<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION NO. 2-88587
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
POST-EFFECTIVE AMENDMENT NO. 22
to
FORM S-1
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1993
------------------
DEAN WITTER CORNERSTONE FUND II
DEAN WITTER CORNERSTONE FUND III
DEAN WITTER CORNERSTONE FUND IV
(Exact name of registrants as specified in their Limited Partnership Agreements)
NEW YORK 6793 13-3212871
(State of organization) (Primary Standard Industrial 13-3190919
Classification Code Number) 13-3393597
(IRS Employer
Identification
Numbers)
TWO WORLD TRADE CENTER, 62ND FLOOR
NEW YORK, NEW YORK 10048
(212) 392-5453
(Address, including zip code and telephone number, including area code,
of registrants' principal executive offices)
MARK J. HAWLEY
DEMETER MANAGEMENT CORPORATION
TWO WORLD TRADE CENTER, 62ND FLOOR
NEW YORK, NEW YORK 10048
(212) 392-5453
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copies of communications to:
EDWIN L. LYON, Esq. MICHAEL T. GREGG, Esq.
Cadwalader, Wickersham & Taft Dean Witter Reynolds Inc.
1333 New Hampshire Avenue, N.W. 130 Liberty street, 29th Floor
Washington, D.C. 20036 New York, New York 10006
(202) 862-2200 (212) 392-5530
------------------
Approximate Date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE
OFFERED ON A DELAYED CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933 CHECK THE FOLLOWING BOX. /X/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN
OFFERING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE
FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF
THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE
462(C) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO
RULE 434, PLEASE CHECK THE FOLLOWING BOX. / /
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM LOCATION IN
NO. REGISTRATION ITEM PROSPECTUS
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Facing Page; Front Cover Pages.
2. Inside Front and Outside Back Cover Pages of......
Prospectus........................................ Inside Front Cover Page; Table of
Contents .
3. Summary Information, Risk Factors, and Ratio of
Earnings to Fixed Charges ........................ Summary of the Prospectus; The
Cornerstone Funds; Description of
Charges to Each Partnership; Risk
Factors; Investment Program, Use of
Proceeds and Trading Policies; The
General Partner; The Commodlity
Broker.
4. Use of Proceeds .................................. Investment Program, Use of Proceeds
and Trading Policies.
5. Determination of Offering Price .................. Plan of Distribution and
Exchange Procedure.
6. Dilution.......................................... Not Applicable.
7. Selling Security Holders.......................... Not Applicable.
8. Plan of Distribution.............................. Plan of Distribution and
Exchange Procedure.
9. Description of Securities to be Registered........ The Limited Partnership
Agreements.
10. Interests of Named Experts and Counsel............ Not Applicable.
11. Information with Respect to the Registrant
(a) Description of Business....................... Summary of the Prospectus; Risk
Factors; The Cornerstone Funds;
The Trading Managers; The
Commodities Market; The Limited
Partnership Agreements.
(b) Description of Property ...................... Not Applicable.
(c) Legal Proceedings............................. The Trading Managers; The General
Partner; The Commodity Broker.
(d) Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters........................... Risk Factors.
(e) Financial Statements. ........................ Independent Auditors' Reports.
(f) Selected Financial Data....................... Selected Financial Data.
(g) Supplementary Financial Information .......... Selected Financial Data.
(h) Management's Discussion and Analysis of
Financial Condition and Results of Operations. Management's Discussion and
Analysis of Financial Condition and
Results of Operations; The General
Partner.
(i) Disagreements with Accountants on Accounting
and Financial Disclosure...................... Not Applicable.
(j) Directors and Executive Officers.............. The General Partner.
(k) Executive Compensation........................ Summary of the Prospectus;
Conflicts of Interest; Fiduciary
Responsibility; Risk Factors; The
Trading Managers; The General
Partner; The Commodity Broker.
</TABLE>
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM LOCATION IN
NO. REGISTRATION ITEM PROSPECTUS
<S> <C> <C>
(l) Security Ownership of Certain Beneficial
Owners and Management......................... Capitalization; The General Partner;
The Trading Managers; Independent
Auditors' Reports.
(m) Certain Relationships and Related
Transactions.................................. Summary of the Prospectus; Con-
flicts of Interest; Fiduciary
Responsibility; Description of
Charges to Each Partnership; Risk
Factors; The Trading Managers; The
General Partner; The Commodity
Broker.
12. Disclosure of Commission Position on Indemnifica-
tion for Securities Act Liabilities............... Not Applicable.
</TABLE>
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
250,000 Units of Limited Partnership Interest
----------------------------
THESE ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK.
THESE SECURITIES ARE SUITABLE FOR INVESTMENT ONLY BY A PERSON WHO CAN
AFFORD TO LOSE HIS ENTIRE INVESTMENT. SEE "INVESTMENT REQUIREMENTS"
(Page 1), "RISK FACTORS" (Page 9) and "CONFLICTS OF INTEREST" (Page 15).
TRANSFERABILITY OF THE UNITS IS RESTRICTED AND THERE IS AND WILL BE NO
PUBLIC MARKET THEREFOR. UNITS ARE ONLY REDEEMABLE ON THE LAST DAY OF ANY
MONTH UPON AT LEAST 15 DAYS' PRIOR WRITTEN NOTICE TO THE GENERAL
PARTNER. SEE "THE LIMITED PARTNERSHIP AGREEMENTS-RESTRICTIONS ON
TRANSFERS OR ASSIGNMENTS" AND "REDEMPTIONS."
The Dean Witter Cornerstone Funds (the "Cornerstone Funds") are three
New York limited partnerships engaged individually in the speculative
trading of commodity interest contracts. The three partnerships that
comprise the Cornerstone Funds are 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" and collectively the "Partnerships").
Each Partnership allows its Limited Partners to shift their investment
among Partnerships by permitting a Limited Partner to redeem Units of
Limited Partnership Interest ("Units") and, with the net proceeds of
such redemption, purchase Units of one or more Partnerships at a price
equal to 100% of the "Net Asset Value" thereof (assets less liabilities,
divided by number of Units) (hereafter referred to as an "Exchange"). An
Exchange may only be effected as of the last day of a calendar month and
if certain additional conditions are satisfied. See "Plan of
Distribution and Exchange Procedure." Units are only being offered and
sold in Exchanges; no new investors may purchase Units, nor may current
investors purchase additional Units.
As of March 31, 1996, Cornerstone II had "Net Assets" (as defined
herein) of $28,711,546 and the Net Asset Value of a Unit thereof was
$2,711.59. Cornerstone II's assets are allocated for management between
Abacus Trading Corporation and John W. Henry & Co., Inc. As of March 31,
1996, Cornerstone III had Net Assets of $38,763,569 and the Net Asset
Value of a Unit thereof was $2,155.72. Cornerstone III's assets are
allocated for management between CCA Capital Management, Inc., and
Sunrise Capital Management, Inc. Effective July 1, 1996, CCA Capital
Management, Inc. will be replaced by Welton Investment Systems
Corporation and Abraham Trading Co. As of March 31, 1996, Cornerstone IV
had Net Assets of $99,154,059 and the Net Asset Value of a Unit thereof
was $2,835.37. Cornerstone IV's assets are allocated for management
between John W. Henry & Co., Inc. and Sunrise Capital Management, Inc.
The Partnerships are not mutual funds or any other type of investment
company within the meaning of the Investment Company Act of 1940, as
amended, and are not subject to regulation thereunder.
An investment in the Partnerships involves significant risks, including
the following:
* Commodity trading is speculative and volatile, and an investor could
lose all or a substantial part of his investment.
* There are substantial charges to each of the Partnerships by their
respective Trading Managers and DWR. Cornerstone II, Cornerstone III and
Cornerstone IV were required, during the period from January 1991-March
1996, to earn annual trading profits (after taking into account
estimated interest income based upon current rates of 5%) of 7.42%,
9.39% and 4.83%, respectively, of average annual Net Assets in order to
break even (earning profit sufficient to recoup an investor's initial
investment after one year).
* No secondary market for Units exist. Certain market conditions may
result in possible delays in, or inability to pay, redemptions.
* Conflicts of interest between and among the Trading Managers, the
General Partner, DWR, their affiliates and each Partnership may
adversely affect the trading performance of such Partnership. See
"Conflicts of Interest."
* Each Partnership's profitability is largely dependent on the
collective performance of its Trading Managers.
* While the General Partner does not intend to make any distributions,
profits earned by a Partnership in any year will result in taxable
income to investors.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
Organizational
Price to the Selling and Offering Proceeds to the
Public Commissions Expenses Partnerships
<S> <C> <C> <C> <C>
Per Unit..................................(1) (1) (1)(2) (1)(2)
- - -------------------------------------------------------------------------------------------------
Total Maximum for all Partnerships
(250,000 Units)...........................(1) (1) (1)(2) (1)(2)
- - -------------------------------------------------------------------------------------------------
<FN>
(Notes to the above table are on page (i))
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS
OF PARTICIPATING IN ANY ONE OF THESE POOLS NOR HAS THE COMMISSION PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS.
DEAN WITTER REYNOLDS INC.
The date of this Prospectus is ___________________, 1996.
<PAGE>
NOTES TO TABLE ON FRONT COVER PAGE:
(1) Units are offered for Exchange at Exchange Dates to be held as of
the last day of each month (each, an "Exchange Date"). Units are
redeemed at 100% of the Net Asset Value thereof as of the close of
business on the Exchange Date, and Units in one or more of the
Partnerships are purchased at a price per Unit equal to 100% of the Net
Asset Value of a Unit as of the first day of the month next following
the Exchange Date. No selling commission or other charges will be
payable in connection with Exchanges.
Employees of DWR will not be paid any up-front fees with respect to
the purchase of a Unit in connection with an Exchange. However, until a
Partnership terminates, DWR will compensate those of its employees and
certain other selling agents ("Additional Sellers") who participated in
the sale of Units and continue to render certain services to Limited
Partners by paying them up to 35% of the brokerage commissions generated
by outstanding Units sold by them and received by DWR as commodity
broker for each Partnership. During the period April 1995-March 1996,
such compensation resulted in average annual payments of approximately
$36, $39, and $17 per Unit of Cornerstone II, III and IV, respectively.
Such additional compensation paid by DWR may be deemed to be
underwriting compensation. No part of such compensation will be paid by
a Partnership and, accordingly, Net Assets will not be reduced as a
result of such compensation. Each person receiving such continuing
compensation must be a DWR employee at the time of receipt of payment
and must be properly registered with the Commodity Futures Trading
Commission ("CFTC"). Such compensation is to be paid in recognition of
the employees' continuing services to the Limited Partners of the
Partnerships. The Selling Agreement among DWR and the Partnerships
provides that such compensation may only be paid by DWR as long as such
services are provided.
DWR has agreed to indemnify any Additional Sellers against certain
civil liabilities, including liabilities under the Securities Act of
1933. DWR will be indemnified by each Partnership against certain civil
liabilities.
(2) DWR will pay all expenses incurred in connection with the offering
of Units pursuant to this Prospectus, and will not be reimbursed
therefor.
_____________________
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
MATTERS DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY ANY PERSON WITHIN ANY
JURISDICTION IN WHICH SUCH OFFER IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT
ANY TIME DOES NOT IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE OF ITS ISSUE.
_____________________
The Partnerships are subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith file, or
will file, reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). These reports, proxy
statements and other information can be inspected and copied at the
public reference facilities maintained by the SEC at the SEC's office at
450 Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C.
20549, and at its regional offices located at 7 World Trade Center,
Suite 1300, New York, New York 10048; and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at the regional
offices described above at prescribed rates.
The Partnerships have filed with the SEC, in Washington, D.C., a
Registration Statement on Form S-1 under the Securities Act of 1933 with
respect to the Units offered hereby. This Prospectus does not contain
all the information included in the Registration Statement, certain
items of which are omitted in accordance with the Rules and Regulations
of the SEC. For further information about the Partnerships and the
Units offered hereby, reference is made to the Registration Statement
and the exhibits thereto.
The Partnerships must furnish all Limited Partners annual and monthly
reports complying with CFTC requirements. The annual reports will
contain audited, and the monthly reports unaudited, financial
information. The audited financial statements will be examined and
reported upon by independent certified public accountants.
i
<PAGE>
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS
YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE
AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES
AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET
VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE
POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY
TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR
THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL
TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS
DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO
BE CHARGED THESE POOLS BEGINNING AT PAGE 36 AND A STATEMENT OF THE
PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS TO RECOVER THE AMOUNT
OF YOUR INITIAL INVESTMENT, AT PAGE 40.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THESE COMMODITY POOLS.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THESE COMMODITY POOLS,
YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A
DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT BEGINNING
AT PAGE 9.
YOU SHOULD ALSO BE AWARE THAT THESE COMMODITY POOLS MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE
THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES
MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR
DIMINISHED PROTECTION TO THE POOLS AND THEIR PARTICIPANTS. FURTHER,
UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE
ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-
UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOLS MAY BE
EFFECTED.
_______________________
ii
<PAGE>
TABLE OF CONTENTS
Page
Risk Disclosure Statement....................................... (ii)
Summary of the Prospectus....................................... 1
Offering Restricted to Exchanges............................ 1
Suitability Standards....................................... 1
The Dean Witter Cornerstone Funds........................... 1
Purchase of Units Pursuant to an Exchange................... 7
Risk Factors.................................................... 9
Risks Relating to Commodity Trading and the
Commodities Markets....................................... 9
Risks Relating to the Partnerships.......................... 12
Risks Relating to the Trading Managers...................... 13
Taxation and Regulatory Risks .............................. 15
Conflicts of Interest........................................... 16
Relationship of the General Partner to the
Commodity Broker.......................................... 16
Accounts of Affiliates of the General Partner............... 17
Management of Other Accounts by Each Trading
Manager................................................... 17
Customer Agreement with DWR................................. 17
Other Commodity Pools....................................... 18
Fiduciary Responsibility........................................ 18
The Cornerstone Funds........................................... 19
The Offering of Units....................................... 19
Performance Records......................................... 19
Selected Financial Data......................................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 26
Description of Charges to Each Partnership...................... 36
1. Commodity Broker......................................... 37
2. Trading Managers......................................... 38
3. Others................................................... 40
4. Break-Even Analysis...................................... 40
Investment Program, Use of Proceeds and Trading Policies........ 41
Differences among the Cornerstone Funds..................... 41
Cornerstone II.............................................. 42
Cornerstone III............................................. 42
Cornerstone IV.............................................. 43
Summary of Differences among Partnerships................... 43
Use of Proceeds............................................. 44
Trading Policies............................................ 44
Capitalization ................................................. 46
General Description of Trading Systems.......................... 47
Introduction................................................ 47
Trading by the Trading Managers............................. 48
The Trading Managers........................................ 49
Introduction................................................ 49
Dean Witter Cornerstone Fund II............................. 50
1. Abacus Trading Corporation............................ 50
2. John W. Henry & Co., Inc. ............................ 52
Dean Witter Cornerstone Fund III ........................... 59
1. CCA Capital Management, Inc. ......................... 59
2. Welton Investment Systems Corporation ................ 61
3. Abraham Trading Co. .................................. 67
4. Sunrise Capital Management, Inc. ..................... 71
Dean Witter Cornerstone Fund IV............................. 74
1. John W. Henry & Co., Inc. ............................ 74
2. Sunrise Capital Management, Inc. ..................... 74
The Management Agreements ...................................... 74
Apportionment of Proceeds .................................. 75
Term ....................................................... 75
Liability and Indemnification .............................. 76
Obligations to a Partnership................................ 76
Restrictions ............................................... 77
Speculative Position Limits ................................ 77
<PAGE>
Page
The General Partner............................................. 77
Directors and Officers of the General Partner............... 78
The Commodity Broker............................................ 79
Description of the Commodity Broker......................... 79
Brokerage Arrangements ..................................... 80
The Commodities Market ......................................... 80
Futures Contracts .......................................... 80
Forward Contracts........................................... 80
Commodity Options .......................................... 81
Hedgers and Speculators .................................... 81
Commodity Exchanges......................................... 82
Speculative Position Limits ................................ 82
Daily Limits................................................ 83
Regulations ................................................ 83
Margins .................................................... 84
Redemptions .................................................... 84
The Exchange Agreement.......................................... 85
The Limited Partnership Agreements.............................. 86
Nature of the Partnerships.................................. 86
Management of Partnerships Affairs.......................... 87
Sharing of Profits and Losses............................... 87
Additional Partners......................................... 88
Restrictions on Transfers or Assignments.................... 89
Term of the Partnerships.................................... 89
Amendments; Meetings........................................ 89
Reports to Limited Partners................................. 90
Plan of Distribution and Exchange Procedure..................... 90
Purchases by Employee Benefit Plans-ERISA
Considerations ............................................. 91
Material Federal Income Tax Considerations...................... 92
Introduction................................................ 92
Partnership Status.......................................... 93
Partnership Taxation ....................................... 93
Cash Distributions and Redemptions ......................... 94
Gain or Loss on Trading Activity............................ 94
Taxation of Limited Partners ............................... 96
Tax Audits ................................................. 98
State and Local Income Tax Aspects ............................. 99
Legal Matters................................................... 99
Experts ........................................................ 100
Additional Information ......................................... 100
Glossary ....................................................... 100
Certain Terms and Definitions............................... 100
Blue Sky Glossary .......................................... 102
Affirmation of General Partner
Dean Witter Cornerstone Fund II
Dean Witter Cornerstone Fund III
Dean Witter Cornerstone Fund IV................................. F-1
Independent Auditors' Report
Statements of Financial Condition
Statements of Operations
Statements of Changes in Partners' Capital
Notes to Financial Statements............................. F-2
Demeter Management Corporation
Independent Auditors ' Report
Statements of Financial Condition
Notes to Statements of Financial Condition ..................... F-8
(certain information relating to the financial
condition of Demeter Management
Corporation 's parent is contained in "The General
Partner ")
Exhibit A-Form of Limited Partnership Agreement.................... A-1
Annex-Request for Redemption................................... A-19
Annex-Request for Exchange..................................... A-21
iii
<PAGE>
SUMMARY OF THE PROSPECTUS
THE DATE OF THIS PROSPECTUS IS , 1996.
The following is a summary of this Prospectus. This Prospectus contains
more detailed information, and this summary is qualified in its entirety
by the information appearing elsewhere herein.
OFFERING RESTRICTED TO EXCHANGES
The Board of Directors of Demeter Management Corporation, the general
partner (the "General Partner") of Dean Witter Cornerstone Funds II, III
and IV (collectively, the "Cornerstone Funds") determined to close the
Cornerstone Funds to new investment, effective September 30, 1994.
After such date (i) no new investors have been nor will be permitted to
purchase Units and (ii) Limited Partners have not been and will not be
permitted to purchase additional Units. Each of the Cornerstone Funds
has and will continue to trade and operate as described in this
Prospectus, and the Exchange and redemption privileges of Limited
Partners will continue uninterrupted. If certain conditions are
satisfied, a Limited Partner may redeem his Units as of the last day of
any calendar month (an "Exchange Date") and, with the net proceeds of
such redemption, purchase Units of one or more other Partnerships
(hereafter referred to as an "Exchange") at a price per Unit equal to
100% of the Net Asset Value thereof on the first day of the month
following the Exchange Date (a "Monthly Closing"). No selling
commissions or other charges will be paid on Units issued on an
Exchange. An Exchange will be effected for a Limited Partner only if
each of the following conditions is satisfied immediately prior to the
Exchange: (i) the Partnership redeeming Units has assets sufficient to
discharge its liabilities and redeem Units; (ii) the General Partner has
received a properly completed Request for Exchange at least 15 days
prior to the date on which such Exchange is to be effective; and (iii)
the Partnership issuing Units has a sufficient number of Units
registered and qualified for sale under federal and applicable state
securities laws pursuant to a current Prospectus. The General Partner
will endeavor to have Units registered and qualified for sale to Limited
Partners at the end of each calendar month, but there can be no
assurance that any or a sufficient number of Units will be available for
sale when an Exchange is requested. If Units are not registered or
qualified for sale under either federal or applicable state law or
pursuant to a current Prospectus, the General Partner will not be able
to effect the Exchange for a Limited Partner. An Exchange can be made
only in whole Units or in multiples of $1,000, unless a Limited Partner
is liquidating his entire interest in a Partnership.
SUITABILITY STANDARDS
Each investor (or person entitled to exercise control over assets of
such investor's account under an Individual Retirement Account or other
employee benefit plan) must represent and warrant in the Exchange
Agreement that such investor and/or other person has received this
Prospectus and Disclosure Document and satisfies certain suitability
standards described in the Exchange Agreement.
THE DEAN WITTER CORNERSTONE FUNDS
The Cornerstone Funds are three New York limited partnerships which are
currently engaged individually in the speculative trading of a diverse
group of commodity interest contracts. The Cornerstone Funds are 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" and collectively the
"Partnerships"). Dean Witter Cornerstone Fund I was terminated and
dissolved effective December 31, 1991. The offices of each Partnership
are located at Two World Trade Center, 62nd Floor, New York, New York
10048, telephone (212) 392-5453. Units of each Partnership are publicly
offered for sale on a continuous basis only to existing Limited Partners
pursuant to the Exchange privilege at Monthly Closings. See "Plan of
Distribution and Exchange Procedure."
The general partner and commodity pool operator of each Partnership is
Demeter Management Corporation ("Demeter" or the "General Partner"), a
Delaware corporation. The General Partner and Dean Witter Reynolds Inc.
("DWR"), the selling agent and commodity broker for the Partnerships,
are each wholly-owned subsidiaries of Dean Witter, Discover & Co. See
"Conflicts of Interest," "The General Partner" and "The Commodity
Broker." All trading decisions for each Partnership are made by the
respective trading managers (each a "Trading Manager" and collectively
the "Trading Managers") with respect to the funds allocated to such
Trading Managers, except that the General Partner may override
instructions of a Trading Manager and make trading decisions under
certain circumstances. See "The Management Agreements."
1
<PAGE>
Each Partnership trades pursuant to the trading systems, methods and
strategies utilized by the Trading Managers retained by the General
Partner for each Partnership as described under "The Trading Managers."
Although the General Partner believes that each Partnership offers its
Limited Partners a different level of risk and, correspondingly, a
different potential rate of return on their investment, all speculative
trading of commodity futures contracts and other commodity interests is
inherently risky and there can be no assurance that the General Partner
can achieve a desired rate of return or effectively reduce the risk
arising from an investment in any of the Partnerships or that the
performance results of each Partnership will necessarily correlate with
the level of risk projected by the General Partner for each Partnership.
Based on the annual fees and expenses of Cornerstone II, Cornerstone III
and Cornerstone IV during the period from January 1991-March 1996 (note
that only the management fees are fixed, and that, effective May 1,
1992, the brokerage commissions were capped, but not otherwise fixed),
each Partnership was required to earn average trading profits (after
taking into account estimated interest income based upon current rates
of 5%) of 7.42%, 9.39% and 4.83%, respectively, of such Partnership's
annual average Net Assets in order to break even (earning profits
sufficient to recoup an investor's initial investment after one year).
See "Description of Charges to Each Partnership" and each Partnership's
financial statements. By reason of the foregoing, investors should
consider an investment in a Partnership as a long-term investment.
DEAN WITTER CORNERSTONE FUND II
Cornerstone II seeks as its investment objective the maximum rate of
capital appreciation consistent with a medium percentage of assets
committed as margin. During the period from April 1995-March 1996, the
Trading Managers for Cornerstone II collectively committed on average
between 10 and 40% of the Net Assets of Cornerstone II as margin. See
"Differences among the Cornerstone Funds" and "The Commodities Market-
Margins." The Trading Managers for Cornerstone II are Abacus Trading
Corporation ("Abacus") and John W. Henry & Co., Inc. ("JWH"). See "The
Trading Managers--Dean Witter Cornerstone Fund II."
DEAN WITTER CORNERSTONE FUND III
Cornerstone III seeks as its investment objective the maximum rate of
capital appreciation consistent with a high percentage of assets
committed as margin. During the period from April 1995-March 1996, the
Trading Managers for Cornerstone III collectively committed on average
between 10 and 45% of the Net Assets of Cornerstone III as margin. See
"Differences among the Cornerstone Funds" and "The Commodities Market--
Margins." The Trading Managers for Cornerstone III are currently CCA
Capital Management, Inc. ("CCA") and Sunrise Capital Management, Inc.
("Sunrise"). Effective July 1, 1996, the General Partner has determined
to replace CCA with Welton Investment Systems Corporation ("WISC") and
Abraham Trading Co. ("Abraham"). See "The Trading Managers--Dean Witter
Cornerstone Fund III."
DEAN WITTER CORNERSTONE FUND IV
Unlike the other Partnerships, Cornerstone IV was organized to trade
exclusively in a portfolio of diverse world currencies, primarily in an
effort to profit from changes in the value between and among various
currencies. Cornerstone IV's investment objective is to profit from the
speculative trading of futures and forward contracts and other commodity
interests on currencies and from favorable price relationships between
and among various currencies. Cornerstone IV seeks as its investment
objective the maximum rate of capital appreciation consistent with a
medium to high percentage of assets committed as margin. During the
period from April 1995-March 1996, the Trading Managers for Cornerstone
IV collectively committed on average between 5 and 55% of the Net Assets
of Cornerstone IV as margin. The higher margin commitment for
Cornerstone IV is due principally to: (a) the fact that the Trading
Managers normally take positions in two different foreign currencies at
or about the same time, thus doubling positions, in order to take
advantage of the price relationship between the two currencies; and (b)
the fact that in the Partnership's trading of currency contracts in the
forward contract and interbank markets, DWR generally requires good
faith deposits with it in lieu of margin (i) in amounts approximately
equivalent to the margin required for trading foreign currency futures
contracts on United States exchanges when the Partnership trades the
same currencies for which futures contracts are traded on such exchanges
and (ii) in amounts which may be higher than such exchange margin
requirements when the Partnership trades other world currencies for
which no futures contracts are traded on such exchanges. See
"Differences among the Cornerstone Funds" and "The Commodities Market--
Margins." The Trading Managers for Cornerstone IV are JWH and Sunrise.
See "The Trading Managers-Dean Witter Cornerstone Fund IV."
2
<PAGE>
PERFORMANCE
Cornerstone II and III began trading on January 2, 1985 and Cornerstone
IV began trading on May 1, 1987. The actual performance summaries of
these Partnerships from January 1, 1991 through March 31, 1996 is set
forth in Capsules I, II and III, respectively, under "The Cornerstone
Funds--Performance Records" and is summarized in "Selected Financial
Data."
FISCAL YEAR
The fiscal years of each of the Partnerships begins on January 1 of each
year and ends on the following December 31.
CONFLICTS OF INTEREST
Significant actual and potential conflicts of interest exist in the
structure and operation of each Partnership, principally arising from
the affiliation between the General Partner and DWR, and the trading of
other accounts of, or managed by the General Partner, DWR, the Trading
Managers and their affiliates. See "Conflicts of Interest," "The
Trading Managers," "The General Partner," and "The Commodity Broker."
RISK FACTORS
As a general matter, an investment in the Partnerships is speculative
and involves substantial risk, including the risk of loss of a Limited
Partner's entire investment. Risks of an investment in the Partnerships
include:
Risks Relating to Commodity Interests Trading
* Commodity interests trading is speculative and volatile and
an investor may lose all or a substantial part of his investment.
* Commodity interests trading is highly leveraged and
relatively small price movements can result in significant losses to a
Partnership.
* Commodity interests trading may be illiquid and in certain
situations prevent a Partnership from limiting its loss on an
unfavorable position.
* Trading in forward contracts may subject a Partnership to
losses if a counterparty is unable to meet its obligations.
* Trading on foreign exchanges may result in a Partnership
having less regulatory protection available. In addition, a Partnership
may suffer losses due to exchange rate changes.
* Trading in futures options can be extremely expensive if
market volatility is incorrectly predicted.
* The Partnerships have credit risk because DWR is the sole
counterparty with respect to most of the Partnerships' assets.
* Speculative position limits may result in a Partnership
having to liquidate profitable positions.
Risks Relating to the Partnerships
* Substantial charges to each Partnership regardless of
whether a Partnership realizes profits.
* Restricted investment liquidity in the Units, absence of a
secondary market, ability to assign or transfer restricted, redemptions
limited to monthly.
* Significant actual and potential conflicts of interest exist
involving the General Partner, the Trading Managers, DWR, and their
affiliates.
* Limited Partners do not participate in the management of the
Partnerships or in the conduct of their business.
Risks Relating to the Trading Managers
* Past results are not necessarily indicative of future
results.
* A Partnership will not be profitable unless the Trading
Managers for the Partnership are collectively successful with their
trading strategies.
* Factors outside the control of a Trading Manager may reduce
the profitability of a trading strategy or require an alteration in the
strategy.
3
<PAGE>
* A Management Agreement may not be renewed, may be renewed on
less favorable terms to the Partnership, or may be terminated by a
Trading Manager such that the Trading Manager will no longer be
available to the Partnership.
* Assets may be reallocated from a Trading Manager to an
additional Trading Manager who may subsequently incur trading losses.
* Substantial increases in assets to a Trading Manager may
adversely affect its performance.
Taxation Risks
* If the tax laws and/or certain facts and circumstances
change, a Partnership may be taxed as a corporation.
* While the General Partner does not intend to make any
distributions, profits earned in any year will result in taxable income
to investors.
* Deductibility of certain of a Partnership's expenses may be
limited.
* A Partnership's tax return may be audited by the Internal
Revenue Service.
Only the General Partner will be liable for a Partnership's obligations
(including margin calls) to the extent that the Partnership's assets,
including amounts contributed by the Limited Partners and amounts paid
to Limited Partners upon redemptions, distributions or otherwise
(together with interest thereon), are insufficient to meet those
obligations. See "Risk Disclosure Statement," "Risk Factors,"
"Conflicts of Interest," "Description of Charges to Each Partnership,"
and "The Limited Partnership Agreements--Nature of the Partnerships."
DESCRIPTION OF CHARGES TO EACH PARTNERSHIP
Each Partnership is subject to substantial charges which are summarized
below and described in detail under "Description of Charges to Each
Partnership."
<TABLE>
<CAPTION>
Entity Form of Compensation Amount of Compensation
------ -------------------- ----------------------
<S> <C> <C>
DWR (as Commodity Broker) Brokerage Commissions. Roundturn commissions (covering
both the opening and liquidating
of a commodity interest) at 80%
of DWR's published non-member
rates (an average rate of $75).
Commissions with respect to each
Trading Manager's allocated
adjusted Net Assets are capped
at (i) 3/4 of 1% per month (in
the case of Trading Managers
which employ multiple trading
systems in trading on behalf
of a Partnership, the foregoing
3/4 of 1% cap is applied on a
per trading system basis) of
the adjusted Net Assets at
month-end allocated to such
Trading Manager or trading
system; and (ii) 14% annually
of the Partnership's average
monthly Net Assets, aggregated
with net excess interest and
compensating balance benefits,
and transaction fees and costs,
as described below.
Transaction fees for the Forward currency contract
execution of each Partnership's fees average $3-$6 per
forward contract transactions, roundturn trade, execution
the execution of cash transactions of cash contract transactions
relating to exchange of futures relating to EFP transactions
for physicals are approximately $2.50
4
<PAGE>
("EFP") actions, per cash contract, and the
and the use of DWR's institutional use of the institutional
and overnight execution facilities. trading desk or overnight
execution facility may be
up to $3 per roundturn (the
amount of such fees is
included in the transaction
fees described under "Other"
and is subject to
the cap described therein).
Financial benefit to DWR from The aggregate of (i) brokerage
interest earned on Partnerships' commissions and transaction
assets in excess of the rate fees and costs payable by the
paid to the Partnerships and Partnership, as described
from compensating balance above and below, and (ii)
treatment in connection with net excess interest and
its designation of a bank or compensating balance benefits
banks in which the Partnerships' to DWR (after crediting the
assets are deposited. Partnership with interest)
are capped at 14% annually
of the Partnership's
average monthly Net Assets
as of the last day of each
month during a calendar
year.
Trading Managers .................... Monthly Management Fee. 1/3 of 1% of Net Assets
allocated to each Trading
Manager on the last day of each
month (a 4% annual rate).
Annual Incentive Fee. 15% of the New Appreciation
(as defined under "Description
of Charges to Each Partnership--2.
Trading Managers") in a Partner-
ship's Net Assets as a whole as
of the end of each annual
incentive period.
Other............................... All transaction fees and Transaction fees and costs
costs incurred in connection have averaged less than 1%
with each Partnership's per year of each Partnership's
commodity trading activities average Net Assets. Such fees
(including floor brokerage and costs are subject to the cap
fees, exchange fees, clearinghouse on aggregate brokerage commissions,
fees, and NFA fees, "give net ex-cess interest and
up" or transfer fees (fees charged compensating balance benefits,
by one clearing brokerage firm to and transaction fees and
transfer a trading position to costs described above.
another clearing firm), and any
costs associated with taking
delivery under commodity interest.
Direct expense and Common Proportionate shares of Common
Administrative Expenses, which Administrative Expenses (which
include printing and mailing, have averaged $292,178 per
reporting, legal, accounting, annum for the period January
auditing and extraordinary 1, 1991-March 31, 1996) are
expenses incurred in connection allocated to each of the
with operating the Partnerships Partnerships based on the
and registering and qualifying number of Units of each
Units for sale to Limited Partnership outstanding
Partners pursuant to a current during the month in which
Prospectus. such expenses are incurred.
</TABLE>
5
<PAGE>
Based on the fees and expenses of Cornerstone II, Cornerstone III and
Cornerstone IV, in order for a Limited Partner to break even (earning
profits sufficient to recoup its initial investment) upon redemption
after one year, Cornerstone II, Cornerstone III and Cornerstone IV must
earn trading profits (after taking into account estimated interest
income based upon current rates of 5%) of $201.20, $202.42, and $136.96,
per Unit. Such amount expressed as a percentage of the selling price of
a Unit of Cornerstone II, Cornerstone III and Cornerstone IV (as of
March 31, 1996) equals 7.42%, 9.39% and 4.83%, respectively, of such
Partnership's annual average Net Assets. This assumes that each Trading
Manager's gross profits equal expenses such that no incentive fees are
earned by the Trading Manager. See "Description of Charges to Each
Partnership -- Break Even Analysis."
The recent statements of financial condition of Cornerstone II, III and
IV and the related statements of operations and changes in partners'
capital are set forth beginning at page F-2 of this Prospectus. Such
financial statements describe, among other things, the fees and expenses
incurred by the Partnerships during the periods shown and are summarized
under "Selected Financial Data."
COMMON EXPENSES
The Partnerships have entered into the Dean Witter Cornerstone Funds
Exchange Agreement (the "Exchange Agreement") permitting the Limited
Partners to have the Exchange privilege described above. The Exchange
Agreement provides that Common Administrative Expenses of the
Partnerships will be shared by such Partnerships based on the number of
Units of each Partnership outstanding during the month in which such
expenses are incurred, so that each outstanding Unit will be charged at
the end of a month the same dollar amount for Common Administrative
Expenses. See "The Exchange Agreement."
DISTRIBUTIONS
Each Partnership will make distributions, if any, at the sole discretion
of the General Partner (the General Partner has not previously made any
distribution of profits and it is currently the intention of the General
Partner not to make distributions). It is possible that no
distributions will be made in some years in which a Partnership has
taxable profits, realized or unrealized. However, a Limited Partner of
such Partnership will nevertheless be required to take his share of such
profits into income for federal tax purposes. To date, no distributions
have been made by the Partnerships. Since it is not the practice or
intention of the General Partner to distribute any profits of the
Partnerships, investors will have to depend on redemptions or limited
transfer rights to realize on an investment in a Partnership. See
"Material Federal Income Tax Considerations."
TRANSFERABILITY OF UNITS
The assignability or transferability of Units of each Partnership is
limited by the applicable Limited Partnership Agreement and no assignee
or transferee may become a substituted limited partner without the
consent of the General Partner, which consent the General Partner may
withhold in its sole discretion. See "The Limited Partnership
Agreements--Restrictions on Transfers or Assignments."
TERM
Each Partnership will terminate on September 30, 2025, or upon the
election of Limited Partners owning more than 50% of its outstanding
Units, or upon the prior withdrawal, insolvency or dissolution of the
General Partner (unless a new general partner has been elected), or upon
a decline in the Net Asset Value of a Unit to less than $250, or upon a
decline in the Partnership's aggregate Net Assets to or below $250,000,
or upon a determination by the General Partner that the Partnership's
aggregate Net Assets in relation to the operating expenses of the
Partnership make it unreasonable or imprudent to continue the business
of the Partnership, or upon the occurrence of any other event which
shall make it unlawful for the Partnership to continue. Cornerstone IV
will also terminate upon the enactment of any law or adoption of any
rule, regulation or policy by any regulatory authority having
jurisdiction which makes it unlawful, unreasonable or imprudent for the
principal business of the Partnership to be continued. In certain
market conditions, the Net Asset Value of a Unit could fall to less than
$250 or a Partnership's aggregate Net Assets could fall to less than
$250,000. In either case, the Partnership would terminate but the Net
Asset Value of a Unit or the Net Assets of a Partnership, as the case
may be, could decline to zero either prior to such termination or
thereafter without the Partnership being able to liquidate its positions
in the commodity futures market. See "Risk Factors
6
<PAGE>
Risks--Relating to Commodity Trading and the Commodities Markets--Commodity
Trading May Be Illiquid" and "The Limited Partnership Agreements--Term of the
Partnerships."
PURCHASE OF UNITS PURSUANT TO AN EXCHANGE
SECURITIES AVAILABLE FOR EXCHANGE
As of May 1, 1996, up to 14,852.502 unsold Units of Limited Partnership
Interest ("Units") were available for purchase pursuant to Exchanges. A
total of 250,000 Units were initially registered with the SEC.
PLAN OF DISTRIBUTION
Units issued to a Limited Partner in an Exchange will be sold at a price
per Unit equal to 100% of the Net Asset Value thereof as of the Monthly
Closing. No selling commissions or other charges are payable in
connection with Exchanges.
Employees of DWR and certain Additional Sellers, if any, will receive
compensation from DWR, and not from the Partnerships, out of the
commodity brokerage commissions paid to DWR by the Partnerships. During
the period January 1991-March 1996, such compensation to employees of
DWR equaled approximately 6.71%, 8.43% and 4.40% of the average annual
Net Assets of Cornerstone II, III and IV, respectively, and resulted in
average annual payments to such persons of approximately $36, $39 and
$17 per Unit of Cornerstone II, III and IV, respectively. Such
continuing compensation is in consideration of certain additional
services provided to Limited Partners by such persons on a continuing
basis and may be deemed to be additional underwriting compensation to
DWR. See "Plan of Distribution and Exchange Procedure."
USE OF PROCEEDS
The net proceeds received at a Monthly Closing from Exchanges of Units
will be divided among the Partnerships, based on the number of Units
issued by them and the Net Asset Value of each Unit issued. The net
proceeds received by a Partnership in an Exchange will be deposited in
the Partnership's commodity trading accounts with DWR and used to trade
commodity futures contracts and other commodity interests. See
"Investment Program, Use of Proceeds and Trading Policies."
INTEREST ON PARTNERSHIP ASSETS
Each Partnership's assets are deposited with DWR in separate commodity
trading accounts established by DWR for each Trading Manager, and are
either held in non-interest-bearing bank accounts or invested in
securities approved by the Commodity Futures Trading Commission ("CFTC")
for investment of customer funds. DWR currently credits each
Partnership at month-end with interest income on 80% of such
Partnership's average daily Net Assets for the month at a rate equal to
the average yield on 13-week U.S. Treasury Bills issued during such
month. In the case of Cornerstone IV, for purposes of such interest
payments, Net Assets do not include monies due the Partnership on or
with respect to forward contracts and other commodity interests but not
actually received by it from banks, brokers, dealers and other persons.
No Partnership receives interest income on the balance of its assets
held by DWR. Each Partnership's assets held by DWR may be used as
margin solely for such Partnership's trading. DWR benefits from
interest earned on the Partnerships' funds in excess of the rate paid to
the Partnerships. DWR also benefits from compensating balance treatment
in connection with its designation of a bank or banks in which the
Partnerships' assets are deposited (i.e., DWR receives favorable loan
rates from such bank or banks by reason of such deposits). It is not
possible to quantify compensating balance benefits at present; however,
while it is anticipated that such benefits will exceed the interest
required to be credited to each Partnership, it is estimated that they
should not exceed 4% of each Partnership's annual average Net Assets
after such credits. To the extent such benefits to DWR exceed the
interest DWR is obligated to credit to the Partnerships, they will not
be shared with the Partnerships. Notwithstanding the foregoing, the
aggregate of (i) the brokerage commissions and transaction fees and
costs payable by a Partnership, and (ii) the net excess interest and
compensating balance benefits to DWR (after crediting the Partnership
with interest as described above) shall not exceed 14% annually of the
Partnership's average month-end Net Assets during each calendar year.
See "Investment Program, Use of Proceeds and Trading Policies."
7
<PAGE>
REDEMPTION OF UNITS
A Limited Partner may require each Partnership to redeem all or part of
his Units, effective as of the last day of any month, at 100% of the Net
Asset Value thereof on such date. A redemption may be made only in
whole Units or in multiples of $1,000 (which may result in redemption of
fractional Units), unless a Limited Partner is redeeming his entire
interest in a Partnership. The right to obtain redemptions is
contingent upon the redeeming Partnership having assets sufficient to
discharge its liabilities as of the end of the applicable month and the
General Partner's receipt of a properly executed Request for Redemption
at least 15 days prior to the date on which such redemption is to be
effective. A Partnership may be forced to liquidate open positions to
satisfy redemptions in the event it does not have sufficient cash on
hand. The General Partner will endeavor to pay redemptions within 10,
and no later than 20, business days after the end of the month and
payment will generally be made by crediting the Limited Partner's
customer account with DWR. See "Redemptions."
When a Limited Partner redeems his Units, either to Exchange his Units
for Units of another Partnership or to liquidate his investment, on any
date other than the date as of which the annual incentive fee is payable
by the relevant Partnership, an accrued incentive fee, if applicable,
will be deducted from the Net Asset Value of such Units. Each
Partnership will pay its Trading Managers the incentive fee accrued on
any such Units as if the redemption date were the date on which such
Partnership paid the incentive fee. Any amount so paid to Trading
Managers for such Partnership will be deducted from any subsequent
incentive fee which includes New Appreciation allocable to such redeemed
Units. See "Description of Charges to Each Partnership--2. Trading
Managers--(b) Annual Incentive Fee."
In addition to the information and reports described below under "The
Limited Partnership Agreements--Reports to Limited Partners," the General
Partner will provide Limited Partners with such other information and
will comply with any such procedures in connection with redemptions as
in the future are specifically required under Securities and Exchange
Commission ("SEC") rules and policies for commodity pools and similar
investment vehicles.
TAX CONSIDERATIONS
In the opinion of the General Partner's tax counsel, the Partnerships
will be classified as partnerships for federal income tax purposes and
not as associations taxable as corporations. Accordingly, the
Partnerships will not be subject to federal income tax. Each Limited
Partner in computing his federal income tax liability for a taxable year
will be required to take into account his distributive share of all
items of Partnership income, gain, loss, deduction or credit for the
taxable year of each Partnership ending within or with such taxable year
of the Limited Partner, regardless of whether such Limited Partner has
received any distributions from the Partnership. Such items of
Partnership gain or loss retain their character (e.g., capital or
ordinary) when allocated to the Partners. Moreover, all such
allocations will increase or decrease each Partner's tax basis in his
Units. The allocation provisions are designed to reconcile tax
allocations to economic allocations; however, no assurance can be given
that the Internal Revenue Service will not challenge such allocation,
especially in light of recently issued final regulations. See "Material
Federal Income Tax Considerations."
Cash distributions by a Partnership and amounts received or deemed
received upon the partial or complete redemption of a Limited Partner's
Units (either with respect to an Exchange of Units for Units of another
Partnership or in liquidation of part or all of a Limited Partner's
investment) that do not exceed a Limited Partner's aggregate basis in
his Units are not taxable. However, to the extent cash distributions
and amounts received or deemed received upon the partial redemption of a
Limited Partner's Units exceed a Limited Partner's aggregate tax basis
in his Units, the excess will be taxable to the Partner as though it
were gain on the sale of his Units. Loss will be recognized on a
redemption of Units only if a Limited Partner redeems or Exchanges all
of his Units in a Partnership and, following the complete redemption,
such Partner has remaining tax basis in the Partnership. In such case,
the Partner will recognize loss to the extent of the remaining basis.
Subject to an exception for certain types of Partnership assets, such
gain or loss (assuming that the Units constitute capital assets) will be
either short-term capital gain or loss or long-term capital gain or loss
depending upon the length of time the Units were held prior to the
distribution or redemption. See "Material Federal Income Tax
Considerations."
The General Partner has been advised that, in the opinion of its
counsel, a Limited Partner who is a nonresidential alien individual,
foreign corporation, foreign trust, or foreign estate (a "Foreign
Limited Partner") should not be engaged in a trade or business in the
United States, and should not be subject to United States federal
8
<PAGE>
income tax, solely because such Foreign Limited Partner is a limited partner in
a Partnership. In the event a Partnership's activities should in the
future not fall within certain safe harbors from U.S. trade or business
status, there is a risk that all of a Foreign Limited Partner's
distributive share of income of the Partnership would be treated as
effectively connected with the conduct of a trade or business in the
United States. In that event, the Foreign Limited Partner would be
taxed at regular rates applicable to U.S. taxpayers and, if a foreign
corporation, could be subject to a 30% branch profits tax. See
"Material Federal Income Tax Considerations."
Tax exempt Limited Partners, see "Purchase by Employee Benefit Plan--
ERISA Considerations."
RISK FACTORS
In addition to the Risk Disclosure Statements appearing at the beginning
of this Prospectus, Limited Partners should consider the following risks
before effecting Exchanges:
RISKS RELATING TO COMMODITY TRADING AND THE COMMODITIES MARKETS
Commodity Trading Is Volatile. Commodity interest contract prices are
highly volatile. Price movements of commodity interest contracts are
influenced by, among other things: changing supply and demand
relationships; weather; agricultural, trade, fiscal, monetary and
exchange control programs and policies of governments; national and
international political and economic events and policies; and changes in
interest rates.
Each Partnership is also subject to the risk of failure of any of the
exchanges on which it trades or of their clearinghouses, if any. In
addition, under certain circumstances, such as the inability of a
customer of a Partnership's commodity broker or the commodity broker
itself to satisfy substantial deficiencies in such customer's account, a
Partnership may be subject to a risk of loss of its funds on deposit
with such commodity broker. See "The Commodities Markets."
Commodity Trading Is Highly Leveraged. Because of the low margin
deposits normally required in commodity interest contract trading
(typically between 2 and 15% of the value of the contract purchased or
sold), an extremely high degree of leverage is typical of a commodity
trading account. As a result, a relatively small price movement in a
commodity interest contract may result in immediate and substantial
losses to the investor. For example, if at the time of purchase 10% of
the price of a contract is deposited as margin, a 10% decrease in the
price of the contract would, if the contract is then closed out, result
in a total loss of the margin deposit before any deduction for brokerage
commissions. A decrease of more than 10% would result in a loss of more
than the total margin deposit. See "The Commodities Market--Margins" and
"The Limited Partnership Agreements--Nature of the Partnerships."
Commodity Trading May Be Illiquid. Most United States commodity
exchanges limit fluctuations in certain commodity interest contract
prices during a single day by regulations referred to as "daily price
fluctuation limits" or "daily limits." Pursuant to such regulations,
during a single trading day no trades may be executed at prices beyond
the daily limits. Once the price of a contract for a particular
commodity has increased or decreased by an amount equal to the daily
limit, positions in the commodity can be neither taken nor liquidated
unless traders are willing to effect trades at or within the limit.
Prices in various commodities have occasionally moved the daily limit
for several consecutive days with little or no trading. Similar
occurrences could prevent each Partnership from promptly liquidating its
unfavorable positions and subject it to substantial losses. While daily
limits may reduce or effectively eliminate the liquidity of a particular
market, they do not limit ultimate losses, and may in fact substantially
increase losses because it may prevent the liquidation of unfavorable
positions. There is no limitation on daily price moves in trading
currency forward contracts.
In addition, each Partnership may not be able to execute trades at
favorable prices if little trading in the contracts involved is taking
place. Under certain circumstances, a Partnership may be required to
accept or make delivery of the underlying commodity if the position
cannot be liquidated prior to its expiration date. It also is possible
that an exchange or the CFTC might suspend trading in a particular
contract, order immediate liquidation and settlement of a particular
contract, or order that trading in a particular contract be conducted
for liquidation only. During periods in October 1987, for example,
trading in certain stock index futures was too illiquid for markets to
function efficiently and was at one point actually suspended. See "The
Commodities Market." The principals who deal in the forward contract
markets are not required to continue to make markets in the forward
contracts they trade. There have been periods during which certain
participants in forward markets have
9
<PAGE>
refused to quote prices for forward contracts or have quoted
prices with an unusually wide spread between the price at which they are
prepared to buy and that at which they are prepared to sell.
Special Risks Associated with Forward Trading. Each Partnership trades
in forward contracts. Cornerstone IV engages in a substantial amount of
trading in forward contracts for diverse world currencies, and
Cornerstone II and III engage in a significant amount of such trading. A
forward contract is a contractual obligation to purchase or sell a
specified quantity of a commodity at a specified date in the future at a
specified price and, therefore, is similar to a futures contract.
However, forward contracts are not traded on exchanges and, as a
consequence, investors in forward contracts are not afforded the
regulatory protections of such exchanges or the CFTC; rather, banks and
dealers act as principals in such markets. Neither the CFTC nor banking
authorities regulate trading in forward contracts on currencies, and
foreign banks may not be regulated by any United States governmental
agency.
Generally, when a Trading Manager for a Partnership instructs the
Partnership to either sell or buy a particular currency, DWR will do
back-to-back principal trades in order to carry out such instructions.
DWR, as principal, will arrange bank lines of credit and contract with a
United States or foreign bank or dealer to make or take future delivery
of a specified quantity of currency at a negotiated price. DWR, again
as principal, will in turn contract with the Partnership to make or take
future delivery of the same specified quantity of currency at the same
price. DWR will not attempt to profit from any mark-up or spread on the
trade with the Partnership.
Because performance of forward contracts are not guaranteed by any
exchange or clearinghouse, a Partnership will be subject to the risk of
the inability or refusal to perform with respect to such contracts on
the part of the principals or agents with or through which the
Partnerships trade, including DWR. Any such failure or refusal, whether
due to insolvency, bankruptcy or other causes, could subject DWR and in
turn a Partnership to substantial losses. The Partnerships and DWR will
trade forward contracts only with banks, brokers, dealers and other
financial institutions which the General Partner, in conjunction with
DWR, has determined to be creditworthy.
The CFTC has published for comment in the United States Federal Register
a statement concerning its jurisdiction over transactions in the foreign
currency markets, including transactions of the type which may be
engaged in by the Partnerships. In the future, the CFTC might assert
that forward contracts of the type entered into by the Partnerships
constitute unauthorized futures contracts subject to the CFTC's
jurisdiction and attempt to prohibit the Partnerships from participating
in transactions in such contracts. If the Partnerships were restricted
in their ability to trade in the currency markets, the activities of
certain trading managers could be materially affected.
Special Risks Associated with Trading on Foreign Exchanges. The
Partnerships trade in futures, forward and option contracts on exchanges
located outside the United States where CFTC regulations do not apply.
Some foreign exchanges, in contrast to domestic exchanges, are
"principals' markets" in which performance with respect to a contract is
the responsibility only of the individual member with whom the trader
has entered into a contract and not of the exchange or clearinghouse, if
any. In the case of trading on such foreign exchanges, a Partnership
will be subject to the risk of the inability of, or refusal by, the
counterparty to perform with respect to such contracts.
Trading on foreign exchanges may involve certain risks not applicable to
trading on United States exchanges, such as the risks of exchange
controls, expropriation, burdensome or confiscatory taxation,
moratoriums, or political or diplomatic events. In addition, certain of
these foreign markets are newly formed and may lack personnel
experienced in floor trading as well as in monitoring floor traders for
compliance with exchange rules.
Furthermore, as the Partnerships determine their respective Net Assets
in United States dollars, with respect to trading on foreign markets the
Partnerships will be subject to the risk of fluctuation in the exchange
rate between the local currency and dollars and to the possibility of
exchange controls. Unless a Partnership hedges itself against
fluctuations in exchange rates between the United States dollar and the
currencies in which trading is done on such foreign exchanges, any
profits which the Partnership might realize in such trading could be
eliminated as a result of adverse changes in exchange rates, and the
Partnership could even incur losses as a result of any such changes.
See "The Commodities Market."
Special Risks Associated with Trading of Commodity Options. Options on
futures contracts and options on physical commodities are traded on
United States commodity exchanges and may be traded by the Partnerships
on certain foreign exchanges. Each such option is a right, purchased
for a certain price, to either buy or sell the underlying futures
contract or physical commodity during a certain period of time for a
fixed
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price. Such trading involves risks substantially similar to those
involved in trading futures contracts in that options are speculative
and highly leveraged. Specific market movements of the commodities or
futures contracts underlying an option cannot accurately be predicted.
The purchaser of an option is subject to the risk of losing the entire
purchase price of the option. The writer of an option is subject to the
risk of loss resulting from the difference between the premium received
for the option and the price of the commodity or futures contract
underlying the option which the writer must purchase or deliver upon
exercise of the option. See "The Commodities Market."
Diversification. Cornerstone II and III each trade a large number of
diverse commodities. However, Cornerstone IV concentrates its trading
exclusively in a portfolio of diverse world currencies. Cornerstone II
and III have also engaged in a significant amount of foreign currency
forward trading. In the case of Cornerstone IV, the limitation to
trading only currencies results in greater concentration of investment,
which may in turn result in increased volatility in Cornerstone IV's
performance compared with that of the other two Partnerships and the
other more diversified accounts managed by its Trading Managers.
However, some diversification of Cornerstone IV's portfolio is achieved
by trading a relatively large number of different and distinctive world
currencies and by the various relationships that are created by trading
different currencies against one another. The effect of governmental
intervention may be particularly significant at certain times in the
currency markets traded by Cornerstone IV and the other Partnerships.
Such intervention (as well as other factors) may cause such markets to
move rapidly in the same direction at certain times. Because of the
possible correlation among the prices of currencies in which Cornerstone
IV trades, the lack of diversification among different commodities in
Cornerstone IV's trading may increase its volatility. Unlike the other
Partnerships, Cornerstone IV will not trade in other commodities in the
foreseeable future; diversified trading could reduce the volatility of
trading results due to differences in the factors affecting price
behavior in markets other than the currency markets. See "Differences
among the Cornerstone Funds."
The Partnerships Have Credit Risk to DWR. The Partnerships have credit
risk because the sole counterparty with respect to most of the
Partnerships' assets is DWR. Exchange traded futures contracts are
marked to market on a daily basis, with variations in value credited or
charged to a Partnership's account on a daily basis. DWR, as futures
commission merchant for each Partnership's exchange traded futures
contracts, is required, pursuant to CFTC regulations, to segregate from
its own assets, and for the sole benefit of its commodity customers, all
funds held by DWR with respect to exchange traded futures contracts,
including an amount equal to the net unrealized gain on all open futures
contracts. With respect to a Partnership's off-exchange traded foreign
currency forward contracts, there are no daily settlements of variations
in value.
