,505 465,476 26,708,981
Offering of Units 2.369 9,330 -- 9,330
Net income -- 2,437,217 53,330 2,490,547
Redemptions (1,152.227) (4,521,167) -- (4,521,167)
---------- ---------- --------- ----------
Partners' Capital
December 31, 2000 5,586.548 24,168,885 518,806 24,687,691
========== ========== ========= ==========
Dean Witter Cornerstone Fund III
Partners' Capital,
December 31, 1997 13,734.437 39,970,539 1,143,835 41,114,374
Offering of Units 5.184 15,998 -- 15,998
Net income -- 3,564,790 92,816 3,657,606
Redemptions (1,404.105) (3,715,755) (772,404) (4,488,159)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 1998 12,335.516 39,835,572 464,247 40,299,819
Net loss -- (2,676,422) (31,482) (2,707,904)
Redemptions (1,357.294) (4,158,513) -- (4,158,513)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 1999 10,978.222 33,000,637 432,765 33,433,402
Net loss -- (418,871) (1,123) (419,994)
Redemptions (1,631.448) (4,622,343) -- (4,622,343)
---------- ---------- --------- ----------
Partners' Capital,
December 31, 2000 9,346.774 27,959,423 431,642 28,391,065
========== ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Funds
Statements of Changes in Partners' Capital
For the Years Ended December 31, 2000, 1999 and 1998
Units of
Partnership Limited General
Interest Partners Partner Total
----------- ----------- ---------- -----------
$ $ $
Dean Witter Cornerstone Fund IV
Partners' Capital,
December 31, 1997 26,696.117 115,575,973 2,833,771 118,409,744
Offering of Units 60.266 269,706 -- 269,706
Net income -- 7,611,778 219,002 7,830,780
Redemptions (2,427.824) (9,490,049) (1,779,082) (11,269,131)
---------- ----------- ---------- -----------
Partners' Capital,
December 31, 1998 24,328.559 113,967,408 1,273,691 115,241,099
Offering of Units 9.851 46,268 -- 46,268
Net loss -- (1,352,664) (14,369) (1,367,033)
Redemptions (2,351.155) (10,944,681) -- (10,944,681)
---------- ----------- ---------- -----------
Partners' Capital,
December 31, 1999 21,987.255 101,716,331 1,259,322 102,975,653
Offering of Units 6.161 29,469 -- 29,469
Net income -- 13,324,073 150,483 13,474,556
Redemptions (3,455.202) (16,600,690) (260,433) (16,861,123)
---------- ----------- ---------- -----------
Partners' Capital, December
31, 2000 18,538.214 98,469,183 1,149,372 99,618,555
========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Fund II
Statements of Cash Flows
For the Years Ended
December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 2,490,547 (1,597,851) 3,596,543
Noncash item included in net
income (loss):
Net change in unrealized (2,111,163) 899,737 (52,473)
(Increase) decrease in operating assets:
Interest receivable (DWR) 2,174 (2,816) 14,219
Due from DWR (9,603) 3,710 12,458
Increase (decrease) in operating
liabilities:
Accrued management fees (16,506) (16,832) 2,263
Accrued administrative
expenses (16,093) 20,510 788
Accrued incentive fees -- (413,951) (204,319)
---------- ---------- ----------
Net cash provided by (used
for) operating activities 339,356 (1,107,493) 3,369,479
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of Units 9,330 10,614 38,137
Increase (decrease) in
redemptions payable 136,664 51,907 (25,647)
Redemptions of Units (4,521,167) (3,100,511) (2,725,692)
---------- ---------- ----------
Net cash used for financing activities (4,375,173) (3,037,990) (2,713,202)
---------- ---------- ----------
Net increase (decrease) in cash (4,035,817) (4,145,483) 656,277
Balance at beginning of period 25,804,088 29,949,571 29,293,294
---------- ---------- ----------
Balance at end of period 21,768,271 25,804,088 29,949,571
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Fund III
Statements of Cash Flows
For the Years Ended
December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) (419,994) (2,707,904) 3,657,606
Noncash item included in net income
(loss):
Net change in unrealized (2,427,220) 677,199 (164,515)
(Increase) decrease in operating assets:
Net option premiums 350,703 (368,328) (108,718)
Interest receivable (DWR) 10,082 4,400 24,635
Due from DWR (38,685) 81,647 13,334
Increase (decrease) in operating
liabilities:
Accrued administrative expenses (32,482) 33,881 5,067
Accrued management fees (29,037) (22,143) (3,413)
---------- ---------- ----------
Net cash provided by (used
for) operating activities (2,586,633) (2,301,248) 3,423,996