Possible Effects of Speculative Position Limits. The CFTC and United
States commodity exchanges have established limits referred to as
"speculative position limits" or "position limits" on the maximum net
long or net short commodity interest position which any person or group
of persons may own, hold or control in particular commodity interest
contracts.
All commodity accounts owned, controlled or managed by each Trading
Manager and its principals and affiliates may be combined for position
limit purposes, to the extent they may be applicable. The Trading
Managers are the trading advisors for other commodity pools and/or
numerous individual accounts and will in the future manage additional
accounts. In this connection, each Management Agreement provides that
if speculative position limits are exceeded by a Trading Manager or any
of its principals or affiliates in the opinion of independent counsel
(who must be other than counsel to the Partnerships) or in the opinion
of the CFTC or any regulatory body, exchange, or board, such Trading
Manager and its principals and affiliates will promptly liquidate
positions in all of their accounts, including the Partnership's account,
as nearly as possible in proportion to their respective equities to the
extent necessary to comply with applicable position limits. While each
Trading Manager believes that established position limits, where
applicable, will not adversely affect its contemplated trading for a
Partnership, it is possible that, from time to time, the trading system
or instructions of a Trading Manager to a Partnership may have to be
modified and that positions held by such Partnership may have to be
liquidated in order to avoid exceeding such limits. Such modification
or liquidation, if required, could adversely affect the operations and
profitability of a Partnership. See "Conflicts of Interest."
Speculative position limits are not applicable to forward contract
trading, although the principals with which DWR or a Partnership may
deal in the forward markets may limit the positions available to DWR or
the Partnerships as a consequence of credit considerations.
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RISKS RELATING TO THE PARTNERSHIPS
Past Results Not Necessarily Indicative of Future Performance.
Investors must consider the uncertain significance of past performance
in determining whether or not to Exchange Units of one Partnership for
Units in another Partnership, and should not place any substantial
degree of reliance on the past performance records of the Trading
Managers or the Partnerships. It should not be assumed that trading
decisions made by the Trading Managers in the future will be profitable
or will result in performance for the Partnerships comparable to such
Trading Managers' past performance.
Neither the past performance results of the Trading Managers nor the
past performance results of the Partnerships are necessarily indicative
of the future performance of the Partnerships.
Substantial Charges to Each Partnership. Each Partnership incurs
substantial charges from payment of brokerage commissions to DWR,
management and incentive fees to its Trading Managers, its direct
expenses and its share of Common Administrative Expenses pursuant to the
Exchange Agreement. Based on the annual fees and expenses of
Cornerstone II, III and IV during the period from January 1991-March
1996 (note that only the management fees are fixed and that brokerage
commissions and transaction fees and costs are capped, but not otherwise
fixed), Cornerstone II, Cornerstone III and Cornerstone IV will be
required to earn average annual trading profits (after taking into
account estimated interest income based upon current rates of 5%) of
7.42%, 9.39% and 4.83%, respectively, of such Partnership's annual
average Net Assets in order to break even (earning profits sufficient to
recoup an investor's initial investment after one year). Each
Partnership will be required to earn gross profits in excess of such
amounts before realizing any net profits. See "Description of Charges
to Each Partnership."
Restricted Investment Liquidity in the Units. The Units cannot be
assigned or transferred except on the terms and conditions set forth in
each Limited Partnership Agreement, and there is and will be no public
market for the Units. See "The Limited Partnership Agreements--
Restrictions on Transfers or Assignments." Limited Partners of a
Partnership may require such Partnership to redeem all or part of their
Units as of the last day of any month at the Net Asset Value thereof.
Furthermore, redemptions may be made only in whole Units or in multiples
of $1,000, unless a Limited Partner is redeeming his entire interest in
a Partnership. The right to obtain payment on redemption is contingent
upon (a) the Partnership having assets sufficient to discharge its
liabilities on the effective date of the redemption, and (b) the receipt
by the General Partner of a Request for Redemption in the form annexed
to the Limited Partnership Agreement (or any other form approved by the
General Partner) at least 15 days prior to the date on which such
redemption is to be effective. All liabilities of the Partnerships are
accrued daily and are reflected in the daily Net Asset Value of the
Partnerships. Under certain circumstances (including, but not limited
to, a Partnership's inability to liquidate or a delay in liquidating
positions or the default or delay in payments due a Partnership from
dealers, brokers, banks, or other persons), a Partnership may delay
payment to Limited Partners requesting redemptions of the proportionate
part of the redemption requests represented by the sums which are the
subject of any such default or delay. See "Redemptions."
Conflicts of Interest in the Partnerships' Structure. Actual and
potential conflicts of interest exist in the structure and operation of
each Partnership's business. These conflicts include (a) the conflict
between the duties of the General Partner and each Trading Manager to
act in the best interests of each Partnership, and the advantage to the
General Partner, as an affiliate of the commodity broker for each
Partnership, resulting from the trading of each Partnership's account by
its Trading Managers, and (b) the probable competition with each
Partnership by the General Partner, each Trading Manager and other
commodity pools organized, managed or advised by such persons, their
principals or affiliates, and customers (including officers, directors
and employees of the General Partner and DWR). See "Conflicts of
Interest," "The Trading Managers" and "The Commodity Broker."
Limited Partners Do Not Participate in Management. Limited Partners do
not participate in the management of a Partnership or in the conduct of
its business. See "The Limited Partnership Agreements-Management of
Partnership Affairs." However, each Limited Partnership Agreement
provides that certain actions may be taken upon the affirmative vote of
Limited Partners owning more than 50% of the Units then owned by Limited
Partners, provided that no such action may be taken unless independent
counsel (who must be other than counsel to the Partnership) has rendered
an opinion to the effect that the action to be taken will not adversely
affect the limited liability of the Limited Partners or the federal tax
status of the Partnership and that the action is permitted under the New
York Uniform Limited Partnership Act (the "Partnership Act") (or, in
lieu thereof, a court of competent jurisdiction has rendered a final
order to such effect). See "The Limited Partnership Agreements--
Amendments; Meetings."
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Reliance on the General Partner. A Limited Partner is relying on the
ability of the General Partner to select and monitor the Trading
Managers for each Partnership, including the existing Trading Managers
and any new Trading Managers retained by the General Partner. The
selection by the General Partner of the current Trading Managers for
each Partnership involved numerous considerations. The General Partner
evaluated the performance record of each Trading Manager and determined
which Trading Managers were suitable for a Partnership's trading
policies and investment objectives. The General Partner reviewed other
aspects of each Trading Manager (including the prospective Trading
Manager's trading system, experience, volatility of trading, commodities
traded, amount of management and incentive fees normally charged,
reputation of the Trading Manager and its personnel and amount of funds
under management) and made certain subjective judgments in retaining
Trading Managers for each Partnership. Although the General Partner
carefully weighed the above factors in making its selections, other
factors not considered by the General Partner may also be important. In
the future, the General Partner may be required to retain additional
Trading Managers for each Partnership and similar judgments will have to
be made from time to time. Pursuant to its authority as general
partner, the General Partner has replaced certain of the Trading
Managers for certain of the Cornerstone Funds during the course of their
trading operations. See "Differences among the Cornerstone Funds."
RISKS RELATING TO THE TRADING MANAGERS
Reliance on the Trading Managers. Under each Management Agreement, each
Trading Manager has exclusive responsibility for making trading
decisions with respect to the Net Assets of a Partnership allocated to
it, except in certain limited situations. No assurance can be given
that the respective trading systems and strategies utilized by the
Trading Managers will prove successful under all or any market
conditions.
Influences on Trading Strategies. Any factor which may for example,
lessen the prospect of major trends in the future (for example,
increased governmental control of, or participation in, the currency
markets) may reduce the Trading Managers' ability to trade profitably in
the future. Any factor which would make it more difficult to execute
timely trades, such as a significant lessening of liquidity in a
particular market, would also be detrimental to profitability. As a
result of these factors and the general volatility of commodity
interests, investors should view their investment as long term (at least
2 years) in order to permit the strategies of the Trading Managers to
function over time. Further, Trading Managers may alter their
strategies from time to time in an attempt to better evaluate market
movements. As a result of such periodic modifications, it is possible
that the trading strategies used by the Trading Managers in the future
may be different from those presently in use. There appears to be a
tendency for the rates of return achieved by commodity trading advisors
to diminish as equity under management increases. None of the Trading
Managers has agreed to limit the amount of additional equity which it
may manage. There can be no assurance whatsoever as to the effect such
increased equity will have on performance. Moreover, somewhat different
trading strategies may be required for accounts of differing sizes or
trading objectives.
New Trading Managers. The General Partner in the future may designate
additional Trading Managers to manage the funds of a Partnership and may
reapportion funds among the Trading Managers for each Partnership or
among a particular Trading Manager's trading systems. There is no
maximum or minimum limit on the amount of funds which may be allocated
to a Trading Manager although certain Trading Managers have the right to
reject additional funds. Under certain circumstances, the General
Partner will have to obtain the prior consent of the Trading Managers
for Cornerstone IV before appointing additional Trading Managers for
that Partnership. See The Management Agreements. A portion of the Net
Assets of each Partnership may be subject to management by Trading
Managers and/or trading systems that have not yet been chosen by the
General Partner. Such additional Trading Managers and/or trading
systems would be selected without prior notice to, or approval from,
Limited Partners, who will not have the opportunity to review the
performance record of newly appointed Trading Managers prior to their
appointment or the performance record of such systems prior to their
implementation.
Expiration or Termination of Management Agreements. The Management
Agreement with each Trading Manager will continue in effect for a
specified period and thereafter will be renewed automatically for an
additional term unless any party thereto upon written notice timely
given notifies the other party of its intention not to renew. In
addition, each Management Agreement is terminable by the Partnership at
any time without penalty on prior written notice timely given and in
certain other circumstances. See "The Management Agreements." Upon the
expiration
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or termination of a Management Agreement, the General Partner
will attempt to renegotiate such Agreement or make other arrangements
for providing trading advice as long as the affected Partnership intends
to continue trading. In the selection of any Trading Manager upon the
expiration or termination of a Management Agreement (including any
retention of a Trading Manager thereafter), the General Partner will
take into account all relevant factors, including the prospective
Trading Manager's trading performance, experience, volatility of
trading, commodities traded, amount of management and incentive fees
normally charged, reputation of the Trading Manager and its personnel
and amount of funds under management, as well as the trading policies
and investment objectives of the relevant Partnership. The General
Partner will attempt to enter into a management agreement with each
Trading Manager which is substantially similar to the Management
Agreements described in this Prospectus; however, there is no assurance
that the services of a Trading Manager will be available on the same or
similar terms.
Distortions Produced by Annual Incentive Fee Arrangement. Each
Partnership has agreed to pay its Trading Managers an annual incentive
fee based on New Appreciation at the end of its annual incentive period.
When such incentive fee is paid by a Partnership, each outstanding Unit
owned by a Limited Partner of such Partnership will pay a proportionate
amount of such incentive fee. Such arrangement creates distortions in
the case of a Limited Partner who redeems or Exchanges Units at any time
other than at the end of an incentive period. For example, since
incentive fees are accrued at the end of each month, a Limited Partner
redeeming Units or effecting an Exchange at the end of a month when
there is an accrued incentive fee will be charged an incentive fee. If
the Partnership's New Appreciation subsequently declines, such Limited
Partner will pay a disproportionate amount of the incentive fee relative
to the amount that other remaining Limited Partners actually pay at the
end of an incentive period. Conversely, a Limited Partner who purchases
Units in an Exchange during an incentive period may be charged an
incentive fee at the end of such period even though the value of his
Units has remained the same or declined since purchase. On the other
hand, a Limited Partner may purchase Units in an Exchange following a
decline in Net Assets and may experience an increase in the value of
such Units without being charged an incentive fee at the end of such
period. See "Description of Charges to Each Partnership."
The Effect of Multiple Trading Managers. The Trading Managers for a
Partnership are making trading decisions independent of each other.
Thus, there is the possibility that a Partnership could hold opposite
positions in the same or similar commodity interests contracts at or
about the same time or during the same period of time. The General
Partner has not prepared combined composite performance records of the
Trading Managers for each Partnership which analyze if this has in the
past or might in the future occur. There is also the possibility that
Trading Managers for one or more Partnerships may from time to time
enter identical orders and, therefore, compete for the same trades.
This competition could prevent the orders from being executed at a
desired price. The performance record of each Trading Manager does not
reflect the impact that such factors may have on the overall performance
of a Partnership.
Unequal Apportionment of a Partnership's Assets among Trading Managers.
The Net Assets of a Partnership may be apportioned unequally among its
Trading Managers and this may affect the performance results of such
Partnership. For example, a Trading Manager may experience a high
monthly rate of return but may only be managing a small percentage of a
Partnership's Net Assets. In this case, such Trading Manager's
performance could have an insignificant effect on the Net Assets of a
Partnership and the Net Asset Value of its Units. See The "Management
Agreements." The General Partner has generally reapportioned the assets
of the Partnerships unequally among its Trading Managers and this may
have the effect described above. Furthermore, in the case of certain
Trading Managers which trade several different systems, the General
Partner may reapportion the assets allocated to a Trading Manager among
such Trading Manager's trading systems. Consequently, the assets of a
particular Partnership may be apportioned unequally among a Trading
Manager's trading systems and this may affect the performance results of
the Partnership in the manner described above. See "The Trading
Managers." Although each Trading Manager's margin requirements and
brokerage commissions will be satisfied from the Net Assets of a
Partnership allocated to such Trading Manager, a Trading Manager may
incur losses of such magnitude that it is unable to meet margin calls
from the Net Assets allocated to it. If this occurs, the General
Partner is authorized under each Management Agreement to reapportion
funds among the Trading Managers for each Partnership and may be
required to take funds from more successful Trading Managers. This
could adversely affect the performance of such other Trading Managers
and the Partnership.
New Trading Managers May be Added. The General Partner, in the future,
may designate additional trading managers to manage the funds of a
Partnership and may reapportion funds among the trading managers for
each Partnership or among a particular trading manager's trading
systems. There is no maximum limit on the amount of funds which may be
allocated to a trading manager. A portion of the Net Assets of each
Partnership may in the future be subject to management by trading
managers and/or trading systems that have not yet been
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chosen by the General Partner. Such additional trading managers and/or trading
systems would be selected without prior notice to, or approval from,
Limited Partners, who will not have the opportunity to review the
performance record of newly appointed trading managers prior to their
appointment or the performance record of such systems prior to their
implementation.
TAXATION AND REGULATORY RISKS
Possibility of Taxation as a Corporation. The General Partner has been
advised by its legal counsel, Cadwalader, Wickersham & Taft, that under
current United States federal income tax (hereinafter "federal income
tax") laws and regulations, each Partnership will be classified as a
partnership and not as an association taxable as a corporation. That
status has not been confirmed by a ruling from, and such advice is not
binding upon, the United States Internal Revenue Service (the "Internal
Revenue Service"). No such ruling has been or will be requested. The
facts and authorities relied upon by counsel in their opinion may change
in the future. If a Partnership were taxed as a corporation for federal
income tax purposes, income or loss of such Partnership would not be
passed through to Partners and the Partnership would be subject to tax
on its income at the rates of tax applicable to corporations, without
any deductions for distributions to the Partners. In addition, all or a
portion of distributions made to the Partners could be taxable as
dividends or capital gains. See "Material Federal Income Tax
Considerations."
Partners' Tax Liability May Exceed Distributions. If a Partnership
realizes profit for a taxable year, such profit will be taxable to the
Partners in accordance with their distributive shares of Partnership
profit, whether or not the profit actually has been distributed to its
Partners. Accordingly, taxes payable by Partners with respect to
Partnership profit may exceed the amount of Partnership distributions,
if any, for a taxable year. Further, a Partnership may sustain losses
offsetting such profit in a succeeding taxable year, so that Partners
may never receive the profit on which they were taxed in the prior year.
See "Material Federal Income Tax Considerations."
Possible Limitation on Deduction of Certain Expenses. The deductibility
of certain miscellaneous itemized deductions is limited to the extent
such expenses exceed 2% of the adjusted gross income of an individual,
trust or estate. In addition, certain of an individual's itemized
deductions are reduced by an amount equal to the lesser of (i) 3% of
such individual's adjusted gross income over a certain threshold amount
and (ii) 80% of such itemized deductions. Based upon the activities of
the Partnerships, the General Partner has been advised by its legal
counsel that various expenses incurred by the Partnerships should not be
subject to these limitations except to the extent that the Internal
Revenue Service promulgates regulations that so provide. See "Material
Federal Income Tax Considerations."
Possibility of Tax Audit. There can be no assurance that the
Partnerships' tax returns will not be audited by the Internal Revenue
Service or that adjustments to such returns will not be made as a result
of such audits. If an audit results in an adjustment, Limited Partners
may be required to file amended returns (which may themselves also be
audited) and to pay back taxes plus interest and/or penalties that may
then be due. See "Material Federal Income Tax Considerations."
Absence of Regulations Applicable to Securities Mutual Funds and Their
Advisers. The Partnerships are not registered as an investment company
or a "mutual fund" under the Investment Company Act of 1940, as amended
(or any similar state law), and neither the General Partner nor any
Trading Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (or any similar state law).
Investors, therefore, are not accorded the protective measures provided
by such legislation. However, in accordance with the provisions of the
Commodity Exchange Act, as amended (the "CEAct"), the regulations of the
CFTC thereunder and the NFA rules, the General Partner is registered as
a commodity pool operator, the Trading Managers are registered as
commodity trading advisors, and DWR is registered as a futures
commission merchant, each subject to regulation by the CFTC and each a
member of the NFA in such respective capacities.
THE FOREGOING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION
OF ALL OF THE RISKS INVOLVED IN AN INVESTMENT IN THE PARTNERSHIPS.
LIMITED PARTNERS SHOULD READ THIS PROSPECTUS IN ITS ENTIRETY BEFORE
DETERMINING WHETHER TO EFFECT EXCHANGES.
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CONFLICTS OF INTEREST
RELATIONSHIP OF THE GENERAL PARTNER TO THE COMMODITY BROKER
The General Partner is a wholly-owned subsidiary of Dean Witter,
Discover & Co., a principal subsidiary of which, DWR, acts as the
commodity broker for each Partnership pursuant to a Customer Agreement.
In such capacity, DWR receives brokerage commissions for commodity
transactions effected for each Partnership pursuant to the instructions
of its Trading Managers. Because the General Partner is an affiliate of
DWR, there has been no arm's-length negotiation of brokerage commission
rates applicable to any Partnership transactions. Moreover, the General
Partner has a disincentive to replace DWR as the commodity broker for
the Partnerships. Most customers of DWR who maintain commodity trading
accounts with over $1,000,000 pay commissions at negotiated rates which
are substantially less than the rate which is paid by each Partnership.
Fourteen of the 24 currently active commodity pools for which Demeter
acts as general partner are charged brokerage commissions on a roundturn
basis (i.e., a charge for entering and exiting each commodity interest
transaction) and ten of such commodity pools are charged flat rate
brokerage fees.
While each Customer Agreement is nonexclusive, so that each Partnership
has the right to seek lower commission rates from other brokers at any
time, the General Partner believes that the Customer Agreement and other
arrangements between each Partnership and DWR are fair, reasonable and
competitive, and represent the best price and services available,
considering the matters discussed in this paragraph below and in the
immediately succeeding paragraph. The General Partner, an affiliate of
DWR, provides ongoing services to the Partnerships, which include
evaluating, retaining, monitoring and terminating Trading Managers for
the Partnerships and administering the redemption and Exchange of Units,
and the General Partner has financial obligations as the general partner
of the Partnerships. A significant portion of the brokerage commissions
paid to DWR by each Partnership will be paid by DWR to its employees and
certain Additional Sellers for providing continuing assistance to
Limited Partners to whom they have sold Units. Such DWR employees and
Additional Sellers who provide continuing advice to Limited Partners as
to when and whether to redeem or Exchange Units may have a conflict of
interest by reason of their receipt of a portion of the brokerage
commissions paid to DWR by the Partnerships.
The General Partner has reviewed, and will continue to review, the
brokerage arrangements at least annually to ensure that they are fair,
reasonable and competitive, and that they represent the best price and
services available, taking into consideration the size and trading
activity of each Partnership and the services provided, and costs,
expenses, and risk borne, by DWR and the General Partner. See "The
Commodity Broker" and "Fiduciary Responsibility."
Each Partnership trades in currency forward contracts. Cornerstone II,
III and IV each engage in differing amounts of trading in the forward
markets and may do so through affiliates of the General Partner (all of
the Partnerships' forward trading is currently done through DWR). Such
forward trading may also be done through other dealers which are not
affiliated with the General Partner under certain circumstances. See
"Risk Factors-Risks Relating to Commodity Trading and the Commodities
Markets-Forward Trading." The General Partner has a conflict of interest
in selecting its affiliates as the parties with which the Partnerships
will execute their forward trades and selecting other entities which
might be able to make a better price or superior execution available to
the Partnerships. The General Partner will review the Partnerships'
forward trading arrangements on an annual basis in an attempt to
determine whether such arrangements are competitive with those of other
comparable pools in light of the circumstances. See "Risk Factors--Risks
Relating to Commodity Trading and the Commodities Markets--Forward
Trading" and "The Commodities Market." Each Trading Manager has complete
discretion to determine what trades in futures contracts and other
commodity interests the Partnership makes in respect of the funds
allocated to the Trading Manager, and the General Partner has no
authority to intervene in the selection of trades, except to override
trading instructions which would result in a violation of the
Partnership's trading policies or to the extent necessary to fund any
distributions, redemptions, Exchanges or reapportionments among Trading
Managers or to pay expenses of the Partnership. Since the General
Partner is an affiliate of DWR, the General Partner has a conflict of
interest between its responsibility to prevent each Trading Manager from
engaging in excessive trading and its interest in allowing each Trading
Manager to generate brokerage commissions for the benefit of DWR up to,
but not exceeding, the caps on brokerage commissions.
DWR and the General Partner may, from time to time, be subject to
conflicting demands in respect of their obligations to the Partnerships
and other commodity pools. Also, certain pools may generate larger
brokerage commissions to DWR, resulting in increased payments to DWR
employees. Since DWR employees may receive
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greater compensation from the sale of units of one pool over another,
such employees are subject to a conflict of interest in providing
advice to Limited Partners.
ACCOUNTS OF AFFILIATES OF THE GENERAL PARTNER
While the General Partner does not trade futures interests for its own
account (other than indirectly as a consequence of its position as
general partner of commodity pools), certain of the officers, directors
and employees of the General Partner and DWR, their affiliates, and
officers, directors and employees of such affiliates, may from time to
time trade in commodity futures contracts and other commodity interests
for their own proprietary accounts. In addition, DWR is a large futures
commission merchant, handling substantial customer business in physical
commodities and futures contracts, and is a clearing member of all major
commodity exchanges in the United States. Thus, DWR may effect
transactions for the account of each Partnership in which the other
parties to the transactions are DWR's employees, customers or
correspondents. Such persons might also compete with a Partnership in
bidding on purchases or sales of contracts without knowing that such
Partnership is also bidding. Transactions for the officers, directors,
affiliates, employees, customers and correspondents of DWR or the
General Partner might be effected when similar trades for one or more
Partnerships are not executed or are executed at less favorable prices.
Limited Partners will not be permitted to inspect the trading records of
the General Partner, DWR or persons related to them in light of their
confidential nature.
MANAGEMENT OF OTHER ACCOUNTS BY EACH TRADING MANAGER
Each Management Agreement allows the Trading Manager to manage commodity
accounts in addition to the Partnership's account. Each Trading Manager
and its principals and affiliates may be trading their own proprietary
accounts and are advising accounts for other commodity pools and/or
individual customers and will advise other accounts in the future. Some
Trading Managers may also operate more than one trading system in their
management of accounts, some of which systems may not be used in trading
for the Partnerships. Such other trading systems have in the past and
may in the future experience significantly different performance results
than the systems used in trading for the Partnerships. A Trading
Manager may have a conflict of interest in rendering advice because its
compensation for managing some other accounts may exceed its
compensation for managing the Partnership's account, and therefore may
provide an incentive to favor such other accounts. Moreover, if a
Trading Manager makes trading decisions for such accounts and the
Partnership's account at or about the same time, the Partnership may be
competing with such other accounts for the same or similar positions.
While the records of the Trading Manager's own account and accounts
managed by it will not be made available to Limited Partners, each
Management Agreement permits the General Partner access to such records
in order to determine that the Partnership's account is traded fairly.
Each Management Agreement also provides that the Trading Manager will
deal with the Partnership in a fiduciary capacity to the extent
recognized by applicable law and will not enter into transactions where
it knowingly or deliberately favors itself or another client over the
Partnership.
CUSTOMER AGREEMENT WITH DWR
Each Partnership has opened a separate commodity trading account with
DWR for each of its Trading Managers pursuant to its Customer Agreement.
Under each such agreement, all funds, commodities and securities
positions and credits carried for each Partnership are held as security
for such Partnership's obligations to DWR; the margins required to
initiate or maintain open positions will be as from time to time
established by DWR; and DWR may close out positions, purchase
commodities or cancel orders at any time it deems necessary for its
protection, without the consent of the Partnership. Each Partnership
also has agreed to indemnify and defend DWR, its stockholders,
employees, officers, directors and affiliates against certain
liabilities incurred by them by reason of acting as such Partnership's
commodity broker. DWR, the General Partner or the Limited Partners of
the Partnership by majority vote (subject to receipt of opinion of
independent legal counsel that such vote would not constitute
participation in the control of the Partnership's business and thus deny
the Limited Partners limited liability) may terminate the brokerage
relationship and close the Partnership's commodity account at DWR at any
time upon 60 days' notice. If so terminated, the Partnership would have
to negotiate a new customer agreement with a commodity broker upon terms
and conditions, including brokerage commission rates, which cannot now
be determined.
17
<PAGE>
OTHER COMMODITY POOLS
The General Partner is or has been the general partner for twenty-five
other commodity pools. DWR is the commodity broker for several other
commodity pools. Each may in the future establish and/or be the general
partner or commodity broker for additional commodity pools, and any such
pools may be said to be in competition with the Partnerships in that any
one or more such pools might compete with the Partnerships for the
execution of trades.
FIDUCIARY RESPONSIBILITY
Investors should be aware that the General Partner has a fiduciary duty
under the Partnership Act to the Limited Partners of each Partnership to
exercise good faith and fairness in all dealings affecting such
Partnership. The General Partner's fiduciary duty to the Limited
Partners under each Limited Partnership Agreement is in accordance with
the fiduciary duty owed to limited partners by a general partner under
Delaware law. The Limited Partnership Agreements prohibit the Limited
Partners from limiting, by any means, the fiduciary duty of the General
Partner owed to the Limited Partners under statutory or common law. In
the event that a Limited Partner believes that the General Partner has
violated its responsibility, such Limited Partner may seek legal relief
for himself and all other similarly situated Limited Partners or on
behalf of the Partnership under the Partnership Act, the CEAct,
applicable federal and state securities laws and other applicable laws
to recover damages from, or to require an accounting by, the General
Partner. The Trading Managers for each Partnership have a fiduciary
duty under applicable law to that Partnership.
Each Partnership has agreed to indemnify the General Partner and its
stockholder, directors, officers, employees and controlling persons for
actions or omissions relating to such Partnership, and also has agreed
to indemnify each Trading Manager, and their respective stockholders,
directors, officers and employees against all liabilities incurred in
the performance of services for such Partnership, provided that in each
case such actions or omissions were not the result of bad faith,
misconduct or negligence or were done in good faith in the reasonable
belief that the actions or omissions were in, or not opposed to, the
best interests of such Partnership, and provided, further, that in any
action brought by a Limited Partner in the right of the Partnership, the
General Partner may only be indemnified to the extent and subject to the
conditions specified in the Partnership Act. Each Partnership has
agreed to certain other indemnities of its Trading Managers in
connection with the offer and sale of Units. See "The Management
Agreements." Under the terms of each Limited Partnership Agreement, no
indemnification of the General Partner or its affiliates by the
Partnership will be permitted for losses resulting from liabilities
incurred for violation of federal or state securities laws in connection
with the registration, offer or sale of the Units.
Each Partnership has agreed to certain other indemnities of its
respective Trading Managers in connection with the offer and sale of
Units arising from material misrepresentations or omissions unrelated to
the Trading Managers.
DWR assumes no responsibility under the Customer Agreement except for
rendering in good faith the services required of it thereunder. The
Customer Agreement provides that DWR, its stockholder, directors,
officers, employees and its or their respective successors or assigns
will not be liable to a Partnership, its partners or any of its or their
respective successors or assigns except by reason of acts of, or
omissions due to, bad faith, misconduct or negligence, or for not having
acted in good faith in the reasonable belief that such actions or
omissions were in, or not opposed to, the best interests of the
Partnership, or by reason of any material breach of the Customer
Agreement. The Customer Agreement also provides that each Partnership
will indemnify DWR, its stockholder, directors, officers, employees and
its or their respective successors or assigns from and against all
liabilities incurred in the performance of the services required by the
Customer Agreement, provided that a court upon entry of final judgment
finds (or, if no final judgment is entered, by an opinion rendered to
the Partnership by independent counsel) that such liability was not the
result of bad faith, misconduct or negligence or that the conduct which
was the basis for such liability was done in the good faith belief that
it was in, or not opposed to, the best interests of the Partnership.
The Customer Agreement also provides that DWR will indemnify each
Partnership, the partners of the Partnership and its or their respective
successors or assigns from and against all liabilities incurred as a
result of the performance of the services required by the Customer
Agreement, provided that such liability arises from conduct of DWR which
has been found by a court upon entry of final judgment (or, if no final
judgment is entered, by an opinion rendered to the Partnership by
independent counsel) to be the result of bad faith, misconduct or
negligence, or for conduct not done in the good faith belief that it was
in, or not opposed to, the best interests of the Partnership or by rea-
18
<PAGE>
son of any material breach of the Customer Agreement. The CFTC has
issued a statement of policy relating to indemnification of officers and
directors of a futures commission merchant and its controlling persons
under which the CFTC has taken the position that whether such an
indemnification is consistent with the policies expressed in the CEAct
will be determined by the CFTC on a case-by-case basis.
THE CORNERSTONE FUNDS
Cornerstone II and III were formed as limited partnerships on December
7, 1983 and commenced trading operations on January 2, 1985, while
Cornerstone IV was formed as a limited partnership on December 11, 1986
and commenced trading operations on May 1, 1987. The Partnerships are
each currently engaged in the speculative trading of a diverse group of
commodity interest contracts. Each Partnership trades pursuant to the
trading systems, method, and strategies utilized by the Trading Managers
retained by the General Partner for each Partnership as described under
"The Trading Managers."
THE OFFERING OF UNITS
In January 1985, Cornerstone II and III commenced their Continuing
Offering of unsold Units and in May 1987, Cornerstone IV joined that
Continuing Offering. Capital contributions from the sale of Units have
been accepted by such Partnerships at the 133 Monthly Closings held as
of March 31, 1996. As of April 1, 1996, there were 14,867.751 unsold
Units available for Exchange.
As of March 31, 1996, Cornerstone II has sold an aggregate of 41,567.273
Units and received net proceeds of $65,184,518. Included in these
numbers are Exchanges of Units in Cornerstone III and IV for Units in
Cornerstone II. As of March 31, 1996, Cornerstone II had Net Assets of
$28,711,546 and the Net Asset Value of a Unit thereof was $2,711.59.
As of March 31, 1996, Cornerstone III has sold an aggregate of
74,394.567 Units and received net proceeds of $137,103,376. Included in
these numbers are Exchanges of Units in Cornerstone II and IV for Units
in Cornerstone III. As of March 31, 1996, Cornerstone III had Net
Assets of $38,763,569 and the Net Asset Value of a Unit thereof was
$2,155.72.
As of March 31, 1996, Cornerstone IV has sold an aggregate of
100,490.766 Units and received net proceeds of $167,480,517. Included
in these numbers are Exchanges of Units in Cornerstone II and
Cornerstone III for Units in Cornerstone IV. As of March 31, 1996,
Cornerstone IV had Net Assets of $99,154,059 and the Net Asset Value of
a Unit thereof was $2,835.37.
In connection with the offering of Units, the General Partner
contributed $511,389, $749,244 and $1,549,805 to Cornerstone II, III and
IV, respectively, and, as of March 31, 1996, the General Partner owned
217.400, 382.103 and 638.889 Units of General Partnership Interest in
Cornerstone II, III and IV, respectively. As of March 31, 1996,
Cornerstone II had 3,676 Limited Partners, Cornerstone III had 6,360
Limited Partners, and Cornerstone IV had 10,752 Limited Partners.
Prior to October 1, 1994, DWR was reimbursed by the Partnerships for
certain continuing offering expenses by means of a "Continuing
Expense Charge" added to the sales price of Units sold
in the Continuing Offering. DWR has been reimbursed
in full for the initial offering expenses of Cornerstone II, III and IV,
and as of March 31, 1996, had approximately $247,152 in excess
reimbursed continuing offering expenses. During the Continuing
Offering, DWR has been able to contribute periodically aggregate excess
reimbursement of $1,418,000 to the Partnerships (which includes amounts
to Cornerstone I) as follows: Cornerstone II, $264,079; Cornerstone III,
$633,109; and Cornerstone IV, $379,335. Because the sale of Units to
investors (other than pursuant to Exchanges) has been terminated, DWR
will not collect any additional continuing expense charges as
reimbursement of continuing offering expenses.
PERFORMANCE RECORDS
Performance of Dean Witter Cornerstone Fund II
Capsule I sets forth the actual performance record of Cornerstone II
from January 1, 1991 through March 31, 1996. As of the date of this
Prospectus, all funds received at Monthly Closings have been allocated
two-thirds to JWH and one-third to Abacus. As of the date of this
Prospectus, the funds allocated to JWH are allo-
19
<PAGE>
cated to the Original Investment Program, the Global
Diversified and the International Foreign
Exchange Program. In the future, allocations and/or reallocations may
be made among such systems and/or additional systems. See "The Trading
Managers--Dean Witter Cornerstone Fund II."
Performance of Dean Witter Cornerstone Fund III
Capsule II sets forth the actual performance record of Cornerstone III
from January 1, 1991 through March 31, 1996. As of the date of this
Prospectus, CCA and Sunrise each will receive approximately one-half of
the proceeds of any Exchanges for Cornerstone III. Effective July 1,
1996, Sunrise will receive approximately one-half and WISC and Abraham
will each receive one-quarter of the proceeds of any Exchanges of
Cornerstone III. See "The Trading Managers--Dean Witter Cornerstone Fund
III."
Performance of Dean Witter Cornerstone Fund IV
Capsule IV sets forth the actual performance record of Cornerstone IV
from January 1, 1991 through March 31, 1996. Since the commencement of
trading on May 1, 1987, Cornerstone IV's trading has been directed by
its initial two Trading Managers, JWH and Sunrise. See "The Trading
Managers--Dean Witter Cornerstone Fund IV." As of the date of this
Prospectus, all funds received by Cornerstone IV at Monthly Closings
have been allocated equally among its Trading Managers, except for
certain periods in which the General Partner allocated assets among JWH
and Sunrise based on their respective percentage of total assets
managed.
---------------
INVESTORS ARE CAUTIONED THAT THE INFORMATION SET FORTH IN CAPSULES I, II
AND III IS NOT INDICATIVE OF, AND HAS NO BEARING ON, ANY TRADING RESULTS
WHICH MAY BE ATTAINED BY CORNERSTONE II, III AND IV, RESPECTIVELY, IN
THE FUTURE, SINCE PAST RESULTS ARE NOT A GUARANTEE OF FUTURE RESULTS.
THERE CAN BE NO ASSURANCE THAT ANY PARTNERSHIP WILL MAKE ANY PROFITS AT
ALL OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES. INVESTORS
SHOULD ALSO NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT
PORTION OF A COMMODITY POOL'S TOTAL INCOME AND, IN CERTAIN INSTANCES,
MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED LOSSES
FROM COMMODITY TRADING.
20
<PAGE>
CAPSULE I
PERFORMANCE OF DEAN WITTER CORNERSTONE FUND II
Type of Pool: Publicly-Offered Pool
Inception of Trading: January 1985
Aggregate Subscriptions: $65,184,518
Current Capitalization: $28,711,546
Current Net Asset Value per Unit: $2,711.59
Worst Monthly Percent Drawdown: (9.76)% (January 1992)
Worst Month-end Peak-to-Valley: (22.29)% (5 months, 1/92-5/92)
Monthly
Rate of
Return(a) 1996 1995 1994 1993 1992 1991
--------- ---- ---- ---- ---- ---- ----
% % % % % %
January 1.98 (2.85) (3.17) (3.97) (9.76) (3.62)
February (6.13) 10.88 0.12 7.79 (6.72) (0.78)
March 0.07 13.73 3.16 (0.07) (1.84) 7.14
April 4.18 (2.59) 3.10 (3.08) (0.60)
May (0.37) 3.84 0.82 (2.96) 2.01
June (0.29) 2.50 (0.89) 8.27 2.41
July (3.82) (3.86) 7.92 10.24 (9.38)
August (0.46) (4.70) (5.45) 10.80 (3.85)
September (2.52) 0.77 (1.69) (5.19) 3.48
October (0.40) (5.31) (2.62) (1.08) (2.44)
November 3.20 3.35 (0.30) 2.01 (2.10)
December 4.00 (2.80) 3.87 0.34 21.15
Compound
Annual
(Period) (4.21) 26.50 (8.93) 7.81 (1.34) 10.98
Rate of Return(b)
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE
OF FUTURE RESULTS
21
<PAGE>
CAPSULE II
PERFORMANCE OF DEAN WITTER CORNERSTONE FUND III
Type of Pool: Publicly-Offered Pool
Inception of Trading: January 1985
Aggregate Subscriptions: $137,103,376
Current Capitalization: $38,763,569
Current Net Asset Value per Unit: $2,155.72
Worst Monthly Percent Drawdown: (15.04)% (February 1996)
Worst Month-end Peak-to-Valley (31.35)% (52 months, 10/90-1/95)
Monthly
Rate of
Return(a) 1996 1995 1994 1993 1992 1991
--------- ---- ---- ---- ---- ---- ----
% % % % % %
January 2.09 (7.31) (10.58) (5.57) (10.46) (14.74)
February (15.04) 1.88 (3.06) 8.96 (7.07) (3.26)
March (0.93) 12.40 4.47 (2.60) (7.16) 17.34
April 2.44 (3.23) 4.13 (0.13) (1.53)
May 4.24 3.78 1.60 (0.36) 0.99
June 0.10 5.60 0.17 10.37 8.37
July (4.17) (3.86) 4.79 11.46 (12.21)
August 1.89 (6.49) (9.31) 7.63 (9.18)
September 0.63 3.82 (4.97) (4.16) 2.40
October (1.66) 4.08 (6.08) (6.21) (0.11)
November 6.35 0.09 (2.42) 0.44 (0.53)
December 9.37 (3.68) 8.32 (3.25) 32.33
Compound
Annual
(Period) (14.07) 27.50 (10.04) (4.78) (11.08) 11.97
Rate of Return(b)
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF
FUTURE RESULTS
22
<PAGE>
CAPSULE III
PERFORMANCE OF DEAN WITTER CORNERSTONE FUND IV
Type of Pool: Publicly-Offered Pool
Inception of Trading: January 1985
Aggregate Subscriptions: $167,480,517
Current Capitalization: $99,154,059
Current Net Asset Value per Unit: $2,835.37
Worst Monthly Percent Drawdown: (10.12)% (January 1992)
Worst Month-end Peak-to-Valley (37.85)% (18 months, 8/93-1/95)
Monthly
Rate of
Return(a) 1996 1995 1994 1993 1992 1991
--------- ---- ---- ---- ---- ---- ----
% % % % % %
January 3.19 (7.65) (1.12) (5.29) (9.64) (10.12)
February (5.78) 6.27 (2.75) 12.92 (7.40) (6.91)
March 2.80 27.02 0.29 (2.55) 1.60 26.00
April 2.39 (3.19) 0.03 (6.40) 1.83
May (4.83) (3.65) 3.95 2.71 1.24
June (0.62) 6.72 0.92 15.10 9.45
July (1.06) (4.21) 5.87 7.47 (9.47)
August 5.49 (3.57) (5.57) 17.25 (8.50)
September (0.06) 1.66 (2.10) (4.21) 6.69
October 0.74 4.93 (7.48) (0.99) (5.29)
November (2.57) (6.82) (7.50) 0.60 5.26
December (0.52) (2.73) (0.78) (2.40) 27.40
Compound
Annual
(Period) (0.05) 22.96 (14.27) (9.12) 10.37 33.52
Rate of Return(b)
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF
FUTURE RESULTS
23
<PAGE>
DEAN WITTER CORNERSTONE FUNDS II, III, and IV
FOOTNOTES TO CAPSULES I, II AND III
"Drawdown" means decline in net asset value per unit. "Worst Month-End
Peak-to-Valley" as used herein is equivalent to the "drawdown"
experienced by a Partnership, determined in accordance with CFTC Rule
4.10 and represents the greatest percentage decline from any month-end
net asset value per unit which occurs without such month-end net asset
value per unit being equaled or exceeded as of a subsequent month-end.
In dollar terms, for example, if the net asset value per unit of a
Partnership declined by $1 in each of January and February, increased by
$1 in March and declined again by $2 in April, a "peak-to-valley
drawdown" analysis conducted as of the end of April would consider that
"drawdown" to be still continuing and to be $3 in amount, whereas if the
net asset value of a unit had increased by $2 in March, the January-
February drawdown would have ended as of the end of February at the $2
level. Such "drawdowns" are measured on the basis of month-end net
asset values only, and do not reflect intra-month figures.
(a) "Monthly Rate of Return" is calculated by dividing Net Performance
by Beginning Net Asset Value. See Footnotes (b) and (k) above. Annual
(Period) Rate of Return is calculated by taking the change in Net Asset
Value per Unit during the year (period) and dividing it by the Net Asset
Value per Unit at the beginning of the year (period).
(b) "Compound Annual Rate of Return" is calculated by multiplying on a
compound basis each of the monthly rates of return and not by adding or
averaging such monthly rates of return. For periods of less than one
year, the results are year-to-date.
24
<PAGE>
SELECTED FINANCIAL DATA
The following is the results of operations of Cornerstone II, III and IV
for the quarters ended March 31, 1996 and 1995 (Unaudited) and the years
ended December 31, 1995, 1994, 1993, 1992 and 1991. For the complete
1994 Annual Report for all of the Partnerships, see page F-2 of this
Prospectus. For performance information with respect to each
Partnership, see "The Cornerstone Funds--Performance Records."
<TABLE>
<CAPTION>
Dean Witter Cornerstone Fund II
-------------------------------------------------------------------------------------------------
For the Quarters Ended For the Years Ended
March 31, December 31,
----------------------- ---------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
$ $ $ $ $ $ $
--------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized 787,501 5,776,949 11,081,716 (878,688) 2,539,342 7,025,818 (24,586)
Net change in unrealized (1,575,420) 2,065,542 (947,973) 556,567 2,029,459 (5,295,641) 5,681,831
--------- --------- ---------- --------- --------- --------- ---------
Total Trading Results (787,919) 7,842,491 10,133,743 (322,121) 4,568,801 1,730,177 5,657,245
Interest income (DWR) 299,604 383,297 1,471,022 1,153,003 694,085 730,244 1,191,975
--------- --------- ---------- --------- --------- --------- ---------
Total Revenues (488,315) 8,225,788 11,604,765 830,882 5,262,886 2,460,421 6,849,220
--------- --------- ---------- --------- --------- --------- ---------
EXPENSES
Management fees 299,467 338,676 1,307,872 1,346,905 1,157,221 1,051,459 1,099,252
Incentive fees --- 397,367 381,720 --- 19,886 461 311,167
Brokerage commissions (DWR) 453,306 555,336 1,864,093 2,336,047 1,773,947 1,757,227 2,257,402
Transaction fees and costs 39,439 42,624 160,238 194,384 141,974 146,367 162,302
Common Administrative Expenses 2,655 8,184 8,183 49,101 68,511 69,697 63,844
Amortization of
organization costs --- --- --- --- --- --- ---
--------- --------- ---------- --------- --------- --------- ---------
Total Expenses 794,967 1,342,187 3,722,106 3,926,437 3,161,539 3,025,211 3,893,967
--------- --------- ---------- --------- --------- --------- ---------
NET INCOME (LOSS) (1,283,182) 6,883,601 7,882,659 (3,095,555) 2,101,347 (564,790) 2,955,253
--------- --------- ---------- --------- --------- --------- ---------
--------- --------- ---------- --------- --------- --------- ---------
NET INCOME (LOSS) PER UNIT FOR PERIOD
Limited Partners (119.06) 503.75 592.90 (219.47) 178.05 (30.96) 228.53
General Partner (119.06) 503.75 592.90 (219.47) 178.05 (30.96) 228.53
TOTAL ASSETS AT END
OF PERIOD 29,239,057 37,974,671 31,558,306 32,062,117 32,511,448 27,333,796 30,907,357
TOTAL NET ASSETS AT THE
END OF PERIOD 28,711,546 33,777,001 30,828,888 31,372,002 31,941,373 26,579,165 29,919,471
NET ASSET VALUE PER
UNIT AT THE END OF PERIOD
Limited Partners 2,711.59 2,741.50 2,830.65 2,237.75 2,457.22 2,279.17 2,310.13
General Partner 2,711.59 2,741.50 2,830.65 2,237.75 2,457.22 2,279.17 2,310.13
<CAPTION>
Dean Witter Cornerstone Fund III
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized (1,228,640) 3,833,272 14,260,042 913,869 (627,751) 8,714,136 3,664,662
Net change in unrealized (4,275,770) 145,188 561,437 (1,350,056) 3,815,157 (10,192,893) 10,995,272
--------- --------- ---------- --------- --------- --------- ---------
Total Trading Results (5,504,410) 3,978,460 14,821,479 (436,187) 3,187,406 (1,478,757) 14,659,934
Interest income (DWR) 433,617 526,023 2,061,461 1,744,148 1,445,561 1,771,620 2,686,389
--------- --------- ---------- --------- --------- --------- ---------
Total Revenues (5,070,793) 4,504,483 16,882,940 1,307,961 4,632,967 292,863 17,346,323
--------- --------- ---------- --------- --------- --------- ---------
EXPENSES
Management fees 424,415 452,182 1,828,013 2,014,028 2,375,033 2,536,398 2,474,621
Incentive fees --- --- --- --- --- --- 73,298
Brokerage commissions (DWR) 875,286 1,221,133 3,499,743 4,417,718 4,587,865 5,203,792 6,004,327
Transaction fees and costs 115,411 115,690 502,332 434,287 348,493 390,742 419,603
Common Administrative Expenses 4,533 21,158 21,158 122,423 150,937 154,323 140,023
Amortization of
organization costs --- --- --- --- --- --- ---
--------- --------- ---------- --------- --------- --------- ---------
Total Expenses 1,419,645 1,810,163 5,851,246 6,988,456 7,462,328 8,285,255 9,111,872
--------- --------- ---------- --------- --------- --------- ---------
NET INCOME (LOSS) (6,490,438) 2,694,320 11,031,694 (5,680,495) (2,829,361) (7,992,392) 8,234,451
--------- --------- ---------- --------- --------- --------- ---------
--------- --------- ---------- --------- --------- --------- ---------
NET INCOME (LOSS) PER
UNIT FOR PERIOD
Limited Partners (352.96) 120.78 541.04 (219.67) (109.91) (286.23) 276.20
General Partners (352.96) 120.78 541.04 (219.67) (109.91) (286.23) 276.20
TOTAL ASSETS AT
END OF PERIOD 39,725,231 48,890,276 48,156,795 48,308,274 57,323,283 61,615,811 76,220,509
TOTAL NET ASSETS AT
THE END OF PERIOD 38,763,569 46,768,230 46,949,674 47,002,453 56,156,693 60,300,087 74,390,400
NET ASSET VALUE PER
UNIT AT THE
END OF PERIOD
Limited Partners 2,155.72 2,088.42 2,508.68 1,967.64 2,187.31 2,297.22 2,583.45
General Partner 2,155.72 2,088.42 2,508.68 1,967.64 2,187.31 2,297.22 2,583.45
</TABLE>
25
<PAGE>
SELECTED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
Dean Witter Cornerstone Fund IV
-------------------------------------------------------------------------------------------------
For the Quarters Ended For the Years Ended
March 31, December 31,
----------------------- ---------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- ---------- --------- --------- --------- ---------
$ $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized (487,455) 9,761,605 27,041,974 (10,447,878) (4,335,118) 34,953,946 9,396,518
Net change in unrealized 1,364,767 17,191,492 (198,148) (1,726,877) 717,487 (16,706,667) 21,141,765
--------- --------- ---------- --------- --------- --------- ---------
Total Trading Results 877,312 26,953,097 26,843,826 (12,174,755) (3,617,631) 18,247,279 30,538,283
Interest income (DWR) 1,020,421 1,244,913 4,912,698 4,129,344 2,937,637 2,509,220 2,873,355
--------- --------- ---------- --------- --------- --------- ---------
Total Revenues 1,897,733 28,198,010 31,756,524 (8,045,411) (697,994) 20,756,499 33,411,638
--------- --------- ---------- --------- --------- --------- ---------
EXPENSES
Management fees 1,021,255 1,294,926 4,575,372 4,952,206 4,945,676 3,806,489 2,826,553
Incentive fees --- --- --- --- 1,400,473 1,415,723 3,512,191
Brokerage commissions (DWR) 843,558 1,126,941 2,776,225 5,336,659 6,634,741 4,544,067 3,905,849
Transaction fees and costs 50,233 80,724 168,718 339,083 398,959 264,789 230,259
Common Administrative Expenses 8,811 39,890 39,890 228,633 223,551 192,980 158,616
Amortization of
organization costs --- --- --- 7,659 --- 800 2,400
--------- --------- ---------- --------- --------- --------- ---------
Total Expenses 1,923,857 2,542,481 7,560,205 10,864,240 13,603,400 10,224,848 10,635,868
--------- --------- ---------- --------- --------- --------- ---------
NET INCOME (LOSS) (26,124) 25,655,529 24,196,319 (18,909,651 (14,283,394) 10,531,651 22,775,770
--------- --------- ---------- --------- --------- --------- ---------
--------- --------- ---------- --------- --------- --------- ---------
NET INCOME (LOSS)
PER UNIT FOR PERIOD
Limited Partners (1.36) 568.79 529.66 (383.89) (270.10) 278.32 673.46
General Partner (1.36) 568.79 529.66 (383.89) (270.10) 278.32 673.46
TOTAL ASSETS AT
END OF PERIOD 100,941,397 131,598,960 105,362,851 112,210,624 127,032,391 109,126,365 94,940,630
TOTAL NET ASSETS AT
THE END OF PERIOD 99,154,059 125,651,220 103,667,011 109,892,266 125,200,630 104,024,062 90,423,078
NET ASSET VALUE
PER UNIT AT THE
END OF PERIOD
Limited Partners 2,835.37 2,875.86 2,836.73 2,307.07 2,690.96 2,961.06 2,682.74
General Partners 2,835.37 2,875.86 2,836.73 2,307.07 2,690.96 2,961.06 2,682.74
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity. The assets of Cornerstone II, III and IV were deposited with
DWR in separate commodity trading accounts established by DWR for each
Trading Manager and are used by each Partnership as margin to engage in
trading. DWR holds such assets in either non-interest bearing bank
accounts or in securities approved by the CFTC for investment of
customer funds. See "Use of Proceeds." Each Partnership's assets held by
DWR may be used as margin solely for such Partnerships trading. Since
each Partnerships sole purpose is to trade in commodity futures
contracts and other commodity interests, it is expected that each
Partnership will continue to own such liquid assets for margin purposes.
The Partnership's investment in commodity futures contracts and other
commodity interests may be illiquid. See "Risk Factors--Commodity Trading
May be Illiquid." If the price for a futures contract for a particular
commodity has increased or decreased by an amount equal to the "daily
limit," positions in the commodity can neither be taken nor liquidated
unless traders are willing to effect trades at or within the limit.
Commodity futures prices have occasionally moved the daily limit for
several consecutive days with little or no trading. Such market
conditions could prevent a Partnership from promptly liquidating its
commodity futures positions and impose restrictions on redemptions. See
"Redemptions." Cornerstone IV may be subject to additional liquidity
risks because it trades exclusively in world currencies, the markets for
some of which are or may become illiquid at times. See "Risk Factors."
However, since commencement of trading by the Partnerships there has
never been a time when illiquidity has affected a material portion of
any Partnerships' assets.
Capital Resources. Each Partnership does not have, nor does it expect to
have, any capital assets. Redemptions and Exchanges will affect the
amount of funds available for investments in commodity futures contracts
and other commodity interests in subsequent periods.
Results of Operations. Due to the nature of the Partnerships' business,
the Partnerships' results depend on its Trading Managers and the ability
of their trading systems to take advantage of price movements or other
profit opportunities in the commodities markets. The following presents
a summary of the operations of each Partnership for the years 1993, 1994
and 1995 and the quarter ended March 31, 1996, and a general discussion
of the trading activities of each Partnership in certain markets during
each period. It is important to note that
26
<PAGE>
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 a Trading Manager or will be profitable in the future.
Consequently, the results of operations of the Partnerships are difficult to
discuss other than in the context of each Trading Manager's trading activities
on behalf of each Partnership as a whole and how each Partnership has
performed in the past. See "The Cornerstone Funds--Performance Records"
and "Selected Financial Data" above and the financial statements of the
Partnerships herein.
CORNERSTONE II
Results of Operations for 1993. In 1993, the Partnership recorded gains
of 7.8%. Cornerstone II began 1993 with positive performance in the
first quarter as a result of profits in the currency, financials and
soft commodities sectors. Increasing price trends in the value of the
Japanese yen, U.S. and Japanese interest rate futures and in sugar and
cotton prices all contributed to profits. Second quarter performance
was also not positive as the Partnership took advantage of further
strengthening in the value of the Japanese yen as well as from an
increase in precious metals prices during April. The third quarter was
relatively flat as profits in July across many distinct market sectors
(currencies, metals, agriculturals and energies) were offset by losses
in August and September as a result of a short-term volatility in
currencies coupled with the inability of more traditional commodities to
sustain July trends. Fourth quarter performance was also sideways as
profits in December from long metals and agriculturals positions as well
as short energies positions were offset by a continued difficult trading
environment in the currencies sector.
Overall, 1993 proved to be a modestly positive year for the Partnership
as the Partnership benefited from price trends in the first half of the
year in the currency and global financial futures markets. For the year
ended December 31, 1993, Cornerstone II's total trading revenues,
including interest income, were $5,262,886. Total expenses for the year
were $3,161,539, resulting in a net gain of $2,101,347. The Net Asset
Value of a Unit increased from $2,279.17 at December 31, 1992 to
$2,457.22 at December 31, 1993.
Results of Operations for 1994. During 1994, the Partnership recorded a
loss of 8.9%. Cornerstone II began the year with losses as a result of
short-term volatility in currencies. Smaller losses were also
experienced in the financials, metals and energy sectors. Trading gains
during March offset losses for the first quarter as the Partnership
benefited from the downward price movement in U.S. and European interest
rate and stock index futures. The second quarter began with losses in
April from a sharp reversal in the value of the U.S. dollar on April
5th, resulting in losses from previously established positions.
Additional losses in April resulted from trendless price patterns in the
agricultural and metals markets. May and June were profitable as a
strong upward trend in coffee prices produced gains from long positions.
Gains were also recorded in the energy, base metals and interest rate
futures markets during June. The third quarter began with losses in
July as the value of the U.S. dollar moved in a short-term volatile
pattern versus the Japanese yen and most major European currencies.
Additional losses were recorded as the previously established downward
trend in the U.S. and European interest rate futures reversed. During
August, losses resulted from short-term volatility in currencies and
from trading in the metals and energy complexes. In September, gains
were recorded in the currency markets due to newly established downward
movement in the value of the U.S. dollar versus major European
currencies. The fourth quarter began with losses in October, primarily
from trading in global financial futures, coffee and precious metals
futures. Gains in November were recorded from short positions in the
coffee and cocoa markets. Additional profits were experienced in the
financial futures markets. December resulted in losses from trading in
the currency, agricultural and financial futures markets.
Overall, losses in Cornerstone II for the calendar year 1994 were due to
short-term volatility across a variety of futures market sectors and a
lack of consistent directional movement in currency values versus the
U.S. dollar and one another. For the year ended December 31, 1994, the
Partnership's total trading revenues, including interest income, were
$830,882. The Partnership's total expenses for the year were $3,926,437,
resulting in a net loss of $3,095,555. The Net Asset Value of a Unit
decreased from $2,457.22 at December 31, 1993 to $2,237.75 at December
31, 1994.
Results of Operations for 1995. During 1995, the Partnership recorded a
gain of 26.5%. During January, Cornerstone II recorded net losses as a
result of short-term volatile movement in the value of the U.S. dollar
relative to most major world currencies. Smaller losses were recorded
in financial and agricultural futures trading. The Partnership profited
significantly during February and March as the value of most major world
currencies increased relative to the U.S. dollar, resulting in profits
for the Partnership's long positions in major European currencies and
the Japanese yen. Additional gains were recorded from long positions in
global bond futures as prices moved higher. Smaller gains were recorded
in crude oil futures. In April, a continued
27
<PAGE>
upward trend in global
financial futures prices resulted in gains for the Partnership's
previously established long stock index and bond futures positions.
Additional gains were recorded for the Partnership's long Japanese yen
positions. Small net losses were recorded during May as losses in
currencies and commodities trading offset gains in global financial
futures. Cornerstone II recorded losses as the previous upward trend in
global interest rate futures prices pulled back during June. Smaller
losses were recorded in currency and agricultural futures trading, but
gains recorded in the energy markets and coffee futures offset a
majority of these losses. During July, the Partnership posted net
losses as a result of trading in global bond futures. Losses were also
recorded in the currency markets as the value of most major world
currencies moved in a narrow trading range relative to one another.
Smaller losses were recorded during August in global bond futures, as
prices experienced a period of short-term volatile movement. These
losses, coupled with losses recorded in soft commodities and silver
futures, more than offset gains recorded from transactions involving the
Japanese yen. Losses in September were due primarily to erratic price
movement in global interest rate and stock index futures. Smaller
losses were recorded in energy and metals futures. Losses were recorded
during October as trendless price movement was commonplace in several of
the markets traded by the Partnership, including cotton, crude oil and
global interest rate futures. Trading profits recorded from short
Japanese yen positions offset a portion of these losses. Trading during
November resulted in profits as global bond futures prices increased
during the month. Additional gains were recorded from short coffee
futures positions as prices declined during the month. In December, the
Partnership was profitable primarily due to strong price trends in
energies, agriculturals and soft commodities.
Overall, Cornerstone II was profitable during 1995 primarily as a result
of sustained trends in global financial futures and currencies in the
first half of the year. Smaller profits were recorded late in the year
from strong trends in domestic commodities. For the year ended December
31, 1995, the Partnership's total trading revenues, including interest
income, were $11,604,765. The Partnership's total expenses for the year
were $3,722,106, resulting in net income of $7,882,659. The Net Asset
Value of a Unit increased from $2,237.75 at December 31, 1994 to
$2,830.65 at December 31, 1995.
Results of Operations for the Quarter Ended March 31, 1996. During the
first quarter of 1996, the Partnership posted a loss of 4.2%. The most
significant trading losses were recorded in the currency markets during
February as previously established short Japanese yen and German mark
positions experienced losses due to a sharp reversal upward in the value
of these currencies relative to the U.S. dollar. Losses were also
recorded in energy futures and soft commodities. During January, the
Partnership recorded smaller losses from energy futures trading as a
result of a sharp and sudden reversal in crude oil prices. During
March, long positions in crude oil futures profited as energy prices
moved upward. These gains, coupled with smaller gains from transactions
involving the Australian dollar and Japanese yen, helped to offset a
portion of the losses recorded during the quarter.
For the quarter ended March 31, 1996, the Partnership's total trading
losses, net of interest income, were $488,316. The total expenses for
the period were $794,868, resulting in a net loss of $1,283,182. The Net
Asset Value of a Unit decreased from $2,830.65 at December 31, 1995 to
$2,711.59 at March 31, 1996. In comparison, for the quarter ended March
31, 1995, the Partnership's total trading revenues, including interest
income, were $8,255,788; the total expenses for such period were
$1,342,187, generating net income of $6,883,601; and the Net Asset Value
of a Unit increased from $2,237.75 at December 31, 1994 to $2,741.50 at
March 31, 1995.
To enhance the foregoing comparison of results of operations from year
to year, prospective investors can examine, line by line, the Statement
of Operations and Statement of Financial Condition. Total trading
results were profitable in 1993 and 1995 and unprofitable in 1994 and
for the quarter ended March 31, 1996.
Interest income to the Partnership is derived from 80% of its assets
earning interest at the prevailing rate paid on U.S. Treasury Bills.
The size of the assets and the fluctuation of interest rates affect the
resulting interest income totals for each year and for the quarter ended
March 31, 1996. Interest income was less in 1993 than 1992 due to a
decline in interest rates paid on U.S. Treasury Bills in 1993. During
1994 and 1995, interest income to the Partnership increased as a result
of increasing rates on U.S. Treasury Bills. During the first quarter of
1996, a reduction in U.S. Treasury bill rates resulted in a decrease in
interest income to the Partnership relative to the first quarter of
1995.
In regard to expenses of the Partnership, brokerage commissions and
transaction fees and costs in the aggregate were slightly greater in
1993 than 1992 due to an increase in the total size of the Partnership.
1994 witnessed a greater increase from 1993 due to an increase in
trading volume resulting from more short-term volatile price movement in
a majority of futures markets traded by the Partnership's Trading
Managers. In 1995, commissions and transaction fees and costs declined
as a result of the presence of more long-term price
28
<PAGE>
trends in futures
markets in which the Partnership's Trading Managers concentrate their
participation, as well as a reduction of the 1% monthly commission cap
to 3/4 of 1% on April 1, 1995. This reduction of the cap also resulted
in brokerage commissions and transaction fees being lower during the
first quarter of 1996 relative to the first quarter of 1995.
Management fees to the Partnership are charged at a 4% annual rate of
Net Assets and have fluctuated from year to year in direct proportion to
the size of the Partnership's Net Assets. Incentive fees were paid in
1992, 1993 and 1995, but not in 1994 and the first quarter of 1996.
Incentive fees are only paid on an annual basis or on any redeemed Units
on a monthly basis if the Partnership is profitable. Incentive fees
were greatest in 1995 due to the Partnership's more successful trading
performance than in other years indicated. Common administrative
expenses have declined each year since 1992 as a result of decreased
printing costs for the Monthly Reports and the termination of the
Partnership's continuous offering in the second half of 1994.
CORNERSTONE III
Results of Operations for 1993. Cornerstone III posted a decline of
approximately 4.78% for the year 1993. The first half of 1993 was a
profitable six-month period for the Partnership as a result of trading
gains from long Japanese yen positions as the value of the yen increased
relative to the U.S. dollar and major European currencies, long precious
metals positions as gold and silver prices moved sharply higher during
April, and from long U.S. interest rate futures positions as long-term
U.S. interest rates declined throughout a majority of the first six
months. Despite starting the second half of the year with strong
profits during July, the Partnership posted overall net losses for the
second half of the year due in large part to sharp trend reversals
followed by significant short-term price volatility in currencies.
These losses, coupled with a lack of significant opportunity in domestic
futures markets during the period August to November, resulted in
difficult performance for the Partnership during this period.
Overall, net losses were recorded by the Partnership during 1993 as
profits recorded during the first half of the year were more than offset
by losses recorded during the second half of the year. These losses
were the result of trend reversals in the currency markets, as well as
trendless price movement across a variety of markets traded by the
Partnership. For the year ended December 31, 1993, the Partnership's
total trading revenues, including interest income, were $4,632,967. The
Partnership's total expenses for the year were $7,462,328, resulting in
a net loss of $2,829,361. The Net Asset Value of a Unit decreased from
$2,297.22 at December 31, 1992 to $2,187.31 at December 31, 1993.
Results of Operations for 1994. During 1994, the Partnership recorded a
net loss of 10.0%. In January 1994, losses were recorded from
transactions involving most major foreign currencies as short-term
volatility continued in the currency markets. In February, losses
resulted from continued trendless movement in the U.S. dollar versus
major European currencies, as well as in global financial, energy and
agricultural futures. Gains in March offset a portion of the quarter's
losses as the Partnership capitalized on a downward trend in U.S. and
European interest rates futures and from a downward move in the value of
the U.S. dollar versus major European currencies. The second quarter of
1994 provided relief, primarily from trading gains attributable to a
strong move higher in coffee prices throughout the quarter and a decline
in the value of the U.S. dollar relative to major world currencies
during June. Trading losses in a variety of markets recorded from price
choppiness during April offset a portion of overall gains recorded
during the quarter. The second half of 1994 began negatively as the
value of the U.S. dollar moved in a short-term volatile pattern versus
the Japanese yen and most major European currencies. Additional losses
during July and August were recorded from trading global financial
futures due to short-term volatility in these markets. During
September, profits were recorded from transactions involving most major
foreign currencies. In October, profits were provided by gains recorded
in the currency markets, as the value of the U.S. dollar declined versus
most major European currencies, and in the base metals and cotton
futures markets. In November, a reversal in the downward move of the
U.S. dollar versus major foreign currencies resulted in losses. Losses
during December were due to the sudden decrease in value of the U.S.
dollar on December 28th after it had shown signs of strengthening during
November and early December.
Overall, the Partnership's trend-following approach resulted in
significant losses in currencies and global financial futures during
1994. Smaller profits in traditional commodities markets such as
coffee, cotton and base metals helped to offset a portion of these
losses.
For the year ended December 31, 1994, the Partnership's total trading
revenues, including interest income, were $1,307,961. The Partnership's
total expenses for the year were $6,988,456, resulting in a net loss of
29
<PAGE>
$5,680,495. The Net Asset Value of a Unit decreased from $2,187.31 at
December 31, 1993 to $1,967.64 at December 31, 1994.
Results of Operations for 1995. During 1995, the Partnership recorded a
net gain of 27.5%. During January, the Partnership recorded losses as
the value of the U.S. dollar declined relative to other major world
currencies early in the month, resulting in losses for previously
established short positions in major foreign currencies. However, these
losses were more than offset by significant gains recorded during
February and March as a result of trading in the currency markets as the
value of the U.S. dollar decreased versus most other world currencies.
Strong gains were also recorded from long positions in global bond
futures as prices in these markets increased between February and May.
In addition to the gains recorded in currencies and global interest rate
futures, gains were also recorded during the first half of the year from
long positions in global stock index futures as prices moved higher.
Smaller gains were recorded during June from trading traditional
commodities, particularly base metals, energy and soft commodities
futures. During July, losses were recorded as global financial futures
prices retreated from their previous upward trend. Trading gains were
recorded during August due to a decline in the value of the Japanese yen
relative to the U.S. dollar. During September, additional gains were
recorded from global interest rate futures trading. Smaller gains in
agricultural and soft commodities contributed to overall gains during
September. Losses were recorded during October as cotton and coffee
prices moved in a trendless pattern. Smaller losses were recorded in
currencies and global financial futures as prices in these markets
experienced short-term volatility. During November, profits were
recorded from trading in global financial futures. Smaller gains were
recorded in soft commodities and energy futures trading.
Overall, the Partnership posted additional gains during December as long
gas and oil positions profited when prices moved dramatically higher.
Agricultural futures trading resulted in smaller gains as long positions
in corn and soybean futures also benefited from rising prices. The
Partnership experiences significant trading gains during 1995 primarily
due to profits recorded in the financial futures and currency markets.
Additionally, the Partnership's diversified market participation allowed
for smaller trading gains in several of the traditional commodity
markets traded by the Partnership's Trading Managers.
For the year ended December 31, 1995, the Partnership's total trading
revenues, including interest income, were $16,882,940. The Partnership's
total expenses for the year were $5,851,246, resulting in income of
$11,031,694. The Net Asset Value of a Unit increased from $1,967.64 at
December 31, 1994 to $2,508.68 at December 31, 1995.
Results of Operations for the Quarter Ended March 31, 1996. Through the
first quarter of 1996, the Partnership recorded a net loss of 14.1%.
The most significant losses were recorded in global interest rate
futures and currency trading during February. In financial futures,
long positions in U.S. European and Australian bond futures, which had
been profitable for the Partnership during January, experienced losses
as global bond futures prices moved sharply lower. Losses were also
recorded in the currency markets during February as short positions in
the Japanese yen and major European currencies experienced losses due to
a sudden increase in the value of these currencies versus the U.S.
dollar. During March, the Partnership recorded small losses as short-
term price volatility was experienced in global financial and base
metals futures. A portion of these losses was offset by profits
recorded during January from long global bond futures positions, as
interest rate futures prices increased, and from short positions in the
Japanese yen, as the value of the yen decreased relative to the U.S.
dollar. Additional trading gains were recorded from long positions in
corn futures as corn prices moved higher during February and March.
For the quarter ended March 31, 1996, the Partnership's total trading
losses, net of interest income, were $5,070,793. Total expenses for the
period were $1,419,645, resulting in a net loss of $6,490,438. The Net
Asset Value of a Unit decreased from $2,508.68 at December 31, 1995 to
$2,155.72 at March 31, 1996. In comparison, for the quarter ended March
31, 1995, the Partnership's total trading gains, including interest
income, were $4,504,483; total expenses for such period were $1,810,163,
resulting in a net gain of $2,694,320; and the Net Asset Value of a Unit
increased from $1,967.64 at December 31, 1994 to $2,088.42 at March 31,
1995.
To enhance the foregoing comparison of results of operations from year
to year, prospective investors can examine, line by line, the Statement
of Operations and Statement of Financial Condition. Total trading
results were profitable during 1993 and 1995, while trading losses were
recorded during 1994 and the first quarter of 1996.
Interest income to the Partnership is derived from 80% of its assets
earning interest at the prevailing rate paid on U.S. Treasury bills.
The size of the assets and the fluctuation of interest rates affect the
resulting inter-
30
<PAGE>
est income annual totals. Interest income in the
Partnership increased during 1994 and 1995, while it declined during
1993 and the first quarter of 1996. The increases during 1994 and 1995
were the result of increasing U.S. Treasury bill rates during these
years. A reduction in U.S. Treasury bill rates during 1993 and the
first quarter of 1996 resulted in a decrease in interest income paid to
the Partnership.
In regard to expenses to the Partnership, brokerage commissions and
transaction fees and costs charged fluctuate based on the volume of
trading by the Partnership's Trading Managers. During each of the three
years between 1993 and 1995, as well as the first quarter of 1996,
brokerage commissions incurred by the Partnership decreased. During
1993 and 1994, brokerage commissions decreased due to a reduction in the
Partnership's net assets. During 1995, brokerage commissions declined
due to the presence of more long-term price trends in a majority of the
futures markets in which the Partnership's Trading Managers concentrate
their participation, as well as a reduction of the 1% monthly commission
cap to 3/4 of 1% on April 1, 1995. This reduction of the cap also
resulted in brokerage commissions being lower during the first quarter
of 1996 relative to the first quarter of 1995.
Transaction fees and costs during 1993 decreased due to a reduction in
the Partnership's assets. In 1994 and 1995, changes made in the Trading
Managers' portfolios resulted in greater execution of trades on non-U.S.
exchanges and a subsequent increase in fees and costs. Transaction fees
and costs during the first quarter of 1996 experienced no change
relative to the first quarter of 1995.
Management fees to the Partnership are charged at a 4% annual rate of
Net Assets and fluctuate based only on the size of the Partnership's Net
Assets. Management fees have decreased each year since 1992, including
the first quarter of 1996, as a result of the reduction in Partnership
assets during these periods. Incentive fees were greatest in 1995 due
to the Partnership's more successful trading performance than in the
other years indicated.
Common administrative expenses to the Partnership are costs and expenses
used to pay legal, accounting, auditing, printing and distribution costs
and are estimated at 0.25% per annum. These expenses decreased during
each of the three years, as well as the first quarter of 1996. During
1993 and 1994, the administrative expenses incurred by the Partnership
decreased as a result of the reduction in Net Assets. The suspension of
the Partnership's continuous offering in September 1994 resulted in a
significant decrease in administrative expenses incurred during 1995.
The significant decrease in administrative expenses during the first
quarter of 1996 was the result of a reduction in the Partnership's
assets, as well as a reduction in costs to print the Partnership's
monthly reports.
CORNERSTONE IV
Results of Operations for 1993. Cornerstone IV posted a decline of
approximately 9.12% for the year 1993. The Partnership began the year
with two consecutive profitable quarters, primarily as a result of a
sustained increase in the value of the Japanese yen versus the U.S.
dollar and from a similar increase in the Japanese yen relative to the
German mark and other European currencies. The Partnership also
profited in the first half of the year from currency transactions
involving the Australian dollar and British pound.
The second half of the year began with strong performance for the
Partnership as an almost 6% increase in July resulted from a continued
strengthening in the value of the Japanese yen, as well as from a
strengthening of the U.S. dollar versus major European currencies.
Unfortunately, these trends were not sustained over the last five months
of the year as a sharp reversal of the trend in the Japanese yen in
August, short-term volatility in currency exchange trading in September,
due in large part to the unrest in Russia, and a surprising interest
rate cut by the German Bundesbank and other European central banks in
October resulted in net losses for the Fund's currency-only portfolio.
Additionally, November and December results were difficult as tight
trading ranges caused losses from a series of false trend signals by the
Trading Advisors' long-term technical trend-following models.
Overall, 1993 was a difficult year for currency-only traders throughout
the managed futures industry as a result of trendless market conditions
during the year's final five months.
For the year ended December 31, 1993, the Partnership's total trading
losses, net of income interest, were $679,944. The Partnership's total
expenses for the year were $13,603,400, resulting in a net loss of
$14,283,394. The Net Asset Value of a Unit decreased from $2,961.06 at
December 31, 1992 to $2,690.96 at December 31, 1993.
31
<PAGE>
Results of Operations for 1994. During 1994, the Partnership recorded a
net loss of 14.3%. During January and February, losses were recorded
from transactions involving the U.S. dollar versus major foreign
currencies and from crossrate transactions as a result of short-term
volatile price movement. Small gains were recorded in March
predominantly from the weakening of the U.S. dollar versus major
European currencies. The most significant losses during the second
quarter were recorded during April as a result of a sharp increase in
the value of the U.S. dollar on April 5th, after decreasing in late
March. In May, losses were recorded primarily from transactions
involving the U.S. dollar versus the Japanese yen. Gains were recorded
in June as a result of long positions in the Swiss franc, German mark,
French franc and British pound. The Partnership posted losses during
July as the value of the U.S. dollar moved in a short-term volatile
pattern versus the Japanese yen and most major European currencies.
During August, losses continued as a result of further trendless
movement in the U.S. dollar versus major foreign currencies and one
another. In September, gains were recorded primarily as a result of a
decrease in value of the U.S. dollar versus the Swiss franc. The fourth
quarter began with profits in October as a result of the continued
decline in value of the U.S. dollar versus major European currencies.
Substantial losses occurred in November as a result of a reversal in the
downward trend in the U.S. dollar. The majority of these losses were
sustained from long positions in major European currencies and the
Japanese yen. During December, the Partnership recorded losses due
primarily to the sudden decrease in value of the U.S. dollar on December
28th after it had shown signs of strengthening in late November and most
of December.
Overall, 1994 was a difficult year for currency-only traders throughout
the managed futures industry due to a lack of sustained value moves in
foreign currencies versus the U.S. dollar and one another, coupled with
sharp reversals of short-term trends.
For the year ended December 31, 1994, the Partnership's total trading
losses, net of interest income, were $8,045,411. The Partnership's total
expenses for the year were $10,864,240, resulting in a net loss of
$18,909,651. The Net Asset Value of a Unit decreased from $2,690.96 at
December 31, 1993 to $2,307.07 at December 31, 1994.
Results of Operations for 1995. In 1995, the Partnership recorded a net
gain of 23.0%. The Partnership recorded net losses during January as a
decline in value of the U.S. dollar was followed by extreme short-term
volatility. Gains were recorded during February from an increase in
value of the Japanese yen and major European currencies relative to the
U.S. dollar. During March, the Partnership recorded significant gains
as previously established long positions in the Japanese yen and most
European currencies continued to produce strong profits. In April, the
Partnership continued to record gains from the upward trend in the value
of the Japanese yen. Trading gains were also recorded from transactions
involving the Australian and New Zealand dollars and the Spanish peseta.
The Partnership recorded losses during May due to a reversal in the
downward trend, and subsequent short-term volatility, in the value of
the U.S. dollar versus most major European currencies and the Japanese
yen. Small losses were recorded during June as the value of most major
world currencies moved in a trendless range versus the U.S. dollar and
one another. During July, the Partnership sustained losses as most
major foreign currencies continued to move in a trendless pattern
relative to one another. Trading gains were recorded during August as a
result of a sharp downward move in the value of the Japanese yen.
Additional gains were recorded from transactions involving the
Australian, Singapore and Canadian dollars. During September, the
Partnership recorded small net losses as a result of a reversal in an
upward move in the value of the U.S. dollar relative to most major
foreign currencies on September 20 and 21. The Partnership recorded
gains during October from the continued decline of the Japanese yen.
Smaller gains were recorded from transactions involving the Malaysian
ringgit, German mark and Australian dollar. Losses were recorded during
November from trendless movement in the value of major European
currencies. Trading in the Japanese yen also resulted in losses as the
previous trend in the yen subsided. The Partnership recorded small
losses as the British pound, relative to the U.S. dollar, moved suddenly
higher late in December. Trading gains from transactions involving the
Japanese yen and German mark offset a majority of these losses.
Overall, the Partnership recorded strong net gains during 1995 primarily
as a result of sustained trends in the value of major world currencies
versus the U.S. dollar in the first half of the year. In particular,
the continued decline of the U.S. dollar relative to the Japanese yen
and most European currencies late in the first quarter presented the
Partnership's two Trading Advisors with an opportunity to profit
utilizing their technically-based trend-following trading approaches.
For the year ended December 31, 1995, the Partnership's total trading
revenues, including interest income, were $31,756,524. The Partnership's
total expenses for the year were $7,560,205, resulting in net income of
$24,196,319. The Net Asset Value of a Unit increased from $2,307.07 at
December 31, 1994 to $2,836.73 at December 31, 1995.
32
<PAGE>
Results of Operations for the Quarter Ended March 31, 1996. During the
first quarter of 1996, the Partnership recorded a net loss of 0.1%.
Losses recorded during the first quarter of 1996 were experienced during
February from previously established short positions in the Japanese yen
as the value of the yen moved dramatically higher. Losses were also
recorded during February from transactions involving several European
currencies, particularly the German mark, Norwegian krone and both the
French and Swiss francs. A majority of the losses recorded during
February were offset by gains recorded in January and March. During
January and March, short positions in the Japanese yen profited from a
decline in the value of the yen versus the U.S. dollar. Additional
profits were recorded during March from long positions in the Australian
dollar as the value of the Australian dollar moved higher relative to
the U.S. dollar and other world currencies.
For the quarter ended March 31, 1996, the Partnership's total trading
revenues, including interest income, were $1,897,733. The Partnership's
total expenses for the quarter were $1,923,857, resulting in a net loss
of $26,124. The Net Asset Value of a Unit decreased from $2,836.73 at
December 31, 1995 to $2,835.37 at March 31, 1996. In comparison, for the
quarter ended March 31, 1995, the Partnership's total trading revenues,
including interest income, were $28,198,010; the Partnership's total
expenses for such period were $2,542,481, resulting in net income of
$25,655,529; and the Net Asset Value of a Unit increased from $2,307.07
at December 31, 1994 to $2,875.86 at March 31, 1995.
To enhance the foregoing comparisons of results of operations from year
to year, prospective investors can examine, line by line, the Statement
of Operations and Statement of Financial Condition. Total trading
results were profitable in 1995 and the first quarter of 1996, versus
losses recorded in 1993 and 1994.
Interest income to the Partnership is derived from 80% of its assets
earning interest at the prevailing rate paid on U.S. Treasury Bills.
The size of the assets and the fluctuation of interest rates affect the
resulting interest income annual totals. Interest income to the
Partnership has increased each year since 1992. Despite a reduction in
U.S. Treasury Bill rates in 1993, interest income in 1993 was greater
than 1992 because assets grew as a result of additional subscriptions
during the year. For each of the years 1994 and 1995, interest income
has increased as a result of increasing rates on U.S. Treasury Bills.
During the first quarter of 1996, the interest income to the Partnership
decreased versus the first quarter of 1995 due primarily to declining
interest rates.
In regard to expenses of the Partnership, brokerage commissions and
transaction fees and costs charged fluctuate based on the volume of
trading by the Partnership's two Trading Managers. In 1993, brokerage
commissions and transaction fees and costs increased as a result of
increasing trading volume due primarily to the increase of assets and
trendless price movement resulting from false signals for the
Partnership's trend-following Trading Managers. 1994 witnessed a slight
decrease in brokerage commissions and transaction fees and costs due to
a decrease in trading assets. Brokerage commissions and transaction
fees and costs declined in 1995 as a result of the presence of more
long-term price trends in the currency markets, as well as a reduction
of the 1% monthly commission cap to 3/4 of 1% on April 1, 1995. This
reduction of the commission cap also resulted in brokerage commissions
and transaction fees and costs being lower during the first quarter of
1996.
Management fees to the Partnership are charged at a 4% annual rate of
Net Assets and fluctuate based only on the size of the Partnership's Net
Assets. The fluctuations in management fees from 1993 through the first
quarter of 1996 are in direct proportion to the changes in Net Asset
size. Incentive fees are only paid on an annual basis or on any
redeemed Units on a monthly basis if the Partnership is profitable.
There have been no incentive fees for the Partnership since 1993. The
common administrative expenses are used to pay legal, accounting,
auditing, printing and distribution costs and are estimated at 0.25% of
net assets. These costs, which had increased from 1992 to 1993 and from
1993 to 1994, have decreased significantly since September 1994 when the
Continuous Offering of the Cornerstone Funds was suspended. The
reduction of these costs can be also be attributed to a decline in the
costs charged for printing the Partnership's monthly reports.
Financial Instruments. Each Partnership is a party to financial
instruments with elements of off-balance sheet market and credit risk.
Cornerstone II and Cornerstone III trade futures, options, and forward
contracts in interest rates, stock indices, commodities, currencies,
petroleum and precious metals. Cornerstone IV trades futures and
forward contracts in currencies only. In entering into these contracts
there exists a risk to the Partnerships (market risk) that such
contracts may be significantly influenced by market conditions, such as
interest rate volatility, resulting in such contracts being less
valuable and more onerous. If the markets should move against all of the
futures positions held by a Partnership at the same time, and if the
Trading Managers were unable to offset futures positions of the
Partnership, the Partnership could lose all of its assets and the
Limited Partners of such Partnership would realize a 100% loss. In
addition to the Trading Managers'
33
<PAGE>
internal controls, each Trading
Manager must be in compliance with the respective trading policies of
the Partnerships. Such trading policies include standards for liquidity
and leverage that the Partnerships must comply with. Each Trading
Manager and the General Partner monitor the Partnerships' trading
activities to ensure compliance with the trading policies. See
"Investment Program, Use of Proceeds and Trading Policies." The General
Partner may (under the terms of each Management Agreement) require a
Trading Manager to modify positions of Partnership if the General
Partner believes they violate the Partnership's trading policies.
In addition to market risk, in entering into futures, options and
forward contracts there is a risk to each Partnership (credit risk) that
a counterparty will not be able to meet its obligations to the
Partnership. The counterparty of a Partnership for futures contracts
traded in the United States and most foreign exchanges on which the
Partnerships trade is the clearinghouse associated with such exchange.
In general, clearinghouses are 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 members' customers, and as such, should significantly reduce
this credit risk. In cases where a Partnership trades on exchanges where
the clearinghouse is not backed by the membership or when a Partnership
enters into off-exchange contracts with a counterparty, the sole
recourse of a Partnership will be the clearinghouse or the counterparty,
as the case may be. DWR, in its business as an international commodity
broker, constantly monitors the creditworthiness of the exchanges and
clearing members of the foreign exchanges with which it does business
for clients, including the Partnerships. As a member of various futures
exchanges, DWR is able to monitor the credit risk of such exchanges. In
addition, DWR employees from time to time serve on supervisory or
management committees of such exchanges. If DWR believes that there
were a problem with the creditworthiness of an exchange on which a
Partnership deals, it would so advise the General Partner. With respect
to exchanges of which DWR is not a member, DWR acts only through
clearing brokers it has determined to be creditworthy. DWR establishes
credit limits for each clearing broker and monitors its exposure to each
clearing broker on a daily basis. If DWR believes that a clearing
broker with which it deals on behalf of clients were not creditworthy,
it would terminate its relationship with such broker. With respect to
forward contract trading, the Partnerships trade only with those
counterparties which the General Partner, together with DWR, have
determined to be creditworthy. The credit exposure of each counterparty
is checked daily and all positions of each Partnership are valued each
day on a mark-to-market basis. As set forth in each Partnership's
Trading Policies, in determining creditworthiness, the General Partner
and DWR consult with the Corporate Credit Department of DWR. Currently,
the Partnerships deal only with DWR as their counterparty on forward
contracts. While DWR and the General Partner monitor the
creditworthiness and risks involved in dealing on the various exchanges
and with counterparties, there can be no assurance that an exchange or
counterparty will be able to meet its obligations to the Partnerships.
For additional discussion regarding exchange and counterparty risk see
"Risk Factors--Risks Relating to Commodities Trading and the Commodities
Markets."
At March 31, 1996 open futures, options and forward contracts were as
follows:
<TABLE>
<CAPTION>
Cornerstone II Cornerstone III Cornerstone IV
$ $ $
<S> <C> <C> <C>
Exchange Traded Contracts
Financial Futures Contracts
Commitments to Purchase.......................... 87,659,000 17,420,000 22,853,000
Commitments to Sell.............................. -- 139,377,000 116,899,000
Commodity Futures
Commitments to Purchase.......................... 42,001,000 67,656,000 --
Commitments to Sell.............................. 2,497,000 2,751,000 --
Foreign Futures
Commitments to Purchase.......................... 1,218,000 34,992,000 --
Commitments to Sell.............................. 19,201,000 49,953,000 --
Off-Exchange Traded Forward Currency Contracts:
Commitments to Purchase.......................... 30,660,000 -- 309,776,000
Commitments to Sell.............................. 21,266,000 -- 103,968,000
</TABLE>
A portion of the amounts indicated as off-balance sheet risk in forward
foreign currency contracts is due to offsetting forward commitments to
purchase and to sell the same currency on the same date in the future.
These commitments are economically offsetting, but are not offset in the
forward market until the settlement date.
The unrealized gains and losses on open contracts is reported as a
component of "Equity in Commodity Futures Trading Accounts" on the
Statements of Financial Condition and, at March 31, 1996, totaled
$1,792,687 for Cornerstone II, $1,302,524 for Cornerstone III, and
$1,434,910 for Cornerstone IV.
34
<PAGE>
For Cornerstone II, of the $1,792,687 net unrealized gain on open
contracts at March 31, 1996, $1,774,628 re-lated to exchange traded
futures contracts and $18,059 related to off-exchange-traded forward
currency contracts.
For Cornerstone III, the $1,302,524 net unrealized gain on open
contracts at March 31, 1996 related entirely to exchange traded futures
contracts.
For Cornerstone IV, of the $1,434,910 net unrealized gain on open
contracts at March 31, 1996, $879,588 re-lated to exchange-traded
futures contracts and $555,322 related to off-exchange-traded forward
currency contracts.
Exchange traded futures contracts held by the Partnerships at March 31,
1996 mature through June 1996 for Cornerstone II, December 1996 for
Cornerstone III, and June 1997 for Cornerstone IV. Off-exchange forward
currency contracts held by the Partnerships at March 31, 1996 mature
through June 1996 for each of Cornerstone II and Cornerstone IV.
The contract amounts in the above table represent the Partnerships'
extent of involvement in the particular class of financial instrument,
but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments is limited to the
amounts reflected in the Partnerships' Statement of Financial Condition,
which funds totaled at March 31, 1996, $29,061,006, $34,490,927 and
$100,054,691 for Cornerstone II, Cornerstone III and Cornerstone IV,
respectively.
The Partnerships also have credit risk because the sole counterparty,
with respect to most of the Partnerships' assets, is DWR. Exchange-
traded futures contracts are marked to market on a daily basis, with
variations in value credited or charged to a Partnership's account on a
daily basis. DWR, as the futures commission merchant for all of the
Partnerships' exchange-traded futures contracts, is required pursuant to
regulations of the CFTC to segregate from its own assets, and for the
sole benefit of its commodity customers, all funds held by DWR with
respect to exchange-traded futures contracts, including an amount equal
to the net unrealized gain on all open futures contracts. With respect
to the Partnerships' off-exchange-traded foreign currency forward
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 foreign currency contracts, the Partnerships are at risk
to the ability of DWR, the counterparty on all of such contracts, to
perform.
At March 31, 1996, the average fair value of financial instruments held
for trading purposes was as follows:
Cornerstone II
--------------------------
March 31, 1996
--------------------------
Assets Liabilities
Exchange-Traded Contracts: $ $
Financial Futures............................. 48,896,000 51,713,000
Commodity Futures............................. 43,478,000 7,954,000
Foreign Futures............................... 29,454,000 15,501,000
Off-Exchange-Traded Foreign Currency Contracts 28,139,000 35,702,000
Cornerstone III
--------------------------
March 31, 1996
--------------------------
Assets Liabilities
---------- -----------
Exchange-Traded Contracts: $ $
Financial Futures............................. 142,334,000 78,196,000
Commodity Futures............................. 99,423,000 10,049,000
Foreign Futures............................... 104,658,000 38,521,000
Off-Exchange-Traded Foreign Currency Contracts -- --
Cornerstone IV
--------------------------
March 31, 1996
--------------------------
Assets Liabilities
---------- -----------
$ $
Exchange-Traded Financial Futures Contracts 13,692,000 100,967,000
Off-Exchange-Traded Foreign Currency Contracts 258,678,000 221,591,000
See "Selected Financial Data" and "Annual Report and Independent
Auditors' Report."
Inflation is not expected to be a major factor in the Partnerships'
operations.
35
<PAGE>
DESCRIPTION OF CHARGES TO EACH PARTNERSHIP
Each Partnership is subject to substantial charges, which are described
below. The recent statements of financial condition of Cornerstone II,
III and IV and the related statements of operations and changes in
partners' capital are set forth beginning at page F-2 in this
Prospectus. Such financial statements describe, among other things, the
fees and expenses incurred by Cornerstone II, III and IV for the periods
set forth therein and are summarized in "Selected Financial Data."
<TABLE>
<CAPTION>
Entity Form of Compensation Amount of Compensation
------ -------------------- ----------------------
<S> <C> <C>
DWR (as Commodity Broker) Brokerage Commissions. Roundturn commissions (the
total cost of both the opening
and liquidating of a commodity
interest) at 80% of DWR's
published rates (an average
rate of $75) plus applicable
fees, which rate DWR may change
from time to time. Comparable
commissions will be paid on
forward contracts. Commissions
with respect to each Trading
Manager's allocated adjusted
Net Assets are capped at (i)
3/4 of 1% per month (in the case
of Trading Managers which employ
multiple trading systems in
trading on behalf of a
Partnership, the foregoing 3/4
of 1% cap is applied on a per
trading system basis) of the
adjusted Net Assets at month-
end allocated to such Trading
Manager or trading system;
and (ii) 14% annually of the
Partner-ship's average monthly
Net Assets, aggregated with
net excess interest and
compensating balance benefits,
and transaction fees and
costs, as described below.
Transaction fees for the Forward currency contract fees
execution of each Partnership's average $3-$6 per roundturn
forward contract transactions, trade, execution of cash
the execution of cash contract transactions relating
transactions relating to to EFP transactions are
exchange of futures for approximately $2.50 per cash
physicals ("EFP") actions, contract, and the use of the
and the use of DWR's institutional trading desk or
institutional and overnight overnight execution facility
execution facilities. may be up to $3 per roundturn
(the amount of such fees is
included in the transaction
fees described under "Other"
and is subject to the cap
described therein).
Financial benefit to DWR The aggregate of (i)
from interest earned on brokerage commissions and
Partnerships' assets in excess transaction fees and costs
of the rate paid to the payable by the Partnership,
Partnerships and from as described above and below,
compensating balance treatment and (ii) net excess interest
in connection with its and compensating balance
designation of a bank or banks benefits to DWR (after
in which the Partnerships' creditng the Partnership
assets are deposited. with interest)
36
<PAGE>
<CAPTION>
Entity Form of Compensation Amount of Compensation
------ -------------------- ----------------------
<S> <C> <C>
are capped
at 14% annually of the
Partnership's average
monthly Net Assets as of the
last day of each month during
a calendar year.
Trading Managers......................... Monthly Management Fee. 1/3 of 1% of Net Assets
allocated to each Trading
Manager on the last day of each
month (a 4% annual rate).
Annual Incentive Fee. 15% of the New Appreciation in
a Partnership's Net Assets as
a whole as of the end of each
annual incentive period. New
Appreciation generally equals
net trading profits, realized
and unrealized, as of the end
of an incentive period, minus
management fees and other
expenses paid or accrued (but
not incentive fees) from the
end of the previous incentive
period in which an incentive
fee was earned.
Other.............................. All transaction fees and Transaction fees and costs
costs incurred in connection with have averaged less than 1%
each Partnership's commodity per year of each Partnership's
trading activities (including average Net Assets. Such fees
floor brokerage fees, exchange and costs are subject to the
fees, clearinghouse fees, and cap on aggregate brokerage
NFA fees, "give up" or transfer commissions, net excess
fees (fees charged by one interest and compensating
clearing brokerage firm to balance benefits, and
transfer a trading position to transaction fees and costs
another clearing firm), and any described above.
costs associated with taking
delivery under commodity interest.
Direct expenses and Common Proportionate shares of
Administrative Expenses, which Common Administrative
include printing, mailing, Expenses (which averaged
reporting, legal, accounting, in the aggregate $292,178 per
auditing and extraordinary annum for the period January 1,
expenses incurred in 1991-March 31, 1996)
connection with operating the are allocated to each of the
Partnerships and registering Partnerships based on the
and qualifying Units for sale number of Units of each
to Limited Partners pursuant Partnership outstanding
to a current Prospectus. during the month in which
such expenses are incurred.
</TABLE>
1. COMMODITY BROKER
(a) Brokerage Commissions. Pursuant to the Customer Agreement with DWR,
each Partnership currently pays DWR brokerage commissions at an average
rate of approximately $75 per roundturn (covering both the taking and
liquidation of a position), which rate DWR may change from time to time.
Commissions with respect to each Trading Manager's allocated Net Assets
are capped at 3/4 of 1% per month (in the case of Trading Managers which
employ multiple trading systems in trading on behalf of a Partnership,
the foregoing 3/4 of 1% cap is applied on a per trading system basis) of
the Net Assets at month-end allocated to such Trading Manager or trading
system (determined before management and incentive fees, redemptions,
distributions and addi-
37
<PAGE>
tions, but after brokerage commissions incurred,
as of the end of such month). In addition, the aggregate of (i)
brokerage commissions and transaction fees and costs payable by each
Partnership, and (ii) the net excess interest and compensating balance
benefits to DWR (after crediting the Partnership with interest) cannot
exceed 14% annually of the Partnership's average month-end Net Assets
during each calendar year. Although the rate being charged the
Partnerships is 80% of DWR's published non-member rates, most customers
of DWR who have over $1,000,000 in commodity trading accounts with DWR
pay commissions at negotiated rates which are substantially less than
the rate which is paid by each Partnership. Additionally, Demeter is
the general partner of and DWR is the commodity broker for certain other
partnerships which pay flat rate brokerage commissions, which
commissions may be less than those paid by the Partnerships. Such
payments to DWR are compensation, in part, for the risks of organizing
the Partnerships and conducting the initial and continuing offerings
(specifically, offering expenses for which DWR was only reimbursed from
the sale of Units; DWR is not reimbursed for the expenses it incurs in
maintaining the registration of Units and keeping the Prospectus
current). Additionally, the General Partner, an affiliate of DWR, which
is not separately compensated by the Partnerships, provides ongoing
services to the Partnerships, which include evaluating, retaining,
monitoring and terminating Trading Managers for the Partnerships and
administering the redemption and Exchange of Units. Such rate also
enables DWR to compensate its employees or Additional Sellers who
provide continuing services to Limited Partners to whom they have sold
Units. See "The Commodity Broker--Brokerage Arrangements" and "Plan of
Distribution and Exchange Procedures." Brokerage commissions paid by
each Partnership to DWR may equal a significant percentage of such
Partnership's average annual Net Assets. During the period January,
1991 - March, 1996, Cornerstone II, III, and IV paid annually an average
of 6.71%, 8.43% and 4.40%, respectively, of their average annual Net
Assets as brokerage commissions. The actual amount of brokerage
commissions paid by each Partnership to DWR in a year will depend on the
amount of funds available for investment and the actual trading activity
of its Trading Managers, subject to the foregoing caps.
Cornerstone IV trades exclusively in diverse world currencies.
Cornerstone II and III also trade currencies. In the case of currency
futures contracts traded on United States exchanges, the Partnerships
pay DWR brokerage commissions at the rate described above. The
Partnerships pay DWR brokerage commissions for currency forward contract
transactions at rates established with reference to the brokerage
commission rate charged on exchange-traded currency futures contracts.
DWR may from time to time adjust the United States dollar size of
currency forward contracts so that the brokerage commission rate charged
on such contracts will closely approximate the rate charged on exchange-
traded currency futures contracts of similar United States dollar value.
DWR will also charge the Partnerships brokerage commissions plus
applicable fees for rollovers of forward contract positions (i.e., the
offsetting of a position which is about to expire and the initiation of
a position in a more distant contract month). Some other brokerage firms
do not charge brokerage commissions for rollovers of forward contract
positions, although such firms may benefit from the mark-up or spread in
the rollover transaction.
(b) Financial Benefits. DWR benefits from the interest credit
arrangements and possible compensating balance treatment in connection
with its designation of a bank or banks in which the Partnerships'
assets are deposited. See "Investment Program, Use of Proceeds and
Trading Policies."
2. TRADING MANAGERS
Each Partnership pays its Trading Managers a monthly management fee,
whether or not the assets of the Partnership as a whole or the assets
allocated to such Trading Manager is profitable, and, in certain
circumstances, may pay its Trading Managers an annual incentive fee.
(a) Monthly Management Fee. Each Partnership pays each of its Trading
Managers a monthly management fee equal to 1/3 of 1% (a 4% annual rate)
of the Partnership's Net Assets allocated to such Trading Manager as of
the last day of each month (after adding back accrued incentive fees, if
any, and before deduction for accrued distributions or redemptions as of
such date). "Net Assets" of a Partnership equals the total assets of
such Partnership, including all cash and cash equivalents (valued at
cost), accrued interest, and the market value of all open commodity
positions and other assets of such Partnership, less (i) the brokerage
commissions accrued on a half-turn basis and (ii) all other liabilities
of such Partnership, including incentive fees accrued or payable,
determined in accordance with the principles specified in its Limited
Partnership Agreement and, where no principle is specified, in
accordance with generally accepted accounting principles consistently
applied under the accrual basis of accounting.
38
<PAGE>
For example, if Net Assets equaled $9,000,000 as of the end of each
month during the fiscal year of a Partnership and there were no
liabilities of such Partnership, such Partnership's Trading Managers
would receive an aggregate monthly management fee for the year of
$360,000 (1/3 of 1% of $9,000,000 per month, or $30,000, times 12). The
management fee would be divided among such Trading Managers based on the
portion of such $9,000,000 allocated to each Trading Manager at the end
of each month.
If during any month a Partnership does not conduct business operations
or suspends trading or, as a result of an act or failure to act by a
Trading Manager or Managers, is otherwise unable to utilize the trading
advice of such Trading Manager(s) on any of the trading days of that
period for any reason, the management fee described above payable to
such Trading Manager(s) will be prorated based on the ratio by which the
number of trading days in the month which such Partnership engaged in
trading operations bears to the total number of trading days in the
month. If a Management Agreement is terminated on a date other than the
end of a Partnership's incentive period, the incentive fee described
below will be determined as if such date were the end of an incentive
period. If a Management Agreement is terminated on a date other than the
end of a calendar month, the management fee described above will be
determined as if such date were the end of a month, but such fee will be
prorated based on the ratio by which the number of trading days in the
month through the date of termination bears to the total number of
trading days in the month.
(b) Annual Incentive Fee. Each Partnership pays an annual incentive fee
equal to 15% of the New Appreciation experienced by such Partnership as
a whole as of the end of such Partnerships incentive period. For
Cornerstone II and III, the incentive period runs from January 1 through
December 31 of each year. For Cornerstone IV, the incentive period
commences on June 1 and ends on May 31 of each year. Each Partnership's
New Appreciation is determined by calculating Appreciation at the end of
an incentive period, as applicable, and making certain adjustments for
funds contributed to or withdrawn from such Partnership and interest
income earned.
The term "Appreciation" under each Management Agreement means (A) the
value of the Partnership's Net Assets as of the last day of any fiscal
year or incentive period, as applicable (reduced by management fees
accrued or payable for the account of such Partnership for such fiscal
year or incentive period, but before reduction for the current annual
incentive fee, if any, accrued or payable for the account of the
Partnership for such fiscal year or incentive period), minus (B) the
highest value of Net Assets as of the last day of any preceding fiscal
year or incentive period. "New Appreciation" equals Appreciation
increased by (i) distributions and redemptions paid or payable on Units
and (ii) Exchanges of Units for Units of another Partnership, and
decreased by (iii) contributions to the Partnership arising from Units
acquired on an Exchange of Units and (iv) interest income earned for the
account of the Partnership, with each item of increase and decrease
determined from the date of such highest value of Net Assets to the last
day of the incentive period as of which such incentive fee calculation
is made.
The annual incentive fee is paid on the basis of New Appreciation in the
Partnership's Net Assets as a whole and not in the individual Trading
Manager's allocated portion of such assets. Thus, there would be no New
Appreciation, and no incentive fee paid, if the trading profits of a
Trading Manager were offset entirely by the trading losses of the other
Trading Manager(s) for a Partnership. The annual incentive fee, if any,
will be divided among and paid to each of the Trading Managers of a
Partnership based on each Trading Manager's proportionate contribution,
if any, to New Appreciation.
All distributions and redemptions paid or payable on Units of each
Partnership and on Exchanges of Units of such Partnership are divided by
the then number of Trading Managers for such Partnership, and a dollar
amount in respect of such distribution, redemption or Exchange is
charged to the Net Assets allocated to each Trading Manager based on the
ratio of the Trading Manager's average allocated trading assets to the
total average trading assets of the Partnership, unless the General
Partner selects an alternative means of allocation and so notifies the
Trading Managers. All incentive fees accrued at the end of a month or
paid at the end of an incentive period are charged to the Net Assets
allocated to each Trading Manager for a Partnership in the same manner
and to the same extent as such amounts would or will be paid to each
such Trading Manager as of the date of accrual or payment.
The General Partner's interest in each Partnership is included in Net
Assets for purposes of calculating any incentive fee. Since Limited
Partners of each Partnership may redeem or Exchange Units at a month-end
which is other than the end of an incentive period, and since accrued
incentive fees, if any, will be a deduction from the Net Asset Value of
such Units upon redemption or Exchange, each Partnership has agreed that
the incentive fee accrued on such Units will be paid to its Trading
Managers in accordance with the terms of the Management Agreements as if
such month-end were the end of an incentive period of such Partnership.
Any amounts so paid to its Trading Managers by a Partnership will be
deducted from any subsequent incentive fee
39
<PAGE>
which includes New
Appreciation allocable to such Units. Notwithstanding the foregoing,
Limited Partners who acquire or redeem Units during an incentive period
may be subject to additional risks. See "Risk Factors-Risks Relating to
the Trading Managers--Distortions Produced by Annual Incentive Fee
Arrangement."
If any payment is made by a Partnership to its Trading Managers on
account of New Appreciation in the value of its Net Assets and the value
of such Net Assets thereafter declines or fails to experience New
Appreciation for any subsequent incentive period, each Trading Manager
is entitled to retain such amounts previously paid by such Partnership
in respect of New Appreciation. No subsequent payment based on New
Appreciation will be made to any of its Trading Managers, however, until
such Partnership has again experienced New Appreciation and a Trading
Manager has contributed thereto.
3. OTHERS
(a) Administrative and Extraordinary Expenses. Each Partnership pays all
of its direct expenses and its share of Common Administrative Expenses,
which have averaged in the aggregate $292,178 per annum for the period
from January 1991 - March 1996, pursuant to the terms of the Exchange
Agreement. Common Administrative Expenses means the costs and expenses
incurred in connection with preparing, printing and mailing monthly
reports, annual reports and all other documents required to be delivered
to Limited Partners under any applicable federal or state laws or
pursuant to the terms of each Limited Partnership Agreement, and all
legal, accounting, auditing, filing, registration and extraordinary
expenses not directly attributable to one Partnership. A Partnership's
share of such expenses is based on the number of its Units outstanding
during the month in which such expenses are incurred.
(b) Transaction Fees and Costs. Each Partnership also pays all
applicable "give up" or transfer fees, NFA fees, exchange fees,
clearinghouse fees, floor brokerage fees and any costs associated with
taking delivery of commodity interests, fees for the execution of each
Partnership's forward contract transactions, the execution of cash
transactions relating to exchange of futures for physicals ("EFP")
transactions (where a Partnership first acquires a cash-physical
position and exchanges that cash position for a futures position on an
exchange), and the use of DWR's institutional and overnight execution
facilities (collectively, "transaction fees and costs"), which
transaction fees and costs averaged approximately 0.54% for Cornerstone
II, 0.76% for Cornerstone III, and 0.27% for Cornerstone IV of average
annual Net Assets for the period January, 1991-March, 1996. Each
Partnership pays DWR a fee for each roundturn forward contract which
will average between $3 and $6 per roundturn contract, depending upon
the size of the trades. DWR will not charge the Partnership a mark-up or
spread on such forward trading. DWR charges a transaction fee of
approximately $2.50 for each cash contract transaction relating to an
EFP transaction, and a transaction fee for the use of the institutional
execution desk or overnight execution facilities which may be up to $3
per roundturn. Each Partnership also pays all applicable principal and
other transaction fees and costs associated with currency forward
contract transactions, which fees and costs have recently averaged
approximately 7% of the brokerage commission fee charged on such
transactions. Transaction fees and costs are subject to the 14% annual
cap on aggregate brokerage commissions, transaction fees and costs, and
net excess interest and compensating balance benefits to DWR, but not
the 3/4 of 1% monthly cap on brokerage commissions, described under "--1.
Commodity Broker--(a) Brokerage Commissions" above.
4. BREAK EVEN ANALYSIS
Based upon the annual fees and expenses of Cornerstone II, Cornerstone
III and Cornerstone IV, the Partnerships will be required to earn
trading profits (after taking into account estimated interest income
based upon current rates of 5%) of 7.42%, 9.39% and 4.83%, respectively,
per year of annual average annual Net Assets in order for a Limited
Partner to break-even (earning profits sufficient to recoup its initial
investment) upon redemption after one year.
Based upon the selling price as of March 31, 1996, Cornerstone II,
Cornerstone III and Cornerstone IV must earn net trading profits of
$201.20, $202.42 and $136.96 per Unit, respectively, in order for a
Limited Partner to break-even (earning profits sufficient to recoup its
initial investment upon redemption of a Unit after one year after
payment by the Partnership of its expenses (as calculated below).
40
<PAGE>
<TABLE>
<CAPTION>
Cornerstone II Cornerstone III Cornerstone IV
$ $ $
<S> <C> <C> <C>
Selling Price per Unit (as of 3/31/96) (1)............ 2,711.59 2,155.72 2,835.37
Management Fee (2).................................... 108.46 86.23 113.41
Brokerage Commissions (3)............................. 181.95 181.73 124.76
Less Interest Income (4).............................. (108.46) (86.23) (113.41)
Transaction Costs (5)................................. 14.64 16.38 7.66
Administrative Expenses (6)........................... 4.61 4.31 4.54
Incentive Fee (7)..................................... -- -- --
Amount of Trading Income Required for a
Limited Partner to Recoup its Investment at
the End of One Year (8)............................. 201.20 202.42 136.96
Percentage of Initial Selling Price .................. 7.42% 9.39% 4.83%
<FN>
- - ------------------------
(1) Units of each Partnership are offered for sale in Exchanges at
Monthly Closings to be held as of the last day of each month at a
purchase price equal to 100% of the Net Asset Value of the Unit on the
first day of the month following the Monthly Closing.
(2) Monthly management fees are equal to 1/3 of 1% of the Net Assets
allocated to each Trading Manager on the last day of each month (a 4%
annual rate).
(3) Each Partnership pays brokerage commissions at an average rate of
approximately $75 per roundturn. Commissions with respect to each
Trading Manager's allocated Net Assets are capped at 3/4 of 1% per month
(in the case of Trading Managers which employ multiple trading systems
in trading on behalf of a Partnership, the foregoing 3/4 of 1% cap is
applied on a per trading system basis). Brokerage commissions have
averaged 6.71%, 8.43% and 4.40% of average annual Net Assets of
Cornerstone II, III and IV, respectively. For purposes of the above
table, brokerage commissions were assumed to be the foregoing
percentages.
(4) DWR credits each Partnership at month-end with interest income as if
80% of such Partnership's average daily Net Assets for the month were
invested at a prevailing rate on U.S. Treasury Bills. Such rate was
estimated based upon current rates of 5%.
(5) Transaction fees and costs have averaged 0.54%, 0.76% and 0.27% of
average annual Net Assets of Cornerstone II, III and IV, respectively.
For purposes of the above table, transaction fees and costs were assumed
to be the foregoing percentages.
(6) Administrative expenses have averaged 0.17%, 0.20% and 0.16% of
average annual Net Assets of Cornerstone II, III and IV, respectively.
For purposes of the above table, administrative expenses were assumed to
be the foregoing percentages.
(7) Incentive fees are assumed to be zero because (i) interest income is
greater than the redemption fee and (ii) each Trading Manager's trading
profits equal expenses.
</TABLE>
The General Partner will furnish to each Limited Partner a monthly
statement describing the performance of each of the Partnerships and
setting forth, among other things, aggregate management and incentive
fees, and brokerage fees, and extraordinary expenses, if any, incurred
or accrued by the Partnerships during the month and certain other
information concerning the Net Asset Value of a Unit of each
Partnership. See "The Limited Partnership Agreements -- Reports to
Limited Partners."