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of Units -- -- 15,998
Increase (decrease) in
redemptions payable (157,499) 223,574 (209,575)
Redemptions of Units (4,622,343) (4,158,513) (4,488,159)
---------- ---------- ----------
Net cash used for financing activities (4,779,842) (3,934,939) (4,681,736)
---------- ---------- ----------
Net decrease in cash (7,366,475) (6,236,187) (1,257,740)
Balance at beginning of period 32,268,788 38,504,975 39,762,715
---------- ---------- ----------
Balance at end of period 24,902,313 32,268,788 38,504,975
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Fund IV
Statements of Cash Flows
For the Years Ended
December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 13,474,556 (1,367,033) 7,830,780
Noncash item included in net
income (loss):
Net change in unrealized (3,714,497) (3,108,762) 4,642,364
(Increase) decrease in operating
assets:
Interest receivable (DWR) (18,220) (7,108) 31,895
Increase (decrease) in operating
liabilities:
Accrued incentive fees 842,617 (1,154,685) (439,686)
Accrued management fees (48,662) (42,180) (13,493)
Accrued administrative
expenses (53,676) 67,107 6,409
----------- ----------- -----------
Net cash provided by (used
for) operating activities 10,482,118 (5,612,661) 12,058,269
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Offering of Units 29,469 46,268 269,706
Increase (decrease) in
redemptions payable 417,652 766,187 (439,424)
Redemptions of Units (16,861,123) (10,944,681) (11,269,131)
----------- ----------- -----------
Net cash used for financing activities (16,414,002) (10,132,226) (11,438,849)
----------- ----------- -----------
Net increase (decrease) in cash (5,931,884) (15,744,887) 619,420
Balance at beginning of period 104,055,664 119,800,551 119,181,131
----------- ----------- -----------
Balance at end of period 98,123,780 104,055,664 119,800,551
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Dean Witter Cornerstone Funds
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Organization--Dean Witter Cornerstone Fund II ("Cornerstone II"), Dean Witter
Cornerstone Fund III ("Cornerstone III"), and Dean Witter Cornerstone Fund IV
("Cornerstone IV") (individually, a "Partnership", or collectively, the "Part-
nerships") are limited partnerships organized to engage in the speculative
trading of futures, options and forward contracts on foreign currencies and
other commodity interests (collectively, "futures interests").
The general partner for each Partnership 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. Inter-
national Limited ("MSIL") provide clearing and execution services. Prior to
May 2000, Carr Futures Inc. ("Carr") provided clearing and execution services
to the Partnership. Demeter, DWR, MS&Co. and MSIL are wholly-owned subsidiar-
ies of Morgan Stanley Dean Witter & Co. ("MSDW").
Effective February 19, 1998, Morgan Stanley, Dean Witter, Discover & Co.
changed its corporate name to Morgan Stanley Dean Witter & Co.
Demeter is required to maintain a 1% minimum interest in the equity of each
Partnership and income (losses) are shared by Demeter and the limited partners
based upon their proportional ownership interests.
Use of Estimates--The financial statements are prepared in accordance with ac-
counting principles generally accepted in the United States of America, which
require management to make estimates and assumptions that affect the reported
amounts in the financial statements and related disclosures. Management be-
lieves that the estimates utilized in the preparation of the financial state-
ments are prudent and reasonable. Actual results could differ from those esti-
mates.
Revenue Recognition--Futures interests are open commitments until settlement
date. They are valued at market on a daily basis and the resulting net change
in unrealized gains and losses are reflected in the change in unrealized prof-
it (loss) on open contracts from one period to the next in the statements of
operations. Monthly, DWR pays each Partnership interest income based upon 80%
of its average daily Net Assets at a rate equal to the average yield on 13-
week U.S. Treasury bills issued. For purposes of such interest payments in
Dean Witter Cornerstone Fund IV, Net Assets do not include monies due the
Partnership on futures interests, but not actually received.