INVESTMENT PROGRAM, USE OF
PROCEEDS AND TRADING POLICIES
Differences Among The Cornerstone Funds. The Cornerstone Funds were
organized by the General Partner to meet certain needs of investors in
commodity pools. The Cornerstone Funds, a series of related commodity
pools, offer the investor a choice of three commodity pools with
different investment objectives, Trading Managers and trading policies
and the opportunity to shift investments among such pools. The
Cornerstone Funds presently consist of three New York limited
partnerships organized pursuant to the form of Limited Partnership
Agreement attached hereto as Exhibit A. The General Partner of each
Partnership is Demeter Management Corporation. See "The General
Partner."
Each Partnership was organized to achieve maximum capital appreciation
from speculative trading of futures contracts and other commodity
interests consistent with such Partnership's maximum permitted level of
leverage. While Cornerstone II and III presently trade a diverse
portfolio of commodity interest contracts, Cornerstone IV presently
trades futures and forward contracts and other commodity interests
exclusively in a portfolio of diverse world currencies. Each Partnership
attempts to operate within parameters established by
41
<PAGE>
the General Partner
which, among other things, attempt to limit the potential risk to a
Limited Partner of such Partnership. Although each Partnership is
intended to offer its Limited Partners a different level of risk, and,
correspondingly, a different potential rate of return on their
investment, all speculative trading of commodity futures contracts and
other commodity interests is inherently risky and there can be no
assurance that a desired rate of return or level of leverage arising
from an investment in any of the Partnerships can be achieved or that
the performance results of each Partnership will necessarily correlate
with the level of leverage intended for such Partnership.
The selection of Trading Managers for each Partnership was based on a
review of each Trading Manager's trading system, strategy, experience
and trading performance record in view of the investment objectives and
trading policies of such Partnership. By reviewing this information, the
General Partner was able, among other things, to categorize each Trading
Manager based on the degree of leverage employed as measured by funds
normally committed as margin. The General Partner also reviewed trading
performance records to determine the level of volatility in performance
experienced by each Trading Manager in the past. Although these factors
are obtained from past trading performance, the General Partner believes
such factors have some value in evaluating the potential trading success
of a Trading Manager.
Although the General Partner used its best efforts in selecting Trading
Managers for each Partnership, there can be no assurance that each
Partnership will perform as desired. For example, a Partnership
attempting to reduce risk on a relative basis by committing a moderate
percentage of assets as margin may sustain greater losses than any other
Partnership. Likewise, a Partnership committing a high percentage of
assets as margin may not achieve the highest rate of capital
appreciation of any Partnership. Indeed, it could be concluded (based
upon the historical performance of the Partnerships) that the success of
the trading methods employed for a Partnership, rather than the level of
leverage employed for that Partnership, has been the greater factor in
determining the potential risk of loss or potential return to an
investor in that Partnership. In selecting Trading Managers, the General
Partner relied largely on prior performance history of each Trading
Manager, and future performance may be completely different. See "Risk
Factors" and "The Commodities Market." THE GENERAL PARTNER IS NOT
PREDICTING OR GUARANTEEING ANY LEVEL OF PERFORMANCE OR RISK BY ANY
PARTNERSHIP AND NO SUCH PREDICTION OR GUARANTEE IS MADE HEREBY.
CORNERSTONE II
Cornerstone II seeks as its investment objective the maximum rate of
capital appreciation consistent with a medium percentage of assets
committed as margin. During the period April 1995 - March 1996, the
Trading Managers for Cornerstone II collectively committed on average
between 10 and 40% of the Net Assets of Cornerstone II as margin.
The General Partner requires Trading Managers for Cornerstone II to
conduct their trading in accordance with the trading policies of
Cornerstone II. See "Trading Policies" below. These trading policies
provide, among other things, that a Trading Manager will not initiate
additional positions in any commodity if such additional positions would
result in aggregate net long or net short positions for all commodities
requiring as margin more than 55% of the Net Assets allocated to such
Trading Manager. For example, a Trading Manager managing $2,000,000 of
Net Assets would not be able to add new positions after it had
$1,100,000 invested as margin in existing open positions. If the initial
margin on all commodity contracts were $5,000, a Trading Manager for
Cornerstone II could have no more than 220 net long or net short open
positions. However, there can be no assurance that such maximum margin
commitment level will prevent Cornerstone II from experiencing losses
larger than those of any other Partnership. See "The Cornerstone Funds--
Performance Records."
The Trading Managers for Cornerstone II are Abacus Trading Corporation
("Abacus") and John W. Henry & Co., Inc. ("JWH"). A detailed description
of Abacus and JWH, their principals and trading systems and their
composite performance records is set forth under "The Trading Managers--
Dean Witter Cornerstone Fund II" and with respect to JWH "--Dean Witter
Cornerstone Fund IV."
CORNERSTONE III
Cornerstone III seeks as its investment objective the maximum rate of
capital appreciation consistent with a high percentage of assets
committed as margin. During the period April 1995-March 1996, the
Trading Managers for Cornerstone III collectively committed on average
between 10 and 45% of the Net Assets of Cornerstone III as margin.
42
<PAGE>
The General Partner requires Trading Managers for Cornerstone III to
conduct their trading in accordance with the trading policies of
Cornerstone III. These trading policies provide, among other things,
that a Trading Manager will not initiate additional positions in any
commodity if such additional positions would result in aggregate net
long or net short positions for all commodities requiring as margin more
than 65% of the funds allocated to such Trading Manager. For example, a
Trading Manager for Cornerstone III managing $2,000,000 of Net Assets
would not be able to add new positions after it had $1,300,000 invested
as margin in existing open positions. If the initial margin on all
commodity contracts were $5,000, a Trading Manager for Cornerstone III
could have no more than 260 net long or net short open positions. This
is $200,000 more in margin and 40 more positions than in the case of a
Trading Manager for Cornerstone II with the same amount of Net Assets
under management.
The Trading Managers for Cornerstone III currently are CCA Capital
Management, Inc. ("CCA") and Sunrise Capital Management, Inc.
("Sunrise"). Effective July 1, 1996, the General Partner has determined
to replace CCA with Welton Investment Systems Corporation ("WISC") and
Abraham Trading Corporation ("Abraham"). A detailed description of CCA,
Sunrise, WISC and Abraham, their principals and trading systems and
their composite performance records is set forth under "The Trading
Managers--Dean Witter Cornerstone Fund III" and with respect to Sunrise
"--Dean Witter Cornerstone Fund IV."
CORNERSTONE IV
Cornerstone IV was formed to engage in the speculative trading of
futures and forward contracts and other commodity interests. Such
trading has concentrated exclusively in a portfolio of diverse world
currencies. Cornerstone IV seeks to profit from the price relationships
of, between and among various currencies.
Cornerstone IV seeks as its investment objective the maximum rate of
capital appreciation consistent with a medium to high percentage of
assets committed as margin. During the period April 1995-March 1996, the
Trading Managers for Cornerstone IV collectively committed on average
between 5 and 55% of the Net Assets of Cornerstone IV as margin. The
higher margin commitment for Cornerstone IV is due principally to: (a)
the fact that the Trading Managers normally take positions in two
different foreign currencies at or about the same time, thus doubling
positions, in order to take advantage of the price relationship between
the two currencies; and (b) the fact that in the Partnership's trading
of currency contracts in the forward contract and interbank markets, DWR
generally requires good faith deposits with it in lieu of margin (i) in
amounts approximately equivalent to the margin required for trading
foreign currency futures contracts on United States exchanges when the
Partnership trades the same currencies for which futures contracts are
traded on such exchanges, and (ii) in amounts which may be higher than
such exchange margin requirements when the Partnership trades other
world currencies for which no futures contracts are traded on such
exchanges.
The General Partner requires Trading Managers for Cornerstone IV to
conduct their trading in accordance with the trading policies of
Cornerstone IV. These trading policies provide, among other things, that
a Trading Manager will not initiate additional positions in any
commodity if such additional positions would result in aggregate net
long or short positions for all commodities requiring as margin more
than 65% of the Net Assets allocated to such Trading Manager. For
example, a Trading Manager managing $2,000,000 of Net Assets would not
be able to add new positions after it had $1,300,000 invested as margin
in existing open positions. If the initial margin on all commodity
contracts were $5,000, a Trading Manager for Cornerstone IV could have
no more than 260 net long or net short open positions. This is the same
amount of margin and positions as in the case of a Trading Manager for
Cornerstone III with the same amount of Net Assets under management.
However, it is $200,000 more in margin and 40 more positions than in the
case of a Trading Manager for Cornerstone II with the same amount of Net
Assets under management.
The Trading Managers for Cornerstone IV are JWH, a Trading Manager for
Cornerstone II, and Sunrise, a Trading Manager for Cornerstone III. In
their trading for Cornerstone IV, JWH utilizes only the JWH
International Foreign Exchange Program, one of the three different
trading systems it utilizes in trading for Cornerstone II, while Sunrise
uses a modification of the same trading systems that it utilizes in
trading for Cornerstone III. A detailed description of JWH and Sunrise,
their principals and trading systems and their composite performance
records is set forth under "The Trading Managers--Dean Witter Cornerstone
Fund IV."
SUMMARY OF DIFFERENCES AMONG PARTNERSHIPS
The following summarizes certain differences among the Partnerships:
43
<PAGE>
<TABLE>
<CAPTION>
Cornerstone II Cornerstone III Cornerstone IV
<S> <C> <C> <C>
Margin Commitment........... Medium High Medium-High
April 1995-March 1996 Average
Margin Commitment........ 10-40% 10-45% 5-55%
Maximum Percentage
Margin Commitment........ 55% 65% 65%
Trading Managers............ Abacus CCA* JWH
JWH Sunrise Sunrise
<FN>
- - ----------------------
* To be replaced July 1, 1996 by WISC and Abraham.
</TABLE>
Each Partnership conducts its business separate and independent of the
other Partnerships. The discussion under "Trading Policies" below and
"General Description of Trading Systems" is applicable to each
Partnership except where noted otherwise. The Trading Managers retained
by each Partnership are discussed separately under "The Trading
Managers."
Use of Proceeds. The Trading Managers for each Partnership will be
allocated an equal amount of the net proceeds received by such
Partnership at each month-end from Exchanges of Units, except that the
Trading Managers for Cornerstone II have agreed to an unequal
apportionment of net proceeds. Each Trading Manager is obligated to
invest its share of such funds in commodity futures contracts and other
commodity interests in accordance with its trading systems. See "General
Description of Trading Systems" and "The Trading Managers." The Trading
Managers for each Partnership are obligated to invest in accordance with
the trading policies applicable to such Partnership. These trading
policies provide, among other things, that a Trading Manager may commit
as margin up to but no more than a certain percentage of funds under
management. See "Trading Policies" below.
Each Partnership's assets are deposited with DWR in separate commodity
trading accounts established by DWR for each Trading Manager, and are
either held in non-interest bearing bank accounts or invested in
securities approved by the CFTC for investment of customer funds. In any
event, DWR credits each Partnership at month-end with interest income on
80% of such Partnership's average daily Net Assets for the month at a
rate equal to the average yield on 13-week U.S. Treasury Bills issued
during such month. In the case of Cornerstone IV, for purposes of such
interest payments, Net Assets do not include monies due the Partnership
on or with respect to forward contracts and other commodity interests
but not actually received by it from banks, brokers, dealers and other
persons. No Partnership receives interest income on the balance of its
assets held by DWR. Each Partnership's assets held by DWR may be used as
margin solely for such Partnership's trading. DWR benefits from interest
earned on the Partnerships' funds in excess of the rate paid to the
Partnerships. DWR also benefits from compensating balance treatment in
connection with its designation of a bank or banks in which the
Partnerships' assets are deposited, i.e., DWR receives favorable loan
rates from such bank or banks by reason of such deposits. To the extent
such benefits exceed the interest DWR is obligated to credit to the
Partnerships, such benefits will not be shared with the Partnerships.
Assets of each Partnership are not commingled with assets of one another
or any other entity. However, margin deposits and deposits of assets
with DWR do not constitute commingling. Each Partnership's assets are
segregated in accordance with Section 4d(2) of the CEAct and the rules
and regulations of the CFTC.
Trading Policies. Each Partnership requires its Trading Managers to
manage the funds allocated to them in accordance with trading policies
set forth in its Limited Partnership Agreement. The following trading
policies are applicable to each Partnership and its Trading Managers
except to the extent noted otherwise.
1. Each Trading Manager will diversify its futures contract holdings
in order to avoid reliance on one or a few commodities and will trade
those futures contracts that, in its opinion, have sufficient liquidity
to enable the Partnership to enter and close out positions without
causing undue price movements (not applicable to Cornerstone IV). Each
Trading Manager for Cornerstone IV may trade in markets which have low
trading volume and are illiquid. Each Trading Manager normally will not
establish new positions in a futures contract for any one commodity
where the original margin therefor, when added to the original margin on
deposit for all open positions in futures contracts for such commodity,
irrespective of the delivery month, exceeds a certain percentage of the
Net Assets being managed by such Trading Manager. The percentages vary
by Partnership as follows:
Dean Witter Cornerstone Fund II--15%
Dean Witter Cornerstone Fund III--20%
Dean Witter Cornerstone Fund IV--20%
44
<PAGE>
If a Trading Manager invests in currency forward contracts, similar
principles will apply. In no event will a Trading Manager commit more
than a maximum percentage of the Net Assets being managed by such
Trading Manager for margin in any one commodity, irrespective of the
delivery month. The maximum percentages vary by Partnership as follows:
Dean Witter Cornerstone Fund II--20%
Dean Witter Cornerstone Fund III--25%
Dean Witter Cornerstone Fund IV--35%
For purposes of this restriction, gold and silver bullion and coins will
be considered one commodity and the soybean complex, consisting of
soybeans, soybean oil and soybean meal, will be considered one
commodity.
2. DWR will require each Partnership to make margin deposits of not
less than the exchange minimum levels applicable to individuals or,
where there are no exchange minimums (as in the currency forward
contract market), the commodity broker's minimums. Each Trading Manager
will not initiate additional positions in any commodity if such
additional positions would result in aggregate net long or net short
positions for all commodities requiring as margin more than a certain
percentage of the Net Assets managed by such Trading Manager. The
percentages vary by Partnership as follows:
Dean Witter Cornerstone Fund II--55%
Dean Witter Cornerstone Fund III--65%
Dean Witter Cornerstone Fund IV--65%
Under certain market conditions, such as an abrupt increase in margins
required by a commodity exchange or its clearinghouse or an inability to
liquidate open positions because of daily price fluctuation limits or
both, the Trading Manager may be required to commit as margin in excess
of the foregoing limit. In such event, the Trading Manager will reduce
its open positions to comply with the foregoing limit before initiating
new positions.
3. Each Trading Manager will only invest funds for a Partnership
where sufficient volume exists, in the opinion of the Trading Manager,
for liquidating positions either on appropriate exchanges or in the
currency forward contract market (not applicable to Cornerstone IV).
Each Trading Manager for Cornerstone IV may trade in markets which have
low trading volume and are illiquid.
4. A Partnership will trade currencies in the interbank and forward
contract markets only with banks, brokers, dealers, and other financial
institutions which the General Partner, in conjunction with DWR, has
determined to be creditworthy. In determining the creditworthiness of a
counterparty to a currency forward contract, the General Partner and DWR
will consult with the Corporate Credit Department ("CCD") of DWR, which
monitors participants in the interbank market with which DWR deals on a
regular basis. The CCD, among other things, reviews published financial
information regarding such participants, and calculates various ratios,
including, but not limited to, net worth requirements, return on average
assets, overall portfolio yield to cost of money, equity to assets,
dividend payout and capital formation, and evaluates each participant's
profitability and compares the same against its peer groups. From time
to time, the CCD modifies such procedures, institutes new procedures and
reviews other information.
5. Because open positions in a futures or forward contract normally
will be closed out before the first notice day for making or taking
delivery of the cash item, each Partnership normally will not make or
take delivery, except as required to match trades and close out a
position in the currency forward contract market. No assurance can be
given that delivery will never occur, but each Trading Manager will make
every effort to avoid the Partnership's taking or making delivery. Each
Trading Manager will not take a position in any commodity during the
delivery month of that contract, except to match trades to close out a
position in the currency forward contract market or liquidate trades in
a limit market. (Not applicable to Cornerstone IV.)
6. Each Partnership will not employ the trading technique commonly
known as "pyramiding," in which the speculator uses unrealized profits
on existing positions in a given commodity due to favorable price
movement as margin specifically to buy or sell additional positions in
the same or a related commodity. However, a Trading Manager may take
into account a Partnership's open trade equity on existing positions in
determining generally whether to acquire additional commodity interest
contracts on behalf of the Partnership and may add to existing positions
so long as it is in compliance with the restriction in the preceding
sentence.
45
<PAGE>
7. Each Trading Manager will not, without the prior written consent
of the General Partner, employ the trading techniques known as "spreads"
and "straddles" on behalf of a Partnership, except to liquidate trades
in a limit market or to hedge cash commodity transactions (not
applicable to Cornerstone IV). In the case of Cornerstone IV, each
Trading Manager will trade spreads and straddles on behalf of the
Partnership. The General Partner has agreed that the Trading Managers
for Cornerstone II and III which have forward contract trading
experience may use "spreads" and "straddles" in managing a portion of
the assets of those Partnerships. The terms "spread" and "straddle"
describe a transaction involving the simultaneous holding of futures or
forward contracts for the same or a related commodity but for different
delivery dates in which the trader expects to earn profits from widening
or narrowing movement of the prices of the two contracts.
8. Each Partnership will not engage in cash commodity transactions
unless the cash commodity is fully hedged (not applicable to Cornerstone
IV).
9. Each Partnership will not purchase, sell or trade securities
(except securities approved by the CFTC for investment of customer
funds).
10. Each Partnership will not borrow (except for margin purposes) or
lend money. Each Partnership may utilize lines of credit for trading
currency forward contracts. Such trading does not, however, involve
borrowing for purposes of this trading policy. Each Partnership will not
permit "churning" of the Partnership's assets.
11. Trading Manager will engage in trading options on futures
contracts or physical commodities only with the prior express written
consent of the General Partner.
Trading policies applicable to each Partnership may be changed by the
General Partner, except that material changes to trading policies
numbered 1, 2, 3, 6, 8, 9 and 10 may only be made by the General Partner
with prior written approval of more than 50% of the Limited Partners of
a Partnership.
CAPITALIZATION
The following table sets forth the actual capitalization of the
Partnerships as of March 31, 1996. Since unsold Units may only be sold
in Exchanges, which requires a redemption of Units from one Partnership
and for purchase of Units in one or two of the other Partnerships, it is
impractical to provide a pro forma table reflecting the capitalization
of the Partnerships if all unsold Units are sold, since redemptions
would, of necessity, offset sales.
There will be no difference insofar as sharing of profits and losses are
concerned between Units of Limited Partnership Interest and Units of
General Partnership Interest.
<TABLE>
<CAPTION>
Amount
Outstanding
as of
March 31,
Title of Class 1996
-------------- ------------
<S> <C> $
Cornerstone II:
Limited Partnership Interest(1)........... 28,122,046
General Partnership Interest(1)........... 589,500
Total................................. 28,711,546
----------
----------
Cornerstone III:
Limited Partnership Interest(1)........... 37,939,860
General Partnership Interest(1)........... 823,709
Total................................. 38,763,569
----------
----------
Cornerstone IV:
Limited Partnership Interest(1)........... 97,342,573
General Partnership Interest(1)........... 1,811,486
Total................................. 99,154,059
----------
----------
- - ---------------
</TABLE>
46
<PAGE>
GENERAL DESCRIPTION OF TRADING SYSTEMS
INTRODUCTION
The primary purpose of each Partnership is appreciation of its assets
through speculative trading in commodity futures contracts and other
commodity interests. A Partnership's ability to succeed in this endeavor
depends largely on the combined success of the respective trading
systems employed on behalf of such Partnership by its Trading Managers.
Each Trading Manager must anticipate market trends and effect the
purchase or sale of commodity interest contracts in accordance with its
predictions as to those trends. To the extent that Trading Managers for
a Partnership anticipate and follow opposite market trends, the gains on
one Trading Manager's positions will tend to offset the losses on
another Trading Manager's positions. While each Trading Manager has
provided the General Partner with a general description of the trading
systems to be employed on behalf of a Partnership's account, investors
are cautioned that the details of the systems are proprietary secrets
and, as such, are not generally known to the General Partner. As a
result, the General Partner will be unable for the most part to
determine whether each Trading Manager is or is not following its
trading system. While the officers of the General Partner are familiar
with commodity trading and monitor each Trading Manager's compliance
with the trading policies applicable to such Trading Manager (see
"Trading Policies"), there is no basis for judging whether or not a
Trading Manager is operating within the general parameters of its
technical trading strategy (that is, whether the losses or gains from
individual transactions are within anticipated ranges). Thus, no
assurance can be given that a trading system followed in the past is
being followed for a particular trade or series of trades.
In addition, there can be no assurance that, even if a trading system
were followed, it would produce results similar to those experienced in
the past. Although the trading system that is employed on behalf of a
Partnership's account by each Trading Manager is the same used in such
Trading Manager's management of other commodity accounts except to the
extent noted otherwise, there can be no assurance that the same or
similar results will occur in the future. Further, the performance
results of all Trading Managers for each Partnership are combined and a
Limited Partner will not receive the direct benefit of any single
Trading Manager's performance record. Additionally, to the extent that
funds are apportioned unequally among Trading Managers for a
Partnership, the results of individual Trading Managers will affect the
Net Assets or Net Asset Value of a Unit disproportionately. See "Risk
Factors--Risks Relating to the Trading Managers--Unequal Apportionment of
a Partnership's Assets among Trading Managers" and "The Management
Agreements."
Commodity traders basically rely on either of two types of analysis for
making their trading decisions, "technical" or "fundamental," or on a
combination of technical and fundamental analysis. Generally speaking,
technical trading strategies are designed to identify and follow
existing and incipient trends in the markets, while fundamental trading
strategies are designed to forecast future developments in the markets.
Technical analysis is not based on the anticipated supply and demand of
a particular cash (actual) commodity; instead, it is based on the theory
that the study of the commodities markets themselves will provide a
means of anticipating the external factors that affect the supply and
demand of a particular commodity in order to predict future prices.
Technical analysis operates on the theory that market prices at any
given point in time reflect all known factors affecting supply and
demand for a particular commodity; consequently, technical analysis
theorizes that a detailed analysis of, among other things, actual daily,
weekly and monthly price fluctuations, volume variations and changes in
open interest can be of predictive value when predicting the future
course of price movements. Technical strategies generally utilize a
series of mathematical measurements and calculations designed to monitor
market activity for the particular strategies used, and trading
decisions are based on signals generated by charts, manual calculations,
computers or a combination of any or all of the foregoing. As an example
with respect to a financial instrument contract, one set of technical
procedures might evaluate the following factors, among others, on a
daily basis: (1) the price trends of the particular financial instrument
contract and the levels at which to initiate new positions and terminate
existing positions; (2) the volatility that the particular financial
instrument contract has displayed in the past; (3) the condition of the
financial instrument market being traded (e.g., to determine whether it
is a trending market or an erratic and non-trending market); and (4) the
state of the financial instrument markets in general (e.g., to determine
the proper points for initiating new positions and allowing increases in
existing commitments).
Fundamental analysis, on the other hand, is based on the study of
factors external to the trading market that affect the supply and demand
of a particular commodity in order to predict future prices. Such
factors might include weather, the economy of a particular commodity,
government policies, United States and foreign political and economic
events, and changing trade prospects. Fundamental analysis theorizes
that by
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monitoring relevant supply and demand factors of a particular
commodity, a state of current or potential disequilibrium of conditions
may be identified that has yet to be reflected in the price level of
that commodity. Fundamental analysis assumes that the markets are
imperfect, that information is not instantaneously assimilated or
disseminated and that econometric models can be constructed that
generate equilibrium prices that may indicate current prices are
unsustainable. As an example with respect to an agricultural commodity,
some of the fundamental factors that might affect the supply of soybeans
include the acreage planted, crop conditions (drought, flood, disease,
etc.), labor disputes affecting planting, harvesting, and distributions
and the previous years crop carryover. The demand for soybeans consists
of domestic usage and exports, which are affected by general world
economic conditions and the cost of soybeans in relation to the cost of
competing food products. As an example with respect to a currency, some
of the fundamental factors that might affect the demand for a currency
(e.g., British pound) include the inflation and interest rates of the
currency's domestic market, exchange controls and that country's balance
of trade, economy and political stability. The supply of a currency can
be determined by, among other things, government spending, credit
controls, domestic money supply and the prior years trade balances.
TRADING BY THE TRADING MANAGERS
The trading systems utilized by the Trading Managers for the
Partnerships are each technical trading systems, and trading decisions
are based in part on chart interpretations, mathematical calculations
and computer-assisted analysis of the commodities markets. The trading
systems employed by the Trading Managers attempt to detect trends in
price movements for commodity interest contracts. All successful
speculative commodity trading depends upon establishing a position and
then maintaining that position while the market moves in favor of the
commodity trader. Technical trading systems seek to establish such
positions and to exit the market and/or establish reverse positions when
the favorable trend either reverses or does not materialize. No such
system will be successful if the market is moving in an erratic and non-
trending manner or if the market moves in the direction opposite to that
predicted by the system. Because of the nature of commodity markets,
prices frequently appear to be trending when the market is, in fact,
without a trend. In addition, a trading system may identify markets as
trending favorably to a particular position even though actual market
performance thereafter is the reverse of the trend identified.
A trend-following trading system will seldom direct market entry or exit
at the most favorable price in the particular market trend. Rather, this
type of trading system seeks to close out losing positions quickly and
to hold portions of profitable positions for as long as the trading
system determines that the particular market trend continues to exist;
however, there can be no assurance that profitable positions can be
liquidated at the most favorable price in a particular trend. As a
result, the number of losing transactions can be expected to exceed
substantially the number of profitable transactions. However, if the
system is successful, these losses should be small and should be more
than offset by a few large gains.
Some of the differences among the trading systems of the Trading
Managers are discussed under "The Trading Managers." Each Trading
Manager, from time to time, may change or refine its trading system.
However, a Trading Manager may not materially change its trading
policies, systems, methods or strategies used for a Partnership's
account without the prior written approval of the General Partner.
Additional trading systems have been or may be developed by the Trading
Managers and, with the written permission of the General Partner, may be
employed in trading a portion of the assets allocated to a Trading
Manager.
Although a technical trading system normally consists of a series of
fixed rules applied manually or by computer, such system still requires
that principals or employees of the Trading Manager make certain
subjective judgments and decisions. For example, a Trading Manager will
select the commodities and markets which it will follow, the commodities
and markets which it will actively trade and the contract months in
which it will maintain positions. A Trading Manager will also determine
when it will roll over a position (i.e., liquidate a position which is
about to expire and initiate a position in a more distant contract
month). In addition, a Trading Manager will determine the position size
or number of contracts in each commodity to be bought or sold at any
given time, the time at which orders are to be placed with and executed
by a commodity broker, the method by which orders are to be placed, and
the types of orders that are to be placed. These types of decisions
require consideration of, among other things, the volatility of the
particular market, the pattern of price movements (both interday and
intraday), open interest, trading volume, changes in spread
relationships between various contract months and between commodities,
and overall portfolio balance and risk exposure. In addition, these
types of decisions are often based on consideration of typical
fundamental factors affecting the supply and demand of a particular
commodity. With respect to
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the timing and execution of trades, a Trading
Manager may also rely to some extent on the judgment of others, such as
commodity brokers and floor brokers. No assurance can be given that
consideration of any or all of the foregoing factors will be made by the
Trading Managers and their principals and employees with respect to
every trade for the Partnerships or that consideration of any of such
factors in a particular situation will lessen a Partnership's risk of
loss. In most cases, these subjective decisions are made by one
principal of the Trading Manager. Investors should be aware that such
decisions may involve a substantial element of judgment and that such
person's unavailability to make such decisions could materially impair
the operation of the trading system.
Each Trading Manager must determine the timing and method by which
orders will be placed with various brokerage firms. The Trading Manager
must also select the types of orders to be placed for its managed
accounts. Executions for the Partnerships' accounts and the Trading
Managers' other accounts may be made during the day: (1) on a "stop"
basis, where an order becomes a market order when the specified stop
price is reached; (2) on an "at the market" basis, where the order is
executed as soon as possible after being received on the floor of the
exchange; (3) on a "limit" basis, where an order is placed to buy or
sell at a specified price or better than the specified price; and (4) on
a "closing price" basis, which is a contingent order based on the
closing range of the market. Order placement will vary in accordance
with the trading system being used, the type of market encountered and
the type of order that can be used on the exchange on which a particular
commodity is traded. Since many of the Trading Managers have varied
these practices over the years, their prior performance may not
necessarily reflect future performance.
Each Trading Manager also maintains a procedure for determining the
appropriate quantity of contracts to be traded for an account of a given
size and for all accounts. Some Trading Managers maintain a fixed or
equal number of positions for each commodity traded, regardless of
differences in volatility or prices among commodities. Other Trading
Managers continually adjust their trading portfolios and the position
size of an order immediately prior to placement, based on such factors
as past market volatility, prices among commodities, amount of risk,
potential return and margin requirements. While each of the Trading
Managers presently has a method for determining position size for a
trade, the initial determination of this method was a subjective
decision made by the principals of the Trading Manager. Although two
Trading Managers might have substantially similar trading systems and
might be following the same trend, the method under which position size
is determined could cause performance results to differ significantly.
Each Trading Manager, from time to time, may at its discretion add to or
delete from its portfolio additional commodity interest contracts and
commodities.
The Trading Managers' orders for trades generally will be placed
directly with the order desk of DWR, and confirmations of the executed
trades will be retained by DWR. Although other accounts advised by each
Trading Manager, from time to time, may employ DWR as their commodity
broker, there is no obligation on the part of each Trading Manager or
the owners of such other accounts to use DWR as broker in connection
with such other accounts, and each Trading Manager may and does trade
for such other accounts at various commodity brokerage firms in addition
to DWR.
The above general description of trading systems does not discuss
significant differences in the trading systems developed and employed by
each Trading Manager. Certain of these differences are discussed for
each Trading Manager under the following section entitled "The Trading
Managers." However, as stated above, the actual systems are proprietary
and confidential and the General Partner does not know the full extent
to which such systems differ.
THE TRADING MANAGERS
INTRODUCTION
Certain of the Trading Managers of the Partnerships are available to
trade "notional" equity for clients-i.e., to trade such clients'
accounts as if more equity were committed to such accounts than is, in
fact, the case. Consequently, the CFTC requires that the following
disclosure statement be included verbatim herein. THE PARTNERSHIPS'
ACCOUNTS WILL NOT INCLUDE ANY NOTIONAL EQUITY
SPECIAL DISCLOSURE FOR NOTIONALLY-FUNDED ACCOUNTS
You should request your commodity trading advisor to advise you of the
amount of cash or other assets
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(Actual Funds) which should be deposited
to the advisor's trading program for your account to be considered
"Fully-Funded." This is the amount upon which the commodity trading
advisor will determine the number of contracts traded in your account
and should be an amount sufficient to make it unlikely that any further
cash deposits would be required from you over the course of your
participation in the commodity trading advisor's program.
You are reminded that the account size you have agreed to in writing
(the "nominal" or "notional" account size) is not the maximum possible
loss that your account may experience.
You should consult the account statements received from your futures
commission merchant in order to determine the actual activity in your
account, including profits, losses and current cash equity balance. To
the extent that the equity in your account is at any time less than the
nominal account size you should be aware of the following:
1. Although your gains and losses, fees and commissions measured in
dollars will be the same, they will be greater when expressed as a
percentage of account equity.
2. You may receive more frequent and larger margin calls.
DEAN WITTER CORNERSTONE FUND II
1. ABACUS TRADING CORPORATION
(CURRENT ALLOCATION-24.9%)
Abacus Trading Corporation (formerly A.O. Management Corporation)
("Abacus") is a Pennsylvania corporation with its principal place of
business at 1536 Cole Blvd., Suite 315, Golden, Colorado 80401. A.O.
Management Corporation was formed in 1978 to manage the trading of
commodity pools and managed accounts. Effective October 26, 1994, A.O.
Management Corporation changed its name to Abacus Trading Corporation.
Abacus is not affiliated with the General Partner or DWR or with any of
the other Trading Managers for the Partnerships. Abacus is registered
with the CFTC as a commodity trading advisor and is a member of the NFA
in such capacity.
Prior to January, 1995, trading by Abacus (and its predecessor, A.O.
Management) was done utilizing A.O. Management systems. Progressive
enhancements to the A.O. Management systems resulted in numerous changes
to the point where, by January 1995, the systems used by Abacus differed
significantly from those employed in the past.
The officers and directors of Abacus are as follows:
Carl C. Peters, is President, a Director and sole stockholder of Abacus.
Dr. Peters is involved in marketing, systems research, and product
development at Abacus. His academic credentials include a Ph.D. in
Operations Research from UCLA, an M.S. from M.I.T. in Engineering and a
B.S. from Penn State University. Prior to joining Abacus, Dr. Peters
held an endowed chair in economics and business at Westminster College
in Pennsylvania (1986-1988). His previous experience includes business
analysis and corporate planning at Weyerhauser Company (1971-1976), and
a faculty appointment in the College of Business, University of Denver
(1977-1985), where he was Department Chairman and Director of the
Decision Sciences Program. A recognized authority on trading system
performance evaluation, he has developed and taught college level
courses on the futures markets, lectured nationally and internationally,
and published papers on trading system performance. Dr. Peters is also
sole principal and stockholder of International Derivative Investments,
Inc. ("IDI"), a commodity trading advisor and investment adviser formed
in 1991.
Ronald D. Murray, Trading Operations Manager, joined Abacus in March,
1991. His registration as a principal of Abacus became effective on
November 16, 1993. He has a B.S. degree from Minot State College
(1977). Prior to joining Abacus, he was a Financial Consultant with
Prudential Securities (1989-1991), Thompson McKinnon Securities (1983-
1988), and Boettcher and Company (1980-1982). Mr. Murray's primary
responsibilities are the management of all operations related to
trading.
There have been no material administrative, civil or criminal
proceedings against Abacus or any of its principals during the five
years preceding the date of this Prospectus.
Pursuant to its Management Agreement, Abacus owns 10 Units of
Cornerstone II. None of the principals of Abacus own any Units of such
Partnership, nor do Abacus and its principals own any Units of
Cornerstone III or IV.
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Abacus and its principals may, from time to time, trade commodity
interest contracts for their own proprietary accounts. Such trades may
or may not be in accordance with the Abacus trading system described
below. The records of trading in such accounts will not be made
available to Limited Partners for inspection. Set forth below is a
general description of the Abacus trading system.
The Abacus Trading System
Abacus offers three different programs: the Currency Program, the
Financials Program and the Metals and Fully Diversified Program. All of
the programs are traded according to the same basic trading strategy.
Descriptions of the different strategies follow. Abacus trades on
exchanges in the U.S. and certain foreign countries. Abacus places its
orders both before and during market hours. When placing its orders
with introducing brokers, futures commission merchants such as DWR,
and/or banks, Abacus does not adhere to any arbitrary mechanical or
rotational system and does not attempt to enter orders simultaneously.
Instead, it attempts to enter orders in such a way as to attain the best
overall price for its clients. Since Abacuss method of entering orders
involves subjective judgments, it necessarily follows that some clients
may receive better prices than others on different occasions or during
different time spans. Abacus uses good faith and its best efforts to
achieve an equitable treatment of all clients with respect to priority
in entering orders and assignments of executed trades. Abacus believes
that its method of placing orders is superior to other available
procedures and that its method will produce the best average prices for
each of its clients over time.
Trading Strategy for the Currency, Financials and Metals and Fully
Diversified Programs. Abacus bases its trades primarily upon a
proprietary computerized, trend-following trading system developed by
Abacus. The system, which has been real-time trading since 1978, has
been periodically modified and expanded. The principal objective of the
trading strategies is to profit from major, sustained changes in prices
of commodity futures.
The trading principles which Abacus employs include: (1) limiting
trading to markets which it believes to be liquid enough to handle the
amount of trading contemplated; (2) diversifying the positions among
various commodities and among similar commodities in order to limit
exposure in any one area; and (3) limiting the assets committed as
margin at minimum exchange margin requirements, generally to between 5%
to 35% of initial capital, although commodity brokers may require margin
in excess of exchange minimums. Under normal conditions Abacus expects
to trade up to 200 fully-executed trades (round-turns) per $100,000 of
client account equity per year, although this may be higher or lower
depending on price volatility. Abacus selects a diversified portfolio of
commodities and occasionally maintains positions in more than one
contract month of the selected commodities. Decisions whether to trade a
particular commodity futures contract are also based upon a calculation
of profit potential (based upon historical and current price analysis).
In addition to utilizing the trading signals provided by its technical,
trend-following system, Abacus may also utilize subjective judgment to
make adjustments to these signals based upon its knowledge of the
strengths and weaknesses of its system under certain market conditions.
Abacus expects such adjustments to be primarily in the nature of an
overlay on system positions, particularly in the financial markets,
although they may play a more prominent role in the non-financial
markets. Such adjustments may result in missing significant profit
opportunities that otherwise might be captured by depending solely on
Abacus's computer-based system or utilizing different strategies.
Abacus's trading systems, programs and strategies have evolved and will
continue to evolve over time as a result of continuing research, testing
of data and cumulative trading experience. These modifications occur
within the general description of the trading programs described herein.
Clients are not advised of these modifications resulting from this
ongoing process unless such changes represent a substantial departure
from Abacus's trading approach as described in its Disclosure Document.
Abacus directs the trading of client accounts in three different
programs each of which trades a variety of commodity futures and cash
and forward contracts in the interbank market as described below.
Fully Diversified Program. This program diversifies among as many
commodity futures as Abacus believes is appropriate to earn a profit
over time. Diversification is achieved by trading a variety of futures,
some of which are not closely related to one another. In so doing,
overall volatility of returns should be reduced with profits accruing at
a smoother rate. Commodity groups used in the Program include metals,
global financial instruments, foreign currencies, oil, grains and other
agricultural products. The amount and degree of diversification depends
upon account size and Abacus's judgment as to which commodity futures
contracts are suitable for trading.
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Financials and Metals Program. This program is concentrated exclusively
in the global interest rate, foreign currency, and metal markets and is
traded using the same trend-following approach as the Fully Diversified
Program. Its objective is to profit from economic forces such as
interest rates, inflation and deflation in the international financial
marketplace. Because of the lower diversity of commodities traded, it
will most likely be more volatile than the Fully Diversified Program.
Based on historical price analysis and past trading experience, Abacus
believes that this increase in volatility will be partially offset by
the broader, smoother trends likely to occur in these commodities.
Currency Program. This program is concentrated exclusively in foreign
currencies and is traded using the same trend-following approach as the
Fully Diversified and Financials and Metals Programs. Its objective is
to profit from economic forces which affect the relationships between
world currencies in the international financial marketplace. Because of
the lower diversity of the commodities traded, it will most likely be
more volatile than the Fully Diversified Program.
As of March 31, 1996, the aggregate amount of funds under management
pursuant to the Diversified Program was $9,245,656, and the aggregate
amount of funds under management pursuant to all Abacus trading programs
was $16,377,188.
As of March 31, 1996, Abacus was managing approximately $7,144,730 of
Cornerstone II. Such amount and the percentage of assets of Cornerstone
II managed by Abacus will change as a result of allocations of assets
from the Exchange of Units of Cornerstone II, allocations and
reallocations among trading managers and/or trading systems, and the
performance of Abacus and the other trading manager for Cornerstone II.
2. JOHN W. HENRY & CO., INC.
(CURRENT ALLOCATION--75.1%)
John W. Henry & Co., Inc. ("JWH") is a United States-based global
investment management corporation with offices located at 301 Yamato
Road, Boca Raton, Florida and at One Glendinning Place, Westport,
Connecticut 06880. Its telephone number is (203) 221-0431. JWH is
recognized as a leader in managing capital in futures, interest rate,
and foreign exchange markets for international banks, brokerage firms,
pension funds, institutions, and high-net-worth individuals. JWH trades
numerous contracts of a 24-hour basis in the U.S., Europe and Asia, and
has grown to be one of the largest advisors in the industry, managing
over $1.3 billion in client capital.
John W. Henry & Company began managing assets in 1981 as a sole
proprietorship, and was later incorporated in the state of California as
John W. Henry & Co., Inc. to conduct business as a commodity trading
advisor. The sole shareholder of JWH is the John W. Henry Trust dated
July 27, 1990. The firm is registered as a commodity trading advisor and
a commodity pool operator with the Commodity Futures Trading Commission
and is a member of the National Futures Association ("NFA"). JWH is not
affiliated with the General Partner or DWR or with any of the other
trading managers for the Partnerships.
The individual principals of JWH are as follows:
Mr. John W. Henry, is chairman of the JWH Board of Directors and is
trustee and sole beneficiary of the John W. Henry Trust dated July 27,
1990. He currently concentrates his activities at JWH on portfolio
management, business issues and frequent dialogue with trading
supervisors. Mr. Henry is the exclusive owner of certain trading systems
licensed to Elysian Licensing Corporation, a corporation wholly-owned by
Mr. Henry and sublicensed by Elysian Licensing Corporation to JWH and
utilized by JWH in managing client accounts. Over the last fifteen
years, Mr. Henry has developed many innovative investment programs which
have enabled JWH to become one of the most successful money managers in
the foreign exchange, futures and fixed income markets.
Mr. Henry has served on the Board of Directors of the National
Association of Futures Trading Advisors ("NAFTA") and the Managed
Futures Trade Association, and has served on the Nominating Committee of
the NFA. Mr. Henry currently serves on the Board of Directors of the
Futures Industry Association ("FIA") and is Chairman of the FIA Task
Force on Derivatives for Investment. He also currently serves on a panel
created by the Chicago Mercantile Exchange and the Chicago Board of
Trade to study cooperative efforts related to electronic trading, common
clearing and the issues regarding a merger. In 1989, Mr. Henry
established residency in Florida and since that time has performed
services from that location as well as from the offices of JWH in
Westport, Connecticut. Mr. Henry is a principal of JWH Risk Management,
Inc., Westport Capital Management Corporation, Global Capital Management
Limited and JWH Investments, Inc., all of which are affiliates of JWH.
Since the beginning of 1987, Mr. Henry has, and will continue to devote
considerable time to activities in businesses unrelated to JWH and its
affiliates.
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Mr. Mark H. Mitchell, is an executive vice president of JWH. He is also
vice chairman and a director of JWH Risk Management, Inc. Prior to
joining JWH in January 1994, Mr. Mitchell was a partner of Chapman and
Cutler, a Chicago law firm, where he headed its futures law practice
since August 1983. From August 1980 to March 1991, he served as General
Counsel of the NAFTA and, from March 1991 to December 1993, he served as
General Counsel of the Managed Futures Association. Mr. Mitchell is
currently a member of the Commodity Pool Operator/Commodity Trading
Advisor Advisory Committee and the Special Committee for the Review of a
Multi-tiered Regulatory Approach to NFA Rules, both of the NFA and the
Executive Committee of the Law and Compliance Division of the FIA. In
1985, he received the Richard P. Donchian Award for Outstanding
Contributions to the Field of Commodity Money Management. He has been an
editor of Futures International Law Letter and its predecessor
publication, Commodities Law Letter. He received an A.B. with honors
from Dartmouth College and a J.D. from the University of California at
Los Angeles, where he was named to the Order of the Coif, the national
legal honorary society.
Mr. David R. Bailin, is an executive vice president and is a member of
the Operating Committee of JWH. He is responsible for the development,
implementation, and management of JWH's sales and marketing
infrastructure. Prior to joining JWH in December 1995, Mr. Bailin was
managing director-development since April 1994 for Global Asset
Management ("GAM"), a Bermuda based management firm with over $7 billion
in managed assets. He was responsible for overseeing the international
distribution of GAM's funds as well as for establishing new distribution
relationships and channels. Prior to his employment with GAM, Mr. Bailin
headed the real estate asset management division of Geometry Asset
Management beginning in July 1992. Prior to that time, beginning in
1988, he was President of Warner Financial, an investment advisory
business in Boston, Massachusetts. Mr. Bailin received a B.A. from
Amherst College and an M.B.A. from Harvard Business School.
Mr. Peter F. Karpen, is a managing director and a member of the
Operating Committee of JWH, president of JWH Investments, Inc.,
president and director of Westport Capital Management Corporation, and
president and chairman of the Board of Directors of Global Capital
Management Limited. Mr. Karpen joined JWH in June 1995 from CS First
Boston where he was director of Futures and Options since 1988 and vice
president since 1981. Mr. Karpen has been a member of the board of the
FIA since 1984 and a member of its Executive Committee since 1988. Mr.
Karpen was Chairman of the FIA from 1994 - 1995. In addition, he is a
Public Director of the New York Cotton Exchange and serves on the CFTC's
Financial Products Advisory Committee. He has been a Trustee of the
Futures Industry Institute, a member of the CFTC's Regulatory
Coordination Advisory Committee and a member of several commodities and
securities exchanges in the United States. He received his B.A. from
Boston University and M.B.A. from Boston College. Mr. Karpen announced
his resignation from JWH and its affiliates on March 18, 1996 but will
continue in his present capacities for 6 months from that date.
Mr. James E. Johnson, Jr., is chief financial officer and chief
administrative officer for JWH. He also serves as a member of the
company's Operating Committee. Mr. Johnson is also a principal of
Westport Capital Management Corporation, JWH Investments, Inc. and JWH
Risk Management Inc. Mr. Johnson joined JWH in May of 1995 from Bankers
Trust Company where he was managing director and chief financial officer
for their Institutional Asset Management Division since January 1983.
His areas of responsibility included finance, operations and technology
for the $160 billion global asset advisor. Prior to joining Bankers
Trust, Mr. Johnson was a product manager at American Express Company
responsible for research and market strategies for the Gold Card. He
received a B.A. with honors from Columbia University and an M.B.A. in
Finance and Marketing from New York University.
Ms. Elizabeth A.M. Kenton, is a senior vice president, the director of
compliance, and a member of the Operating Committee of JWH. Since
joining JWH in March of 1989, Ms. Kenton has held positions of
increasing responsibility in research and development, administration
and regulatory compliance. Ms. Kenton is also a director and treasurer
of Westport Capital Management Corporation, the executive vice president
of JWH Investments, Inc.. senior vice president of JWH Risk Management,
Inc., and a director of Global Capital Management Limited. Prior to her
employment at JWH, Ms. Kenton was Associate Manager of Financial and
Trading Operations at Krieger Investments, a currency and commodity
trading firm. From July 1987 to September 1988, Ms. Kenton worked for
Bankers Trust Company as a product specialist for foreign exchange and
treasury options trading. She received a B.S. in Finance from Ithaca
College.
Ms. Mary Beth Hardy, is a senior vice president, the manager of trading
administration, and is a member of the Operating Committee of JWH. Since
joining JWH in September 1990, Ms. Hardy has held positions of
increasing responsibility in research and development and trading. Prior
to her employment at JWH, Ms.
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Hardy held the position of associate
editor at Waters Information Services where she wrote weekly articles
covering technological advances in the securities and futures markets.
Prior to joining Waters in 1989, Ms. Hardy was at Shearson Lehman
Brothers Inc. where she held the position of assistant director of the
Managed Futures Trading Department. Prior to that, Ms. Hardy was an
institutional salesperson for Shearson, in a group specializing in
financial futures and options. Previously, Ms. Hardy was an
institutional salesperson for Donaldson, Lufkin and Jenrette with a
group which also specialized in financial futures and options. Ms. Hardy
serves on the Board of Directors of the Managed Futures Association (the
"MFA") and chairs its Trading and Markets committee. She received a
B.B.A. in Finance from Pace University.
Mr. David M. Kozak, is Counsel to the Firm, vice president and secretary
of JWH. He is also secretary of JWH Risk Management, Inc. Prior to
joining JWH in September 1995, Mr. Kozak was employed at Chapman and
Cutler, where he was an associate from September 1983 and a partner from
1989. Mr. Kozak has concentrated in commodity futures law since 1981,
with emphasis in the area of commodity money management. During the time
he was employed at Chapman and Cutler, he served as outside counsel to
NAFTA and the MFA. Mr. Kozak is currently a member of the Government
Relations Committee of the MFA, the NFA Special Committee on CPO/CTA
Disclosure Issues and the Visiting Committee of The University of
Chicago Library. He received a B.A. from Lake Forest College, an M.A.
from The University of Chicago, and a J.D. from Loyola University of
Chicago.
Mr. Kevin S. Koshi, is a senior vice president and chief trader for JWH.
Mr. Koshi is responsible for the supervision and administration of all
aspects of order execution strategies and implementation of trading
policies and procedures. Mr. Koshi joined JWH in August 1988 as a
professional in the Finance Department, and since 1990 has held
positions of increasing responsibility in the Trading Department. He
received a B.S. in Finance from California State University at Long
Beach.
Mr. Barry S. Fox, is the director of research and is responsible for the
design and testing of existing and new programs. He also supports and
maintains the proprietary algorithms used to generate JWH trades. Mr.
Fox joined JWH in March 1991 and since that time has held positions of
increasing responsibility in the Research and Development department.
Prior to his employment at JWH, Mr. Fox provided sales and financial
analysis support for Spreadsheet Solutions, a financial software
development company. Prior to joining Spreadsheet Solutions in October
1990, Mr. Fox operated a trading company where he traded his own
proprietary capital. Before that, he was employed with Bankers Trust as
a product specialist for foreign exchange and treasury options trading.
He received a B.S. in Business Administration from the University of
Buffalo.
Ms. Glenda G. Twist, is a director of JWH and has held that position
since August 1993. Ms. Twist joined JWH in September 1991 with
responsibilities for corporate liaison and she continues her duties in
that area. Her responsibilities include assistance in the day-to-day
administration of the Florida office, and review and compilation of
financial information for JWH. Ms. Twist was President of J.W. Henry
Enterprises Corp., for which she performed financial, consulting and
administration services from January 1991 to August 1991. From 1988 to
1990, Ms. Twist was Executive Director of Cities in Schools, a program
in Arkansas designed to prevent students from leaving school before
completing their high school education. She received her B.S. in
Education from Arkansas State University.
Mr. Michael D. Gould, is director of sales at JWH. He is responsible for
general business development and oversees the investor services
function. He joined JWH in April 1994 from Smith Barney Inc. where he
served as senior sales manager and vice president-futures for the
Managed Futures Department. He held the identical position with the
predecessor firms of Shearson Lehman Bros. and Lehman Bros. beginning in
November 1991. Prior to that time, he was engaged in a proprietary
trader development program at Tricon USA from September 1990 to October
1991. He was a registered financial consultant with Merrill Lynch from
1985 through August 1990. His professional career began in 1982 as an
owner-operator of a non-ferrous metals trading and export business which
he ran until September 1985. He attended the Indiana University School
of Business.
Mr. Jack M. Ryng, C.P.A., joined JWH as the controller in November 1991.
He is also secretary and chief financial officer of JWH Investments,
Inc. Prior to that time, he was a senior manager with Deloitte & Touche
where he held positions of increasing responsibility since September of
1985 for commodities and securities industry clients. His clients
included one of the largest commodity pool operators in the United
States, along with other broker/dealers, futures commission merchants,
investment banks, and foreign exchange operations, in the areas of
accounting regulatory compliance and consulting. Prior to his employment
by the Financial Services Center of Touche Ross & Co. (the predecessor
firm of Deloitte & Touche), he worked for Leonard Rosen & Co. as a
senior accountant. Mr. Ryng is a member of AICPA and the New York C.P.A.
Society and is a member of the board of the New York operations of the
FIA. He received a B.S. in Business Administration from Duquesne
University.
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Mr. Michael J. Scoyni, is a managing director of JWH and is a principal
of Westport Capital Management Corporation. Mr. Scoyni has been
associated with Mr. Henry since 1974 and with JWH since 1982. He was
engaged in research and development for John W. Henry Company (JWH's
predecessor) from November 1981 to December 1982 and subsequently has
been employed by JWH in positions of increasing responsibility. He
received a B.A. in Anthropology from California State University.
Mr. Christopher E. Deakins, is a vice president of JWH. He is
responsible for general business development and investor services
support. Prior to joining JWH in August 1995, he was a vice president,
national sales, and a member of the Management Team for RXR Capital
Management, Inc. His responsibilities consisted of business development,
institutional sales, and broker dealer support. Prior to joining RXR in
August 1986, he was engaged as an account executive for Prudential-Bache
Securities starting in February 1985. Prior to that, Mr. Deakins was an
account executive for Merrill Lynch, Pierce, Fenner and Smith
Incorporated. He received a B.A. in Economics from Hartwick College.
Chris J. Lautenslager, is a Vice President of John W. Henry & Co., Inc.
He is responsible for general business development and Investor Services
support. Prior to joining JWH in April 1996, he was the Vice President
of Institutional Sales for I/B/E/S International, Inc., a distributor of
corporate earnings estimate information. His responsibilities consisted
of business development and support of global money managers and
investment bankers. Prior to his employment with I/B/E/S, Mr.
Lautenslager devoted time to personal activities from April 1994 to
March 1995, following the closing of the Stamford, Connecticut office of
Gruntal & Co., where he had worked as a proprietary equity trader since
November 1993. Before that, he held the same position at S.A.C. Capital
Management starting in February 1993. From October 1987 to December
1993, Mr. Lautenslager was a partner and managing director of Limitless
Option Partners, a registered Chicago Mercantile Exchange trading and
brokerage organization, where he traded currency futures and options. He
received a B.S. in Accounting from the University of Colorado and a
Masters in Management from Northwestern University.
Mr. Edwin B. Twist, is a director of JWH and has held that position
since August 1993. Mr. Twist is also a director of JWH Risk Management,
Inc. Mr. Twist joined JWH as internal projects manager in September
1991. Mr. Twist's responsibilities include assistance in the day-to-day
administration of JWH's Florida office and internal projects. Mr. Twist
was secretary and treasurer of J.W. Henry Enterprises Corp., a Florida
corporation engaged in administrative and financial consulting services,
for which he performed financial, consulting and administrative services
from January 1991 to August 1991.
Ms. Nancy Fox, C.P.A., is a vice president and the manager of investment
support of JWH. She is responsible for the day-to-day activities of the
Investment Support Department, including all aspects of operations and
performance reporting. Prior to joining JWH in January 1992, Ms. Fox was
a senior accountant at Deloitte & Touche, where she served commodities
and securities industry clients and had positions of increasing
responsibility since July 1987. Ms. Fox is a member of the AICPA and the
New Jersey Society of C.P.A.s. She received a B.S. in Accounting and
Finance from Fairfield University.
JWH and its principals and affiliates may, from time to time, trade
commodity interest contracts for their own proprietary accounts. Such
trades may or may not be in accordance with the JWH trading systems
described below.
The JWH Trading Approach
JWH specializes in managing institutional and individual capital in the
global futures, interest rate and foreign exchange markets. Since 1981,
JWH has developed and implemented proprietary trend-following trading
techniques that focus on long-term trends rather than short-term, day-
to-day trends. Each JWH trading system is a technical trend-following
system.
TRADING TECHNIQUES
The quantitative models of JWH are guided by a set of mathematical
formulas that provide signals for trading decisions integrated within a
disciplined money-management framework. JWH investment techniques focus
on long-term trends rather than day-to-day price fluctuations. Positions
held for two to four months are not unusual, and positions have been
held for more than one year. Historically, only thirty to forty percent
of all trades made pursuant to the trading methods have been profitable.
Large profits on a few trades in positions that typically exist for
several months have produced favorable overall results. Generally, the
majority of losing positions have been liquidated within weeks. The
greatest cumulative percentage decline in daily net
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asset value JWH has experienced in any single program was nearly sixty
percent. Investors should understand that similar or greater draw-downs
are possible in the future.
JWH at its sole discretion may override computer-generated trading
signals, and may at times use discretion in the application of its
quantitative models which may affect performance positively or
negatively. Subjective aspects of JWH's trading methods also include the
determination of portfolio leverage, commencement of trading in an
account, contracts traded, contract month selection, margin utilization,
markets traded, and effective trade execution.
PROGRAM MODIFICATIONS
In an effort to maintain and improve performance, JWH has engaged, and
continues to engage in an extensive program of research. While the basic
parameters underlying the firm's trading approach have remained intact
throughout its history, the potential benefits of employing more than
one trading parameter alternatively, or in varying combinations, is a
subject of continual testing, review and evaluation. Extensive research
and analysis may suggest substitution of alternative parameters with
respect to particular contracts in light of relative differences in
historical trading performance achieved through testing different
parameters. In addition, risk management research and analysis may
suggest modifications regarding the relative weighting among various
contracts, the addition or deletion of particular contracts for a
program or a change in the degree of leverage employed.
As capital in each JWH program increases, additional emphasis and
weighting may be placed on certain markets which have historically
demonstrated the greatest liquidity and profitability. Furthermore, the
weighting of capital committed to various markets in the trading
programs is dynamic, and JWH may vary the weighting at its discretion as
market conditions. liquidity, position limit considerations and other
factors warrant. Investors will not be informed of the changes.
LEVERAGE
Leverage adjustments have been and continue to be an integral part of
JWH's investment strategy. At its discretion, JWH may adjust leverage in
certain markets or entire programs. Leverage adjustments may be made at
certain times for some programs but not for others. Factors which may
affect the decision to adjust leverage include: ongoing research,
program volatility, current market volatility, risk exposure, and
subjective judgment and evaluation of these and other general market
conditions. Such decisions to change leverage may positively or
negatively affect performance, and will alter risk exposure for an
account. Leverage adjustments may lead to greater profits and losses,
more frequent and larger margin calls, and greater brokerage expense. No
assurance is given that such leverage adjustments will be to the
financial advantage of JWH clients. JWH reserves the right, in its sole
discretion, to adjust its leverage policy without notification to
investors.
ADDITION, REDEMPTION AND REALLOCATION OF CAPITAL FOR COMMODITY POOL OR
FUND ACCOUNTS
JWH has developed procedures for investing fund accounts that provide
for the addition, redemption and/or reallocation of capital. Investors
who purchase or redeem units in a fund are most frequently permitted to
do so at a price equal to the net asset value per unit on the close of
business on the last business day of the month or quarter. In addition,
funds may reallocate capital among advisors at the close of business on
the last business day of the month. In order to provide market exposure
commensurate with equity in the account on the date of these
transactions JWH's practice is to adjust positions at a time as close at
possible to the close of business on the last trading date of the month.
The intention is to provide for additions, redemptions and reallocations
at a net asset value per unit that will be the same for each of these
transactions and to eliminate possible variation in net asset value per
unit that could occur as a result of inter-day price changes when
additions are calculated on the first day of the subsequent month.
Therefore JWH may, in its sole discretion, adjust its investing of the
assets associated with the addition, redemption and reallocation of
capital at a time as close as possible to the close of business on the
last business day of the month to reflect the amount then available for
trading. Based on JWH's determination of liquidity or other market
conditions, JWH may decide to commence trading earlier in the day on, or
before, the last business day of the month. In the case of an addition
to a fund account, JWH may also, in its sole discretion, delay the
actual start of trading for those new assets. No assurance is given that
JWH will be able to achieve the objectives described above in connection
with funding level changes. The use of discretion by JWH in the
application of this procedure may affect performance positively or
negatively.
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The JWH programs often make trades in markets that have lower trading
volume and are less liquid, such as the markets for coffee, cotton and
certain currencies. JWH operates each JWH program as a completely
separate and independent program.
The assets of Cornerstone II allocated to JWH are traded pursuant to its
Original Investment Program, Global Diversified Portfolio and the
International Foreign Exchange Program.
The Original Investment Program. The Original Investment Program began
trading proprietary funds in June 1981 and managing client accounts in
October 1982. The Original Investment Program uses long-term
quantitative models in that it maintains a position, either long or
short, at all times in all of the commodities in which the program
participates. The Original Investment Program considers volatility,
duration of trend and mathematical relationships based on the dollar
value of each contract and is designed to generate buy and sell signals
with an emphasis on long-term trends.
From 1981 through June 1992, the Original Investment Program maintained
a relatively static portfolio and market sector weighting profile. The
portfolio was structured to best utilize the liquidity, volatility, and
diversity of markets as they existed at that time. However, the futures
markets have evolved much in the last ten years such that the markets
and their characteristics are much different than those in 1981. Global
markets have emerged, while some of the more traditional products have
become less liquid and less viable for trading large positions.
Accordingly, extensive research analysis was performed by JWH during the
first half of 1992 on all markets that are available for trading in the
Original Investment Program. As part of the research initiative, each
market currently traded or now available to trade was analyzed for
liquidity, volatility, profitability and correlation characteristics. A
market was included in the new portfolio if it proved to be profitable
over time and currently affords sufficient liquidity. A weighing for
each market was determined based on price volatility, correlation to
other markets, performance contract size, risk and other considerations.
Based on these results, certain changes described below were instituted
effective July l, 1992 to all Original Investment Program accounts.
Lumber, heating oil, cocoa, S&P 500 Index, wheat and hogs no longer are
traded as part of the Original Investment Program. Eurodollars, silver,
crude oil, bean oil, London cocoa, Australian All Ordinaries Stock
Index, Nikkei Stock Index, German bonds and Japanese bonds have been
added as markets to be traded as part of the Original Investment
Program.
The new portfolio now includes a significant increase in positions in
financial markets, largely as a result of new products developed over
the last ten years. In addition, the currencies, stock indexes and
interest rate markets now receive a greater weighing, while the size of
positions in the soft commodities and grain markets have been reduced.
The weighing of the metals and energy classes are relatively unchanged,
although their components have been changed. The meats have been
eliminated altogether. The Original Investment Program follows and
trades approximately 20 to 25 commodities.
The Global Diversified Portfolio. The Global Diversified Portfolio was
first offered in 1988 and was developed to take advantage of price
trends in diverse markets around the world. The Global Diversified
Portfolio is JWH's most diversified program offering participation in
virtually every liquid futures market in the world. Accordingly, the
portfolio trades in base metals in the London Metals Exchange, long-term
and short-term interest rates in the U.S., Europe, Asia, currencies,
stock indices in Japan and the U.K., and participates in both U.S. and
international agricultural and energy markets.
The Global Diversified Portfolio utilizes an intermediate-term trading
system, which attempts to identify and profit from market trends and to
remain neutral (i.e. no position taken) during non-trending market
periods. Since November 1, 1993 this program has traded a portion of the
assets of Cornerstone II allocated to JWH.
International Foreign Exchange Program. The International Foreign
Exchange Program, which began in 1986, concentrates exclusively on
foreign currencies, primarily through forward contracts traded in the
interbank market. The program trades the Swiss franc, German mark,
British pound, and Japanese yen versus the U.S. dollar, as well as a
diversity of other world currencies. The program has been structured and
the different markets weighted to take into account the potentially
higher volatility of a portfolio which trades exclusively in the
currency markets. The International Foreign Exchange Program seeks to
eliminate eighty-five to ninety percent of U.S. dollar movements by
engaging in "spread" trading. Currency spreads are effected by, for
example, buying the Swedish kroner while simultaneously selling an
equivalent amount of Australian dollars. Profits and losses accrue as
the relationship between the Swedish and Australian currencies change,
irrespective of the U.S. dollar movements. Currency indices, "outrights"
(i.e., dollar positions versus foreign currency positions) and spreads
are taken primarily on the interbank markets in forward contracts. The
program calculates position size based on risk in the particular
currency market and the correlation of a particular currency
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with and against other currencies. Portfolios are dynamic and include from time
to time various matrices of future positions. Since April 1987, JWH has
used the International Foreign Exchange Program in trading a portion of
the funds of Cornerstone II allocated to JWH.
OTHER JWH PROGRAMS
In addition to the Original Investment Program, Global Diversified
Portfolio and the International Foreign Exchange Program, JWH currently
operates eight different programs for U.S. and foreign investors, none
of which are utilized by JWH for Cornerstone II or Cornerstone IV. Each
program is operated separately and independently. With the exception of
InterRateTM, these programs are intermediate and long-term,
quantitative, trend-analysis models designed to achieve speculative
rates of return.
The KT Diversified Program, which began trading in 1983 and closed in
February 1994, participated in 8 market sectors and traded 19-24
commodities only on U.S. exchanges. Researched throughout 1983 by JWH, a
systematic forecasting method was first traded in a format using solely
financial futures in August of 1984. That program, the Financial and
Metals Portfolio, participates in four major market sectors--currencies,
metals, interest rates and stock indexes--and initiates trades according
to trend-emergence and computerized determination of relative risk.
While still maintaining a long-term perspective, the Financial and
Metals Portfolio attempts to take better advantage of the intermediate
trends available in the global financially oriented markets of the
1990's. The Financial and Metals Portfolio may take long, short or
neutral positions in approximately 39 markets within the four groups
traded, may use stop orders and commits 10%-30% of equity to margin on
open positions. Because assets are concentrated in financial futures and
metals only, volatility can be higher than in a more diversified
portfolio. The World Financial Perspective, which began trading in 1986,
involves trading the financial and energy sector markets from the
perspective of the Japanese yen, German mark, Swiss franc, British
pound, Australian dollar, French franc, Canadian dollar and the U.S.
dollar. This pricing of key global markets in terms of foreign
currencies provides a level of diversification not generally found in a
futures portfolio. In February 1991, JWH began trading a portfolio in
which the same trading techniques utilized in the International Foreign
Exchange Program are primarily applied to the currencies of the major
industrial nations known as the Group of Seven, and Switzerland. These
currencies are among the most liquid, actively traded currencies in the
world. The G-7 Currency Portfolio makes use of both outright positions
and cross-rate positions. Positions are primarily taken in the Interbank
market and, from time to time, on futures exchanges. The Yen Financial
Portfolio began trading in August 1991 and uses the same quantitative
models as the Financial and the Metals Portfolio. The Yen Financial
Portfolio concentrates trading specifically in the Japanese financial
markets trading only the Japanese yen, the 10-year Japanese Government
Bond, Euroyen and Nikkei 225 stock index. The International Currency and
Bond Portfolio, begun in January 1993, combines the techniques employed
in the G-7 Currency Portfolio and the global bond sector of the
Financial and Metals Portfolio to make a combined portfolio of
currencies and international long-term bonds. The Global Financial
Portfolio, which began trading client capital in June 1994, utilizes the
same long-term, trend-following reversal approach of JWH's first
portfolio, the Original Investment Program. The portfolio is comprised
of diverse financial markets including select global currencies,
interest rates and stock indexes, as well as energy. The Dollar Program
began trading proprietary capital in June 1994. This program is
designed to capitalize on price movements in the U.S. dollar utilizing
an intermediate-term quantitative trend analysis model, and takes
outright positions in the Japanese yen, German mark, Swiss franc, and
British pound versus the U.S. dollar. The Delevered Yen Financial and
Metals Profile was opened at the request of a client in October 1995. It
is not open to new investment except at the sole discretion of JWH. This
program seeks to capitalize on sustained moves in global financial
markets utilizing intermediate-term and long-term quantitative trend
analysis models, some of which attempt to employ neutral stances during
periods of nontrending markets. This portfolio is traded at
approximately one-half of the leverage of the traditional Financial and
Metals Portfolio and is traded from the perspective of the Japanese yen.
The Worldwide Bond Program began trading proprietary capital in 1994.
This program invests in the long-term portion of global interest rate
markets. Although this program concentrates on one sector,
diversification is achieved by trading the interest rate instruments of
numerous countries. This program utilizes the proprietary quantitative
models developed by JWH, but with a moderate level of leverage as
compared with programs that participate in multiple market sectors.
As of March 31, 1996, the aggregate amount of funds under management
pursuant to the Original Investment Program was $105,139,174; the
aggregate amount of funds under management pursuant to the Global
Diversified Program was $100,062,443; and the aggregate amount of funds
under management pursuant to the International Foreign Exchange Program
was $79,329,434. As of March 31, 1996 the aggregate amount of all funds
under management pursuant to all JWH programs were $1.3 billion.
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As of March 31, 1996 JWH was managing approximately $21,566,815, of
Cornerstone II. Such amount and the percentage of assets of Cornerstone
II managed by JWH will change as a result of allocations of assets from
the Exchange of units of Cornerstone II, allocations and reallocations
among trading managers and/or trading systems, and the performance of
JWH and the other trading manager for Cornerstone II.
DEAN WITTER CORNERSTONE FUND III
1. CCA CAPITAL MANAGEMENT, INC.
(CURRENT ALLOCATION--56.4%)
CCA Capital Management, Inc. ("CCA") is a New York corporation with its
principal office located at 266A Delaware Avenue, Delmar, New York 12054
and its branch office, opened in October 1991, located at 1202 Highway
74, Suite 200, Evergreen, Colorado 80439. CCA was formed in January 1979
to conduct business as a commodity trading advisor. CCA is not
affiliated with the General Partner or DWR or with any of the other
Trading Managers for the Partnerships. CCA is registered as a commodity
trading advisor and a commodity pool operator with the CFTC and is a
member of the NFA in such capacities. In order to maintain client
records in an orderly, readily accessible fashion, CCA stores dated
client records at an off-site storage facility located at 15 West Yard
Road, Feura Bush, New York 12067.
The principals of CCA are Douglas G. Mitchell, Bruce M. Rogol, Daniel M.
Byrnes, Laurie A. Water and Monica Mitchell. CCA is wholly-owned by
principals of CCA.
Douglas G. Mitchell, Ph.D., age 57, is the Chief Executive Officer,
President and Chairman of CCA. Dr. Mitchell earned his B.S. degree in
1959 from the University of Melbourne, Australia and his M.S. and Ph.D.
degrees in 1967 and 1970, respectively, from the University of London,
England. Dr. Mitchell has extensive research experience in analytical
chemistry, statistics, time series analysis and computerized data
management. Dr. Mitchell is primarily responsible for the development of
the trading systems and methods used by CCA and concentrates on system
design, research, development, testing, implementation, monitoring and
improving CCA's approaches to the markets. Dr. Mitchell served as the
president of CCA from its inception in 1979 to October, 1992. Dr.
Mitchell was also employed as a research scientist by the New York State
Department of Health on a full-time basis from 1971 to 1984 and on a
part-time basis through May 1986.
Mr. Bruce M. Rogol, age 50 is the Chief Operating Officer (COO) of CCA.
Mr. Rogol matriculated at Central Connecticut State College, the
University of Hartford and the University of Wisconsin. Mr. Rogol has
worked internationally in a diverse range of industries including
manufacturing, agriculture, communications and financial services. He
had served as the Director of Training and Development for the
Connecticut Bank and Trust, Organizational Development Officer for the
Industrial Bank, and Senior Manager of the Alexander Proudfoot Co., an
international management consulting firm in Chicago. For the past ten
years Mr. Rogol has been President and CEO of his own consulting firm,
Rogol and Associates. His extensive client list includes: Alcoa
Aluminum, AT&T, Martin Marietta, Westinghouse, CONRAIL, Modern
Engineering, CDI, Carnation, Cities Service, the U.S. Navy, the
governments of Jamaica, Guatemala and Iceland and the states of South
Carolina and Connecticut. Mr. Rogol is a professional manager and has
an in-depth knowledge of the internal operations of CCA from his five
years of consulting to the organization.
Mr. Daniel M. Byrnes, age 31 has been employed by CCA since September
1987 and was appointed Vice President of Trading in August of 1994.
Since December 1988, Mr. Byrnes has served as CCA's Manager of Trading,
and is thus responsible for implementing the CCA trading decisions
generated by CCA's system and strategies. Prior to working for CCA, Mr.
Byrnes was a student at the University of Colorado at Boulder where he
earned his B.A. degree in Economics.
Ms. Laurie A. Walter, age 30 has been employed with CCA since August,
1988 and was appointed Vice President of Administration in August, 1994.
Prior to August, 1994, Ms. Walter was the Manager of Customer Accounting
and Regulatory Compliance as well as the supervisor of certain
additional administrative tasks. Ms. Walter will continue to oversee
the accounting and compliance departments and will also be responsible
for overseeing various administrative functions of CCA. Before joining
CCA in 1988, she was a student at the State University of New York,
College at Oswego where she earned her bachelor of Science degree in
Business Administration. Ms. Walter also holds an Associate in Applied
Science degree in Accounting.
Mrs. Monica Mitchell, age 56, the wife of Dr. Mitchell, has served as
CCA's Secretary-Treasurer since its in-ception in 1979. Mrs. Mitchell is
primarily responsible for overseeing various administrative and
personnel issues.
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While Dr. and Mrs. Mitchell reside outside the Untied States for a
significant portion of each year, Dr. Mitchell continues to work
actively for CCA during those periods, using various computer and
communications technologies.
There has never been any material administrative, civil or criminal
actions against CCA or any of its principals.
Pursuant to its Management Agreement, CCA owns 10 Units of Cornerstone
III. None of the principals of CCA own any Units of such Partnership,
nor do CCA and its principals own any Units of Cornerstone II or IV.
CCA and its principals may, from time to time, trade commodity interest
contracts for their own proprietary accounts. Such trades may or may not
be in accordance with the trading systems used by CCA as described
below. The records of trading in such accounts will not be made
available to Limited Partners for inspection.
The CCA Trading Systems
CCA currently has one trading program: the Global Strategic Program.
The Global Strategic Program trades a diversified portfolio of over
fifty physical and financial futures markets on domestic and on foreign
futures exchanges. The Global Strategic Program includes a
discretionary trading component, under the direction of Dr. Mitchell,
which will supplement the system-based trading. The discretionary
trading component typically involves increasing or decreasing the degree
of participation in the markets but may at times include a broader
discretion.
Effective December 1, 1994, the General Partner has reallocated the
assets of Cornerstone III managed by CCA to its Global Strategic
Program.
As of March 31, 1996, the aggregate amount of funds under management was
$44,113,998.
As of March 31, 1996, CCA was managing $21,844,637.81 of Cornerstone
III. Such amount and the percentage of assets of Cornerstone III
managed by CCA will change as a result of allocations of assets from the
Exchange of Units of Cornerstone III, allocations and reallocations
among trading managers and/or trading systems, and the performance of
CCA and the other trading managers for Cornerstone III.
Dr. Mitchell has investigated several hundred different technical
trading systems. These trading systems were studied by expressing the
system as a mathematical model; writing a computer program to carry out
simulated or "paper" trading using the model; testing the mathematical
model using historical price data; evaluating the simulated trading
results and selecting and using the trading systems which, in Dr.
Mitchell's judgment, are most likely to yield future profits consistent
with acceptable risk. In the process of evaluating the simulated trading
results, Dr. Mitchell relies on his experience, knowledge and intuition.
The long-term trend following systems are designed to generally buy when
prices rise and sell when prices fall. These systems differ in several
ways: their mathematical design, the sensitivity with which they respond
to market movements, the method by which exit points track the market
and the ease with which they reverse direction.
The phased entry trend following system requires that positions be
accumulated over time as a market confirms that it remains in a trend.
As each position is initiated, the stop on all the phased entry
positions in that market is adjusted to keep risk controlled.
The systems use a trailing stop to exit from positions. Some systems may
also set a price objective. These systems will exit if the objective is
reached (before the trailing stop is triggered), and may then attempt to
re-enter the market at a subsequent date.
The trading systems are programmed into computers maintained and
operated on CCA's premises. Each day, price information for the futures
interest contracts being monitored is entered into the computer.
Programs are then run to generate a series of trading signals
highlighting changes in trends and indicating desired entry and/or exit
prices for each futures interest contract.
The systems currently being utilized by CCA are independent from one
another; one method may be signaling that a long position in a commodity
should be established while the other methods are signaling that funds
should not be invested in that commodity. In some instances, the systems
might temporarily recommend opposing positions in the same delivery
month of the same commodity, in which case, the recommendations would
cancel each other out and a neutral position would be assumed. The
objective of CCA in utilizing more
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than one trading system is to have
diversification in the approaches to the markets and to reduce down-side
volatility, relative to expected reward.
While CCA will rely on the mathematical models of the trading systems to
guide its trading decisions, there are times when CCA has and will
continue to employ some subjective judgments or discretion in the
management of client accounts. The intent of such subjective judgments
and discretion is to enhance returns, and/or lower risks, however there
can be no assurances that such actions will be successful. Examples of
such discretion may be determining the appropriate level of
aggressiveness during periods of unusual uncertainty or deciding to
reduce existing positions before the normal exit price is reached. CCA
may increase or decrease the aggressiveness of the entire portfolio or
individual markets within the portfolio when, in its subjective
judgment, such action is appropriate. Subjective judgment is also
necessary when determining the contract months to be traded and when
implementing trading strategies to achieve favorable executions. CCA
trading programs may include a component of discretionary trading. Such
discretionary trading is directed by Dr. Mitchell and is intended to
supplement the system-based trading described above, for example, by
increasing or decreasing the exposure in given markets when Dr. Mitchell
feels significant opportunity exists.
The number of contracts traded under each system will not be identical
and will vary by commodity. Such factors as the typical price action of
the commodity and the relative degree of risk taken by the system will
influence the number of contracts of a particular commodity traded by
each system. The number of contracts, in each commodity and in total,
traded pursuant to each of the systems will be largely a matter of
judgment by CCA. CCA will from time to time increase or decrease the
number of contracts held for Cornerstone III's account based on
increases or decreases in Partnership capital allocated to CCA, changes
in internal market conditions, perceived changes in portfolio-wide risk
factors or other factors which CCA may deem relevant.
CCA endeavors to achieve a degree of balance in market commitments among
various groups of related commodities based primarily upon number of
contracts, margin requirements, total available capital and market
volatility for each commodity. Based on the margin required to maintain
a position, normal commitments to each commodity will range between 0
and 6% of Cornerstone III's Net Assets allocated to CCA. Margin on open
positions at any given time generally ranges between 5 and 30% of the
assets CCA manages, although from time to time margin commitments could
be substantially below or above this range.
CCA is engaged in continuous research on its trading systems and as a
result makes frequent changes and adjustments, particularly in the early
stages of new and evolving trading programs. As a result of these
changes, the prior track record of a program will not necessarily
reflect the performance of the current techniques if they had been
applied during the earlier periods.
Beginning July 1, 1996, CCA will no longer act as a trading manager to
Cornerstone III.
2. WELTON INVESTMENT SYSTEMS CORPORATION
Beginning July 1, 1996, Welton Investment Systems Corporation ("WISC")
will become a Trading Manager for Cornerstone III.
WISC is a California corporation with its principal place of business at
The Eastwood Building, San Carlos between 5th and 6th, P.O. Box 6147,
Carmel, California 93921-6147. WISC was formed in November 1988. Its
business is providing professional investment management services
specializing in futures and foreign exchange markets worldwide. The
company was formed to offer proprietary investment and portfolio
management techniques to qualified individual, institutional, and
corporate investors. WISC is registered beginning January 4, 1989, as a
commodity trading advisor and commodity pool operator with the Commodity
Futures Trading Commission, is a trading advisor and commodity pool
operator member of the National Futures Association, the futures
industry self-regulatory organization, and is also a member of the
Managed Futures Association. WISC is not affiliated with the General
Partner or DWR or with any of the other Trading Managers for the
Partnership.
Principals of WISC
Patrick L. Welton, age 35, is the President, Chief Executive Officer,
and a Director of WISC. Dr. Welton developed the mathematical analysis
techniques and systems software employed by WISC in its trading and
portfolio management. He is responsible for monitoring trading for the
company's clients and directs ongoing trading research. Dr. Welton
earned Bachelors Degrees in Molecular Biology and English Literature at
the University of Wisconsin. A portion of his undergraduate studies was
completed at Harvard University. From 1982 to 1986 he attended the UCLA
School of Medicine where he completed graduate biophysics and medi-
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cal studies and earned an MD degree. From 1986 to 1990, he was a
postgraduate physician completing residency training at the Stanford
University Medical Center. In addition to his full-time management of
WISC, he is a shareholder in Peninsula Radiation Oncology Specialists,
Inc. and is a volunteer Clinical Professor of Medicine at Stanford
University School of Medicine. He has engaged in futures and equities
market research since 1981 and has traded futures for his own account
since 1983. He is a member of the Electronics Standards Committee of
the Managed Futures Association and the Commodity Trading Advisor
Subcommittee of the National Futures Association 1996 Nominating
Committee.
Annette L. Welton, age 34, is the Executive Vice-President, Chief
Financial Officer, and a Director of WISC. From 1980 to 1984, she
earned a Bachelor of Science Degree from UCLA, completing a portion of
her studies at the University of California, Santa Barbara. Subsequent
to obtaining her degree, she completed further studies at San Diego
State University. From 1984 to 1989, she was involved in clinical
pediatric and neonatal intensive care at the UCLA, San Diego Children's
and Stanford University Medical Centers. Ms. Welton participated in the
development of the systems software employed by WISC in its trading and
portfolio management methods and has been responsible for daily
management and administration of WISC since 1988. In addition, she is
responsible for monitoring trading for the company's clients and client
relations. She is a member of the Trading and Markets Committee of the
Managed Futures Association.
Jerry M. Harris, age 45, is the Senior Vice President and a Principal of
WISC. He received a Bachelor of Science Degree in 1973 in Aerospace
Engineering at the University of Virginia. In May of 1983, he earned a
Masters Degree in Information Systems from the University of Southern
California. From 1983 to 1984, Mr. Harris was employed by General
Dynamics as an Engineering Specialist in systems integration. From 1984
through 1988, he was Vice President and Chief Operating Officer of
Cresta Commodity Management, Inc. in San Diego, California. Beginning
1989 through 1990, he was Vice President of Marketing at Commodities
Corporation in Princeton, New Jersey. Since November 1988, he has been
a pilot with Delta Airlines. Mr. Harris is responsible for business
development efforts and industry representation, as well as
participating in strategic planning for WISC. He has been associated
with WISC since 1993.
There have never been any administrative, civil, or criminal proceedings
WISC or its principals.
Neither WISC nor any of its principals own any Units of Cornerstone III.
WISC INVESTMENT PHILOSOPHY AND TECHNOLOGY
WISC is committed to achieving attractive rates of return while
successfully managing risk. This is accomplished through the consistent
application of the firm's primary trading principles:
* Market diversification
* Methodological diversification
* Portfolio allocation and management
* Transaction cost management and market participant structure
analysis
* Monitoring and review systems to the above points
These principles are the basis to pursue strong rates of return with
controlled volatility and with low correlation to other managed futures
programs as well as to alternative investment classes.
WISC considers its portfolios and programs to be in a constant cycle of
review and improvement centered on a stable process for improving their
long term success. This paradigm for performance improvement involves
all divisions of the firm. The continuous process involves regular
review and analysis of all actual trading activity; of all new and
existing global markets with the goal of increasing market
diversification; of all potential strategic approaches to various market
conditions with the goal of increasing strategic diversification, and
hence, effective diversification; of trading costs and execution
methods; and of portfolio management models and techniques to best
integrate all of the above. This process implicitly recognizes that
adaptation is essential in approaching the global markets and that
adaptation is best implemented at even the most primary model levels.
To implement these models, WISC has developed an advanced decision
support platform capable of real-time analyzation of markets and
combinations of markets around the world. This tool allows the
implementation of WISC trading strategies independently or in
complementary combinations across a tremendous diversity of global
markets. Ongoing research and development continues to be WISC's
largest single commitment of resources and is conducted within its
performance improvement paradigm to improve the level, consistency, and
quality of performance in its offered portfolios and programs.
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Although the trading of WISC portfolios is guided by the consistent
application of proprietary mathematical systems, there will always
remain investment decisions requiring the discretion and judgment of
WISC. These include but are not limited to contract month selection,
analysis of portfolio balance, and capital requirements. In addition,
WISC may at its sole discretion choose not to implement certain trades
if they are judged to carry unusual risk to an account. WISC will
reinvest trading profits unless withdrawn by the client. WISC may also
stop trading certain markets should they become, in WISC's judgment, too
illiquid or volatile to trade or their movement too correlated with
other portfolio elements. Assets committed to meet minimum exchange
margin for all positions usually remain between 5-35% of total account
equity. These levels may from time to time be greater or less than this
range. All investments including WISC managed portfolios and programs
involve the risk of loss.
WISC INVESTMENT PORTFOLIOS AND PROGRAMS
WISC offers two distinct categories of investment products to
institutional, corporate, and qualified individual clients. The first
category is a select group of diversified investment portfolios each
utilizing a managed futures structure and designed to achieve attractive
absolute rates of return. The second category includes two inherently
customized investment programs designed to improve returns relative to
accepted global investment performance benchmarks such as a client's
portfolio return, an equity index or a fixed income index or note. A
brief description of these investment portfolios and programs follows.
MANAGED FUTURES PORTFOLIOS
WISC offers investors two different managed futures portfolios whose
emphasis is directed toward achieving attractive rates of appreciation
while continually managing risk. Each portfolio employs several
different integrated trading systems and seeks to achieve both
systematic and market diversification unavailable from traditional
managed investments. Specific portfolios include: Diversified
Portfolio; Global Financials and Metals Portfolio; and Global Financials
Portfolio.
Each portfolio provides broad diversification selected from various
global agricultural, currency, energy, interest rate, precious and base
metals, softs, and stock index markets. Clients may flexibly invest
with WISC allocating assets to the Diversified Portfolio for balanced
exposure across all of these market sectors or they may shape
allocations toward financial markets by using the Global Financials and
Metals Portfolio. In addition, WISC does manage for several fund and
institutional clients more market focused portfolios such as a pure
Global Financials (interest rates, currencies and equity indices), and
sector specific accounts in the Equity Index and Interest Rates on an
individualized basis.
CUSTOMIZED RETURN ENHANCEMENT PROGRAMS
WISC works closely with its clients to create low leverage return
enhancement programs which are designed to provide a supplemental
relative rate of return based upon a preselected benchmark measure
matched to the needs of the client. These programs include: Benchmark
Linked Return Enhancement Program and Fixed Income Return Enhancement
Program.
In its capacity as a Trading Manager of Cornerstone III assets, WISC
will use its Diversified Portfolio trading program.
DIVERSIFIED PORTFOLIO
The Diversified Portfolio manages investors' assets through exposure to
the widest spectrum of futures markets spanning all major market
sectors. Multiple trading strategies are employed in an attempt to
profitably participate in a variety of market conditions. This emphasis
on market and methodological diversification epitomizes WISC's core
principles in advising on investor assets in the global marketplace.
WISC and its principals intend to trade futures for their own accounts
and to provide management services to other clients. Investments made
on behalf of WISC, its principals, and its clients as well as any
policies related thereto will remain confidential. In the course of
such trading, WISC or its principals may take positions in their own
accounts which are in the same market and in the same direction as
positions advocated for clients. In the case that WISC or its
principals place the same trade orders for their accounts as they do for
their clients in a single block order with the brokerage firm, the
brokerage firm shall allocate the trade fill
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<PAGE>
prices assigned to each
account in a manner consistent with that firm's policy. This equalizes
the likelihood of WISC or its principals receiving a superior or
inferior price compared to any of their clients or in the case of a
partial fill of a block order, equalizes the likelihood of WISC or its
principals receiving a trade that some customers will not receive or
vice versa.
Past Performance of WISC
WISC and its principals have established a performance history in the
client accounts for which they have acted as a commodity trading
advisor. The assets of Cornerstone III to be allocated to WISC are
allocated only to the Diversified Portfolio.
INVESTORS ARE CAUTIONED THAT THE INFORMATION SET FORTH IN CAPSULES A, B,
C AND D IS NOT INDICATIVE OF, AND HAS NO BEARING ON, ANY TRADING RESULTS
WHICH MAY BE ATTAINED BY WISC OR CORNERSTONE III IN THE FUTURE, SINCE
PAST RESULTS ARE NOT A GUARANTEE OF FUTURE RESULTS AND OTHER TRADING
MANAGERS WILL BE INVESTING FUNDS OF SUCH PARTNERSHIP, THERE CAN BE NO
ASSURANCE THAT WISC OR SUCH PARTNERSHIP WILL MAKE ANY PROFITS AT ALL, OR
WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES. INVESTORS SHOULD
ALSO NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT PORTION OF A
COMMODITY POOL'S TOTAL INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE
PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED LOSSES FROM
COMMODITY TRADING.
Capsule A
WELTON INVESTMENT SYSTEMS CORPORATION
DIVERSIFIED PORTFOLIO
Name of CTA: Welton Investment Systems Corporation
Name of Program: Diversified Portfolio
Inception of Client Trading by CTA: February 1989
Inception of Client Trading in Program: April 1992
Number of Open Accounts: 18
Aggregate Assets Overall (excluding notional): $27,700,725
Aggregate Assets Overall (including notional): $40,374,490
Aggregate Assets in Program (excluding notional): $18,271,393
Aggregate Assets in Program (including notional): $30,818,658
Worst Monthly % Drawdown: (15.94)% -- (2/96)
Worst Month-End Peak-to-Valley: (17.43)% -- (1/96-3/96)
Monthly Rates
of Return 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
% % % % %
January 5.94 (3.94) (4.74) (0.12)
February (15.94) 8.90 (6.67) 15.85
March (1.77) 10.11 0.69 (0.09)
April 3.57 (5.32) 7.04 (0.48)
May 11.71 5.77 (6.61) (7.47)
June (1.38) 5.72 (1.89) 9.32
July (2.57) (4.04) 11.40 12.72
August (1.25) (6.40) (4.45) (1.77)
September 1.55 3.18 0.66 (6.89)
October (7.39) 0.48 4.90 (0.86)
November 4.77 14.60 5.05 (2.10)
December 9.44 1.23 10.48 (4.98)
Compound (12.52) 36.35 2.38 47.90 (4.28)
Annual (Period)
Rate of Return
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
64
<PAGE>
Capsule B
WELTON INVESTMENT SYSTEMS CORPORATION
GLOBAL FINANCIAL METALS PORTFOLIO
Name of CTA: Welton Investment Systems Corporation
Name of Program: Global Financial and Metals Portfolio
Inception of Client Trading by CTA: February 1989
Inception of Client Trading in Program: March 1992
Number of Open Accounts: 4
Aggregate Assets Overall (excluding notional): $27,700,725
Aggregate Assets Overall (including notional): $40,374,490
Aggregate Assets in Program (excluding notional): $3,185,270
Aggregate Assets in Program (including notional): $3,311,770
Worst Monthly % Drawdown: (15.72)% -- (2/96)
Worst Month-End Peak-to-Valley: (30.89)% -- (12/93-9/94)
1996 year-to-date return (3 months): (9.82)%
1995 annual return: 48.90%
1994 annual return: (23.34)%
1993 annual return: 70.38%
1992 period return (9 months): 13.00%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Capsule C
WELTON INVESTMENT SYSTEMS CORPORATION
GLOBAL FINANCIALS PORTFOLIO
Name of CTA: Welton Investment Systems Corporation
Name of Program: Global Financial Portfolio
Inception of Client Trading by CTA: February 1989
Inception of Client Trading in Program: November 1994
Number of Open Accounts: 2
Aggregate Assets Overall (excluding notional): $27,700,725
Aggregate Assets Overall (including notional): $40,374,490
Aggregate Assets in Program (excluding notional): $3,983,460
Aggregate Assets in Program (including notional): N/A
Worst Monthly % Drawdown: (15.68)% -- (2/96)
Worst Month-End Peak-to-Valley: (19.43)% -- (1/96-3/96)
1996 year-to-date return (3 months): (8.94)%
1995 annual return: 49.67%
1994 period return (2 months): (3.73)%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
65
<PAGE>
<TABLE>
<CAPTION>
Capsule D
WELTON INVESTMENT SYSTEMS CORPORATION
TRADING PROGRAMS NO LONGER OFFERED
February, 1989 Date advisor began trading client accounts
$27,700,725 Total assets under management by the advisor representing actual funds
$40,374,490 Total assets under management by the advisor representing nominal funds
- - ------------------------------------------------------------------------------------------------------------------------------------
Equity Linked Quantitative
Portfolio Former International Foreign World
Enhancement Financials Diversified Interest Rate Nonfinancial Exchange Currency World Equity
Trading Program Product Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Index Portfolio
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Date Program
Began Trading Oct-93 Jul-89 Feb-89 Mar-92 Mar-94 Jun-94 Apr-92 May-94
Actual Funds
Managed Closed Oct-94 Closed Mar-92 Closed Mar-92 1,739,144 Closed Aug-95 Closed Feb-95 Closed Feb-94 521,459
Nominal Funds
Managed -- -- -- 1,739,144 -- -- -- 521,459
Open Accounts 0 0 0 1 0 0 0 1
Closed Accounts 2 1 8 32 4 2 4 10
Accounts Closed
at a Profit 1 0 0 9 2 0 1 1
Accounts Closed
at a Loss 1 1 8 23 2 2 3 9
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Annual Rates
of Return 3
1991 -- (11.48)% (7.84)% -- -- -- -- --
1992 -- (27.75)% (18.81)% 9.57% -- -- 8.28% --
1993 7.36% -- -- 70.00% -- -- (18.90)% --
1994 (4.21)% -- -- (26.68)% 44.13% (13.66)% (2.99)% (15.97)%
1995 -- -- -- 56.49% (16.38)% (2.94)% -- 4.99%
YTD through Jan-96 -- -- -- (14.90)% -- -- -- 3.87%
Largest Single
Monthly Draw-
down 1 (1.79)% (17.89)% (15.11)% (14.47)% (8.99)% (14.68)% (8.80)% (5.81)%
Date of Draw-down Jul-94 Jan-92 Jan-91 Feb-96 Mar-95 Nov-94 Jan-93 Sep-94
Largest Peak-to-
Valley Draw-
down 2 (6.55)% (36.04)% (25.24)% (32.40)% (19.03)% (17.58)% (23.21)% (17.89)%
Date of Peak Mar-94 Dec-90 Mar-91 Dec-93 Feb-95 Oct-94 Nov-92 May-94
Date of Valley Oct-94 Mar-92 Mar-92 Jan-95 Aug-95 Feb-95 Feb-94 Jan-95
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
THE FOLLOWING NOTES ARE AN INTEGRAL PART OF WISC'S PERFORMANCE COMPOSITE CAPSULES:
1. "Draw-down" means losses experienced by the trading program over a
specified period. "Largest Single Monthly Draw-down" means greatest
percentage decline in net asset value due to losses sustained by the
trading program from the beginning to the end of a calendar month.
2. "Largest Peak-to-Valley Draw-down" means greatest cumulative
percentage decline in month-end net asset value of the trading program
due to losses sustained during a period in which the initial month-end
net asset value of the trading program is not equaled or exceeded by a
subsequent month-end net asset value of the trading program.
3. "Rates of Return" presented in the composite performance capsules are
calculated based on the "Fully-Funded Subset" method as prescribed by
the CFTC. These monthly rates of return are derived by dividing the sum
of the net performance, i.e. the aggregate of net performance for each
of the accounts qualifying for inclusion in the Fully-Funded Subset, by
the sum of the Actual Funds-based BNAVs for the Fully-Funded Subset.
Monthly returns are then compounded to arrive at the year-to-date rate
of return.
</FN>
</TABLE>
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3. ABRAHAM TRADING CO.
Beginning July 1, 1996, Abraham Trading Co. ("ATC") will act as a
Trading Manager for Cornerstone III.
ATC is a corporation organized under the laws of the State of Texas on
August 13, 1990. ATC's principal business address is the Moody
Building, 2nd & Main, Canadian, Texas 79014. Salem A. Abraham is the
sole principal of ATC. He became registered as an associated person of
ATC on October 11, 1990 and became registered as a Commodity Trading
Advisor ("CTA") on October 24, 1988. ATC succeeded to such CTA
registration on September 11, 1990, at which time it also registered as
a Commodity Pool Operator ("CPO"). ATC is a member of the National
Futures Association ("NFA"). ATC is not affiliated with the General
Partner or DWR or with any of the other Trading Managers for the
Partnerships.
ATC is engaged in the business of offering trading advice to customers
with respect to futures contracts, options on futures contracts and
physical commodities, forward contracts and other commodity-related
contracts traded on United States, foreign, and international exchanges
and markets. (Such contracts are hereinafter referred to collectively
as "commodity interests.") ATC trades commodity interests in interest
rate sensitive instruments, currencies, agriculturals, energies, and
metals, among others.
ATC has developed a Managed Account Program pursuant to which it directs
the speculative purchase and sale of commodity interests for the
accounts of participating customers in accordance with its trading
methods and strategies. Because speculative commodity trading presents
the risk of substantial losses, only persons with high income and the
ability to absorb such losses should consider participating in the
Program.
Salem A. Abraham, age 30, is the President, sole director and sole
shareholder of ATC, and is the sole person responsible for making
trading decisions on behalf of ATC. Salem Abraham is registered with
the CFTC as a CTA and principal and associated person of ATC and is a
member of the NFA.
Salem Abraham attended the University of Notre Dame from August 1984
until December 1987 when he graduated cum laude with a B.A. degree in
Finance. His interest in commodity trading began while still in
college, and it was during the spring and summer of 1987 that he
developed his present trading strategy. During this time, he did
extensive research in the technical and methodological aspects of
commodities trading. Combining the information he had gathered with
ideas that he had developed during his research, he began the task of
back-testing the profitability of numerous trading theories in an effort
to establish the relative validity of those theories. This testing was
accomplished by running computer simulations using historical data
and/or by manually studying historical charts. Through this process
many long-venerated trading strategies were shown to be unviable in
changing market conditions, while other strategies were modified in
order to maximize their profitability. This research led Salem to
develop a trend following trading system, and in August 1987, while
still in college, he began to test that approach by trading commodity
interests for his own account. In January 1988, he began to manage
customer accounts using his systematic approach, initially through a
joint account with three of his relatives. He became registered as a
CTA in October 1988 and organized ATC in August 1990 to act as CTA for
all customer accounts. Salem continues to conduct research on trading
strategies.
Edward C. Abraham, age 31, Salem Abraham's brother, is registered with
the CFTC as an associated person of ATC and is a member of NFA. He
attended Texas Tech University from 1983 through 1988 where he received
a B.B.A. degree in Petroleum Land Management. He received a degree in
Ranch and Feedlot Business Management from Clarendon College in May
1989. From his graduation in May 1989 until October 1990, Edward
Abraham was employed in his family's business as a ranch manager. He
joined ATC in October 1990 as Salem Abraham's trading assistant.
Although not a principal, in his role as trading assistant, Edward has
worked with ATC's clearing brokers to improve the execution and
implementation of ATC's trading strategies.
Craig L. Caudle, age 35, Director of Marketing and Operations, is
registered with the CFTC as an associated person of ATC and is a member
of the NFA. Although not a principal of ATC, Craig assists Salem in the
company's marketing, operating, and trading efforts. He graduated from
Texas Tech University in 1983 with a B.S. degree in International Trade.
From June 1983 through June 1985, he was a member of the Index and
Options Market, a division of the Chicago Mercantile Exchange. From
June 1985 through October 1987, he was a Funds Management Officer at
Nations Bank Texas. During that time he traded for the bank's foreign
exchange and government securities operations. From October 1987 until
joining ATC in April 994, Craig was President of Star-Tex Asset
Management, Inc. a CTA and CPO in Dallas, TX. At Star-Tex he was
responsible for trading support, business operations, compliance,
accounting, customer relations, and marketing.
Neither ATC nor its principal own any Units of Cornerstone III.
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PROPRIETARY TRADING BY ATC AND ITS PRINCIPALS
ATC does not at the present time trade commodity interests for its own
proprietary account; however, employees of ATC, including Edward
Abraham, may trade for their own proprietary accounts. In addition,
Salem Abraham in the past has traded and may trade commodity interests
for his own proprietary accounts. In his proprietary trading, he
generally follows the same basic trading methods and strategies
developed, modified and refined by him over the past six years. See
"Description of Trading Methods and Strategies." He may not, however,
trade his proprietary accounts in parallel with the accounts of his and
ATC's customers. In trading for proprietary accounts and in contrast to
his and ATC's customer account trading, Salem Abraham at times may trade
a larger number of contracts, utilize a higher degree of leverage, pay
lower commission rates, and test new markets. In addition, he may
conduct experimental trading in proprietary accounts to test new systems
or variations of his basic trading methods and strategies. He also may
trade contracts for a proprietary account, but not for customer
accounts, including customer accounts of ATC, where a given market or a
market at a given time is illiquid or extremely volatile, thereby
assuming a greater risk in his proprietary account than he or ATC is
willing to assume for the accounts of customers; however, ATC, Salem
Abraham, or Edward Abraham will not knowingly take positions ahead of or
opposite to those taken by ATC on behalf of participating customers'
accounts. Accordingly, his proprietary accounts may produce trading
results that are different from those experienced by participating
customers. Participating customers will not be permitted to inspect the
proprietary trading records of Salem Abraham or ATC or its employees,
should ATC or its employees elect to trade proprietary accounts, due to
the confidential nature of such records.
DESCRIPTION OF TRADING METHODS AND STRATEGIES
Salem A. Abraham is employed by ATC and is the sole person responsible
for overseeing ATC's trading decisions. ATC's trading approach draws
upon Salem Abraham's judgment, experience and his knowledge of the
technical factors affecting various commodity markets and attempts to
identify optimal trading opportunities. The approach is primarily
guided by trading systems which are owned by Salem Abraham but are
licensed to ATC. These trading systems are trend following in nature
and are based on classical technical analysis.
The underlying premise of ATC's trading approach is that commodity
interests will, from time to time, enter into periods of major price
change to either a higher or lower level. These price changes are known
as trends, which have been observed and recorded since the beginning of
market history. There is every reason to believe that in free markets
prices will continue to trend. The trading approach used by ATC is
designed to exploit these price moves.
The trading systems which are licensed to ATC and which guide ATC's
trading decisions were developed by Salem through intense research
designed to uncover trading opportunities. Primarily, this research
focused on events in the marketplace which are often precursors to the
development of a trending price in a given market. The trading approach
relies heavily on the disciplined management of risk. In evaluating the
various factors which make up a trading decision, the systems pay close
attention to each trade's risk-reward potential, how it fits into the
risk profile of the entire portfolio, and whether it adheres to the
account's overall trading goals.
Salem may refine or change ATC's trading approach (including
enhancements or changes to this trading systems which are licensed to
ATC or the addition or deletion of commodity interests traded) at any
time without prior notice to or approval by its customers. There can be
no assurance that ATC's approach to trading the commodities markets will
yield the same results which have been achieved in the past.
GOAL OF TRADING; MARKETS EMPLOYED
The trading approach employed by ATC in trading customer accounts uses
technical analysis to anticipate structural changes in the marketplace.
Technical analysis is based on the theory that the study of the
commodities markets themselves provides a means of anticipating the
external factors that affect the supply and demand of a particular
commodity in order to predict future prices. Technical analysis
operates on the theory that market prices at any given point in time
reflect all known factors affecting supply and demand for a particular
commodity; consequently, only a detailed analysis of, among other
things, actual daily, weekly and monthly price fluctuations, volume
varia-
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tions and changes in open interest are of predictive value when
determining the future course of price movements. In general, trading
recommendations may be based on computer-generated signals, chart
interpretations, mathematical measurements or a combination of such
items.
Technical analysis is a particular concern in the timing of entry and
exit positions and in evaluating the extent to which the market price
reflects the underlying value. ATC's evaluation of the technical
position of the market can thus help in determining the direction of
prices and is also used as a tool in risk control. ATC believes that
the confluence of technical signals gives it optimal risk/reward
possibilities.
In its evaluation of the markets, ATC will utilize a trend-following
strategy. Successful speculative commodity trading depends upon
establishing a position and then maintaining the position while the
market moves in a favorable direction. The trader then seeks to exit
the particular market and/or may establish reverse positions when the
favorable trend either does not materialize or reverses. Trading will
not normally be successful if the particular market is moving in an
erratic and non-trending manner or if the market moves in the direction
opposite to that predicted by the trader. Because of the nature of the
commodities markets, prices frequently appear to be trending when the
market is, in fact, without a trend. In addition, a particular trading
method may identify markets as trending favorably to a particular
position in the market even though actual market performance thereafter
is the reverse of the trend identified.
A trend-following trading strategy will seldom direct market entry or
exit at the most favorable price in the particular market trend.
Rather, this type of trading method seeks to close out losing positions
and to hold portions of profitable positions for as long as the trader
determines that the particular market trend continues to exist.
However, there can be no assurance that profitable positions can be
liquidated at the most favorable price in a particular trend. As a
result, the number of losing transactions can be expected to exceed
substantially the number of profitable transactions. However, if the
approach is successful, these losses should be small and should be more
than offset by a few large gains.
ATC's trading strategy is to identify a trend and initiate a position
until a neutral or opposite trend signal is generated. The position is
then closed out or reversed. This strategy does not always result in a
position being held in every commodity traded since individual
commodities may have extended non-trending periods.
ATC presently monitors and trades 38 commodity interests: Wheat; Corn;
Soybeans; Soybean Oil; Soybean Meal; British Pound; Canadian Dollar;
Swiss Franc; Deutsche Mark; Japanese Yen; Australian Dollar; Silver;
Platinum; Copper; Gold; Aluminum; Zinc; Nickel; Eurodollar; U.S.
Treasury Notes; U.S. Treasury Bonds; Australian Bonds; Japanese Bonds;
French Bonds; German Bunds; British Gilts; S&P Index; Crude Oil; Heating
Oil; Harbor Unleaded Gas; Natural Gas; Cotton; Sugar; coffee; Cocoa;
Orange Juice; Live Cattle; and Live Hogs. ATC presently trades currency
forward contracts through the interbank market. ATC may trade for
participating customers' accounts any commodity interests which are now
or may hereafter be offered for trading on United States and
international exchanges and markets. In that regard, ATC from time to
time in its sole discretion may add commodity interests to participating
customers portfolios and from time to time may drop such items.
EMPHASIS ON RISK MANAGEMENT
A vital part of ATC's trading strategy is sound risk management. The
good times, when the markets are in trending periods, will take care of
themselves. ATC's trading strategy is designed to endure the imminent
non-trending periods in order to profit when trends in the markets do
occur. Each commodity interest is tracked on its own merits, and a stop
loss level is determined at the time a trade is entered. Stops are
designed to weed out losing trades quickly and help ensure that no loss
will be more than a nominal percentage of the account's net assets.
On average, ATC utilizes approximately 20% of the Net Assets of
participating customers to meet initial margin requirements, although
this percentage may vary widely.
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Past Performance of ATC.
ATC and its principal have established a performance history in the
client accounts for which they have acted as a commodity trading
advisor. The assets of Cornerstone III to be allocated to ATC will be
traded pursuant to the Diversified Program.
INVESTORS ARE CAUTIONED THAT THE INFORMATION SET FORTH IN CAPSULE A
IS NOT INDICATIVE OF, AND HAS NO BEARING ON, ANY TRADING RESULTS WHICH
MAY BE ATTAINED BY ATC OR CORNERSTONE III IN THE FUTURE, SINCE PAST
RESULTS ARE NOT A GUARANTEE OF FUTURE RESULTS AND OTHER TRADING MANAGERS
WILL BE INVESTING FUNDS OF SUCH PARTNERSHIP. THERE CAN BE NO ASSURANCE
THAT ATC OR SUCH PARTNERSHIP WILL MAKE ANY PROFITS AT ALL, OR WILL BE
ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES. INVESTORS SHOULD ALSO NOTE
THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT PORTION OF A COMMODITY
POOL'S TOTAL INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE PROFITS
WHERE THERE HAVE BEEN REALIZED OR UNREALIZED LOSSES FROM COMMODITY
TRADING.
Capsule A
PERFORMANCE OF ABRAHAM TRADING COMPANY
Name of CTA: Abraham Trading Company
Name of Program: Diversified
Inception of Client Trading by CTA: January 1988
Inception of Client Trading in Program: January 1988
Number of Open Accounts: 15
Aggregate Assets Overall: $100,651,275
Aggregate Assets in Program: $100,651,275
Worst Monthly % Drawdown: (15.94)%--(1/91)
Worst Month-End Peak-to-Valley: (27.11)%--(9/90--8/91)
Monthly Rates
of Return 1996 1995 1994 1993 1992 1991
% % % % % %
January (6.85) (7.91) (1.45) (4.21) (12.60) (15.94)
February (13.78) 1.24 (4.16) 6.10 (6.00) 1.30
March 9.66 6.63 2.87 4.57 (5.47) 2.43
April 4.73 (8.39) 9.24 0.31 (13.70)
May 8.22 15.01 4.88 (5.71) 2.94
June 0.11 1.47 (1.22) 6.58 2.11
July (8.75) 0.98 6.60 16.52 (1.52)
August (5.34) (7.83) (5.28) 1.92 (6.33)
September (1.84) 5.05 (1.16) (0.34) 11.61
October (6.67) (5.43) (6.59) (3.31) 16.61
November (0.19) 14.24 (3.71) 4.65 (2.09)
December 19.11 1.06 12.83 (4.54) 33.75
Compound 6.12 24.22 34.29 (10.50) 24.39
Annual (Period)
Rate of Return
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
THE FOLLOWING NOTES ARE AN INTEGRAL PART OF THIS PERFORMANCE COMPOSITE CAPSULE:
1. "Draw-down" means losses experienced by the trading program over a
specified period. "Largest Single Monthly Draw-down" means greatest
percentage decline in net asset value due to losses sustained by the
trading program from the beginning to the end of a calendar month.
2. "Largest Peak-to-Valley Draw-down" means greatest cumulative
percentage decline in month-end net asset value of the trading program
due to losses sustained during a period in which the initial month-end
net asset value of the trading program is not equaled or exceeded by a
subsequent month-end net asset value of the trading program.
3. "Monthly Rates of Return" is calculated by dividing net performance
of the Fully-Funded Subset by the beginning equity of the Fully-Funded
Subset. In such instances, the Fully-Funded Subset is adjusted to
exclude accounts with significant additions or withdrawals which would
materially distort the rate of return pursuant to the Fully-Funded
Subset method.
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4. SUNRISE CAPITAL MANAGEMENT, INC.
(CURRENT ALLOCATION -- 42.5%
Sunrise is a California corporation with offices at 990 Highland Drive,
Suite 303, Solana Beach, California 92075-2472. Its telephone number is
(619)-259-8911. In January 1994, Sunrise changed its name from "Sunrise
Commodities, Inc." to "Sunrise Capital Management, Inc." This name
change became effective with respect to Sunrise's registration with the
NFA in January 1994. Sunrise was organized in 1983 and continues the
business of Sunrise Commodities, a California sole proprietorship
organized in 1982. Sunrise was registered in February 1983 as a
commodity trading advisor and in April 1990 as a commodity pool operator
with the CFTC and is a member of the NFA in both such capacities. In
January 1995, Sunrise and Commodity Monitors, Inc. ("CMI") organized
Sunrise Capital Partners L.L.C. ("Sunrise Capital Partners"), a
California limited liability company. Sunrise Capital Partners is
wholly-owned by Sunrise and CMI and was registered in February 1995 as a
commodity trading advisor and commodity pool operator with the CFTC and
is a member of the NFA in both such capacities. CMI is a California
corporation organized in October 1977, and is the successor to the
partnership of Harris & Slaughter. CMI was registered in November 1977
with the CFTC as a commodity trading advisor and is a member of the NFA
in such capacity. Sunrise Capital Partners and CMI are also located at
the address of Sunrise set forth above. While Sunrise, not Sunrise
Capital Partners, is a Trading Advisor for the Partnership, a
description of the principals of Sunrise Capital Partners is included
below due to the relationship between Sunrise and CMI resulting from the
establishment of Sunrise Capital Partners. Sunrise and Sunrise Capital
Partners currently operate 5 commodity pools. Sunrise and Sunrise
Capital Partners are not affiliated with the General Partner, DWR, EMC
or Rabar.