Net Income (Loss) per Unit--Net income (loss) per unit of limited partnership
interest ("Unit(s)") is computed using the weighted average number of Units
outstanding during the period.
Dean Witter Cornerstone Funds
Notes to Financial Statements--(Continued)
Equity in Futures Interests Trading Accounts--The Partnerships' asset "Equity
in futures interests trading accounts," reflected in the statements of finan-
cial condition, consists of (A) cash on deposit with DWR, MS&Co. and MSIL to
be used as margin for trading; (B) net unrealized gains or losses on open con-
tracts, which are valued at market and calculated as the difference between
original contract value and market value, and (C) net option premiums, which
represent the net of all monies paid and/or received for such option premiums.
The Partnerships, in their normal course of business, enter into various con-
tracts with MS&Co. and MSIL acting as their commodity brokers. Pursuant to
brokerage agreements with MS&Co. and MSIL, to the extent that such trading re-
sults in unrealized gains or losses, these amounts are offset and reported on
a net basis on the Partnerships' statements of financial condition.
The Partnerships have offset the fair value amounts recognized for forward
contracts executed with the same counterparty as allowable under terms of the
master netting agreements with MS&Co., the sole counterparty on such con-
tracts. The Partnerships have consistently applied their right to offset.
Brokerage Commissions and Related Transaction Fees and Costs--Brokerage com-
missions for each Partnership are accrued at 80% of DWR's published non-member
rates on a half-turn basis. Related transaction fees and costs are accrued on
a half-turn basis. Brokerage commissions and transaction fees combined for
each Partnership are capped at 13/20 of 1% per month (a 7.8% maximum annual
rate) of the adjusted Net Assets allocated to each trading program employed by
the Partnerships' trading managers.
Operating Expenses--Each Partnership has entered into an exchange agreement
pursuant to which certain common administrative expenses (i.e., legal, audit-
ing, accounting, filing fees and other related expenses) are shared by each of
the Partnerships based upon the number of outstanding Units of each Partner-
ship during the month in which such expenses are incurred. In addition, the
Partnerships incur monthly management fees and may incur incentive fees.
Demeter bears all other operating expenses.
Income Taxes--No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible for reporting
income or loss based upon their respective share of each Partnership's reve-
nues and expenses for income tax purposes.
Distributions--Distributions, other than redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made to date.
Dean Witter Cornerstone Funds
Notes to Financial Statements--(Continued)
Redemptions--Limited Partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit as of the last day of any month upon fifteen days
advance notice by redemption form to Demeter.
Exchanges--Prior to the April 30, 2000 monthly closing, Limited Partners were
able to transfer their investments among the Partnerships (subject to certain
restrictions outlined in the Limited Partnership Agreements) without paying
additional charges.
Effective with the April 30, 2000 monthly closing, the exchange privilege
among the Cornerstone funds (a "Series Exchange") was terminated. However,
limited partners retained the ability to execute an exchange from a Corner-
stone fund into other funds outside the Cornerstone Series (a "Non-Series Ex-
change") subject to certain restrictions set forth in the applicable limited
partnership agreements.
Dissolution of the Partnerships--Each Partnership will terminate on September
30, 2025 regardless of its financial condition at such time, upon a decline in
Net Assets to less than $250,000, a decline in the Net Asset Value per Unit to
less than $250, or under certain other circumstances defined in each Limited
Partnership Agreement.
2. Related Party Transactions
Each Partnership pays brokerage commissions to DWR as described in Note 1.
Each Partnership's cash is on deposit with DWR, MS&Co. and MSIL in futures in-
terests trading accounts to meet margin requirements as needed. DWR pays in-
terest on these funds as described in Note 1.
3. Trading Managers
Demeter, on behalf of each Partnership, retains certain commodity trading man-
agers to make all trading decisions for the Partnerships. The trading managers
for each Partnership as of December 31, 2000 were as follows:
Dean Witter Cornerstone Fund II
Northfield Trading L.P.