Martin P. Klitzner, age 51, is President, Secretary and a Director of
Sunrise, and a Managing Director of Sunrise Capital Partners. Mr.
Klitzner received a B.A. Degree from the University of Michigan in 1967
and a M.B.A. from the University of Michigan in 1968. He did post
graduate work in economics at the University of California, Los Angeles,
from 1968 to 1971. Mr. Klitzner joined Sunrise in December 1982, and has
exclusive operational control of the day-to-day activities of Sunrise
which includes the supervision of trading procedures.
Richard C. Slaughter, age 45, is a Managing Director of Sunrise Capital
Partners. Mr. Slaughter, with Mr. Klitzner, is responsible for Sunrise
Capital Partners' day-to-day trading activities, as well as research and
trading systems development. In 1974, he received a B.S. in finance from
San Diego State University. He has pursued graduate studies in finance
at the State University and in systems management at the University of
Southern California. Mr. Slaughter has been a Professor of Finance,
instructing M.B.A. candidates in securities analysis and portfolio
management. Mr. Slaughter, a co-founder of CMI in 1977, serves as its
President. He was responsible, along with Dr. Forrest, for the
development of CMI's current trading systems. Mr. Slaughter began
trading commodities on a full-time basis in 1975 for his own account and
as a commodity trading advisor.
Dr. Gary B. Davis, age 50, is the Chairman of the Board and Chief
Financial Officer of Sunrise. Dr. Davis received a B.S. degree from the
University of Michigan in 1968 and received his medical degree from the
University of Michigan in 1970. Dr. Davis was a professor at the
University of California, San Diego School of Medicine, where he has
served on the faculty from 1980 through 1990. Since 1979, Dr. Davis has
studied and traded the commodity futures markets. Dr. Davis currently
concentrates his efforts in the research and trading systems development
activities of Sunrise and Sunrise Capital Partners.
Dr. John V. Forrest, age 52, engages in research and trading systems
development on behalf of Sunrise Capital Partners. In 1962, he received
a B.A. from Notre Dame and in 1966 received a Medical Degree from the
State University New York Downstate Medical Center. Dr. Forrest is
currently a Professor of Medicine at the University of California, San
Diego, where he has served on the faculty since 1976. Dr. Forrest joined
CMI in September 1991 and is a co-developer, with Mr. Slaughter, of
CMI's current trading systems. He was President and sole shareholder of
Cresta Commodities, a commodity trading advisor, from September 1981 to
August 1989. Dr. Forrest began trading the commodity markets in 1975.
Martin M. Ehrlich, age 48, is Vice President and a Director of Sunrise,
and Vice President-Marketing of Sunrise Capital Partners. His academic
background includes studies at the University of Cincinnati where he
majored in business administration. Mr. Ehrlich joined Sunrise in 1986
after having been a long-time investor with Sunrise. Prior to assuming
responsibilities for marketing and public relations for Sunrise, Mr.
Ehrlich was an independent businessman and investor.
Marie Laufik, age 46, is a Vice President and Director of Sunrise, and
Vice President-Trading of Sunrise Capital Partners. She received a
degree in Economics from the University of Prague, Czechoslovakia before
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joining a Czechoslovakian import/export company. She held a position
with this firm for nine years before immigrating to the United States.
From 1986 through 1988, Mrs. Laufik was a commodity trader for Cresta
Commodities. Mrs. Laufik joined Sunrise on August 8, 1988 and currently
oversees trading room procedures.
The Davis Family Trust, dated October 12, 1989, is a Director and the
Sole Shareholder of Sunrise; Gary B. Davis and his wife, Elissa Davis,
are Trustees and the sole beneficiaries of this Trust. Elissa Davis, age
49, is a principal of Sunrise and Sunrise Capital Partners by virtue of
her role as a Trustee of the Davis Family Trust. Mrs. Davis is not
active in the management of Sunrise or Sunrise Capital Partners and has
not been involved in any other business activities during the past five
years.
Sunrise, Sunrise Capital Partners, their principals and their affiliates
intend to trade or to continue to trade commodity interests for their
own accounts. Limited Partners will not be permitted to inspect the
personal trading records of Sunrise, Sunrise Capital Partners, their
principals, or their affiliates.
Neither Sunrise nor any of its principals owns any Units of Cornerstone
III.
There have been no material administrative, civil or criminal actions
pending, on appeal or concluded during the five years preceding the date
of this Prospectus against Sunrise, Sunrise Capital Partners or any of
their principals or their affiliates.
Description of Sunrise's Trading Approach
Sunrise has historically traded three types of portfolios, all of which
are traded in accordance with the description below.
The first type of portfolio is a fully diversified futures portfolio
which follows approximately 15 different markets. Such markets include
metals, grains, petroleum, soft commodities, interest rates and
currencies. The second type of portfolio that is available for
investment is a currency portfolio which trades in currency futures
contracts traded on the International Monetary Market Division of the
Chicago Mercantile Exchange and in forward currency contracts in the
interbank market. The currency portfolio follows approximately 13
different currencies, including the British pound, the Canadian dollar,
the German deutschemark, the Australian dollar, the French franc, the
Japanese yen, the Swiss franc, Spanish peseta, Italian lira, Singapore
dollar and Malaysian ringgit. The third type of portfolio available for
investment is the CIMCO portfolio, which is derived from Sunrise's
diversified portfolio. The CIMCO portfolio was designed by Sunrise to
include selected financial markets and participates in foreign currency
and crossrate trades, interest rates, precious and industrial metals,
and energy products.
Sunrise utilizes technical trend-following systems, trading a wide
continuum of time windows. Most of these time frames are decidedly long
term by industry standards. Pro-active money management strategies are
designed to protect open profits and to minimize exposure to non-
directional markets.
Effective November 1, 1993, the General Partner has reallocated the
assets of Cornerstone III managed by Sunrise in proportions of
approximately 50% pursuant to the fully diversified futures portfolio
and approximately 50% to the CIMCO portfolio. The fully diversified
futures portfolio follows approximately 25 different commodities,
although fewer commodities may be traded at any time due to the absence
of a price trend. The CIMCO portfolio was designed by Sunrise to include
selected financial markets and participates in foreign currency and
cross-rate trades, interest rates, precious metals and energy products.
Major currencies are traded both against the dollar and each other.
Interest rates include U. S. Treasury bond and Eurodollar trades.
Precious metals include gold and silver, while energy products will
include crude oil. The method of trading the CIMCO portfolio is the same
as that used in the larger diversified portfolio; however, the CIMCO
program is limited to only the markets listed above. The CIMCO portfolio
is not limited to the contracts mentioned in each of the categories
above nor does it trade all the contracts that were named at all times.
In the future, stock indices may be added to the portfolio traded for
the Partnership.
The General Partner has granted Sunrise permission to utilize the
modified Sunrise trading system for currency portfolios in trading a
portion of the funds of Cornerstone III allocated to Sunrise for
management. Such trading has not yet commenced. The modified Sunrise
trading system for currency portfolios is described under "The Trading
Managers--Dean Witter Cornerstone Fund IV."
Relying on technical analysis, Sunrise believes that future price
movements in all markets may be more accurately anticipated by analyzing
historical price movements within a quantitative framework rather than
attempting to predict or forecast changes in price through fundamental
economic analysis. The trading
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methodologies employed by Sunrise are
based on programs analyzing a large number of interrelated mathematical
and statistical formulas and techniques which are quantitative,
proprietary in nature and which have been either learned or developed by
Dr. Davis, and which have been influenced by Dr. Forrest and Mr.
Slaughter. The profitability of the trading programs, traded pursuant to
technical analysis emphasizing mathematical and charting approaches,
will depend upon the occurrence in the future, as in the past, of major
trends in some markets. If there are no trends, the trading programs are
likely to be unprofitable.
Sunrise's trading systems attempt to detect a trend, or lack of a trend,
with respect to a particular futures interest in a program by analyzing
price movement and volatility over time. Sunrise's trading system
consists of multiple, independent and parallel systems, each designed
and tested to seek out and extract different market inefficiencies on
different time horizons. These systems will generate a signal to sell a
"short" contract or purchase a "long" contract based upon their
identification of a price trend in the particular futures interest. If
the systems do not detect a price trend, a "neutral" trading signal will
be generated. While this neutral signal is designed to filter out high-
risk "whipsaw" markets, it is successful on only a limited basis.
Successful speculative futures interests trading employing trend-
following techniques, such as Sunrise's, depends to a large degree upon
not trading non-directional, volatile markets. Accordingly, to the
extent that this signal is not generated during a non-trading market,
trading would likely be unsuccessful because an account would trade such
markets.
The number of losing transactions may exceed substantially the number of
profitable transactions. However, if Sunrise's approach is successful,
these losses should be more than offset by gains.
While Sunrise relies primarily on its mechanical, technical trading
systems in making investment decisions, the strategy does include the
latitude to depart from this approach if market conditions are such
that, in the opinion of Sunrise, execution of trades recommended by the
mechanical systems would be difficult or unusually risky. There may
occur the rare instances in which Sunrise will override the system to
decrease market exposure. Any modification of trading instructions could
adversely affect the profitability of an account. Among the possible
consequences of such a modification would be (1) the entrance of a trade
at a price significantly worse than a system's signal price, (2) the
complete negation of a signal which subsequently would have produced a
profitable trade, or (3) the premature termination of an existing trade.
Sunrise is under no obligation to notify clients (including Limited
Partners) of this type of deviation from its mechanical systems, since
it is an integral part of its overall trading method.
A technical trading system consists of a series of fixed rules applied
systematically, however, the system still requires Sunrise make certain
subjective judgments. For example, Sunrise must select the markets it
will follow and futures interests it will actively trade, along with the
contract months in which it will maintain positions. Sunrise must also
subjectively determine when to liquidate positions in a contract month
which is about to expire and initiate a position in a more distant
contract month.
Sunrise engages in ongoing research which may lead to significant
modifications from time to time. Sunrise will notify the General Partner
if modifications to its trading systems or portfolio structure are
material.
Sunrise believes that the development of a commodity trading strategy is
a continual process. As a result of further analysis and research into
the performance of Sunrise's methods, changes have been made from time
to time in the specific manner in which these trading methods evaluate
price movements in various futures interests, and it is likely that
similar revisions will be made in the future. As a result of such
modifications, the trading methods that may be used by Sunrise in the
future might differ from those presently being used.
Sunrise has discretionary authority to make all trading decisions
including upgrading or downgrading the trading size of the account of
the Partnership to reflect additions, withdrawals, trading profits,
and/or trading losses, without prior consultation or notice. In
addition, Sunrise may from time to time adjust the leverage applicable
to the Partnership's assets allocated to Sunrise; provided, however, any
such adjustments will be consistent with the leverage parameters
described herein and the Partnership's overall investment objectives and
Trading Policies. Such adjustments may be in respect of certain markets
or in respect of the overall CIMCO investment portfolio. Factors which
may affect the decision to adjust leverage include: ongoing research,
volatility of individual markets, risk considerations, and Sunrise's
subjective judgment and evaluation of general market conditions.
Adjustments to leverage may result in greater profits or losses and
increased brokerage costs. No assurance can be given that any leverage
adjustment will be to the financial advantage of Limited Partners.
As of March 31, 1996, the aggregate amount of funds under management
pursuant to the Diversified program was $17,903,033 and $55,301,787
pursuant to the CIMCO portfolio. As of March 31, 1996 the aggregate
amount under management pursuant to all Sunrise's programs was
$162,777,098.
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As of March 31, 1996, Sunrise was managing approximately, $16,918,870 of
Cornerstone III. Such amount and percentage of assets of Cornerstone III
managed by Sunrise will change as a result of allocations of net
proceeds from the Exchange of Units of Cornerstone III, allocations and
reallocations among trading managers and/or trading systems, and the
performance of Sunrise and other trading managers for Cornerstone III.
DEAN WITTER CORNERSTONE FUND IV
The Trading Managers initially selected by the General Partner for
Cornerstone IV are John W. Henry & Co., Inc. ("JWH") and Sunrise Capital
Management, Inc. ("Sunrise"). JWH and Sunrise have served as Trading
Managers for Cornerstone II and III respectively since the inception of
those Partnerships. Detailed descriptions of each of JWH and Sunrise,
their respective principals and trading systems and their respective
composite performance records are set forth under "The Trading Managers--
Dean Witter Cornerstone Fund II" and "Dean Witter Cornerstone Fund III."
Descriptions of the respective performance records of Cornerstone II and
III are set forth under "The Cornerstone Funds--Performance Records."
1. JOHN W. HENRY & CO., INC.
(CURRENT ALLOCATION--49.5%)
JWH makes trading decisions for Cornerstone IV pursuant to the
International Foreign Exchange Program. Like the other JWH trading
systems, the International Foreign Exchange Program is a long-term,
technical, trend-following trading system which generally operates as
described under "General Description of Trading Systems" and "The
Trading Managers--Dean Witter Cornerstone Fund II." The International
Foreign Exchange Program has been structured and the different markets
weighted to take into account the potentially higher volatility of a
portfolio which trades exclusively in the currency markets. JWH has
attempted to reduce volatility and risk by utilizing the trading method
described above--i.e., applying the principles of spread trading by
establishing two related foreign currency positions at or about the same
time. The International Foreign Exchange Program calculates position
size based on perceived risk in the particular currency market and the
correlation of a particular currency with and against other currencies.
As of March 31, 1996 JWH was managing approximately $49,099,891.05 of
Cornerstone IV. Such amount and the percentage of assets of Cornerstone
IV managed by JWH will change as a result of allocations of assets from
the Exchange of Units of Cornerstone IV, allocations and reallocations
among trading managers and/or trading systems, and the performance of
JWH and the other trading manager for Cornerstone IV.
2. SUNRISE CAPITAL MANAGEMENT, INC.
(CURRENT ALLOCATION--51.5%)
Sunrise will make trading decisions for Cornerstone IV pursuant to the
Sunrise trading system described under "General Description of Trading
Systems" and "The Trading Managers--Dean Witter Cornerstone Fund III,"
but with minor modifications to the system to account for the trading of
an exclusive portfolio of diverse world currencies. Such modifications
have consisted principally of applying the principles of spread trading
as described herein, including multiple additional currencies to a
portfolio and reweighting the emphasis given the different markets
traded, all in an attempt to adjust to the potentially higher volatility
of a portfolio which trades in a less diversified group of markets.
Sunrise has utilized its modified trading system to trade currency
portfolios since October 1985. Sunrise normally commits between 40 and
60% of an accounts equity as margin on open positions pursuant to its
trading system.
As of March 31, 1996, Sunrise was managing approximately $50,054,167.6
of Cornerstone IV. Such amount and the percentage of assets of
Cornerstone IV managed by Sunrise will change as a result of allo-
cations of assets from the Exchange of Units of Cornerstone IV,
allocations and reallocations among trading managers and/or trading
systems, and the performance of Sunrise and the other trading manager
for Cornerstone IV.
THE MANAGEMENT AGREEMENTS
Each Trading Manager has entered into a Management Agreement with a
Partnership and the General Partner which provides that the Trading
Manager will have sole authority and responsibility, except in certain
limited situations, for directing the investment and reinvestment in
commodity futures contracts and other commodity interests of the portion
of the Partnership's assets allocated to the management of such Trading
Manager from time to time during the term of the Management Agreement.
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APPORTIONMENT OF PROCEEDS
Under the terms of the Management Agreements, the General Partner agreed
to apportion the net proceeds received by each Partnership from the
initial sale of its Units in approximately equal proportions among the
Trading Managers for such Partnership and, thereafter, to apportion new
funds contributed to such Partnership in approximately equal proportions
among the then Trading Managers for such Partnership. For a discussion
of certain exceptions which have been agreed to by the Trading Managers,
see "The Cornerstone Funds." The General Partner may designate
additional Trading Managers for each Partnership and may apportion funds
to new Trading Managers as it shall determine in its absolute
discretion. However, the Trading Managers for Cornerstone IV have the
right to approve the appointment of additional (but not replacement)
Trading Managers for that Partnership so long as the General Partner has
allocated an agreed amount of funds to each Trading Manager during the
prior year and each manager continues to be restricted as to other
accounts it may manage. See "Restrictions" below. The General Partner
may reapportion funds among Trading Managers for each Partnership when a
new Trading Manager is designated, an existing Trading Manager is
terminated, a Trading Manager experiences a 35% decline in the adjusted
value of Net Assets managed by it during a 12-month period, the
Partnership's incentive period ends, or speculative position limits are
exceeded or about to be exceeded by a Trading Manager. Furthermore, the
General Partner in its discretion may permit a portion of a
Partnership's assets to be allocated among one or more additional
trading systems of a Trading Manager and/or may reallocate assets among
a Trading Manager's trading systems.
TERM
Each Management Agreement continues in effect for a fixed period after
the end of the month in which the Partnership with which such Agreement
was entered into commenced trading operations. Each Management
Agreement is thereafter renewed automatically for additional one-year
terms unless either the Partnership or the Trading Manager, upon written
notice given not less than 60 days (six months in the case of
Cornerstone IV) prior to the original termination date or any extended
termination date, notifies the other party of its intention not to
renew.
Each Management Agreement with a Partnership will terminate if the
Partnership terminates. Each Management Agreement may also be terminated
by the Partnership, without penalty, at any time upon 15 days' (60 days'
in the case of Cornerstone IV) prior written notice to the Trading
Manager. In addition, each Management Agreement may be terminated by the
Partnership at any time without penalty upon the occurrence of certain
events relating to the business operations of a Trading Manager. These
are as follows: (i) if a certain principal employee ceases to be an
active executive officer of the Trading Manager; (ii) if the Trading
Manager becomes bankrupt or insolvent; (iii) if the Trading Manager is
unable to use its trading systems or methods as in effect on the date of
the Management Agreement and as refined and modified in the future with
the written consent of the General Partner for the benefit of the
Partnership; (iv) if the registration, as a commodity trading advisor or
otherwise, of the Trading Manager with the CFTC or its membership in the
NFA is revoked, suspended, terminated, or not renewed or limited,
conditioned, restricted or qualified in any respect; or (v) if the
Trading Manager merges or consolidates with, or sells or otherwise
transfers its advisory business, or all or a substantial portion of its
assets, any portion of its commodity trading systems or methods, or its
goodwill to, any individual or entity. Under each Management Agreement,
the Trading Manager may, however, merge or consolidate with, or sell or
otherwise transfer its advisory business, or all or a substantial
portion of its assets, any portion of its commodity trading systems or
methods, or its goodwill to, any entity that is directly or indirectly
controlled by, controlling or under common control with, the Trading
Manager, provided that such entity expressly assumes all obligations of
the Trading Manager under the Management Agreement and agrees to
continue to operate the business of the Trading Manager, substantially
as such business was being conducted on the date of the Management
Agreement, as a separate and distinct division of such entity.
In addition, each Partnership may terminate its Management Agreement
with a Trading Manager at any time without penalty upon the occurrence
of certain events relating to trading. These include the following: (i)
a decline in the Net Asset Value of a Unit, without taking into account
distributions, if any, to less than 40% of the Net Asset Value of a Unit
on the date that the Partnership commenced trading operations or during
any fiscal year to less than 50% of the Net Asset Value of a Unit as of
the beginning of such fiscal year of the Partnership; (ii) a decline by
50% during any consecutive 12-month period in the value of the Net
Assets managed by the Trading Manager (after adding back the amount of
distributions, redemptions, Exchanges or reapportionments charged to
such Net Assets and subtracting increases in such Net Assets from Units
acquired by Exchange or from reapportionments among Trading Managers
during the relevant portion of such twelve con-
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secutive month period);
(iii) the Trading Manager violates any of the Partnership's trading
policies or any administrative policy described in writing to the
General Partner, except with the prior written consent of the General
Partner; or (iv) the Trading Manager fails to perform any of its
obligations under the Management Agreement.
No assurance is given that each Partnership will be able to retain the
services of a Trading Manager once its Management Agreement with such
person is terminated, or, if such services are available, that they will
be available on the same or similar terms as those of the Management
Agreement. The compensation payable by each Partnership to a Trading
Manager for its services under the Management Agreement is described
under "Description of Charges to Each Partnership."
LIABILITY AND INDEMNIFICATION
Each Management Agreement provides that the Trading Manager, its
stockholders, directors, officers, employees, assigns and their
respective successors and assigns will not be liable to or obligated to
indemnify and hold harmless the Partnership, its Partners or any of
their respective successors or assigns, except for certain errors as
described below and by reason of acts of, or omissions due to, bad
faith, misconduct or negligence, or for not having acted in good faith
in the reasonable belief that such acts or omissions were in, or not
opposed to, the best interests of the Partnership or by reason of a
material breach of the Management Agreement or any representation or
warranty therein.
Each Management Agreement also provides that the Trading Manager will
assume financial responsibility for any errors committed or caused by it
in transmitting orders to or order placement with DWR for the purchase
or sale of commodity interest contracts for the Partnership, including,
without limitation, brokerage commissions, but only for the amount of
DWR's actual out-of-pocket costs in respect thereof. Each Trading
Manager and DWR have an affirmative obligation to promptly notify the
other party of its own errors, and each Trading Manager must use its
best efforts to identify and promptly notify the General Partner of any
order or trade which the Trading Manager reasonably believes was not
executed in accordance with its instructions to DWR.
Each Management Agreement also provides that the Partnership and the
General Partner will indemnify, defend and hold harmless the Trading
Manager, its stockholders, directors, officers, employees and their
respective successors and assigns from and against all liabilities
incurred in the performance of the services required by the Management
Agreement, provided that a court of competent jurisdiction upon entry of
a final judgment finds (or, if no final judgment is entered, an opinion
is rendered to the Partnership by independent counsel) to the effect
that such liability was not the result of bad faith, misconduct or
negligence or that the conduct was done in the good faith belief that it
was in, or not opposed to, the best interests of the Partnership. In
addition, each Management Agreement provides that the Trading Manager
and the Partnership, as well as the General Partner, will indemnify each
other against certain other liabilities, including liabilities under the
Securities Act of 1933.
OBLIGATIONS TO A PARTNERSHIP
Each Trading Manager is engaged in the business of advising investors as
to the purchase and sale of commodity interest contracts. During the
term of each Management Agreement, the Trading Manager may or will be
advising other investors (including their officers, directors and
employees and their families and employees of such Trading Manager,
principals and affiliates of such Trading Manager and stockholders,
officers, directors and their families and employees of the principals
and affiliates of such Trading Manager) and trading for their accounts.
However, under no circumstances will the Trading Manager or any of its
principals and affiliates knowingly or deliberately favor (other than by
charging different management and/or incentive fees) any account
advised or managed by such Trading Manager or any of its principals and
affiliates over the account of the Partnership in any way or manner or
employ a trading system, method or strategy on behalf of the
Partnership's account that is materially different from that employed
for any other account advised or managed by such Trading Manager or any
of its principals and affiliates, unless the Trading Manager or any of
its principals and affiliates has first offered to employ such other
system, method or strategy on behalf of the Partnership's account and
the General Partner has declined such offer in writing. Each Trading
Manager will treat the Partnership for which it manages funds in a
fiduciary capacity to the extent recognized by applicable law, but,
subject to that standard, the Trading Manager or any of its principals
and affiliates will be free to advise and manage accounts of other
investors and will be free to trade on the basis of the same trading sys-
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tems, methods or strategies employed by the Trading Manager on behalf
of the Partnership or trading systems, methods or strategies that are
entirely independent of, or materially different from (if the General
Partner has expressly declined an offer as described above), those
employed on behalf of the Partnership, and will be free to compete for
the same commodity interest contracts as the Partnership or to take
positions opposite to the Partnership, where such actions do not
knowingly or deliberately favor any of such accounts to the
Partnership's account.
RESTRICTIONS
The Management Agreement does not restrict the number or nature of the
clients of the Trading Manager, except that each Trading Manager and its
principals and affiliates have agreed that: (i) it will not accept
additional advisory clients or open additional positions for such
clients if to do so would result in aggregate positions in any one
commodity exceeding the applicable speculative position limits of the
CFTC or any other regulatory body, exchange or board having
jurisdiction; and (ii) neither the Trading Manager nor any of its
principals or affiliates will knowingly hold any position or control any
other account that would cause the Partnership, the Trading Manager or
the principals or affiliates of the Trading Manager to be in violation
of any applicable rule or regulation of the CFTC or any other regulatory
body, exchange or board so as to require the significant modification of
positions taken or intended for the Partnership.
The Management Agreements for Cornerstone IV also provide that so long
as a Trading Manager acts as a Trading Manager for that Partnership,
unless the General Partner has given its prior written consent, which
may be withheld in its sole discretion, neither the Trading Manager nor
any of its principals or affiliates will act or negotiate to act as a
Trading Manager or advisor to any domestic publicly-offered investment
fund which trades exclusively or proposes to trade exclusively in world
currencies and/or is marketed or is proposed to be marketed primarily as
a foreign currency investment fund (which will not include a fund which
trades or proposes to trade world currencies as well as any other major
commodity group, such as metals, energy products or financial
instruments). The foregoing restriction may, at the Trading Manager's
option, cease to be in effect if the General Partner has not allocated
during the prior year at least $7,500,000 of additional funds to the
Trading Manager for management.
SPECULATIVE POSITION LIMITS
Each Management Agreement provides that if speculative position limits
are exceeded by the Trading Manager or any of its principals or
affiliates in the opinion of independent counsel (who must be other than
counsel to the Partnership), the CFTC or any other regulatory body,
exchange or board, such Trading Manager and its principals and
affiliates will liquidate positions in all of their accounts, including
the Partnership's account, as to which positions are attributed to such
Trading Manager or any of its principals or affiliates as nearly as
possible in proportion to their respective equities to the extent
necessary to comply with the applicable position limits. Each Management
Agreement further provides that if, in the reasonable opinion of counsel
to the Partnership, it becomes necessary for purposes of speculative position
limits for positions in commodity interests of the Trading Manager taken for
the account of the Partnership to be aggregated with positions taken by the
other Trading Managers for the account of the Partnership, or if an
order to that effect is rendered by the CFTC, an exchange or any other
commodity regulatory agency or authority, the General Partner may
require all Trading Managers affected thereby to utilize only that
portion of the speculative position limit as the General Partner
determines from time to time in its sole discretion. See "Risk Factors--
Risks Relating to Commodity Trading and the Commodities Markets--Possible
Effects of Speculative Position Limits."
THE GENERAL PARTNER
The general partner and commodity pool operator of each Partnership is
Demeter Management Corporation, a Delaware corporation formed on August
18, 1977 to act as a commodity pool operator ("Demeter" or the "General
Partner"). The General Partner is registered with the CFTC as a
commodity pool operator and is a member of the NFA in such capacity. The
General Partner's main business office is located at Two World Trade
Center, 62nd Floor, New York, New York 10048, telephone (212) 392-5453.
The General Partner is an affiliate of DWR in that both companies are
wholly-owned subsidiaries of Dean Witter, Discover & Co. ("DWD"), which
is a publicly-owned company. DWD, DWR and the General Partner each may
be deemed to be a "parent" and "promoter" of the Partnerships within the
meaning of the federal securities laws.
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The General Partner is or has been the general partner and commodity
pool operator of twenty-five other commodity pools, including
Cornerstone II, III and IV, which have, in the aggregate, $992.20
million of net assets under management as of March 31, 1996.
The responsibilities of the General Partner are described under
"Fiduciary Responsibility" and "The Limited Partnership Agreements--
Management of Partnership Affairs." The General Partner receives no
compensation for its services to the Partnerships (however, the General
Partner shares office space, equipment and staff with DWR, which
receives brokerage commissions from the Partnerships, as described under
"Description of Charges to Each Partnership"). Under the Limited
Partnership Agreement of each Partnership, the General Partner is
required to maintain its net worth at an amount not less than 10% of the
total contributions to each Partnership by all the partners thereof and
to any other limited partnership for which it acts as a general partner
by all partners. DWD has contributed to the General Partner additional
capital necessary to permit the General Partner to meet such net worth
requirement and intends to continue to do so. See "Capitalization."
In this connection, as reflected in DWD's 1995 Annual Report and its
Form 10-Q for the quarter ended March 31, 1996, DWD had total
shareholders' equity of $4,833.7 million and total assets of $38,208.2
million as of December 31, 1995 (audited) and total shareholders' equity
of $4,912.7 million and total assets of $35,342.1 million as of March
31, 1996 (unaudited). Additional financial information regarding DWD is
included in the financial statements filed as part of such Annual Report
and Form 10-Q. DWD will provide to investors, upon request, copies of
its most recent Forms 10-K, 10-Q and 8-K, as filed from time to time
with the SEC. Such Prospectus and such reports will be available for
review or copying at the offices of the SEC, 450 Fifth Street, Room
1024, N.W., Judiciary Plaza, Washington, D.C. 20549 or will be available
at no charge by writing to DWD at Two World Trade Center, New York, New
York 10048 (Attn: Investor Relations).
DIRECTORS AND OFFICERS OF THE GENERAL PARTNER
Richard M. DeMartini, age 43, is the Chairman of the Board and a
Director of the General Partner. Mr. DeMartini has served as President
and Chief Operating Officer of Dean Witter Capital, a division of DWR
since January 1989. From January 1988 until January 1989, Mr. DeMartini
served as President and Chief Operating Officer of the Consumer Banking
Division of DWD, and from May 1985 until January 1988 was President and
Chief Executive Officer of the Consumer Markets Division of DWD. Mr.
DeMartini currently serves as a Director of DWD and of DWR, and has
served as an officer of DWR for the past five years. Mr. DeMartini has
been with DWD and its affiliates for 17 years. While Mr. DeMartini has
extensive experience in the securities industry, he has no experience in
futures interests trading.
Mark J. Hawley, age 53, is President and a Director of the General
Partner. Mr. Hawley joined DWR in February 1989. He is an Executive
Vice President and Director of DWR's Managed Futures and Precious Metals
Department. Mr. Hawley also serves as President of DWFCM. From 1978 to
1989, Mr. Hawley was a member of the senior management team at Heinold
Asset Management, Inc., a commodity pool operator, and was responsible
for a variety of projects in public futures funds. From 1972 to 1978,
Mr. Hawley was a Vice President in charge of institutional block trading
for the Mid-West at Kuhn Loeb & Co.
Lawrence Volpe, age 49, is a Director of the General Partner. Mr. Volpe
joined DWR as a Senior Vice President and Controller in September 1983,
and currently holds those positions. From July 1979 to September 1983,
he was associated with E.F. Hutton & Company Inc. and prior to his
departure, held the positions of First Vice President and Assistant
Controller. From 1970 to July 1979, he served as audit manager in the
financial services division of Arthur Andersen & Co.
Joseph G. Siniscalchi, age 51, is a Director of the General Partner. Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President, Director
of General Accounting. He is currently Senior Vice President and
Controller of the Financial Markets Division of DWR. From February 1980
to July 1984 Mr. Siniscalchi was Director of Internal Audit at Lehman
Brothers Kuhn Loeb, Inc.
Laurence E. Mollner, age 54, is a Director of the General Partner. Mr.
Mollner joined DWR in May 1979 as Vice President and Director of
Commercial Sales. He is currently Executive Vice President and Deputy
Director of the Futures Markets Division of DWR.
Edward C. Oelsner III, age 53, is a Director of the General Partner.
Mr. Oelsner joined DWR in March 1981 as a Managing Director in the
Corporate Finance Department. He currently manages DWR's Retail
Products Group within the Corporate Finance Department. While Mr.
Oelsner has extensive experience in the securities industry, he has no
experience in futures interests trading.
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Robert E. Murray, age 35, is a Director of the General Partner. Mr.
Murray is currently a Senior Vice President of the DWR Managed Futures
Division and is the Senior Administrative Officer of DWFCM. Mr. Murray
graduated from Geneseo State University in May 1983 with a B.A. degree
in Finance. Mr. Murray began at DWR in 1984 and is currently the
Director of Product Development for the Managed Futures Division and is
responsible for the development and maintenance of the proprietary Fund
Management System utilized by the General Partner and DWFCM for
organizing information and producing reports for monitoring investors'
accounts.
Patti L. Behnke, age 36, is Vice President and Chief Financial Officer
of the General Partner. Ms. Behnke joined DWR in April 1991 as
Assistant Vice President of Financial Reporting and is currently a Vice
President and Director of Financial Reporting and Managed Futures
Accounting in the Capital Markets division of DWR. From August 1988 to
April 1991, Ms. Behnke was Assistant Controller of L.P. Rothschild & Co.
and from September 1986 to August 1988, she was associated with Cartaret
Savings Bank as Assistant Vice President-Financial Analysis. From April
1982 to September 1986, Ms. Behnke was an auditor at Arthur Andersen &
Co.
The General Partner and its officers and directors may, from time to
time, trade commodity interest contracts for their own proprietary
accounts. The records of trading in such accounts will not be made
available to Limited Partners for inspection.
There have been no administrative, civil or criminal actions against the
General Partner or any of its principals within the five years preceding
the date of this Prospectus which the General Partner believes would be
material to an investors' decision to Exchange Units.
As of March 31, 1995, the General Partner had contributed a total of
$2,810,438 to Cornerstone II, III and IV in order to meet its minimum
capital requirements. Such contribution is evidenced by approximately
217,400 units of general partnership interest of Cornerstone II, 382.103
units of general partnership interest of Cornerstone III and 638.889
units of general partnership interest of Cornerstone IV. Each such unit
of general partnership interest has a net asset value equal to the Net
Asset Value of a Unit of Limited Partnership Interest of the respective
Partnership. The General Partner has agreed to make additional
contributions to each Partnership so that the General Partner's
aggregate capital contribution will at all times be equal to the sum of
(i) the lesser of $100,000 or 3% of the first $10,000,000 in aggregate
capital contributions to such Partnership by all partners (including the
General Partner's contribution) and (ii) 1% of any such aggregate
capital contributions in excess of $10,000,000; but not less than
$50,000. The General Partner and its principals are not obligated to
purchase Units of Limited Partnership Interest and do not presently own
any Units of Cornerstone II. A principal of the General Partner owns
2.750 Units of Cornerstone III and 4.856 Units of Cornerstone IV.
THE COMMODITY BROKER
DESCRIPTION OF THE COMMODITY BROKER
Dean Witter Reynolds Inc. ("DWR"), a Delaware corporation, is the
commodity broker for each of the Partnerships. DWR also is commodity
broker for the other commodity pools for which Demeter serves as general
partner and commodity pool operator.
DWR is a principal operating subsidiary of DWDC, which is a publicly-
owned company. DWR is a financial services company which provides to its
individual, corporate and institutional clients services as a broker in
securities and commodity interest contracts, a dealer in corporate,
municipal and government securities, an investment banker, an investment
adviser and an agent in the sale of life insurance and various other
products and services. DWR is a member firm of the New York Stock
Exchange, Inc., the American Stock Exchange, the Chicago Board Options
Exchange, other major securities exchanges, and the National Association
of Securities Dealers, Inc. ("NASD"), and is a clearing member of the
Chicago Board of Trade, the Chicago Mercantile Exchange, the Commodity
Exchange Inc., and other major commodities exchanges. DWR is registered
with the CFTC as a futures commission merchant and is a member of the
NFA in such capacity. DWR is currently servicing its clients through a
network of over 350 domestic and international offices with
approximately 8,700 account executives servicing individual and
institutional client accounts.
At any given time, DWR is involved in numerous legal actions, some of
which seek significant damages. On January 16, 1992, DWR, without
admitting or denying liability, consented to findings in an
administrative proceeding brought by the SEC that it failed to keep
accurate records with respect to customer orders relating to the primary
distribution of securities of government sponsored enterprises ("GSEs").
In that proceeding,
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DWR was censured, paid a civil money penalty of
$100,000 and was ordered to cease and desist from any future violations
of Section 17(a) of the 1934 Act and Rules 17a-3 and 17a-4 thereunder in
connection with the primary distribution of securities of GSEs. During
the five years preceding the date of this Prospectus, there have been
(other than as described above) no administrative, civil or criminal
actions pending, on appeal or concluded against DWR or any of its
principals which is material in light of all the circumstances.
BROKERAGE ARRANGEMENTS
The Partnerships' brokerage arrangements with DWR, including the cap
imposed on certain expenses, are discussed in "Conflicts of Interest--
Relationship of the General Partner to the Commodity Broker," and
"Description of Charges to Each Partnership--2. Commodity Broker."
The General Partner will review at least annually the brokerage
arrangements of each Partnership to ensure that such brokerage
arrangements are fair, reasonable, and competitive, and represent the
best price and services available, taking into consideration, in
particular, when the commodity broker is an "affiliate" of the General
Partner (as such term is defined in the Limited Partnership Agreement):
(i) the size of the Partnership, (ii) the commodity interests contract
trading activity; (iii) the services provided by the commodity broker,
the General Partners or any affiliate thereof to the Partnership; (iv)
the cost incurred by the commodity broker, the General Partner or any
affiliate thereof in organizing and operating the Partnership and
offering Units; (v) the overall costs to the Partnership; (vi) any
excess interest and compensating balance benefits to the Commodity
Broker from assets held thereby; and (vii) if the General Partner does
not receive any direct compensation from the Partnership for its
services as General Partner, the risks incurred by the General Partner
as such. See "Conflicts of Interest."
Each Customer Agreement sets forth a standard of liability for DWR and
provides for certain indemnities of and by DWR as Commodity Broker. See
"Fiduciary Responsibility."
THE COMMODITIES MARKET
FUTURES CONTRACTS
Commodity futures contracts are standardized contracts made on domestic
or foreign commodity exchanges which call for the future delivery of
specified quantities of various agricultural and tropical commodities,
industrial commodities, currencies, financial instruments or metals at a
specified time and place. The contractual obligations, depending upon
whether one is a buyer or a seller, may be satisfied either by taking or
making, as the case may be, physical delivery of an approved grade of
commodity or by making an offsetting sale or purchase of an equivalent
but opposite futures contract on the same exchange prior to the
designated date of delivery. As an example of an offsetting transaction
where the physical commodity is not delivered, the contractual
obligation arising from the sale of one contract of December 1994 wheat
on a commodity exchange may be fulfilled at any time before delivery of
the commodity is required by the purchase of one contract of December
1994 wheat on the same exchange. The difference between the price at
which the futures contract is sold or purchased and the price paid for
the offsetting purchase or sale, after allowance for brokerage
commissions, constitutes the profit or loss to the trader. Certain
futures contracts, such as a stock index or other financial or economic
index approved by the CFTC or Eurodollar contracts, settle in cash
(irrespective of whether any attempt is made to offset such contracts)
rather than delivery of any physical commodity.
FORWARD CONTRACTS
Contracts for the future delivery of certain commodities may also be
made through banks or dealers pursuant to what are commonly referred to
as "forward contracts." A forward contract is a contractual right to
purchase or sell a specified quantity of a commodity at or before a
specified date in the future at a specified price and, therefore, is
similar to a futures contract. In forward contract trading, a bank or
dealer generally acts as principal in the transaction and includes its
anticipated profit (the "spread" between the "bid" and the "asked"
prices) and in some instances a mark-up in the prices it quotes for
forward contracts. Cornerstone IV trades a substantial number of forward
contracts in currencies, and Cornerstone II and III also engage in a
significant amount of such trading. Unlike futures contracts, forward
contracts are not standardized contracts; rather, forward contracts for
a given commodity are generally available in any size and maturity and
are subject to indi-
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vidual negotiation between the parties involved.
Moreover, because there is no clearinghouse system applicable to forward
contracts, forward contracts are not fungible, and there is no direct
means of "offsetting" a forward contract by purchase of an offsetting
position on the same exchange as one can a futures contract. In recent
years, the terms of forward contracts have become more standardized and
in some instances such contracts now provide a right of offset or cash
settlement as an alternative to making delivery on the contract.
COMMODITY OPTIONS
An option on a futures contract or on a physical commodity gives the
buyer of the option the right to take a position at a specified price
(the "striking," "strike," or "exercise" price) in the underlying
futures contract or commodity. The buyer of a "call" option acquires the
right to take a long position in the underlying futures contract or
commodity, and the buyer of a "put" option acquires the right to take a
short position in the underlying futures contract or commodity.
The purchase price of an option is referred to as its "premium." The
seller (or "writer") of an option is obligated to take a futures
position at a specified price opposite to the option buyer if the option
is exercised. Thus, the seller of a call option must stand ready to take
a short position in the underlying futures contract at the striking
price if the buyer should exercise the option. The seller of a put
option, on the other hand, must stand ready to take a long position in
the underlying futures contract at the striking price.
A call option on a futures contract is said to be "in-the-money" if the
striking price is below current market levels, and "out-of-the-money" if
the striking price is above current market levels. Similarly, a put
option on a futures contract is said to be "in-the-money" if the
striking price is above current market levels, and "out-of-the-money" if
the striking price is below current market levels.
Options have limited life spans, usually tied to the delivery or
settlement date of the underlying futures contract. An option that is
out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options
simply become worthless after their expiration date. Options usually
trade at a premium above their intrinsic value (i.e., the difference
between the market price for the underlying futures contract and the
striking price) because the option trader is speculating on (or hedging
against) future movements in the price of the underlying contract. As an
option nears its expiration date, the market and intrinsic value
typically move into parity. The difference between an options intrinsic
and market values is referred to as the "time value" of the option.
Successful futures options trading requires many of the same skills as
does successful futures trading. However, since specific market
movements of the underlying futures contract or commodity must be
predicted accurately, the risks involved are somewhat different. For
example, if a Partnership buys an option (either to sell or buy a
futures contract or commodity), it will pay a "premium" representing
the market value and time value of the option. Unless the price of the
futures contract or commodity underlying the option changes and it
becomes profitable to exercise or offset the option before it expires,
the Partnership may lose the entire amount of such premium. Conversely,
if the Partnership sells an option (either to sell or buy a futures
contract or commodity), it will be credited with the premium but will
have to deposit margin due to its contingent liability to take or
deliver the futures contract or commodity underlying the option in the
event the option is exercised. Traders who sell options are subject to
the entire loss which occurs in the underlying futures position or
commodity (less any premium received). The ability to trade in or
exercise options may be restricted in the event that trading in the
underlying futures contract or commodity becomes restricted.
HEDGERS AND SPECULATORS
The two broad classes of persons who trade commodity interest contracts
are "hedgers" and "speculators." Commercial interests, including
farmers, that market or process commodities and financial institutions
that market or deal in commodities (including, for example, interest
rate sensitive instruments, foreign currencies and stock portfolios) and
which are exposed to exchange, interest rate and stock market risks, may
use the commodities markets primarily for hedging. Hedging is a
protective procedure designed to minimize losses that may occur because
of price fluctuations occurring, for example, between the time a
merchandiser or processor makes a contract to buy or sell a raw or
processed commodity at a certain price and the time he must perform the
contract. The commodity markets enable the hedger to shift the risk of
price fluctuations to the speculator. The speculator risks his capital
with the hope of making profits from price fluctuations in futures
interest contracts. Speculators rarely take delivery of commodities but
close out their positions by entering
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into offsetting purchases or sales
of contracts. Since the speculator may take either a long or short
position in the commodities markets, it is possible for him to make
profits or incur losses regardless of whether prices go up or down.
Trading by the Partnerships is for speculative rather than for hedging
purposes.
COMMODITY EXCHANGES
Commodity exchanges provide centralized market facilities for trading
futures contracts and options (but not forward contracts) relating to
specified commodities. Members of, and trades executed on, a particular
exchange are subject to the rules of that exchange. Among the principal
exchanges in the United States are the Chicago Board of Trade, the
Chicago Mercantile Exchange (including the International Monetary
Market), the New York Mercantile Exchange and the Commodity Exchange,
Inc.
Each of the commodity exchanges in the United States has an associated
"clearinghouse." Once trades between members of an exchange have been
confirmed, the clearinghouse becomes substituted for each buyer and each
seller of contracts traded on the exchange and, in effect, becomes the
other party to each trader's open position in the market. Thereafter,
each party to a trade looks only to the clearinghouse for performance.
The clearinghouse generally establishes some sort of security or
guarantee fund to which all clearing members of the exchange must
contribute; this fund acts as an emergency buffer which enables the
clearinghouse, at least to a large degree, to meet its obligations with
regard to the "other side" of an insolvent clearing member's contracts.
Furthermore, clearinghouses require margin deposits and continuously
mark positions to market to provide some assurance that their members
will be able to fulfill their contractual obligations. Thus, a central
function of the clearinghouses is to ensure the integrity of trades, and
members effecting futures transactions on an organized exchange need not
worry about the solvency of the party on the opposite side of the trade;
their only remaining concerns are the respective solvencies of their
commodity broker and the clearinghouse. The exchanges also impose
speculative position limits and other restrictions on customer positions
to help ensure that no single trader can amass a position that would
have a major impact on market prices.
Commodity exchanges in the United States and their clearinghouses are
given reasonable latitude in promulgating rules and regulations to
control and regulate their members. Examples of regulations by exchanges
and clearinghouses include the establishment of initial margin levels,
size of trading units, contract specifications, speculative position
limits and daily price fluctuation limits. The CFTC reviews all such
rules (other than those relating to specific margin levels for futures,
as opposed to options) and can disapprove or, with respect to certain of
such rules, require the amendment or modification thereof.
Foreign commodity exchanges differ in certain respects from their United
States counterparts. In contrast to United States exchanges, certain
foreign exchanges are "principals' markets," where trades remain the
liability of the traders involved, and the exchange does not become
substituted for any party. See "The Commodities Markets--Regulation" and
"Risk Factors Risks Relating to Commodity Trading and the Commodities
Markets--Trading on Foreign Exchanges."
SPECULATIVE POSITION LIMITS
The CFTC and United States commodity exchanges have established limits,
referred to as "speculative position limits" or "position limits," on
the maximum net long or net short speculative position which any person
or group of persons (other than a hedger, which the Partnerships are
not) may hold, own or control in commodity interest contracts. Among the
purposes of speculative position limits is to prevent a "corner" on a
market or undue influence on prices by any single trader or group of
traders. The CFTC has jurisdiction to establish position limits with
respect to all commodities. The position limits established by the CFTC
apply to certain agricultural commodities, such as grains (oats, barley
and flax seed), soybeans, cotton, eggs, rye, corn, wheat and potatoes.
In addition, however, the CFTC requires each United States exchange to
submit position limits for all commodities traded on such exchange for
approval by the CFTC. Certain exchanges or their clearinghouses also set
limits on the total net positions that may be held by a clearing broker,
such as DWR. However, position limits do not apply to many currency
futures contracts, and, in general, no position limits are in effect in
bank or dealer forward contract trading or in trading on foreign
commodity exchanges, although the principals with which the Partnerships
may trade in such markets may impose such limits as a matter
of credit policy. The commodity interest contract positions of the
Partnerships are not, and will not
be, attributable to Limited Partners with respect to their own
commodities trading, if any, for purposes of position limits.
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DAILY LIMITS
Most United States commodity exchanges (but generally not foreign
exchanges or banks or dealers in the case of forward contracts) normally
limit the amount of fluctuation in commodity interest contract prices
during a single trading day by regulation. These regulations specify
what are referred to as "daily price fluctuation limits" or more
commonly "daily limits." The daily limits establish the maximum amount
that the price of a commodity interest contract may vary either up or
down from the previous day's settlement price. Once the daily limit has
been reached in a particular commodity, no trades may be made at a price
beyond the limit. This can create certain liquidity problems.
REGULATIONS
Commodity exchanges in the United States are subject to regulation under
the CEAct by the CFTC, the governmental agency having responsibility for
regulation of commodity exchanges and commodity interest contract
trading conducted thereon. The function of the CFTC is to implement the
objectives of the CEAct of preventing price manipulation and excessive
speculation and promoting orderly and efficient commodities markets.
Such regulation, among other things, provides that trading in commodity
interest contracts must be on exchanges designated as "contract
markets," and that all trading on such exchanges must be done by or
through exchange members.
The CFTC possesses exclusive jurisdiction to regulate the activities of
"commodity trading advisors" and "commodity pool operators" and has
adopted regulations with respect to certain of such persons' activities.
Pursuant to its authority, the CFTC requires a commodity pool operator
to keep accurate, current and orderly records with respect to each pool
it operates. The CFTC may suspend the registration of a commodity pool
operator (i) if the CFTC finds that the operator has violated the CEAct
or regulations thereunder and in certain other circumstances.
Suspension, restriction or termination of the General Partner's
registration as a commodity pool operator would prevent it, until such
time (if any) as such registration were to be reinstated, from managing,
and might result in the termination of, the Partnerships. The CEAct
gives the CFTC similar authority with respect to the activities of
commodity trading advisors, such as the Trading Managers. If the
registration of a Trading Manager as a commodity trading advisor were to
be terminated, restricted or suspended, the Trading Manager would be
unable, until such time (if any) as such registration were to be
reinstated, to render trading advice to the relevant Partnership. The
Partnerships themselves are not registered with the CFTC in any
capacity.
The CEAct requires all "futures commission merchants," such as DWR, to
meet and maintain specified fitness and financial requirements,
segregate customer funds from proprietary funds and account separately
for all customers' funds and positions, and to maintain specified books
and records open to inspection by the staff of the CFTC. The CFTC has
similar authority over "introducing brokers," i.e., persons who solicit
or accept orders for commodity trades but who do not accept margin
deposits for the execution of trades. The Partnerships have no present
intention of using any introducing brokers in their trading. The CEAct
also gives the states certain powers to enforce its provisions and the
regulations of the CFTC.
The fact of CFTC registration of the General Partner, DWR and the
Trading Managers does not imply that the CFTC has passed on or approved
this offering or their qualifications to act as described in the
Prospectus.
Limited Partners are afforded certain rights for reparations under the
CEAct. Limited Partners may also be able to maintain a private right of
action for certain violations of the CEAct. The CFTC has adopted rules
implementing the reparation provisions of the CEAct which provide that
any person may file a complaint for a reparations award with the CFTC
for violation of the CEAct against a floor broker, futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator, and their respective associated persons.
Pursuant to authority in the CEAct, the NFA has been formed and
registered with the CFTC as a "registered futures association." At the
present time, the NFA is the only non-exchange self-regulatory
organization for commodities professionals. NFA members are subject to
NFA standards relating to fair trade practices, financial condition and
consumer protection. As the self-regulatory body of the commodities
industry, the NFA promulgates rules governing the conduct of commodity
professionals and disciplines those professionals who do not comply with
such standards. The CFTC has delegated to the NFA responsibility for the
registration of commodity trading advisors, commodity pool operators,
futures commission merchants, introducing brokers and their respective
associated persons and floor brokers. DWR, the General Partner and the
Trading Managers are all members of the NFA (the Partnerships themselves
are not required to become members of the NFA).
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The above-described regulatory structure may be modified by rules and
regulations promulgated by the CFTC or by legislative changes enacted by
Congress.
The CFTC has no authority to regulate trading on foreign commodity
exchanges and markets. The CFTC has, however, adopted rules relating to
the marketing of foreign futures contracts and options in the United
States. These rules permit commodity options traded only on certain
foreign exchanges to be offered and sold in the United States. See "Risk
Factors--Risks Relating to the Commodity Trading and the Commodities
Markets--Trading on Foreign Exchanges."
MARGINS
"Initial" or "original" margin is the minimum amount of funds that must
be deposited by a commodity trader with his commodity broker in order to
initiate futures trading or to maintain an open position in futures
contracts. "Maintenance" margin is the amount (generally less than
initial margin) to which a trader's account may decline before he must
deliver additional margin. A margin deposit is like a cash performance
bond. It helps assure the commodity trader's performance of the
commodity futures contracts he purchases or sells. Futures contracts are
customarily bought and sold on margins that represent a very small
percentage (ranging upward from less than 2%) of the purchase price of
the underlying commodity being traded. Because of such low margins,
price fluctuations occurring in the futures markets may create profits
and losses that are greater, in relation to the amount invested, than
are customary in other forms of investment or speculation. The minimum
amount of margin required in connection with a particular futures
contract is set from time to time by the exchange on which such contract
is traded, and may be modified from time to time by the exchange during
the term of the contract. See "Risk Factors--Risks Relating to Commodity
Trading and the Commodities Markets--Commodity Trading is Highly
Leveraged."
Brokerage firms, such as DWR, carrying accounts for traders in futures
contracts may not accept lower, and generally require higher, amounts of
margin as a matter of policy in order to afford further protection for
themselves. DWR presently requires each Partnership to make margin
deposits equal to the exchange minimum levels for all futures contracts.
This requirement may be altered from time to time at the discretion of
DWR.
Trading in the currency forward contract market does not require margin,
but generally does require the extension of credit by a bank or dealer
to those with whom the bank or dealer trades. Since each Partnership's
trading will be done through DWR, each Partnership will be able to take
advantage of DWR's credit lines with several participants in the
interbank market. The General Partner does not anticipate that banks and
dealers with which DWR and the Partnerships may trade will require
margin with respect to their trading of currencies.
When a trader purchases an option, there is no margin requirement. When
a trader sells an option, on the other hand, he is required to deposit
margin in an amount determined by the margin requirements established
for the futures contract underlying the option, and, in addition, an
amount substantially equal to the current premium for the option. The
margin requirements imposed on the writing of options, although adjusted
to reflect the probability that out-of-the-money options will not be
exercised, can in fact be higher than those imposed in dealing in the
futures markets directly. Complicated margin requirements apply to
"spreads" and "conversions," which are complex trading strategies in
which a trader acquires a mixture of related futures and options
positions.
Margin requirements are computed each day by a trader's commodity
broker. When the market value of a particular open futures contract
position changes to a point where the margin on deposit does not satisfy
maintenance margin requirements, a margin call is made by the commodity
broker. If the margin call is not met within a reasonable time, the
broker may close out the trader's position. With respect to a
Partnership's trading, that Partnership, and not its Limited Partners
personally or any other Partnership, will be subject to margin calls.
REDEMPTIONS
Except as provided below, a Limited Partner may cause all or part of his
Units to be redeemed by a Partnership effective as of the last day of
any month at the Net Asset Value thereof on such date. A redemption may
be made only in whole Units or in multiples of $1,000 (which may result
in a redemption of fractional Units), unless a Limited Partner is
redeeming his entire interest in a Partnership. Redemptions will be
effective as of the last day of the month in which a Request for
Redemption in proper form has been timely received by the General
Partner ("Redemption Date"). A "Request for Redemption" is a letter in
the form specified by the
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General Partner, sent by a Limited Partner (or
any assignee thereof) to a DWR branch office and received by the General
Partner at least 15 days prior to the Redemption Date. A form of Request
for Redemption is annexed to the Limited Partnership Agreement, which is
annexed hereto as Exhibit A. Additional forms of Request for Redemption
may be obtained by written request to the General Partner or a local DWR
branch office.
The "Net Asset Value" of a Unit is an amount equal to a Partnership's
Net Assets allocated to capital accounts represented by Units, divided
by the number of Units outstanding on the Redemption Date. For a
definition of "Net Assets," see "Description of Charges to Each
Partnership -2. Trading Managers-(a) Monthly Management Fee." The Net
Asset Value of a Unit of each Partnership is determined daily by the
General Partner and the most recent Net Asset Value calculations will be
promptly supplied in writing to any Limited Partner after receipt of a
request in writing to such effect. Where the Net Asset Value of a Unit
is determined as of the end of a month that is not the end of an annual
incentive period, the incentive fee calculation will be made, and any
such fee will be accrued, as though the end of the month were the end of
an incentive period.
The General Partner will endeavor to pay redemptions within 10, and no
later than 20, business days after the Redemption Date, and a
Partnership's commodity positions will be liquidated to the extent
necessary to effect redemptions. Payment will be made by credit in the
amount of such redemption to the Limited Partner's customer account with
DWR or by check mailed to the Limited Partner if such account is closed.
The right to obtain redemption is contingent upon (i) the redeeming
Partnership having assets sufficient to discharge its liabilities on the
Redemption Date, and (ii) timely receipt by the General Partner of a
Request for Redemption as described above.
The liability of Limited Partners, including the possible liability of a
person who has redeemed Units, for liabilities of the Partnership which
arose before such redemption is described under "The Limited Partnership
Agreements--Nature of the Partnerships."
Federal income tax aspects of redemptions are described under the
caption "Federal Income Tax Aspects."
THE EXCHANGE AGREEMENT
The following is a summary of the more significant provisions of the
Exchange Agreement entered into by each of the Partnerships and Demeter,
in its individual capacity.
Purposes. The Exchange Agreement provides for the Partnerships to
associate as the Dean Witter Cornerstone Funds and sets forth the rights
and obligations of each Partnership to each other Partnership and its
Limited Partners. The purposes of the Cornerstone Funds include offering
Units of each Partnership for sale to the public as part of a common
offering of such Units by a single selling agent pursuant to a single
prospectus, sharing common administrative services, providing a means
for Limited Partners of each Partnership to switch their investment in
one Partnership for an investment in another Partnership without payment
of any selling commissions or charges for Continuing Offering Expenses,
and allocating the cost and expenses of the foregoing among the
Partnerships. Demeter has agreed to act as the administrator of the
Cornerstone Funds and may advance certain expenses on behalf of the
Partnerships.
Obligations of Each Partnership. Under the Exchange Agreement, each
Partnership has agreed to assist in the preparation of registration
statements and prospectuses, to conduct its business as described
herein, to cause its Limited Partners to utilize the forms for
subscriptions, redemptions or Exchanges contained herein, and to provide
Demeter with certain information regarding its Limited Partners and any
other information required to be delivered to such Limited Partners.
Each Partnership also has agreed to take certain actions which will
enable Limited Partners to switch investments between Partnerships. Each
Partnership has agreed to redeem Units specified in a Limited Partner's
Request for Exchange of Units and to utilize the net proceeds thereof to
purchase on behalf of such Limited Partner Units of other Partnerships
at a price per Unit equal to 100% of the Net Asset Value thereof. Each
Partnership has undertaken to issue and sell its Units at a price per
Unit equal to 100% of the Net Asset Value thereof, without payment of
any selling commissions or charges, to a Limited Partner timely
delivering a properly completed Request for Exchange of Units to
Demeter, and to use its best efforts to cause a sufficient number of its
Units to be registered and qualified at all times under federal and
applicable state securities or Blue Sky laws pursuant to a current
Prospectus. See "Plan of Distribution."
Obligations of Demeter. Under the Exchange Agreement, Demeter has agreed
to act as the administrator of the Cornerstone Funds and, as such, to
maintain books and records relating to all Common Administrative
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Expenses (as defined below) and to allocate such amounts to each
Partnership, to process redemptions and Exchanges and to prepare, print
and distribute combined monthly reports, annual reports and other
documents required to be delivered to Limited Partners. Demeter may from
time to time advance expenses on behalf of the Partnerships and is
entitled to full reimbursement therefor.
Sharing of Expenses. The Partnerships have agreed to share Common
Administrative Expenses. Common Administrative Expenses means the costs
and expenses incurred in connection with preparing, printing and mailing
monthly reports, annual reports and all other documents required to be
delivered to Limited Partners under any applicable federal or state laws
or pursuant to the terms of each Limited Partnership Agreement, and all
legal, accounting, auditing, filing, registration and extraordinary
expenses not directly attributable to one Partnership. Demeter
calculates Common Administrative Expenses for each month and such amount
is divided among the Partnerships based solely on the ratio which the
number of each Partnership's Units outstanding during such month bears
to the total number of all Units of all of the Partnerships outstanding
during such month.
Liability and Indemnity. Demeter and its stockholder, directors,
officers and employees and its or their respective successors and
assigns will not be liable to any Partnership, its general partners and
limited partners, or any of its or their respective successors and
assigns in the performance of its obligations under the Exchange
Agreement, except by reason of acts of, or omissions due to, bad faith,
misconduct or negligence or for not having acted in good faith in the
reasonable belief that such acts or omissions were in, or not opposed
to, the best interests of such Partnership.
Each Partnership has agreed to indemnify Demeter and its stockholder,
directors, officers and employees and its or their respective successors
and assigns from and against any loss, liability, damage, cost or
expense (including legal fees and expenses incurred in defense of any
demands, claims or lawsuits) actually and reasonably incurred arising
from the performance of the services required of Demeter by the Exchange
Agreement, including, without limitation, any demands, claims or
lawsuits initiated by a Limited Partner, provided that a court of
competent jurisdiction upon entry of a final judgment shall find (or, if
no final judgment is entered, an opinion is rendered to Demeter by
independent counsel, other than counsel to the Partnership or Demeter)
to the effect that the conduct that was the basis for such liability was
not the result of bad faith, misconduct or negligence or that the
conduct was done in the good faith belief that it was in, or not opposed
to, the best interests of such Partnership. Each Partnership has waived
any fiduciary obligations owed to it by Demeter to the extent permitted
by law and to the extent necessary to permit Demeter to perform its
obligations under the Exchange Agreement.
Term. The Exchange Agreement will remain in force until all the parties
thereto consent in writing to its termination or, due to the dissolution
or termination of the Partnerships, less than two Partnerships are
parties to the Agreement, whichever occurs earlier.
THE LIMITED PARTNERSHIP AGREEMENTS
This Prospectus contains an explanation of the more significant terms
and provisions of the Limited Partnership Agreement of each Partnership,
a copy of which is annexed hereto as Exhibit A and is incorporated
herein by this reference. Each Limited Partnership Agreement is
identical insofar as the terms and provisions thereof discussed
hereunder are concerned, except to the extent noted otherwise. The
following description is a summary only, is not intended to be complete
and is qualified in its entirety by such reference.
NATURE OF THE PARTNERSHIPS
Cornerstone II and III were each formed on December 7, 1983 and
Cornerstone IV was formed on December 11, 1986 under the Partnership
Act. The fiscal years of the Partnerships begin on January 1 of each
year and end on the following December 31. This change was made
effective as of the period beginning October 1, 1987.
Units acquired pursuant to an Exchange will be fully paid and
nonassessable. Each Partnership may have a claim against its Limited
Partners after redemption or Exchange of Units or receipt of
distributions from such Partnership for liabilities of the Partnership
that arose before the date of such redemption, Exchange or distribution,
but such claim will not exceed the sum of such Limited Partner's
unredeemed capital contribution, undistributed profits, if any, and any
redemptions, amounts deemed received on an Exchange or distributions,
together with interest thereon. No Partnership will make a claim against
its Limited Partners with respect to amounts distributed to them or
amounts received by them upon redemption of Units or deemed received upon
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an Exchange of Units unless the assets of the Partnership are
insufficient to discharge liabilities of the Partnership that arose
before the payment of such amounts. The General Partner will be liable
for all obligations of each Partnership to the extent that assets of
such Partnership, including amounts contributed by its Limited Partners
and paid out in distributions, redemptions, Exchanges, or otherwise to
Limited Partners, are insufficient to discharge such obligations.
Each Limited Partnership Agreement provides that the death of a Limited
Partner will not terminate or dissolve the Partnership and that the
legal representative of such Limited Partner has no right to withdraw or
value his interest, except by redemption of Units. Each Limited Partner,
in the event of his death, waives on behalf of himself and his estate
the furnishing of any inventory, audit, accounting or appraisal of any
of the Partnership's assets or any right to an audit or examination of
the books of the Partnership of which he was a Limited Partner.
MANAGEMENT OF PARTNERSHIP AFFAIRS
The Limited Partners of each Partnership do not participate in the
management or operations of such Partnership. Any participation by a
Limited Partner in the management of a Partnership may jeopardize the
limited liability of such Limited Partner. Under each Limited
Partnership Agreement, responsibility for managing the Partnership is
vested solely in Demeter as general partner. See "Fiduciary
Responsibility." The General Partner may delegate complete trading
authority to Trading Managers and has done so (except for the ability of
the General Partner to override trading instructions that violate a
Partnership's trading policies and to the extent necessary to fund
distributions, redemptions, Exchanges, or reapportionments among Trading
Managers or to pay Partnership expenses) in each Management Agreement
with a Trading Manager. However, the General Partner may make trading
decisions at any time at which any such Trading Manager becomes
incapacitated or some other emergency arises as a result of which such
Trading Manager is unable or unwilling to act and the General Partner
has not yet retained a successor Trading Manager. See "The Trading
Managers" and "The Management Agreements."
On behalf of each Partnership, the General Partner may engage and
compensate from the funds of that Partnership such persons as the
General Partner deems advisable, provided that, except as described in
this Prospectus, the General Partner will not engage on behalf of a
Partnership any person affiliated with the General Partner without the
approval of Limited Partners owning more than 50% of the then
outstanding Units of such Partnership and after making a good faith
determination that: (i) the affiliate which it proposes to engage to
perform such services is qualified to do so (considering the prior
experience of the affiliate or the individuals employed thereby); and
(ii) the terms and conditions of the agreement pursuant to which such
affiliate is to perform services for the Partnership are no less
favorable to the Partnership than could be obtained from equally-
qualified third parties, or are otherwise determined by the General
Partner to be fair and reasonable to the Partnership and the Limited
Partners.
Other responsibilities of the General Partner include, but are not
limited to, the following: determining whether each Partnership will
make distributions; administering redemptions or Exchanges of Units;
preparing monthly and annual reports to the Limited Partners of each
Partnership; directing the investment of a Partnership's assets (other
than investments in commodity futures contracts and other commodity
interests); executing various documents on behalf of a Partnership and
its Limited Partners pursuant to a power of attorney; and supervising
the liquidation of a Partnership if an event causing termination of that
Partnership occurs. To facilitate the execution of various documents by
the General Partner on behalf of each Partnership and its Limited
Partners, each of the Limited Partners will appoint the General Partner,
with power of substitution, his attorney-in-fact by executing a
Subscription Agreement and Power of Attorney.
SHARING OF PROFITS AND LOSSES
Partnership Accounting. Each Partner, including the General Partner, of
each Partnership will have a capital account with an initial balance
equal to the amount he paid for his Units of such Partnership, less any
selling commission, or, in the case of the General Partner, its capital
contribution. Each Partnership's Net Assets will be determined monthly,
and any increase or decrease from the end of the preceding month will be
added to or subtracted from the accounts of the Partners in the ratio
that each account bears to all accounts.
Federal Tax Allocations. At the end of each fiscal year, each
Partnership's realized income and expense and capital gain or loss will
be allocated among its Partners, and each Partner will be required to
include in his personal federal income tax return his share of such
items. Also, on the date a Partner completely redeems
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all of his Units in a Partnership, the Partnership's realized income and
expense and capital gain or loss will be allocated to such Partner, and such
Partner will be required to include in his personal federal income tax return
his share of such items. Allocations of capital gain or loss will be pro
rata with respect to short-term capital gain or loss and long-term
capital gain or loss.
Each Partnership's items of ordinary income (such as interest or credits
in lieu of interest) and expense (such as monthly management fees,
annual incentive fees, extraordinary expenses and the Partnerships
proportionate share of Common Administrative Expenses as determined
pursuant to the Exchange Agreement) will be allocated pro rata among its
Partners based on their respective capital accounts (exclusive of these
items of ordinary income or expense) as of the end of each month in
which the items of ordinary income or expense accrued.
For the purpose of allocating net realized capital gain or net realized
capital loss, an "allocation account" is established with respect to
each Unit of each Partnership, the initial balance of which is the
amount paid for the Unit, less any selling commission. At the end of
each fiscal year and when a Partner completely redeems his Units in a
Partnership, each outstanding Unit's allocation account will be
increased by the amount of the Partnership's income allocated to the
Partner holding the Unit and decreased by the amount of the
Partnership's loss and expense allocated and by the amount of
distributions to the Partner holding the Unit. When a Unit is redeemed
or Exchanged, the allocation account with respect to the Unit is
eliminated.
Net realized capital gain will be allocated first to each Partner who
has partially redeemed his Units in a Partnership or Exchanged less than
all his Units in a Partnership during the year to the extent that the
amount he receives on redemption, or is deemed to receive on an
Exchange, exceeds the allocation account with respect to the Unit
redeemed or Exchanged. Net realized capital gain remaining after the
allocation to the Partners who have redeemed or Exchanged Units will be
allocated among the Partners whose capital accounts are in excess of
their Units' allocation accounts in the ratio that each Partner's excess
bears to all Partners' excesses to the extent of such excesses. Any
remaining net realized capital gain will be allocated among all Partners
in proportion to their capital accounts.
Net realized capital loss will be allocated first to each Partner who
has partially redeemed his Units in a Partnership or Exchanged less than
all his Units in a Partnership during the year to the extent that the
allocation account with respect to the Unit redeemed or Exchanged
exceeds the amount he receives on redemption or is deemed to receive on
an Exchange. Net realized capital loss remaining after the allocation to
Partners who have redeemed or Exchanged Units will be allocated among
the Partners who hold Units with allocation accounts which are in excess
of the Partners' capital accounts in the ratio that each such Partners'
excess bears to all such Partners' excesses to the extent of such
excesses. Any remaining net realized capital loss will be allocated
among all Partners in proportion to their capital accounts.
If a Unit has been assigned as permitted by the Limited Partnership
Agreement of each Partnership, the above-described tax allocations will
be made with respect to such Unit without regard to the assignment,
except that in the year of assignment the tax allocations will be
divided among the assignor and assignee based on the months each held
the assigned Unit.
Upon liquidation and termination of each Partnership, the assets of such
Partnership will be distributed to each Partner thereof in the ratio
that his capital account bears to the accounts of all Partners of that
Partnership.
ADDITIONAL PARTNERS
Units of each Partnership may be issued pursuant to an Exchange at
Monthly Closings. Each Limited Partnership Agreement provides that, at
any time, the General Partner may admit additional Limited Partners to
each Partnership, with each such newly-admitted Limited Partner paying
in cash (pursuant to an Exchange) not less than the Net Asset Value of
the Unit purchased. The General Partner also may admit substituted
Limited Partners as set forth in each Limited Partnership Agreement.
Each Limited Partnership Agreement provides that the General Partner may
register additional Units for the Exchange. In such connection, the
General Partner is authorized to take such action and make such
arrangements as it deems appropriate, including the preparation and
filing of registration statements and amendments thereto with the SEC
and other appropriate regulatory bodies.
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RESTRICTIONS ON TRANSFERS OR ASSIGNMENTS
Except as set forth below, each Limited Partnership Agreement provides
that Units may be transferred or assigned, but that no transferee or
assignee may become a substituted Limited Partner without the consent of
the General Partner, which consent the General Partner may withhold in
its sole discretion, nor may a Limited Partner, an assignee, transferee,
or the estate of any beneficiary of a deceased Limited Partner withdraw
any capital or profits from the Partnerships except by redemption of
Units. See "Redemptions." The General Partner, upon 30 days' notice to
the Limited Partners, may withdraw any portion of its interest in each
Partnership that is in excess of the interest required under the Limited
Partnership Agreement (3% of the first $10,000,000 in aggregate capital
contributions to each Partnership or $100,000, whichever is less, plus
1% of aggregate capital contributions in excess of $10,000,000; but in
no event less than $50,000) or may assign or transfer any Units owned by
it in excess of such required interest, subject to the same restrictions
on transfers and redemptions as are applicable to Limited Partners.
Any transfer or assignment of Units permitted by the Limited Partnership
Agreements will be effective as of the end of the month in which such
transfer or assignment is made; provided, however, that no Partnership
need recognize any transfer or assignment until the General Partner has
received at least 30 days' prior written notice of such transfer or
assignment from the transferor or assignor, which notice sets forth the
address and social security or taxpayer identification number of the
transferee or assignee and the number of Units transferred or assigned,
and is signed by the transferor or assignor. No transfer or assignment
will be permitted unless the General Partner is satisfied that (i) such
transfer or assignment would not be in violation of the Partnership Act
and (ii) notwithstanding such transfer or assignment, the Partnership
will continue to be classified as a partnership rather than as an
association taxable as a corporation under the Code. No transfer or
assignment of Units will be effective or recognized by any of the
Partnerships if such transfer or assignment would result in the
termination of that Partnership for federal income tax purposes, and any
attempted transfer or assignment in violation of the Limited Partnership
Agreement will be ineffective to transfer or assign any such Units. The
transfer or assignment of Units will be subject to all applicable
securities laws. The transferor or assignor will bear all costs
(including any attorneys' fees) related to such transfer or assignment.
Certificates representing Units may bear appropriate legends to the
foregoing effects (although no such physical certificates have been
issued or are contemplated).
TERM OF THE PARTNERSHIPS
The affairs of a given Partnership will be wound up and that Partnership
liquidated as soon as practicable upon the first to occur of the
following: (i) September 30, 2025; (ii) receipt by the General Partner
of an election to dissolve such Partnership at a specified time by
Limited Partners owning more than 50% of the Units then outstanding,
notice of which is sent by registered mail to the General Partner not
less than 90 days prior to the effective date of such dissolution; (iii)
withdrawal, insolvency or dissolution of the General Partner (unless a
new general partner has been elected); (iv) a decline in the Net Asset
Value of a Unit to less than $250; (v) a decline in such Partnership's
aggregate Net Assets to or below $250,000; (vi) a determination by the
General Partner that such Partnership's aggregate Net Assets in relation
to the operating expenses of such Partnership make it unreasonable or
imprudent to continue the business of such Partnership; or (vii) the
occurrence of any event that makes it unlawful for the existence of the
Partnership to be continued. Cornerstone IV will also terminate upon the
enactment of any law or adoption of any rule, regulation or policy by
any regulatory authority having jurisdiction which makes it unlawful,
unreasonable or imprudent for the principal business of the Partnership
to be continued. In certain market conditions, the Net Asset Value of a
Unit could fall to less than $250 or such Partnership's aggregate Net
Assets could fall to or below $250,000, thereby terminating the
Partnership, and could decline to zero without the Partnership being
able to liquidate its positions in the market. In such event, the
Limited Partners could receive less than $250 per Unit or even nothing
upon dissolution and liquidation of the Partnership.
AMENDMENTS; MEETINGS
Each Limited Partnership Agreement may be amended by an instrument
signed by the General Partner and by Limited Partners owning more than
50% of the Units then owned by Limited Partners of that Partnership.
However, if such an amendment is an amendment which revises Section 8(c)
of the Limited Partnership Agreement to comply with final regulations
promulgated by the Internal Revenue Service under Section 704(b) of the
Code, such amendment will be effective when signed by the General
Partner. Further, no amendment of the Limited Partnership Agreement of a
Partnership without the consent of all Partners affected thereby may
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reduce the capital account of any Partner, modify the percentage of
profits, losses, or distributions to which any Partner is entitled or
change or alter the provisions of such Agreement relating to amendments
requiring the consent of all Partners.
Any Limited Partner, upon written request addressed to the General
Partner, may obtain, at such Limited Partner's expense, from the General
Partner a list of the names and addresses of record of all Limited
Partners of the Partnership(s) in which he owns Units and the number of
Units owned by each. Upon receipt of a written request, signed by
Limited Partners owning at least 10% of the Units then owned by Limited
Partners of a Partnership, that a meeting of such Partnership be called
to consider any matter upon which Limited Partners may vote pursuant to
its Limited Partnership Agreement, the General Partner, by written
notice to each Limited Partner of record mailed within 15 days after
such notice, must call a meeting of that Partnership. Such meeting must
be held at least 30 but not more than 50 days after the mailing of such
notice, and such notice must specify the date, a reasonable time and
place and the purpose of such meeting.
At any such meeting, upon the affirmative vote of Limited Partners
owning more than 50% of the Units then owned by Limited Partners of a
Partnership, the following actions may be taken: (i) the Limited
Partnership Agreement may, with certain exceptions described above, be
amended; (ii) the Partnership may be dissolved; (iii) the General
Partner may be removed and replaced; (iv) a new general partner or
general partners may be elected if the General Partner elects to
withdraw from the Partnership, becomes insolvent or is dissolved; (v)
any contracts with the General Partner or any of its affiliates may be
terminated without penalty on 60 days notice; and (vi) the sale of all
assets of the Partnership may be approved, provided, however, no such
action may be taken unless an opinion of counsel is furnished to the
General Partner that the action to be taken will not adversely affect
the classification of the Partnership as a partnership under United
States federal income tax laws or the status of the Limited Partners as
limited partners under the Partnership Act, and that the action is
permitted under such Partnership Act (or in lieu thereof, a court of
competent jurisdiction has rendered a final order to such effect).
REPORTS TO LIMITED PARTNERS
The books and records of each Partnership will be maintained at its
principal office. To the extent required by CFTC regulations, the
Limited Partners will have the right at all times during normal business
hours to have access to and copy such books and records of each
Partnership of which they are Limited Partners, in person or by their
authorized attorney or agent, and, upon request, copies of such books
and records will be sent to any Limited Partner if reasonable
reproduction and distribution costs are paid by him. Each month the
General Partner will report, or cause to be reported, to the Limited
Partners such financial and other information with respect to each
Partnership as the CFTC, from time to time, may by regulation require in
such monthly reports to participants in commodity pools such as the
Partnerships. In addition, if any of the following events occurs as to
any of the Partnerships, notice of such event will be mailed to each
Limited Partner of that Partnership within seven business days of the
occurrence of the event: a decrease in the Net Asset Value of a Unit to
50% or less of the Net Asset Value for the most recent fiscal year-end
most recently reported; any change in the Trading Managers; any change
in commodity brokers; any change in the general partner; any change in
the Partnership's fiscal year; or any material change in the
Partnership's trading policies. Additionally, there will be distributed
to the Limited Partners of each Partnership not more than 90 days after
the close of each fiscal year an annual report containing audited
financial statements (including a statement of income and statement of
financial condition) of that Partnership for the fiscal year then ended,
and such other information as the CFTC may require. Not more than 90
days after the close of each fiscal year, the General Partner will
report to each Limited Partner tax information necessary for the
preparation of the Limited Partner's annual federal income tax returns.
The Net Asset Value of each Partnership's Units is determined daily by
the General Partner and the most recent Net Asset Value calculations
will be promptly supplied in writing to any Limited Partner after
receipt of a request in writing to such effect.
PLAN OF DISTRIBUTION AND EXCHANGE PROCEDURE
If the conditions described below are satisfied, a Limited Partner can
redeem his Units as of the last day of a calendar month (an "Exchange
Date") and, with the net proceeds of such redemption, purchase Units of
one or more Partnerships at 100% of the Net Asset Value thereof (an
"Exchange"). Each Unit purchased with the net proceeds of a redemption
will be issued and sold at a price per Unit equal to 100% of the Net Asset
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Value of a Unit as of the first day of the month next following
the Exchange Date. No selling commissions or other charges will be paid
on Units issued on an Exchange.
Each Exchange of Units is subject to satisfaction of certain additional
conditions immediately prior to an Exchange Date. Each redeeming
Partnership must have assets sufficient to discharge its liabilities and
redeem Units. See "Redemptions." The General Partner must have received
a Request for Exchange in proper form. A "Request for Exchange" is a
letter in the form specified by the General Partner, sent by a Limited
Partner (or any assignee thereof) to a DWR branch office and received by
the General Partner at least 15 days prior to the applicable Exchange
Date. Such Request must acknowledge that the Limited Partner remains
eligible to purchase Units on such date. A form of Request for Exchange
is annexed to the Limited Partnership Agreement, which is annexed hereto
as Exhibit A. Additional forms of Request for Exchange may be obtained
by written request to the General Partner or from a local DWR branch
office. To the extent deemed necessary by the Partnership's counsel,
each Partnership issuing Units to Limited Partners in an Exchange must
have a sufficient number of Units registered and qualified for sale
under federal and applicable state securities laws pursuant to a current
Prospectus. The General Partner will endeavor to have Units registered
and qualified for sale to Limited Partners immediately prior to each
Exchange Date, but there can be no assurance that any or a sufficient
number of Units will be available for sale on an Exchange Date. If Units
are not registered or qualified for sale under either federal or
applicable state securities laws or pursuant to a current Prospectus,
the General Partner will not be able to effect the Exchange for the
Limited Partner. Furthermore, certain states may impose significant
burdens on, or alter the requirements for, qualifying Units for sale
and, in such cases, the General Partner may not continue qualifying
Units for sale in such state or states, and a resident thereof would not
be eligible to Exchange his Units. At some time in the future, certain
states may impose more restrictive suitability and/or investment
requirements than those set forth in the form of Request for Exchange.
Any such restrictions may limit the ability of a resident of such state
to Exchange his Units. See "The Exchange Agreement." In the event that
not all Requests for Exchange can be processed because an insufficient
number of Units are available for sale on an Exchange Date, the General
Partner will allocate Units in any manner which it deems reasonable
under the circumstances and may allocate a substantial portion of such
Units to new subscribers for Units.
Since an Exchange is equivalent to a redemption and immediate
reinvestment of the proceeds of such redemption, a Limited Partner
should carefully review the portions of this Prospectus describing
redemptions and certain tax consequences thereof. See "Redemptions" and
"Federal Income Tax Aspects." In particular, any tax-exempt Limited
Partners, including IRAs, considering an Exchange should carefully
review the section of the Prospectus entitled "Purchases By Employee
Benefit Plans--ERISA Considerations."
PURCHASES BY EMPLOYEE BENEFIT
PLANS-ERISA CONSIDERATIONS
The purchase of Units might or might not be a suitable investment for an
employee benefit plan. Before proceeding with a purchase of Units, the
person with investment discretion on behalf of an employee benefit plan
should determine whether the purchase of Units is (a) permitted under
the governing instruments of the plan and (b) appropriate for that
particular plan in view of its overall investment policy and the
composition and diversification of its portfolio, as well as the
considerations discussed below.
As used herein, the term "employee benefit plans" refers to plans and
accounts of various types (including their related trusts) which provide
for the accumulation of a portion of an individual's earnings or
compensation, as well as investment income earned thereon, free from
federal income tax until such time as funds are distributed from the
plan. Such plans include corporate pension and profit-sharing plans
(such as so-called 401(k) plans), "simplified employee pension plans,"
so-called "Keogh" plans for self-employed individuals, including
partners, and for purposes of this discussion, individual retirement
accounts ("IRAs"), described in Section 408 of the Internal Revenue Code
of 1986, as amended (the "Code").
If the assets of an investing employee benefit plan were to be treated,
for purposes of the reporting and disclosure provisions and certain
other of the fiduciary responsibility provisions of Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code, as including an undivided interest in each
of the underlying assets of a Partnership, an investment in Units would
in general be an inappropriate investment for the plan. A U.S.
Department of Labor regulation (the "Regulation") defines "plan assets"
in situations where employee benefit plans purchase equity securities in
investment entities
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such as a Partnership. The Regulation provides that
the assets of an entity will not be deemed to be "plan assets" of an
employee benefit plan which purchases an equity security of such an
entity if the equity security is a "publicly-offered security," meaning
it is (1) freely transferable, (2) held by more than 100 investors
independent of the issuer and of each other, and (3) either (i)
registered under Section 12(b) or Section 12(g) of the Securities Act of
1934, as amended (the "1934 Act") or (ii) sold to the plan as part of a
public offering of such securities pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "1933 Act").
The Units do meet the criteria of the Regulation.
It is expected that the Units will continue to meet the criteria of the
Regulation: as of March 31, 1995, Units of Cornerstone II, III and IV
were each held by more than 100 persons; there are no restrictions
imposed by any Partnership on the transfer of Units beyond those
designed to ensure classification of such Partnership as a partnership
under the Code (see "The Limited Partnership Agreements--Restrictions on
Transfers or Assignments"); and the registration requirements of the
Regulation have been met with respect to the Partnerships.
The General Partner believes, based upon the advice of its legal
counsel, that income earned by the Partnerships will not constitute
"unrelated business taxable income" under Section 512 of the Code to
employee benefit plans and other tax-exempt entities which purchase
Units in one or more of the Partnerships. Although the Internal Revenue
Service has issued favorable private letter rulings to taxpayers in
somewhat similar circumstances, other taxpayers may not use or cite such
rulings as precedent. The person with investment discretion on behalf
of an employee benefit plan who is considering the Exchange of Units,
should consult his or her professional tax adviser regarding the
application of the foregoing matters to their Exchange of Units.
Units may not be purchased with the assets of an employee benefit plan
if the General Partner, DWR, any Additional Seller, any Trading Manager
or any of their respective affiliates either: (a) has investment
discretion with respect to the investment of such plan assets; (b) has
authority or responsibility to give, or regularly gives investment
advice with respect to such plan assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary
basis for investment decisions with respect to such plan assets and that
such advice will be based on the particular investment needs of the
plan; or (c) is an employer maintaining or contributing to such plan.
ACCEPTANCE OF EXCHANGES ON BEHALF OF IRAs OR OTHER EMPLOYEE BENEFIT
PLANS IS IN NO RESPECT A REPRESENTATION BY THE GENERAL PARTNER, DWR OR
ANY ADDITIONAL SELLER THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY
PARTICULAR PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS
GENERALLY OR ANY PARTICULAR PLAN.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The General Partner has been advised by counsel, Cadwalader, Wickersham
& Taft, that the following summary correctly describes (subject to the
uncertainties referred to below) the material federal income tax
consequences to United States taxpayers of acquiring, owning and
disposing of Units. The opinions appearing in this section are the
opinions of Cadwalader, Wickersham & Taft, except as otherwise
specifically noted herein. The following summary is based upon the
Internal Revenue Code of 1986 as amended (the "Code"), rulings thereon,
regulations promulgated thereunder and existing interpretations thereof,
any of which could be changed at any time and which changes could be
retroactive. The federal income tax summary and the state and local
income tax summary which follow in general relate only to the tax
implications of an investment in the Partnerships by individuals who are
citizens or residents of the United States. Except as indicated below or
under "Purchases by Employee Benefit Plans-ERISA Considerations," the
summaries do not address the tax implications of an investment in the
Partnerships by corporations, partnerships, trusts and other non-
individuals. Moreover, the summaries are not intended as a substitute
for careful tax planning, particularly since certain of the tax
consequences of owning an interest in the Partnerships may not be the
same for all taxpayers, such as non-individuals or foreign persons, or
in light of an investors' personal investment circumstances. A complete
discussion of all federal, state and local tax aspects of an investment
in each Partnership is beyond the scope of the following summary, and
prospective investors must consult their own tax advisors on such
matters.
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PARTNERSHIP STATUS
The General Partner has been advised by its legal counsel, Cadwalader,
Wickersham & Taft, that in its opinion under current federal income tax
law, each Partnership will be classified as a partnership and not as an
association taxable as a corporation. No ruling has been requested from
the Internal Revenue Service with respect to classification of each
Partnership, and the General Partner does not intend to request such a
ruling.
The opinion of counsel described above is based upon the facts set forth
herein, including that (i) the General Partner will maintain a net worth
(exclusive of its interest in the Partnerships and any other limited
partnership) equal to the sum of at least 10% of the total contributions
to the Partnerships and any other limited partnership for which it acts
as general partner (or, if the total contributions to the Partnerships
or to any other limited partnership are less than $2,500,000, of at
least 15% of total contributions to the Partnership's and to any other
limited partnership or $250,000, whichever is lesser); (ii) the General
Partner's interest in each item of the Partnership's income, gain, loss,
deduction, or credit will be equal to at least 1% of each such item;
(iii) the Limited Partners will not own, directly or indirectly,
individually or in the aggregate, more than 20% of the stock of the
General Partner or of any affiliate of the General Partner; and (iv) a
principal activity of each Partnership consists of buying and selling
commodities not held as inventory, or futures, options and forward
contracts with respect to such commodities, and at least 90% of each
Partnership's income consists of gains from such trading and interest
income.
Certain "publicly traded partnerships" are taxed as corporations. While
this treatment does not affect the Partnerships, new legislation
governing the taxation of limited partnerships may be enacted at any
time, and may apply to the Partnerships retroactively. If a partnership
were classified as an association taxable as a corporation, income or
loss of such partnership would not be passed through to its partners,
and such partnership would be subject to tax on its income without
deduction for any distributions to its partners, at the rates applicable
to corporations. In addition, all or a portion of any distributions by
such partnership to its partners could be taxable to the partners as
dividends or capital gains.
PARTNERSHIP TAXATION
Partners, Rather than Partnership, Subject to Federal Income Tax. Each
Partnership, as an entity, will not be subject to federal income tax.
Except as provided below with respect to certain nonresident aliens,
each Limited Partner in computing his federal income tax liability for
a taxable year will be required to take into account his distributive
share of all items of Partnership income, gain, loss, deduction, and
credit for the taxable year of the Partnership ending within or with the
taxable year of such Partner, regardless of whether such Partner has
received any distributions from the Partnership. The characterization of
an item of profit or loss will usually be determined at the Partnership
level.
Organization and Syndication Expenses. None of the Partnerships nor any
Partner thereof will be entitled to any deduction for syndication
expenses (i.e., those amounts paid or incurred in connection with
issuing and marketing Units). Most of the expenses paid by DWR for
Cornerstone II, III and IV as initial offering expenses were syndication
expenses for federal income tax purposes.
Cornerstone II, III and IV have reimbursed DWR for the full amount of
the costs incurred by DWR in connection with the commencement of those
Partnerships' operations ("Organization Costs"). Organization Costs were
not deductible in the year incurred, but were amortized by each
Partnership over a 60-month period beginning with the month in which the
Partnership commenced operations.
Allocation of Partnership Profits and Losses. For federal income tax
purposes, a Limited Partner's distributive share of items of Partnership
income, gain, loss, deduction, and credit will be determined by each
Limited Partnership Agreement, annexed hereto as Exhibit A, unless an
allocation under such Agreement does not have "substantial economic
effect" or is not in accordance with the Partners' interests in the
Partnership. The allocations provided by each Limited Partnership
Agreement are described under "The Limited Partnership Agreement--Sharing
of Profits and Losses." In general, each Limited Partnership Agreement
allocates items of ordinary income and expense pro rata among the
Partners based upon their respective capital accounts as of the end of
the month in which such items are accrued. Net realized capital gains
and losses are generally allocated among all Partners based upon their
respective capital accounts. However, net realized capital gain and loss
is allocated first to Partners who have redeemed Units in the
Partnership during a taxable year to the extent of the difference
between the amount received on the redemption and the allocation account
as of the date of redemption attributable to the redeemed Units. Net
realized capital gains for each year are allocated next among all
Partners whose capital accounts are in excess of their Units' allocation
accounts to
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the extent of such excess in the ratio that each such
Partner's excess bears to all such Partners' excesses. Net realized
capital loss for each year is allocated next among all Partners whose
Units' allocation accounts are in excess of their capital accounts to
the extent of such excess in the ratio that each such Partner's excess
bears to all such Partners' excesses.
These allocation provisions are designed to reconcile tax allocations to
economic allocations. However, no assurance can be given that the
Internal Revenue Service will not challenge such allocations
particularly in light of recently-issued final regulations.
If the allocation provided by each Limited Partnership Agreement is not
recognized by the Internal Revenue Service for federal income tax
purposes, the amount of income or loss allocated to Partners for federal
income tax purposes under such Limited Partnership Agreement may be
increased or reduced or the character of such income or loss may be
modified.
CASH DISTRIBUTIONS AND REDEMPTIONS
Distributions by a Partnership and amounts received upon the partial or
complete redemption of a Limited Partner's Units normally will not be
taxable to the Limited Partners. However, if cash distributions by a
Partnership or amounts received upon redemption by a Limited Partner
exceed such Partner's adjusted tax basis in his Units, the excess will
be taxable to him as though it were a gain from a sale of the Units. A
loss will be recognized upon a redemption of Units only if, following
the redemption of all of a Limited Partner's Units, such Partner has any
tax basis in his Units remaining. In such case, the Limited Partner will
recognize loss to the extent of such remaining basis. See "Redemptions."
Generally, if a Limited Partner is not a "dealer" with respect to his
interest in the Partnership and he has held his interest in the
Partnership for more than one year, such gain or loss would be long-term
capital gain or loss.
GAIN OR LOSS ON TRADING ACTIVITY
Because each Partnership will purchase commodity contracts for its own
account and not for the account of others, because each Partnership will
not maintain an inventory of commodity interest contracts, because
substantially all of the expected return of any combination of each
Partnership's commodity contract positions will not be attributable to
the time value of such Partnership's net investment in such positions,
and because each Partnership will be considered a "qualified fund" for
purposes of its foreign currency commodity contracts positions, for
federal income tax purposes substantially all of the profit and loss
generated by each Partnership from its trading activities will be
capital gain and loss, which in turn may be either short-term, long-term
or a combination of both. Gain or loss with respect to a "Section 1256
contract" is generally treated as short-term capital gain or loss to the
extent of 40% of such gain or loss, and long-term capital gain or loss
to the extent of 60% of such gain or loss. For individual partners,
long-term capital gains are taxed at a maximum marginal rate of 28%
while short-term capital gains are currently taxed at a maximum marginal
rate of 39.6%. For corporate partners, long-term and short-term capital
gains are taxed at the same effective rate.
A "Section 1256 contract" includes a "regulated futures contract," a
"foreign currency contract," a "nonequity option," and a "dealer equity
option." A "regulated futures contract" is a futures contract which is
traded on or subject to the rules of a national securities exchange
which is registered with the SEC, a domestic board of trade designated
as a contract market by the CFTC, or any other board of trade, exchange
or other market designated by the Secretary of the Treasury ("a
qualified board or exchange"), and which is "marked to-market" to
determine the amount of margin which must be deposited or may be
withdrawn. A "foreign currency contract" is a contract which requires
delivery of, or the settlement of which depends upon the value of,
foreign currency which is a currency in which positions are also traded
through regulated futures contracts, which are traded in the interbank
market, and which are entered into at arm's length at a price determined
by reference to the price in the interbank market. (The Secretary of the
Treasury is authorized to issue regulations excluding certain currency
forward contracts from mark-to-market treatment.) A "nonequity option"
means an option which is traded on a qualified board or exchange and the
value of which is not determined directly or indirectly by reference to
any stock (or group of stocks) or stock index, unless (i) there is in
effect a designation by the CFTC of a contract market for a contract
based on such group of stocks or stock index or (ii) such option is a
cash-settled option on a stock index that the SEC has determined to be
"broad based". A "dealer equity option" means, with respect to an
options dealer, any listed option which is an equity option, is
purchased or granted by such options dealer in the normal course of his
activity of dealing in options, and is listed on the qualified board or
exchange on which such options dealer is registered. Each Section 1256 contract
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held at the end of a Partnership's taxable year will be treated
as having been sold for its fair market value on the last day of such
taxable year, and gain or loss will be taken into account for such year.
Cornerstone II and III each currently expects substantially all of its
trading activities will be conducted in Section 1256 contracts.
Cornerstone IV expects that a portion of its trading activities will be
conducted in Section 1256 contracts; however, Cornerstone IV also
expects that a portion of its trading activities will be conducted in
contracts that do not presently qualify as Section 1256 contracts ("non-
Section 1256 contracts").
Gain or loss with respect to foreign currency forward and futures
contracts that are not traded on U.S. exchanges or on certain foreign
exchanges designated as "qualified boards or exchanges" by the Internal
Revenue Service ("foreign currency positions"), is treated as capital
gain or loss only if held by an electing "qualified fund." In general, a
"qualified fund" is an electing partnership that: (1) has at least 20
unrelated partners (no one of which owns more than 20% of the capital or
profits of the partnership); (2) has as its principal activity the
buying and selling of options, futures, or forwards with respect to
commodities; and (3) receives at least 90% of its gross income from
interest, dividends, gains from the sale or disposition of capital
assets held for the production of interest or dividends, and income and
gain from futures, forward, and option contracts with respect to
commodities. All such foreign currency positions held by a qualified
fund are treated as "Section 1256 contracts" (i.e., marked-to-market at
year end) and gain or loss with respect to all such foreign currency
positions is treated as 100% long-term gain or loss. Gain or loss with
respect to "regulated futures contracts," "foreign currency contracts"
and "non-equity options" is treated as 60% long-term gain or loss and
40% short term gain or loss. The General Partner has made a qualified
fund election for the Partnerships.
Subject to certain limitations, a Limited Partner, other than a
corporation, estate or trust, may elect to carry back net Section 1256
contract losses to each of the three preceding years. Net Section 1256
contract losses carried back to prior years may only be used to offset
net Section 1256 contract gains. Generally, such losses are carried back
as 40% short-term capital losses and 60% long-term capital losses.
During taxable years in which little or no profit is generated from
trading activities, a Limited Partner may still have interest income.
With the exception of Cornerstone IV, a Trading Manager may engage in
spread and straddle trading (i.e., holding offsetting positions whereby
the risk of loss from holding either or both position(s) is
substantially diminished) on behalf of a Partnership only with the prior
written consent of the General Partner. Realized losses with respect to
any position in a spread or straddle are taken into account for federal
income tax purposes only to the extent that the losses exceed
unrecognized gain (at the end of the taxable year) from offsetting
positions, successor positions, or offsetting positions to the successor
positions. Thus, spreads and straddles may not be used to defer gain
from one taxable year to the next. For purposes of applying the above
rules restricting the deductibility of losses with respect to offsetting
positions, if a partner takes into account gain or loss with respect to
a position held by the Partnership, the partner will be treated, except
to the extent otherwise provided in regulations, as holding positions
held by a partnership. Accordingly, positions held by a Partnership may
limit the deductibility of realized losses sustained by a Limited
Partner with respect to positions held for his own account, and
positions held by a Limited Partner for his own account may limit his
ability to deduct realized losses sustained by a Partnership. Reporting
requirements generally require taxpayers to disclose all unrecognized
gains with respect to positions held at the end of the taxable year. The
above principle, whereby a Limited Partner may be treated as holding
Partnership positions, may also apply to require a Limited Partner to
capitalize (rather than deduct) interest and carrying charges allocable
to property held by him. A portion of the gain on a "conversion
transaction," including certain spread and straddle trading, may be
characterized as ordinary income where substantially all of the expected
return is attributable to the time value of the net investment in the
transaction.
Pursuant to current Proposed and Temporary Treasury Regulations, the
holding period of any position included in a straddle begins anew when
the straddle is terminated unless the position was held for more than
the long-term capital gain and loss holding period before the straddle
was established. Further, the loss on any position included in a
straddle will be treated as a long-term capital loss if, at the time the
loss position was acquired, the taxpayer held offsetting positions with
respect to such loss position that would give rise only to long-term
capital loss if such offsetting position were disposed of on the day the
loss position was acquired.
Where the positions of a straddle are comprised of both Section 1256 and
non-Section 1256 contracts, a Partnership will be subject to the mixed
straddle rules of the Code and the regulations promulgated thereunder.
The appropriate tax treatment of any gains and losses from trading in
mixed straddles will depend on which of the following four alternatives
a Partnership elects to pursue. A Partnership may elect to treat Section
1256 positions as non-Section 1256 positions, and the mixed straddle
would be subject to the rules governing
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non-Section 1256 straddles.
Alternatively, a Partnership may identify the positions of a particular
straddle as an "identified mixed straddle" under Section 1092(b)(2) of
the Code and, thereby, net the capital gain or loss attributable to the
offsetting positions. The net capital gain or loss is treated as 60%
long-term and 40% short-term capital gain or loss if attributable to the
Section 1256 positions, or all short-term capital gain or loss if
attributable to the non-Section 1256 positions. Alternatively, a
Partnership may place the positions in an "mixed straddle" account which
is marked-to-market daily. Under a special account cap, not more than
50% of net capital gain may be long-term capital gain, and not more than
40% of net capital loss may be short-term capital loss. If a Partnership
does not make any of the aforementioned three elections, any net loss
attributable to either the Section 1256 or the non-Section 1256
positions will be treated as 60% long-term and 40% short-term capital
loss, while any net gain would be treated as 60% long-term and 40%
short-term capital gain, or all short-term capital gain, depending upon
whether the net gain was attributable to Section 1256 positions or non-
Section 1256 positions.
TAXATION OF LIMITED PARTNERS
Limitations on Deductibility of Partnership Losses. The amount of
Partnership loss, including capital loss, which a Limited Partner will
be entitled to take into account for federal income tax purposes is
limited to the lesser of the tax basis of his Units or in the case of
certain Limited Partners, including individuals and closely held C
corporations the amounts for which he is "at risk" with respect to such
interest as of the end of the Partnership's taxable year in which such
loss occurred.
Generally, a Limited Partner's initial tax basis will be the amount paid
for each Unit of a Partnership (100% of the Net Asset Value of a Unit).
A Limited Partner's adjusted tax basis will be his initial tax basis
reduced by the Limited Partner's share of Partnership distributions,
losses and expenses and increased by his share of Partnership income,
including gains. The amount for which a Limited Partner is "at risk"
with respect to his interest in a Partnership is generally equal to his
tax basis for such interest, less: (i) any amounts borrowed in
connection with his acquisition of such interest for which he is not
personally liable and for which he has pledged no property other than
his interest; (ii) any amounts borrowed from persons who have a
proprietary interest in such Partnership; and (iii) any amounts borrowed
for which the Limited Partner is protected against loss through
guarantees or similar arrangements.
Because of the limitations imposed upon the deductibility of capital
losses referred to below, a Limited Partner's share of a Partnership's
net capital losses, if any, will not materially reduce his federal
income tax on his ordinary income. In addition, certain expenses of a
Partnership might be deductible by a Partner only as so-called itemized
deductions and, therefore, will not reduce the federal taxable income of
a Partner who does not itemize his deductions. Furthermore, an
individual who is subject to the alternative minimum tax for a taxable
year will not realize any tax benefit from such itemized deductions.
Limitations on Deductibility of Passive Losses. In general, losses from
a passive activity ("passive losses") are disallowed to the extent such
losses exceed income from all passive activities ("passive income"). A
passive activity is defined as a trade or business in which the taxpayer
does not materially participate unless otherwise provided in Treasury
Regulations.
Proposed and Temporary Treasury Regulations provide that the trading of
personal property, such as commodities, will not be treated as a passive
activity. Accordingly, a Limited Partner's distributive share of items
of income, gain, deduction, or loss from a Partnership will not be
treated as passive income or loss and Partnership gains allocable to
Limited Partners will not be available to offset passive losses from
sources outside such Partnership. Partnership gains allocable to Limited
Partners will, however, be available to offset
losses with respect to "portfolio" investments, such as stocks and
bonds. Moreover, any Partnership losses allocable to Limited Partners
will be available to offset other income, regardless of source. Final
Treasury Regulations may modify the Proposed and Temporary Regulations,
and such regulations may be retroactive in effect.
Limited Deduction of Certain Expenses. Certain miscellaneous itemized
deductions, such as expenses incurred to maintain property held for
investment, are deductible only to the extent that they exceed 2% of the
adjusted gross income of an individual, trust or estate. The amount of
certain itemized deductions allowable to individuals is further reduced
by an amount equal to the lesser of (i) 3% of the individuals adjusted
gross income in excess of a certain threshold amount (for tax years
beginning in 1995, this amount is $114,700 ($57,350 in the case of
married individuals filing a separate return)) and (ii) 80% of such
itemized deductions. Based upon the activities of the Partnerships, the
General Partner has been advised by its legal counsel that in such
counsel's opinion expenses incurred by the Partnerships in their
commodity trading businesses should
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not be subject to the 2% "floor" or
the 3% phaseout, except to the extent that the Internal Revenue Service
promulgates regulations that so provide.
Tax on Capital Gains and Losses. For individuals, trusts and estates,
"net capital gains" are currently taxed at a maximum marginal tax rate
of 28%, while other income is taxed at a maximum marginal tax rate of
39.6%. Corporate taxpayers are currently subject to a maximum effective
tax rate of 35% on all income.
The excess of capital losses over capital gains is deductible by an
individual against ordinary income on a one-for-one basis, subject to an
annual limitation of $3,000 ($1,500 in the case of married individuals
filing a separate return). Excess capital losses may be carried forward.
Net losses from Section 1256 contracts are treated as 60% long-term
capital loss and 40% short-term capital loss. Such losses may, at the
individual taxpayer's election, be carried back to each of the preceding
three years and applied against gains from Section 1256 contracts.
Alternative Minimum Tax. An alternative minimum tax may be imposed on
Limited Partners, depending on their particular circumstances. This tax,
with respect to taxpayers other than corporations, will be assessed to
the extent that 26% of the first $175,000 ($87,500 for married
individuals filing a separate return) of "alternative minimum taxable
income" in excess of the exemption amount ($45,000 in the case of
married taxpayers filing joint returns or a surviving spouse; $33,750 in
the case of an unmarried taxpayer who is not a surviving spouse; or
$22,500 in the case of a married individual filing a separate return or
an estate or trust) plus 28% of the balance of such excess exceeds the
taxpayer's regular federal income tax liability (subject to special
modification) for the year. The alternative minimum tax exemption is
phased-out for individual taxpayers with alternative minimum taxable
income in excess of $112,500 ($150,000 for married taxpayers filing a
joint return and surviving spouses; $75,000 for married individuals
filing separate returns estates and trusts). "Alternative minimum
taxable income" is equal to adjusted gross income computed without
deducting normal net operating losses, less specified net operating
losses, credits, trust distributions and itemized deductions, and
increased by certain tax preferences. Long-term capital gains are taxed
at a maximum 28% rate. However, the limitation on the long-term capital
gains rate does not give rise to an adjustment or increase in
"alternative minimum taxable income." Therefore, transactions in Section
1256 contracts should not directly affect the application of the
alternative minimum tax. The extent, if any, to which the alternative
minimum tax will be imposed will depend on the overall tax situation of
each Limited Partner at the end of each such taxable year.
Limitation on Deductibility of Interest on Investment Indebtedness.
Interest paid or accrued on indebtedness properly allocable to property
held for investment is investment interest. Such interest is generally
deductible by non-corporate taxpayers only to the extent it does not
exceed net investment income. A Limited Partner's distributive share of
net Partnership income and any gain from the disposition of Units will
be treated as investment income, except that a Limited Partner's net
capital gain from the disposition of Units is not investment income
unless the Limited Partner waives the benefit of the 28% tax rate on
such gain. It is not clear whether a Limited Partner's distributive
share of Partnership net capital gain constitutes investment income
where such gain is taxed at the maximum 28% rate. Interest expense
incurred by a Limited Partner to acquire his Units generally will be
investment interest. Any investment interest disallowed as a deduction
in a taxable year solely by reason of the limitation above is treated as
investment interest paid or accrued in the succeeding taxable year.
Taxation of Foreign Limited Partners. A Limited Partner who is a non-
resident alien individual, foreign corporation, foreign partnership,
foreign trust or foreign estate (a "Foreign Limited Partner") generally
is not subject to taxation by the United States on United States source
capital gains from commodity trading for a taxable year, provided that
such Foreign Limited Partner does not have certain present or former
connections with the United States (e.g., if the Foreign Limited Partner
(in the case of an individual) does not spend more than 182 days in the
United States during his taxable year (or, in certain circumstances, a
prior taxable year) or if the Foreign Limited Partner is not engaged in
a trade or business within the United States during the taxable year to
which income, gain, or loss from a Partnership is treated as effectively
connected. As explained below, an investment in a Partnership should
not, by itself, cause a Foreign Limited Partner to be engaged in a trade
or business within the United States during the taxable year or in
certain limited circumstances, a prior taxable year to which income,
gain or loss from a Partnership is treated as effectively connected).
Pursuant to a "safe harbor" provision of the Code, a Foreign Limited
Partner would not be engaged in a trade or business within the United
States solely because such Foreign Limited Partner is a partner of a
partnership which effects transactions in the United States in
commodities for the partnership's own account, as long as the
partnership is not a dealer in commodities and as long as the
partnership only trades commodities
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which are of a kind customarily
dealt in on an organized commodity exchange in transactions of a kind
customarily consummated on such an exchange and that each Partnership's
commodities transactions should satisfy the safe harbor, owning an
interest in a Partnership should not in such counsel's opinion, by
itself, cause a Foreign Limited Partner to be engaged in a trade or
business within the United States. In the event that future Partnership
transactions are not covered by the safe harbor, there is a risk that
all of a Foreign Limited Partner's distributive share of income of a
Partnership will be treated as effectively connected with the conduct of
a trade or business in the United States and taxed at regular rates
(discussed previously) and, in the case of a Foreign Limited Partner
which is a foreign corporation, an additional 30% branch profits tax
(unless reduced or eliminated by treaty).
If a Foreign Limited Partner is a dealer in commodities, or is otherwise
engaged in a U.S. trade or business and if income, gain or loss from a
Partnership is treated as effectively connected with the conduct of such
trade or business, such Partnership may be required to withhold tax on
income allocable to such Foreign Limited Partners and remit to the
Internal Revenue Service an amount equal to 39.6% (35% for corporations)
of the amount of such effectively connected taxable income allocable to
the Foreign Limited Partner. Any amounts remitted will constitute a
refundable credit against the Foreign Limited Partner's United States
federal income tax liability, which can be claimed on the Foreign
Limited Partner's United States federal income tax return.
A foreign person generally is subject to a 30% withholding tax (unless
reduced or exempted by treaty) on certain types of United States source
income that are not effectively connected with the conduct of a United
States trade or business, such as certain interest-bearing obligations,
the income attributable to which is not exempt from tax. This tax must
be withheld by the person having control over the payment of such
income. Accordingly, a Partnership may be required to withhold tax on
items of such income which are included in the distributive share
(whether or not actually distributed) of a Foreign Limited Partner.
However, 30% withholding is not required in respect of certain interest
bearing obligations, such as "portfolio interest" obligations issued
after July 18, 1984 (if procedural requirements are complied with). If a
Partnership is required to withhold tax on such income of a Foreign
Limited Partner, the General Partner may pay such tax out of its own
funds and then be reimbursed out of the proceeds of any distribution to
or redemption of Units by the Foreign Limited Partner.
The estate of a deceased Foreign Limited Partner may be liable for U.S.
estate tax and may be required to obtain an estate tax release from the
Internal Revenue Service in order to transfer the Units of such Foreign
Limited Partner.
FOREIGN PERSONS SHOULD CONSULT THEIR OWN TAX ADVISERS BEFORE DECIDING
WHETHER TO INVEST IN THE PARTNERSHIPS.
Tax Elections. The Code provides for optional adjustments to the basis
of Partnership property upon distributions of Partnership property to a
Partner (Section 734) and transfers of Units, including transfers by
reason of death (Section 743), provided that a Partnership election has
been made pursuant to Section 754. As a result of the complexities and
added expense of the tax accounting required to implement such an
election, the General Partner does not presently intend to make such an
election. Therefore, any benefits which might be available to the
Partners by reason of such an election will be foreclosed.