John W. Henry & Company, Inc.
Dean Witter Cornerstone Fund III
Welton Investment Corporation ("Welton")
Sunrise Capital Management, Inc. ("Sunrise")
Dean Witter Cornerstone Fund IV
John W. Henry & Company, Inc.
Sunrise Capital Management, Inc.
Dean Witter Cornerstone Funds
Notes to Financial Statements--(Continued)
Compensation to the trading managers by the Partnerships consists of a manage-
ment fee and an incentive fee as follows:
Management Fee--Each Partnership's management fee is accrued at the rate of
1/12 of 3.5% per month (a 3.5% annual rate) of the Net Assets under management
by each trading manager at each month end. Prior to December 1, 2000, each
Partnership's management fee was accrued at the rate of 1/3 of 1% per month (a
4% annual rate) of the Net Assets under management by each trading manager at
each month end.
Incentive Fee--Each Partnership pays an annual incentive fee equal to 15% of
the new appreciation in Net Assets, as defined in the Limited Partnership
Agreements, as of the end of each annual incentive period ending December 31,
except for Dean Witter Cornerstone Fund IV, which pays incentive fees at the
end of each annual incentive period ending May 31. New appreciation represents
the amount by which Net Assets are increased by profits from futures, forward
and options trading exceed losses after brokerage commissions, management
fees, transaction fees and costs and common administrative expenses are de-
ducted. Such incentive fee is accrued in each month in which new appreciation
occurs. In those months in which new appreciation is negative, previous
accruals, if any, during the incentive period will be reduced. In those in-
stances in which a Limited Partner redeems an investment, the incentive fee
(if earned through a redemption date) is to be paid on those redemptions to
the trading manager in the month of such redemption.
4. Financial Instruments
The Partnerships trade futures, options and forward contracts on foreign cur-
rencies and other commodity interests. Futures and forwards represent con-
tracts 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 in-
ability 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 State-
ment of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Deriv-
ative Instruments and Hedging Activities" effective for fiscal years beginning
after June 15, 2000, as amended by SFAS No. 137. The Partnership adopted the
provisions of SFAS No. 133 beginning with the fiscal year ended December 31,
1998. SFAS No. 133 superceded SFAS Nos. 119 and 105, which required the dis-
closure of average aggregate fair values and contract/notional values, respec-
Dean Witter Cornerstone Funds
Notes to Financial Statements--(Continued)
tively, of derivative financial instruments for an entity that carries its as-
sets at fair value. SFAS No. 133 was further amended by SFAS No. 138, which
clarifies issues surrounding interest rate risk, foreign currency denomina-
tions, normal purchases and sales and net hedging. The application of SFAS No.
133, as amended by SFAS No. 137 and SFAS No. 138, did not have a significant
effect on the Partnership's financial statements.
SFAS No. 133 defines a derivative as a financial instrument or other contract
that has all three of the following characteristics:
(1) One or more underlying notional amounts or payment provisions;
(2) Requires no initial net investment or a smaller initial net investment
than would be required relative to changes in market factors;
(3) Terms require or permit net settlement.
Generally derivatives include futures, forwards, swaps or option contracts, or
other financial instruments with similar characteristics such as caps, floors
and collars.
The net unrealized gains on open contracts are reported as a component of "Eq-
uity in futures interests trading accounts" on the statements of financial
condition and totaled at December 31, 2000 and 1999, respectively, $3,267,578
and $1,156,415 for Cornerstone II, $3,852,831 and $1,425,611 for Cornerstone
III and $3,996,007 and $281,510 for Cornerstone IV.
For Cornerstone II, of the $3,267,578 net unrealized gain on open contracts at
December 31, 2000, $2,772,779 related to exchange-traded futures and $494,799
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-trad-
ed forward currency contracts.
For Cornerstone III, of the $3,852,831 net unrealized gain on open contracts
at December 31, 2000, $3,576,953 related to exchange-traded futures and
futures-styled options contracts and $275,878 related to off-exchange-traded
forward currency contracts. All of the $1,425,611 net unrealized gain on open
contracts at December 31, 1999 related to exchange-traded futures and futures-
styled options contracts.
For Cornerstone IV, all of the $3,996,007 net unrealized gain on open con-
tracts at December 31, 2000 and all of the $281,510 net unrealized gain on
open contracts at December 31, 1999 related to off-exchange-traded forward
currency contracts.
Exchange-traded contracts and off-exchange-traded forward currency contracts
held by the Partnerships at December 31, 2000 and 1999 mature as follows:
Dean Witter Cornerstone Funds
Notes to Financial Statements--(Continued)
2000 1999
------------- -------------
Cornerstone II
Exchange-Traded Contracts December 2001 December 2000
Off-Exchange-Traded Forward Currency Contracts March 2001 March 2000
Cornerstone III
Exchange-Traded Contracts December 2001 May 2000
Off-Exchange-Traded Forward Currency Contracts March 2001 --
Cornerstone IV
Off-Exchange-Traded Forward Currency Contracts March 2001 March 2000
The Partnerships have credit risk associated with counterparty nonperformance.
The credit risk associated with the instruments in which the Partnerships are
involved is limited to the amounts reflected in the Partnerships' statements
of financial condition.
The Partnerships also have credit risk because DWR, MS&Co., and MSIL act as
the futures commission merchants or the counterparties with respect to most of
the Partnerships' assets. Exchange-traded futures and futures-styled options
contracts are marked to market on a daily basis, with variations in value set-
tled on a daily basis. DWR, MS&Co. and MSIL, each as a futures commission mer-
chant for each Partnership's exchange-traded futures and futures-styled op-
tions contracts, are required, pursuant to regulations of the Commodity
Futures Trading Commission, 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 and futures-styled options contracts, including an
amount equal to the net unrealized gain on all open futures and futures-styled
options contracts, which funds, in the aggregate, totaled at December 31, 2000
and 1999 respectively, $24,541,050 and $26,934,277 for Cornerstone II,
$28,479,266 and $33,694,399 for Cornerstone III, and $98,123,780 and
$104,055,664 for Cornerstone IV. With respect to each Partnership's off-ex-
change-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 Partnerships are at
risk to the ability of MS&Co., the sole counterparty on all such contracts, to
perform. Each Partnership has a netting agreement with MS&Co. These agree-
ments, which seek to reduce both the Partnerships' and MS&Co.'s exposure on
off-exchange-traded forward currency contracts, should materially decrease the
Partnerships' credit risk in the event of MS&Co.'s bankruptcy or insolvency.
5. Legal Matters
Similar class actions were filed in 1996 in California and New York state
courts. Each of the actions were dismissed in 1999. However, the New York
state class action discussed below is
Dean Witter Cornerstone Funds
Notes to Financial Statements--(Concluded)
still pending because plaintiffs appealed the trial court's dismissal of their
case on March 3, 2000.
On September 18 and 20, 1996, purported class actions were filed in the Su-
preme Court of the State of New York, New York County, on behalf of all pur-
chasers of interests in limited partnership commodity pools sold by DWR. Named
defendants include DWR, Demeter, Dean Witter Futures & Currency Management
Inc., MSDW, the Partnerships, certain limited partnership commodity pools of
which Demeter is the general partner and certain trading managers to those
pools. A consolidated and amended complaint in the action pending in the Su-
preme Court of the State of New York was filed on August 13, 1997, alleging
that the defendants committed fraud, breach of fiduciary duty, and negligent
misrepresentation in the sale and operation of the various limited partnership
commodity pools. The complaints sought unspecified amounts of compensatory and
punitive damages and other relief. The New York Supreme Court dismissed the
New York action in November 1998, but granted plaintiffs leave to file an
amended complaint, which they did in early December 1998. The defendants filed
a motion to dismiss the amended complaint with prejudice on February 1, 1999.
By decision dated December 21, 1999, the New York Supreme Court dismissed the
case with prejudice. However, on March 3, 2000, plaintiffs appealed the trial
court's dismissal of their case.
MORGAN STANLEY DEAN WITTER & CO.
Two World Trade Center
62nd Floor
New York, NY 10048
Presorted
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Brooklyn, NY
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