Tax Returns and Information. The Partnerships will file their
information returns using the accrual method of accounting. Within 90
days after the close of each Partnership's taxable year, the Partnership
will furnish each Limited Partner (and any assignee of the Unit of any
Limited Partner) copies of (i) the Partnership's Schedule K-1 indicating
the Limited Partner's distributive share of tax items and (ii) such
additional information as is reasonably necessary to permit the Limited
Partners to prepare their own federal and state tax returns.
Partnership's Tax Accounting. Each Partnership has the calendar year as
its taxable year.
Unrelated Business Taxable Income of Employee Benefit Plan Limited
Partners and Other Tax-Exempt Investors. Income allocated to a Limited
Partner which is an employee benefit plan or other tax-exempt entity
should not be subject to tax under Section 511 of the Code. Such
investors should see "Purchases by Employee Benefit Plans--ERISA
Considerations."
TAX AUDITS
All Partners are required under the Code to report all the Partnership
items on their own returns consistently with the treatment by a
Partnership, unless they file a statement with the Internal Revenue
Service disclosing the inconsistencies. Adjustments in tax liability
with respect to Partnership items will be made at the
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Partnership level.
The General Partner will represent each Partnership during any audit and
in any dispute with the Internal Revenue Service. Each Limited Partner
will be informed by the General Partner of the commencement of an audit
of a Partnership. In general, the General Partner may enter into a
settlement agreement with the Internal Revenue Service on behalf of, and
binding upon, the Limited Partners. However, prior to settlement, a
Limited Partner may file a statement with the Internal Revenue Service
stating that the General Partner does not have the authority to settle
on behalf of such Limited Partner.
The period for assessing a deficiency against a partner in a
partnership, such as any of the Partnerships, with respect to a
partnership item is the later of three years after such partnership
files its return or, if the name and address of the partner does not
appear on such partnership return, one year after the Internal Revenue
Service is furnished with the name and address of the partner. In
addition, the General Partner may consent on behalf of each Partnership
to the extension of the period for assessing a deficiency with respect
to a Partnership item. As a result, a Limited Partner's federal income
tax return may be subject to examination and adjustment by the Internal
Revenue Service for a Partnership item more than three years after it
has been filed.
____________________
All of the foregoing statements are based upon the existing provisions
of the Code and the regulations promulgated thereunder and the existing
administrative and judicial interpretations thereof. It is emphasized
that no assurance can be given that legislative, administrative or
judicial changes will not occur which will modify such statements.
The foregoing statements are not intended as a substitute for careful
tax planning, particularly since certain of the federal income tax
consequences of purchasing an interest in the Partnerships may not be
the same for all taxpayers. There can be no assurance that the
Partnership's tax returns will not be audited by the Internal Revenue
Service or that no adjustments to the returns will be made as a result
of such audits. If an audit results in adjustment, Limited Partners may
be required to file amended returns and their returns may be audited.
Accordingly, prospective purchasers of an interest in the Partnership
are urged to consult their tax advisers with specific reference to their
own tax situation under federal law and the provisions of applicable
state, local and foreign laws before subscribing for Units.
STATE AND LOCAL INCOME TAX ASPECTS
In addition to the federal income tax consequences for individuals
described under "Federal Income Tax Aspects" above, each Partnership and
its Limited Partners may be subject to various state and local taxes. A
Limited Partner's distributive share of the realized profits of a
Partnership may be required to be included in determining his reportable
income for state or local tax purposes. Furthermore, state and local tax
laws may not reflect recent changes made to the federal income tax law
and hence may be inconsistent with the federal income treatment of gains
and losses arising from the Partnerships' transactions in Section 1256
contracts. Accordingly, prospective Limited Partners should consult with
their own tax advisers concerning the applicability of state and local
taxes to an investment in the Partnerships.
The General Partner has been advised by its legal counsel, Cadwalader,
Wickersham & Taft, that the Partnerships will not be liable for New York
City unincorporated business tax. Limited Partners who are nonresidents
of New York State will not be liable for New York State personal income
tax on such Partners' income from the Partnerships. Likewise, Limited
Partners who are nonresidents of New York City will not be liable for
New York City earnings tax on such Partners' income from the
Partnerships. New York City residents may be subject to New York City
personal income tax on such Partners' income from the Partnerships. No
ruling from either the New York State or New York City tax authorities
will be requested regarding such matters.
LEGAL MATTERS
Legal matters in connection with the Units being offered hereby,
including the discussion of the material federal income tax consequences
relating to the acquisition, ownership and disposition of Units, have
been passed upon for each Partnership and the General Partner by
Cadwalader, Wickersham & Taft, 100 Maiden Lane, New York, New York
10038. Cadwalader, Wickersham & Taft also has acted as counsel for DWR
in connection with the offering of Units. Cadwalader, Wickersham & Taft
may advise the General Partner with respect to its responsibilities as
general partner of, and with respect to matters relating to, the
Partnerships.
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EXPERTS
The statements of financial condition of Dean Witter Cornerstone II,
Dean Witter Cornerstone III and Dean Witter Cornerstone IV as of
December 31, 1995 and 1994, and their related statements of operations,
changes in partners' capital, and their cash flows for each of the three
years in the period ended December 31, 1995 and the statements of
financial condition of Demeter Management Corporation as of December 31,
1995 and 1994 included in this Prospectus, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing
herein, and are included in reliance upon such reports of such firm
given upon their authority as experts in accounting and auditing.
Deloitte & Touche LLP also acts as independent auditors for DWR.
ADDITIONAL INFORMATION
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits relating thereto that have been
filed with the Securities and Exchange Commission in Washington, D.C.
For further information pertaining to each Partnership and the Units
offered hereby, reference is hereby made to the Registration Statement,
including the exhibits filed as part thereof. The Registration Statement
and exhibits are on file at the offices of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Room 1024, Judiciary Plaza,
Washington, D.C. 20549 and may be examined, without charge, at the
offices of the SEC and copies may be obtained of all or part thereof
from the SEC upon payment of the prescribed fees.
GLOSSARY
CERTAIN TERMS AND DEFINITIONS
Knowledge of various terms and concepts relating to this offering is
necessary for a potential investor to determine whether to invest in the
Partnerships.
"Brokerage Commission"--The fee charged by a broker for executing a trade
in a commodity account of a customer. DWR charges each Partnership
brokerage commissions at a roundturn rate of 80% of DWR's published
rates (an average rate of $75) plus applicable fees. Commissions with
respect to each Trading Manager's allocated Net Assets will be capped at
1% per month (in the case of Trading Managers which employ multiple
trading systems in trading on behalf of a Partnership, the foregoing 1%
cap will be applied on a per trading system basis) of the adjusted Net
Assets at month-end allocated to such Trading Manager or trading system.
"Churning"--Engaging in excessive trading with respect to a commodity
account for the purpose of generating brokerage commissions.
"Commodity Futures Contract"--Standardized contract made on domestic or
foreign commodity exchanges which calls for the future delivery of a
specified quantity of a commodity at a specified time and place.
"Commodity Trading Advisor"--Any person who for any consideration engages
in the business of advising others, either directly or indirectly, as to
the value or purchase of commodity contracts or options thereon.
"Common Administrative Expenses"--Costs and expenses incurred in
connection with preparing, printing, and mailing monthly reports, annual
reports, and all other documents required to be delivered to Limited
Partners in the Cornerstone Funds under any applicable federal or state
law or pursuant to the terms of each Limited Partnership Agreement; and
all legal, accounting, auditing, filing, registration and extraordinary
expenses not directly attributable to one Partnership.
"Daily Limits"--Limits imposed by commodity exchanges on the amount of
fluctuation in commodity contract prices during a single trading day.
"Forward Contract"--A contractual right to purchase or sell a specified
quantity of a commodity at or before a specified date in the future at a
specified price. It is distinguished from a futures contract in that it
is not traded on an exchange and it contains terms and conditions
specifically negotiated by the parties.
"Limit Order"--An order to execute a trade at a specified price or
better. As contrasted with a stop order,
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a limit order does not become a market order when the limit price is reached.
"Margin"--Good faith deposits with a broker to assure fulfillment of a
purchase or sale of a commodity futures contract and, under certain
circumstances, a commodity option contract.
"Market Order"--An order to execute a trade at the prevailing price as
soon as possible.
"Net Assets"--A Partnership's "Net Assets" shall mean the total assets of
the Partnership, including all cash and cash equivalents (valued at
cost), accrued interest, and the market value of all open commodity
positions and other assets of the Partnership less (a) the brokerage
commissions accrued on a half-turn basis and (b) all other liabilities
of the Partnership including incentive fees accrued or payable. The
above specified items will be determined in accordance with the
principles specified in the applicable Limited Partnership Agreement
and, where no principle is specified, in accordance with generally
accepted accounting principles consistently applied under the accrual
basis of accounting. The market value of a commodity futures contract
traded on a commodity exchange shall mean the settlement price on the
commodity exchange on which the particular commodity futures contract is
traded by a Partnership on the day with respect to which Net Assets are
being determined, provided, that if a contract could not be liquidated
on such day due to the operation of daily limits or other rules of the
commodity exchange upon which that contract is traded or otherwise, the
settlement price on the first subsequent day on which the contract could
be liquidated shall be the market value of such contract for such day.
The market value of a commodity forward contract or a commodity futures
contract traded on a foreign exchange shall mean its market value as
determined by the General Partner on a basis consistently applied.
"Net Asset Value Per Unit"--The Net Assets allocated to capital accounts
represented by Units of Limited Partnership Interest divided by the
number of such Units outstanding on the date of calculation.
"New Appreciation"--Appreciation (as defined below) increased by (i)
distributions and redemptions paid or payable on Units and (ii)
Exchanges of Units for Units of another Partnership, and decreased by
(iii) contributions to the Partnership arising from Units acquired on an
Exchange or from the Continuing Offering of Units and (iv) interest
income earned for the account of the Partnership, with each item of
increase and decrease determined from the date of such highest value of
Net Assets or Initial Net Assets, as the case may be, to the last day of
the incentive period as of which such incentive fee calculation is made.
The "Initial Net Assets" of each Partnership equals the total amount of
subscriptions accepted by such Partnership at its Initial Closing less
total selling commissions and Initial Offering Expenses paid by such
Partnership at such Initial Closing. "Appreciation" under each
Management Agreement means (A) the value of the Partnership's Net Assets
as of the last day of any fiscal year or incentive period, as applicable
(reduced by management fees accrued or payable for the account of such
Partnership for such fiscal year or incentive period, but before
reduction for the current annual incentive fee, if any, accrued or
payable for the account of the Partnership for such fiscal year or
incentive period), minus (B) the highest value of Net Assets as of the
last day of any preceding fiscal year or incentive period (or the
Initial Net Assets, whichever is higher).
"Option"--An option on a futures contract or a physical commodity gives
the buyer of the option the right, as opposed to the obligation, to take
a position at a specified price in an underlying futures contract or
commodity.
"Pyramiding"--Using unrealized profits on existing positions in a given
commodity due to favorable price movements as margin specifically to buy
or sell additional positions in the same or related commodity.
"Settlement Price"--The closing price for futures contracts in a
particular commodity established by the clearinghouse or exchange after
the close of each day's trading.
"Speculative Position Limits"--Limits established by the CFTC and United
States commodity exchanges on the maximum net long or short speculative
positions which a person or group of persons may hold, own, or control
in commodity contracts.
"Spot Contract"--A cash market transaction in which the buyer and seller
agree to the immediate purchase and sale of a specific commodity lot,
usually with a two-day settlement.
"Stop Order"--An order given to a broker to execute a trade in a
commodity contract when the contract price reaches the specified stop
order price. Stop orders become market orders when the stop price is
reached.
"Unrealized Profit or Loss"--The profit or loss which could be realized
on an open position if it were closed out at the current settlement
price.
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BLUE SKY GLOSSARY
Prospective investors should be aware of the following definitions,
reprinted verbatim from the "Guidelines for Registration of Commodity
Pool Programs" adopted by the North American Securities Administrators
Association, Inc., as revised in September, 1993 (the "Guidelines"),
which Guidelines are applied by certain state securities administrators
in reviewing public offerings of "commodity pools" (such as the
Partnerships). For ease of reference, each of these definitions is
followed by the comparable defined term used in the Form of Limited
Partnership Agreement and this Prospectus, in brackets, as applicable.
"Advisor"--Any Person who for any consideration engages in the business
of advising others, either directly or indirectly, as to the value,
purchase, or sale of Commodity Futures Contracts or commodity options.
["Trading Managers"--page A-9]
"Affiliate"--An Affiliate of a Person means (a) any Person directly or
indirectly owning, controlling or holding with power to vote 10% or more
of the outstanding voting securities of such Person; (b) any Person 10%
or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote, by such Person;
(c) any Person, directly or indirectly, controlling, controlled by, or
under common control of such Person; (d) any officer, director or
partner of such Person; or (e) if such Person is an officer, director or
partner, any Person for which such Person acts in any such capacity. [No
comparable term, but for purposes of indemnification of the General
Partner and its affiliates, see pages A-15--A-16]
"Capital Contributions"--The total investment in a Program by a
Participant or by all Participants, as the case may be. ["Unit of
General Partnership Interest"--page A-3; "Units"--page A-3]
"Commodity Broker"--Any Person who engages in the business of effecting
transactions in Commodity Contracts for the account of others or for his
own account. ["DWR"--page A-3]
"Commodity Contract"--A contract or option thereon providing for the
delivery or receipt at a future date of a specified amount and grade of
a traded commodity at a specified price and delivery point. ["commodity
interest contracts"--page A-1]
"Net Assets"--The total assets, less total liabilities, of the Program
determined on the basis of generally accepted accounting principles. Net
Assets shall include any unrealized profits or losses on open positions,
and any fee or expense including Net Asset fees accruing to the Program.
["Net Assets"--page A-7]
"Net Worth"--The excess of total assets over total liabilities as
determined by generally accepted accounting principles. Net Worth shall
be determined exclusive of home, home furnishings and automobiles. ["net
worth," as regards subscribers' investment requirements, is referenced
on page and A-; as regards the General Partner's net
worth requirement, see Section 5 of the Limited Partnership Agreement]
"Organizational and Offering Expenses"--All expenses incurred by the
Program in connection with and in preparing a Program for registration
and subsequently offering and distributing it to the public, including,
but not limited to, total underwriting and brokerage discounts and
commissions (including fees of the underwriter's attorneys), expenses
for printing, engraving, mailing, salaries of employees while engaged in
sales activity, charges of transfer agents, registrars, trustees, escrow
holders, depositories, experts, expenses of qualification of the sale of
its Program Interest under federal and state law, including taxes and
fees, accountants' and attorneys' fees. ["Initial Offering Expenses,"
"Continuing Offering Expenses"--pages A-4, A-7--A-8]
"Participant"--The holder of a Program Interest. ["General Partner" and
"Limited Partners"--page A-3]
"Person"--Any natural Person, partnership, corporation, association or
other legal entity. [No comparable term]
"Program"--The limited partnership, joint venture, corporation, trust or
other entity formed and operated for the purpose of investing in
Commodity Contracts. ["Partnership"--page A-1]
"Pyramiding"--A method of using all or part of an unrealized profit in a
Commodity Contract position to provide margin for any additional
Commodity Contracts of the same or related commodities. [See trading
policy 6 on page A-10]
"Sponsor"--Any Person directly or indirectly instrumental in organizing a
Program or any Person who will manage or participate in the management
of a Program, including a Commodity Broker who pays any portion of the
Organizational Expenses of the Program, and the general partner(s) and
any other Person who regularly performs or selects the Persons who
perform services for the Program. Sponsor does not include wholly
independent third parties such as attorneys, accountants, and
underwriters whose only compensation is for
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professional services
rendered in connection with the offering of the units. The term
"Sponsor" shall be deemed to include its Affiliates. ["General Partner,"
"DWR"]
"Valuation Date"--The date as of which the Net Assets of the Program are
determined. [No comparable term, but for purposes of redemption, Net
Assets of the Partnership are determined as of the last business day of
the month-page A-13]
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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, 1995
and 1994 and the related statements of operations, changes in partners' capital,
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Partnerships'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dean Witter Cornerstone Fund II, Dean Witter
Cornerstone Fund III and Dean Witter Cornerstone Fund IV as of December 31, 1995
and 1994 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
February 21, 1996
New York, New York
F-1
<PAGE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
------------ -----------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS $ $ $
Equity in Commodity futures trading accounts: (unaudited)
Cash 27,286,378 28,057,189 27,570,984
Net unrealized gain on open contracts 1,792,687 3,368,107 4,316,080
------------ ------------ -----------
Total Trading Equity 29,079,065 31,425,296 31,887,064
Interest receivable (DWR) 95,760 107,485 124,668
Receivable from DWR 64,232 25,525 50,385
------------ ------------ -----------
Total Assets 29,239,057 31,558,306 32,062,117
============ ============ ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accrued incentive fees -- 307,567 --
Redemptions payable 302,009 134,889 386,099
Accrued management fees 96,036 104,238 105,860
Accrued brokerage commissions (DWR) 71,984 94,453 81,268
Common administrative expenses payable 51,946 81,314 111,168
Accrued transaction fees and costs 5,536 6,957 5,720
------------ ------------ -----------
Total Liabilities 527,511 729,418 690,115
------------ ------------ -----------
PARTNERS' CAPITAL
Limited Partners (10,371.045, 10,673.698 and
13,802.050 Units, respectively) 28,122,046 30,213,505 30,885,515
General Partner (217.400 Units) 589,500 615,383 486,487
------------ ------------ -----------
Total Partners' Capital 28,711,546 30,828,888 31,372,002
------------ ------------ -----------
Total Liabilities and Partners' Capital 29,239,057 31,558,306 32,062,117
============ ============ ===========
NET ASSET VALUE PER UNIT 2,711.59 2,830.65 2,237.75
============ ============ ===========
</TABLE>
STATEMENTS OF OPERATIONS
For the Quarters ended March 31, 1996 and 1995 (unaudited) and
for the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES $ $ $ $ $
Trading Profit (Loss): (unaudited) (unaudited)
Realized 787,501 5,776,949 11,081,716 (878,688) 2,539,342
Net change in unrealized (1,575,420) 2,065,542 (947,973) 556,567 2,029,459
---------- ----------- ----------- ----------- ----------
Total Trading Results (787,919) 7,842,491 10,133,743 (322,121) 4,568,801
Interest income (DWR) 299,604 383,297 1,471,022 1,153,003 694,085
---------- ----------- ----------- ----------- ----------
Total Revenues (488,315) 8,225,788 11,604,765 830,882 5,262,886
---------- ----------- ----------- ----------- ----------
EXPENSES
Brokerage commissions (DWR) 453,306 555,336 1,864,093 2,336,047 1,773,947
Management fees 299,467 338,676 1,307,872 1,346,905 1,157,221
Incentive fees -- 397,367 381,720 -- 19,886
Transaction fees and costs 39,439 42,624 160,238 194,384 141,974
Common administrative expenses 2,655 8,184 8,183 49,101 68,511
---------- ----------- ----------- ----------- ----------
Total Expenses 794,867 1,342,187 3,722,106 3,926,437 3,161,539
---------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) (1,283,182) 6,883,601 7,882,659 (3,095,555) 2,101,347
========== =========== =========== =========== ==========
Net Income (Loss) Allocation:
Limited Partners (1,257,299) 6,774,086 7,753,763 (3,050,650) 2,057,120
General Partner (25,883) 109,515 128,896 (44,905) 44,227
Net Income (Loss) per Unit:
Limited Partners (119.06) 503.75 592.90 (219.47) 178.05
General Partner (119.06) 503.75 592.90 (219.47) 178.05
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
------------ -----------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS $ $ $
Equity in Commodity futures trading accounts: (unaudited)
Cash 38,188,403 42,294,365 42,884,780
Net unrealized gain on open contracts 1,302,524 5,578,294 5,016,857
------------ ------------ -----------
Total Trading Equity 39,490,927 47,872,659 47,901,637
Interest receivable (DWR) 129,771 159,680 193,048
Receivable from DWR 104,533 124,456 213,589
------------ ------------ -----------
Total Assets 39,725,231 48,156,795 48,308,274
============ ============ ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 534,432 639,349 666,178
Common administrative expenses payable 171,929 222,036 266,405
Accrued brokerage commissions (DWR) 105,778 166,128 200,604
Accrued management fees 130,993 158,630 158,895
Accrued transaction fees and costs 18,530 20,978 13,739
------------ ------------ -----------
Total Liabilities 961,662 1,207,121 1,305,821
------------ ------------ -----------
PARTNERS' CAPITAL
Limited Partners (17,599.592, 18,332.818 and
23,505.598 Units, respectively) 37,939,860 45,991,101 46,250,611
General Partner (382.103 Units) 823,709 958,573 751,842
------------ ------------ -----------
Total Partners' Capital 38,763,569 46,949,674 47,002,453
------------ ------------ -----------
Total Liabilities and Partners' Capital 39,725,231 48,156,795 48,308,274
============ ============ ===========
NET ASSET VALUE PER UNIT 2,155.72 2,508.68 1,967.64
============ ============ ===========
</TABLE>
STATEMENTS OF OPERATIONS
For the Quarters ended March 31, 1996 and 1995 (unaudited) and
for the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES $ $ $ $ $
Trading Profit (Loss): (unaudited) (unaudited)
Realized (1,228,640) 3,833,272 14,260,042 913,869 (627,751)
Net change in unrealized (4,275,770) 145,188 561,437 (1,350,056) 3,815,157
---------- ----------- ----------- ----------- -----------
Total Trading Results (5,504,410) 3,978,460 14,821,479 (436,187) 3,187,406
Interest income (DWR) 433,617 526,023 2,061,461 1,744,148 1,445,561
---------- ----------- ----------- ----------- -----------
Total Revenues (5,070,793) 4,504,483 16,882,940 1,307,961 4,632,967
---------- ----------- ----------- ----------- -----------
EXPENSES
Brokerage commissions (DWR) 875,286 1,221,133 3,499,743 4,417,718 4,587,865
Management fees 424,415 452,182 1,828,013 2,014,028 2,375,033
Transaction fees and costs 115,411 115,690 502,332 434,287 348,493
Common administrative expenses 4,533 21,158 21,158 122,423 150,937
---------- ----------- ----------- ----------- -----------
Total Expenses 1,419,645 1,810,163 5,851,246 6,988,456 7,462,328
---------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) (6,490,438) 2,694,320 11,031,694 (5,680,495) (2,829,361)
========== =========== =========== =========== ===========
Net Income (Loss) Allocation:
Limited Partners (6,355,574) 2,648,170 10,824,963 (5,594,569) (2,784,837)
General Partner (134,864) 46,150 206,731 (85,926) (44,524)
Net Income (Loss) per Unit:
Limited Partners (352.96) 120.78 541.04 (219.67) (109.91)
General Partner (352.96) 120.78 541.04 (219.67) (109.91)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
----------- ----------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS $ $ $
Equity in Commodity futures trading accounts: (unaudited)
Cash 99,175,103 104,927,961 111,508,180
Net unrealized gain on open contracts 1,434,910 70,143 268,291
----------- ----------- -----------
Total Trading Equity 100,610,013 104,998,104 111,776,471
Interest receivable (DWR) 364,747 434,153
Receivable from DWR 331,384 -- --
----------- ----------- -----------
Total Assets 100,941,397 105,362,851 112,210,624
=========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 1,230,073 1,044,804 1,589,622
Accrued management fees 334,614 349,039 371,606
Common administrative expenses payable 170,261 267,788 357,130
Accrued brokerage commissions (DWR) 49,896 32,580 --
Accrued transaction fees and costs 2,494 1,629 --
----------- ----------- -----------
Total Liabilities 1,787,338 1,695,840 2,318,358
----------- ----------- -----------
PARTNERS' CAPITAL
Limited Partners (34,331.535, 35,905.625 and
46,994.002 Units, respectively) 97,342,573 101,854,654 108,418,306
General Partner (638.889 Units) 1,811,486 1,812,357 1,473,960
----------- ----------- -----------
Total Partners' Capital 99,154,059 103,667,011 109,892,266
----------- ----------- -----------
Total Liabilities and Partners' Capital 100,941,397 105,362,851 112,210,624
=========== =========== ===========
NET ASSET VALUE PER UNIT 2,835.37 2,836.73 2,307.07
=========== =========== ===========
</TABLE>
STATEMENTS OF OPERATIONS
For the Quarters ended March 31, 1996 and 1995 (unaudited) and
for the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
---------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
REVENUES $ $ $ $ $
Trading Profit (Loss): (unaudited) (unaudited)
Realized (487,455) 9,761,605 27,041,974 (10,447,878) (4,335,118)
Net change in unrealized 1,364,767 17,191,492 (198,148) (1,726,877) 717,487
---------- ----------- ----------- ------------- -----------
Total Trading Results 877,312 26,953,097 26,843,826 (12,174,755) (3,617,631)
Interest income (DWR) 1,020,421 1,244,913 4,912,698 4,129,344 2,937,637
---------- ----------- ----------- ------------- -----------
Total Revenues 1,897,733 28,198,010 31,756,524 (8,045,411) (679,994)
---------- ----------- ----------- ------------- -----------
EXPENSES
Management fees 1,021,255 1,126,941 4,575,372 4,952,206 4,945,676
Brokerage commissions (DWR) 843,558 1,294,926 2,776,225 5,336,659 6,634,741
Transaction fees and costs 50,233 80,724 168,718 339,083 398,959
Common administrative expenses 8,811 39,890 39,890 228,633 223,551
Incentive fees -- -- -- 7,659 1,400,473
---------- ----------- ----------- ------------- -----------
Total Expenses 1,923,857 2,542,481 7,560,205 10,864,240 13,603,400
---------- ----------- ----------- ------------- -----------
NET INCOME (LOSS) (26,124) 25,655,529 24,196,319 (18,909,651) (14,283,394)
========== =========== =========== ============= ===========
Net Income (Loss) Allocation:
Limited Partners (25,253) 25,292,132 23,857,922 (18,664,384) (14,156,711)
General Partner (871) 363,397 338,397 (245,267) (126,683)
Net Income (Loss) per Unit:
Limited Partners (1.36) 568.79 529.66 (383.89) (270.10)
General Partner (1.36) 568.79 529.66 (383.89) (270.10)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Quarter ended March 31, 1996 (unaudited) and
for the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
Dean Witter Cornerstone Fund II
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Partners' Capital, December 31, 1992 11,661.781 26,013,019 566,146 26,579,165
Continuous Offering 2,936.402 7,100,239 -- 7,100,239
Net Income -- 2,057,120 44,227 2,101,347
Redemptions (1,599.188) (3,839,378) -- (3,839,378)
----------- ---------- --------- ----------
Partners' Capital, December 31, 1993 12,998.995 31,331,000 610,373 31,941,373
Continuous Offering 2,948.327 7,098,104 -- 7,098,104
Net Loss -- (3,050,650) (44,905) (3,095,555)
Redemptions (1,927.872) (4,492,939) (78,981) (4,571,920)
----------- ---------- --------- ----------
Partners' Capital, December 31, 1994 14,019.450 30,885,515 486,487 31,372,002
Offerings of Units 70.020 178,837 -- 178,837
Net Income -- 7,753,763 128,896 7,882,659
Redemptions (3,198.372) (8,604,610) -- (8,604,610)
----------- ---------- --------- ----------
Partners' Capital, December 31, 1995 10,891.098 30,213,505 615,383 30,828,888
Continuous Offering 21.937 60,182 -- 60,182
Net Loss -- (1,257,299) (25,883) (1,283,182)
Redemptions (324.590) (894,342) -- (894,342)
----------- ---------- --------- ----------
Partners' Capital, March 31, 1996 10,588.445 28,122,046 589,500 28,711,546
=========== ========== ========= ==========
<CAPTION>
Dean Witter Cornerstone Fund III
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Partners' Capital, December 31, 1992 26,249.121 59,369,475 930,612 60,300,087
Continuous Offering 4,324.292 9,819,616 -- 9,819,616
Net Loss -- (2,784,837) (44,524) (2,829,361)
Redemptions (4,899.608) (11,133,649) -- (11,133,649)
----------- ---------- --------- ----------
Partners' Capital, December 31, 1993 25,673.805 55,270,605 886,088 56,156,693
Continuous Offering 2,630.127 5,299,578 -- 5,299,578
Net Loss -- (5,594,569) (85,926) (5,680,495)
Redemptions (4,416.231) (8,725,003) (48,320) (8,773,323)
----------- ---------- --------- ----------
Partners' Capital, December 31, 1994 23,887.701 46,250,611 751,842 47,002,453
Offerings of Units 25.778 49,000 -- 49,000
Net Income -- 10,824,963 206,731 11,031,694
Redemptions (5,198.558) (11,133,473) -- (11,133,473)
----------- ---------- --------- ----------
Partners' Capital, December 31, 1995 18,714.921 45,991,101 958,573 46,949,674
Net Loss -- (6,355,574) (134,864) (6,490,438)
Redemptions (733.226) (1,695,667) -- (1,695,667)
----------- ---------- --------- ----------
Partners' Capital, March 31, 1996 17,981.695 37,939,860 823,709 38,763,569
=========== ========== ========= ==========
<CAPTION>
Dean Witter Cornerstone Fund IV
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Partners' Capital, December 31, 1992 35,130.725 102,678,152 1,345,910 104,024,062
Continuous Offering 15,029.077 45,950,637 500,000 46,450,637
Net Loss -- (14,156,711) (126,683) (14,283,394)
Redemptions (3,633.498) (10,990,675) -- (10,990,675)
----------- ------------ ---------- -----------
Partners' Capital, December 31, 1993 46,526.304 123,481,403 1,719,227 125,200,630
Continuous Offering 8,032.577 20,753,129 -- 20,753,129
Net Loss -- (18,664,384) (245,267) (18,909,651)
Redemptions (6,925.990) (17,151,842) -- (17,151,842)
----------- ------------ ---------- -----------
Partners' Capital, December 31, 1994 47,632.891 108,418,306 1,473,960 109,892,266
Offerings of Units 77.319 212,691 -- 212,691
Net Income -- 23,857,922 338,397 24,196,319
Redemptions (11,165.696) (30,634,265) -- (30,634,265)
----------- ------------ ---------- -----------
Partners' Capital, December 31, 1995 36,544.514 101,854,654 1,812,357 103,667,011
Continuous Offering 17.140 48,482 -- 48,482
Net Loss -- (25,253) (871) (26,124)
Redemptions (1,591.230) (4,535,310) -- (4,535,310)
----------- ------------ ---------- -----------
Partners' Capital, March 31, 1996 34,970.424 97,342,573 1,811,486 99,154,059
=========== ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Quarters Ended March 31, For the Years Ended December 31,
-------------------------------- -----------------------------------------
1996 1995 1995 1994 1993
$ $ $ $ $
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Dean Witter Cornerstone Fund II
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (1,283,182) 6,883,601 7,882,659 (3,095,555) 2,101,347
Noncash item included in net income (loss):
Net change in unrealized 1,575,420 (2,065,542) 947,973 (556,567) (2,029,459)
(Increase) decrease in operating assets:
Interest receivable (DWR) 11,725 (17,074) 17,183 (61,279) (4,984)
Receivable from DWR (38,707) 44,382 24,860 (42,174) (5,264)
Increase (decrease) in operating liabilities:
Accrued incentive fees (307,567) 397,367 307,567 (15,336) 15,336
Accrued management fees (8,202) 19,545 (1,622) (1,443) 16,994
Accrued brokerage commissions (DWR) (22,469) 19,188 13,185 (972) 360
Common administrative expenses payable (29,368) 8,184 (29,854) (14,074) 62,518
Accrued transaction fees and costs (1,421) 2,056 1,237 (52) (415)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) operating activities (103,771) 5,291,707 9,163,188 (3,787,452) 156,433
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 60,232 72,748 178,837 7,098,104 7,100,239
Increase (decrease) in redemptions payable 167,120 3,061,215 (251,210) 151,917 (279,349)
Redemptions of units (894,392) (4,551,350) (8,604,610) (4,571,920) (3,839,378)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) financing activities (667,040) (1,417,387) (8,676,983) 2,678,101 2,981,512
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash (770,811) 3,874,320 486,205 (1,109,351) 3,137,945
Balance at beginning of period 28,057,189 27,570,984 27,570,984 28,680,335 25,542,390
----------- ----------- ----------- ----------- -----------
Balance at end of period 27,286,378 31,445,304 28,057,189 27,570,984 28,680,335
=========== =========== =========== =========== ===========
<CAPTION>
Dean Witter Cornerstone Fund III
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (6,490,438) 2,694,320 11,031,694 (5,680,495) (2,829,361)
Noncash item included in net income (loss):
Net change in unrealized 4,275,770 (145,188) (561,437) 1,350,056 (3,815,157)
(Increase) decrease in operating assets:
Interest receivable (DWR) 29,909 8,920 33,368 (79,962) 21,271
Receivable from DWR 19,923 97,305 89,133 (213,589) 32,428
Increase (decrease) in operating liabilities:
Common administrative expenses payable (50,107) 21,158 (44,369) 11,260 137,662
Accrued brokerage commissions (DWR) (60,350) (32,874) (34,476) 77,852 (65,492)
Accrued management fees (27,637) 1,926 (265) (30,263) (14,483)
Accrued transaction fees and costs (2,448) 14,139 7,239 4,810 (5,129)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) operating activities (2,305,378) 2,659,706 10,520,887 (4,560,331) (6,538,261)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units -- 40,000 49,000 5,299,578 9,819,616
Increase (decrease) in redemptions payable (104,917) 811,876 (26,829) 75,572 (201,692)
Redemptions of units (1,695,667) (2,968,543) (11,133,473) (8,773,323) (11,133,649)
----------- ----------- ----------- ----------- -----------
Net cash used for financing activities (1,800,584) (2,116,667) (11,111,302) (3,398,173) (1,515,725)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash (4,105,962) 543,039 (590,415) (7,958,504) (8,053,986)
Balance at beginning of period 42,294,365 42,884,780 42,884,780 50,843,284 58,897,270
----------- ----------- ----------- ----------- -----------
Balance at end of period 38,188,403 43,427,819 42,294,365 42,884,780 50,843,284
=========== =========== =========== =========== ===========
<CAPTION>
Dean Witter Cornerstone Fund IV
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (26,124) 25,655,529 24,196,319 (18,909,651) (14,283,394)
Noncash item included in net income (loss):
Net change in unrealized (1,364,767) (17,191,492) 198,148 1,726,877 (717,487)
(Increase) decrease in operating assets:
Interest receivable (DWR) 33,363 5,109 69,406 (184,980) (18,641)
Increase (decrease) in operating liabilities:
Accrued management fees (14,425) 64,281 (22,567) (41,612) 51,567
Common administrative expenses payable (97,527) 39,890 (89,342) 8,605 206,517
Accrued brokerage commissions (DWR) 17,316 -- 32,580 -- (120,420)
Accrued transaction fees and costs 865 -- 1,629 -- (6,924)
Accrued incentive fees -- -- -- -- (3,722,665)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) operating activities (1,451,299) 8,573,317 24,386,173 (17,400,761) (18,611,447)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 48,482 23,746 212,691 20,753,129 46,450,637
Increase (decrease) in redemptions payable 185,269 3,525,211 (544,818) 519,604 321,383
Redemptions of units (4,535,310) (9,920,321) (30,634,265) (17,151,842) (10,990,675)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) financing activities (4,301,559) (6,371,364) (30,966,392) 4,120,891 35,781,345
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash (5,752,858) 2,201,953 (6,580,219) (13,279,870) 17,169,898
Balance at beginning of period 104,927,961 111,508,180 111,508,180 124,788,050 107,618,152
----------- ----------- ----------- ----------- -----------
Balance at end of period 99,175,103 113,710,133 104,927,961 111,508,180 124,788,050
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS
(the information with respect to 1996 is unaudited)
1. Summary of Significant Accounting Policies
Organization--Dean Witter Cornerstone Fund II, Dean Witter Cornerstone Fund
III and Dean Witter Cornerstone Fund IV (individually, a "Partnership", or
collectively, the "Partnerships") are limited partnerships organized to engage
in the speculative trading of commodity futures contracts and forward contracts
on foreign currencies. The general partner for each Partnership is Demeter
Management Corporation (the "General Partner"). The commodity broker is Dean
Witter Reynolds Inc. ("DWR"). Both DWR and the General Partner are wholly-owned
subsidiaries of Dean Witter, Discover & Co.
The General Partner is required to maintain a 1% minimum interest in the
equity of each Partnership and in-come (losses) are shared by the General and
Limited Partners based upon their proportional ownership interests.
Basis of Accounting--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements.
Revenue Recognition--Commodity futures contracts and forward contracts on
foreign currencies are open commitments until settlement date. They are valued
at market and the resulting unrealized gains and losses are reflected in income.
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 during such month. For purposes of such interest payments in Dean
Witter Cornerstone Fund IV, Net Assets do not include monies due the Partnership
on forward contracts and other commodity interests, but not actually received.
Net Income (Loss) per Unit--Net income (loss) per Unit is computed using
the weighted average number of units outstanding during the period.
Equity in Commodity Futures Trading Accounts--The Partnerships' assets
"Equity in Commodity futures trading accounts" consists of cash on deposit at
DWR to be used as margin for trading and the net asset or liability related to
unrealized gains or losses on open contracts. The asset or liability related to
the unrealized gains or losses on forward contracts is presented as a net amount
because each Partnership has a master netting agreement with DWR.
Brokerage Commissions and Related Transaction Fees and Costs--Brokerage
commissions for each Partnership are accrued at 80% of DWR's published
non-member rates on a half-turn basis.
Through March 31, 1995, brokerage commissions were capped at 1% per month
of the adjusted Net Assets allocated to each trading program employed by a
Trading Advisor. Effective April 1, 1995, the cap was reduced to 3/4 of 1%.
Related transaction fees and costs are accrued on a half-turn basis.
Operating Expenses--Each Partnership has entered into an exchange agreement
pursuant to which certain common administrative expenses (i.e., legal, auditing,
accounting, filing fees and other related expenses) are shared by each of the
Partnerships based upon the number of Units of each Partnership outstanding
during the month in which such expenses are incurred. In addition, the
Partnerships incur monthly management fees and may incur incentive fees. The
General Partner 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
revenues and expenses for income tax purposes.
Distributions--Distributions, other than on redemptions of Units, are made
on a pro-rata basis at the sole discretion of the General Partner. No
distributions have been made to date.
Continuing Offering--Through September 26, 1994, Units of each Partnership
were offered at a price equal to 107.625% of the Net Asset Value per Unit as of
the opening of business on the first day of the month, which price included a 5%
selling commission and a 2.5% charge for expenses relating to the continuing
offering of Units. These expenses were shared by the Partnerships. Any funds
received by DWR as a result of the Continuing Offering Expense charges that were
in excess of the Continuing Offering Expenses incurred, were contributed
pro-rata to the Partnerships, as a contribution of capital to the Partnerships
for which no Units were issued. On September 26, 1994, the Continuing Offering
was discontinued.
Redemptions--After an initial 180-day period, 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 the
General Partner.
If the proceeds of a redemption are reinvested in any of the Partnerships
within 180 days, the General Partner will waive the selling commissions and
continuous offering expense charges on the amount reinvested.
F-7
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(the information with respect to 1996 is unaudited)
Exchanges--On the last day of the first month, which occurs more than 180
days after a person first becomes a Limited Partner in any of the Partnerships,
and the end of each month thereafter, Limited Partners may transfer their
investment among the Partnerships (subject to certain restrictions outlined in
the Limited Partnership Agreement) without paying additional charges.
Dissolution of the Partnership--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 the
Limited Partnership Agreement.
2. Related Party Transactions
Each Partnership pays brokerage commissions to DWR on trades executed on
its behalf as described in Note 1. Each Partnership's cash is on deposit with
DWR in commodity trading accounts to meet margin requirements as needed. DWR
pays interest on these funds as described in Note 1.
3. Trading Advisors
The General Partner, on behalf of each Partnership, retains certain
commodity trading advisors to make all trading decisions for the Partnerships.
The trading advisors for each Partnership as of December 31, 1995 were as
follows:
Dean Witter Cornerstone Fund II
Abacus Asset Management Inc.
John W. Henry & Co., Inc.
Dean Witter Cornerstone Fund III
CCA Capital Management, Inc.
Sunrise Capital Management
Dean Witter Cornerstone Fund IV
John W. Henry & Co., Inc.
Sunrise Capital Management
Each trading advisor owns at least ten Units in its respective Partnership.
Compensation to the trading advisors by the Partnerships consists of a
management fee and an incentive fee as follows:
Management Fee--The management fee is accrued at the rate of 1/3 of 1% per
month of the Net Assets under management by each trading advisor at each month
end.
Incentive Fee--Each Partnership will pay an annual incentive fee equal to
15% of the "New Appreciation" in Net Assets as of the end of each annual
incentive period ending December 31, except for Dean Witter Cornerstone Fund IV,
which will pay incentive fees at the end of each annual incentive period ending
May 31. 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
instances 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 advisor in the month of such redemption.
4. Financial Instruments
The Partnerships trade futures and forward contracts in interest rates,
stock indices, commodities, currencies, petroleum and precious metals. Risk
arises from changes in the value of these contracts and the potential inability
of counterparties to perform under the terms of the contracts. There are
numerous factors which may significantly influence the market value of these
contracts, including interest rate volatility. At March 31, 1996, December 31,
1995 and 1994, open contracts were:
F-8
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Cornerstone II
-----------------------------------------------
Contract or Notional Amount
-----------------------------------------------
March 31, December 31,
1996 1995 1994
----------- ----------------------------
(unaudited)
<S> <C> <C> <C>
$ $ $
Exchange-Traded Financial Futures Contracts
Commitments to Purchase................................. -- 140,924,000 7,734,000
Commitments to Sell..................................... 87,695,000 3,298,000 --
Commodity Futures:
Commitments to Purchase................................. 42,001,000 53,994,000 23,692,000
Commitments to Sell..................................... 2,497,000 10,484,000 14,973,000
Foreign Futures:
Commitments to Purchase................................. 1,218,000 51,681,000 8,655,000
Commitments to Sell..................................... 29,201,000 1,656,000 161,925,000
Off-Exchange-Traded Forward Currency Contracts
Commitments to Purchase................................. 30,660,000 15,585,000 28,327,000
Commitments to Sell..................................... 21,266,000 44,881,000 32,192,000
<CAPTION>
Cornerstone III
-----------------------------------------------
Contract or Notional Amount
-----------------------------------------------
March 31, December 31,
1996 1995 1994
----------- ----------------------------
(unaudited)
<S> <C> <C> <C>
$ $ $
Exchange-Traded Financial Futures Contracts
Commitments to Purchase ................................ 17,420,000 239,465,000 54,158,000
Commitments to Sell .................................... 139,377,000 39,640,000 204,207,000
Commodity Futures:
Commitments to Purchase ................................ 67,656,000 115,420,000 48,926,000
Commitments to Sell .................................... 2,751,000 19,794,000 14,006,000
Foreign Futures:
Commitments to Purchase ................................ 34,992,000 139,878,000 116,919,000
Commitments to Sell .................................... 49,953,000 22,202,000 169,271,000
Off-Exchange-Traded Forward Currency Contracts
Commitments to Purchase ................................ -- -- 29,664,000
Commitments to Sell .................................... -- -- 84,416,000
<CAPTION>
Cornerstone IV
-----------------------------------------------
Contract or Notional Amount
-----------------------------------------------
March 31, December 31,
1996 1995 1994
----------- ----------------------------
(unaudited)
<S> <C> <C> <C>
$ $ $
Exchange-Traded Financial Futures Contracts
Commitments to Purchase ................................ 22,853,000 31,917,000 --
Commitments to Sell .................................... 116,899,000 70,298,000 --
Off-Exchange-Traded Forward Currency Contracts
Commitments to Purchase ................................ 309,776,000 116,547,000 504,027,000
Commitments to Sell .................................... 103,968,000 170,990,000 645,892,000
</TABLE>
A portion of the amounts indicated as off-balance-sheet risk in forward
foreign currency contracts is due to offsetting forward commitments to purchase
and to sell the same currency on the same date in the future. These commitments
are economically offsetting, but are not offset in the forward market until the
settlement date.
The unrealized gains on open contracts are reported as a component of
"Equity in Commodity futures trading accounts" on the Statements of Financial
Condition and totaled at March 31, 1996, December 31, 1995 and 1994,
respectively, $1,792,687, $3,368,107 and $4,316,080 for Cornerstone II,
$1,302,524,
F-9
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
$5,578,294 and $5,016,857 for Cornerstone III and $1,434,910, $70,143 and
$268,291 for Cornerstone IV.
For Cornerstone II, of the $1,792,687 net unrealized gain on open contracts
at March 31, 1996, $1,774,628 related to exchange-traded futures contracts and
$18,059 related to off-exchange-traded forward currency contracts. Of the
$3,368,107 net unrealized gain on open contracts at December 31, 1995,
$3,448,812 related to exchange-traded futures contracts and ($80,705) related to
off-exchange-traded forward currency contracts. Of the $4,316,080 net unrealized
gain on open contracts at December 31, 1994, $4,296,011 related to
exchange-traded futures contracts and $20,069 related to off-exchange-traded
forward currency contracts.
For Cornerstone III, the net unrealized gain on open contracts at March 31,
1996 and December 31, 1995 related entirely to exchange-traded futures. Of the
$5,016,857 net unrealized gain on open contracts at December 31, 1994,
$5,788,691 related to exchange-traded futures contracts and ($771,834) related
to off-exchange-traded forward currency contracts.
For Cornerstone IV, of the $1,434,910 net unrealized gain on open contracts
at March 31, 1996, $879,588 related to exchange-traded futures contracts and
$555,322 related to off exchange-traded forward currency contracts. Of the
$70,143 net unrealized gain on open contracts at December 31, 1995, $534,487
related to exchange-traded futures contracts and ($464,344) related to
off-exchange-traded forward currency contracts. The net unrealized gain on open
contracts at December 31, 1994, related entirely to off-exchange-traded forward
currency contracts.
The contract amounts in the above table represent the Partnership's extent
of involvement in the particular class of financial instrument, but not the
credit risk associated with counterparty nonperformance. The credit risk
associated with these instruments is limited to the amounts reflected in the
Partnerships' Statements of Financial Condition.
Exchange-traded contracts and off-exchange-traded forward currency
contracts held by the Partnerships at March 1996, December 1995 and 1994 mature
as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1994
------------- ---------------------------------
(unaudited)
<S> <C> <C> <C>
Cornerstone II
Exchange-Traded Contracts........................... June 1997 December 1996 September 1995
Off-Exchange-Traded Forward Currency Contracts...... June 1996 December 1996 March 1995
Cornerstone III
Exchange-Traded Contracts........................... December 1996 December 1996 May 1995
Off-Exchange-Traded Forward Currency Contracts...... -- January 1996 March 1995
Cornerstone IV
Exchange-Traded Contracts........................... June 1996 March 1996 --
Off-Exchange-Traded Forward Currency Contracts...... June 1996 January 1996 March 1995
</TABLE>
The Partnerships also have credit risk because the sole counterparty, with
respect to most of the Partnerships' assets, is DWR. Exchange-traded futures
contracts are marked to market on a daily basis, with variations in value
settled on a daily basis. DWR, as the futures commission merchant of all of the
Partnership's exchange-traded futures contracts, is required pursuant to
regulations of the Commodity Futures Trading Commission to segregate from its
own assets, and for the sole benefit of its commodity customers, all funds held
by DWR with respect to exchange-traded futures contracts including an amount
equal to the net unrealized gain on all open futures contracts which funds
totaled at March 31, 1996, December 31, 1995 and 1994 respectively, $29,061,006,
$31,506,001 and $31,866,995 for Cornerstone II, $39,490,927, $47,872,659 and
$48,673,471 for Cornerstone III, $100,054,691, $105,462,448 and $111,508,180 for
Cornerstone IV. With respect to the Partnership's off-exchange-traded forward
currency contracts, there are no daily settlements of variations in value nor is
there any requirement that an amount equal to the net unrealized gain on open
forward contracts be segregated. With respect to
F-10
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS -- (Concluded)
those off-exchange-traded forward currency contracts, the Partnerships are at
risk to the ability of DWR, the counterparty on all of such contracts, to
perform.
For the quarter ended March 31, 1996 and for the year ended December 31,
1995 the average fair value of financial instruments held for trading purposes
was as follows:
<TABLE>
<CAPTION>
Cornerstone II
------------------------------------------------------
For the quarter ended For the year ended
March 1996 December 1995
------------------------- -------------------------
Assets Liabilities Assets Liabilities
---------- -- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$ $ $ $
Exchange-Traded Contracts:
Financial Futures .................................. 48,896,000 51,713,000 75,146,000 7,443,000
Commodity Futures .................................. 43,478,000 7,954,000 36,847,000 12,456,000
Foreign Futures .................................... 29,454,000 15,501,000 62,270,000 57,113,000
Off-Exchange-Traded Forward Currency Contracts ....... 28,139,000 35,702,000 16,455,000 23,929,000
<CAPTION>
Cornerstone III
------------------------------------------------------
For the quarter ended For the year ended
March 1996 December 1995
------------------------- -------------------------
Assets Liabilities Assets Liabilities
---------- -- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$ $ $ $
Exchange-Traded Contracts:
Financial Futures .................................. 142,334,000 78,196,000 125,222,000 74,782,000
Commodity Futures .................................. 99,478,000 10,049,000 67,127,000 16,871,000
Foreign Futures .................................... 104,658,000 38,521,000 122,725,000 68,993,000
Off-Exchange-Traded Forward Currency Contracts ....... -- -- 8,899,000 25,325,000
<CAPTION>
Cornerstone IV
------------------------------------------------------
For the quarter ended For the year ended
March 1996 December 1995
------------------------- -------------------------
Assets Liabilities Assets Liabilities
---------- -- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$ $ $ $
Exchange-Traded Financial Futures Contracts .......... 13,692,000 100,967,000 10,215,000 22,213,000
Off-Exchange-Traded Forward Currency Contracts ....... 258,678,000 221,591,000 273,150,000 311,898,000
</TABLE>
5. UNAUDITED INTERIM INFORMATION
The unaudited financial statements included herein and the related
financial information in the footnotes include, in the opinion of management,
all adjustments (including normal and recurring adjustments) necessary for a
fair presentation of the financial position and results of operations at and for
the three months ended March 31, 1996.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Demeter Management Corporation:
We have audited the accompanying statements of financial condition of Demeter
Management Corporation (a wholly-owned subsidiary of Dean Witter, Discovery &
Co.) (the "Company") as of December 31, 1995 and 1994. These statements of
financial condition are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such statements of financial condition present fairly, in all
material respects, the financial position of Demeter Management Corporation as
of December 31, 1995 and 1994 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
March 1, 1996
New York, New York
F-12
<PAGE>
DEMETER MANAGEMENT CORPORATION
(Wholly-owned subsidiary of Dean Witter, Discover & Co.)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
------------ ----------------------------
1996 1995 1994
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS $ $ $
Investments in affiliated partnerships (Note 2) ..................... 16,592,322 17,788,814 12,833,311
Income taxes receivable ............................................. 664,301 -- --
Receivable from affiliated partnership .............................. 1,127 1,154 1,268
------------ ------------ -----------
TOTAL ASSETS .................................................. 17,257,750 17,789,968 12,834,579
============ ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Payable to Parent (Note 3) ....................................... 15,695,868 15,314,134 11,630,183
Accrued expenses ................................................. 29,079 32,579 20,079
------------ ------------ -----------
TOTAL LIABILITIES .............................................. 15,724,947 15,346,713 11,650,262
------------ ------------ -----------
STOCKHOLDER'S EQUITY:
Common stock, no par value;
Authorized 1,000 shares;
Issued and outstanding 100 shares
at stated value of $500 per share .............................. 50,000 50,000 50,000
Additional paid-in capital ....................................... 111,170,000 111,170,000 98,170,000
Retained earnings ................................................ 1,382,803 2,293,255 1,034,317
------------ ------------ -----------
112,602,803 113,513,255 99,254,317
Less: Notes receivable from Parent (Note 4) ...................... (111,070,000) (111,070,000) (98,070,000)
------------ ------------ -----------
TOTAL STOCKHOLDER'S EQUITY ..................................... 1,532,803 2,443,255 1,184,317
------------ ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY .......................................... 17,257,750 17,789,968 12,834,579
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
DEMETER MANAGEMENT CORPORATION
(Wholly-owned subsidiary of Dean Witter Discover & Co.)
NOTES TO STATEMENTS OF FINANCIAL CONDITION
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Demeter Management Corporation ("Demeter") is a wholly-owned subsidiary of
Dean Witter, Discover & Co. (the "Parent").
Demeter manages the following commodity pools as their sole general
partner: Dean Witter Cornerstone Fund II, Dean Witter Cornerstone Fund III, Dean
Witter Cornerstone Fund IV, Columbia Futures Fund, Dean Witter Diversified
Futures Fund Limited Partnership ("DWDFF"), Dean Witter Diversified Futures Fund
II L.P., Dean Witter Diversified Futures Fund III L.P., Dean Witter Multi-Market
Portfolio, L.P. (formerly, Dean Witter Principal Guaranteed Fund L.P.,
("DWPGF")), Dean Witter Principal Guaranteed Fund II L.P., ("DWPGFII"), Dean
Witter Principal Plus Fund L.P., Dean Witter Principal Plus Fund Management
L.P., Dean Witter Principal Secured Futures Fund L.P., Dean Witter Select
Futures Fund L.P. ("DWSFF"), Dean Witter Global Perspective Portfolio L.P., Dean
Witter World Currency Fund L.P., Dean Witter Institutional Balanced Portfolio
Account I L.P., Dean Witter Institutional Account II L.P., DWFCM International
Access Fund L.P., Dean Witter Anchor Institutional Balanced Portfolio Account I
L.P., Dean Witter Spectrum Balanced L.P., Dean Witter Spectrum Strategic L.P.,
Dean Witter Spectrum Technical L.P., DWR Chesapeake L.P. and DWR Institutional
Balanced Portfolio Account III L.P.
Each of the commodity pools is a limited partnership organized to engage in
the speculative trading of commodity futures contracts, forward contracts on
foreign currencies and other commodity interests.
Demeter reopened DWDFF for additional investment and on June 29, 1995 DWDFF
registered with the Securities and Exchange Commission 75,000 units which were
to investors for a limited time in a public offering.
Income Taxes--The results of operations of Demeter are included in the
consolidated federal income tax return of the Parent Income Taxes. Income tax
expense is calculated on a separate company basis.
Basis of Accounting--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements.
2. INVESTMENTS IN AFFILIATED PARTNERSHIPS
The limited partnership agreement of each commodity pool requires Demeter
to maintain a general partnership interest in each partnership, generally in an
amount equal to, but not less than, 1 percent of the aggregate capital
contributed to the partnership by all partners.
The total assets, liabilities and partners' capital of all the funds
managed by Demeter at March 31, 1996, December 31, 1995 and December 31, 1994
were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
------------- -----------------------------
1996 1995 1994
------------- ------------- -----------
(Unaudited)
$ $ $
<S> <C> <C> <C>
Total assets ......................................... 1,011,239,012 1,091,082,360 907,037,211
Total liabilities .................................... 18,997,012 20,934,451 22,472,852
Total partners' capital .............................. 992,242,000 1,070,147,909 884,564,359
</TABLE>
Demeter's investments in the above limited partnerships are carried at
market value with changes in such market value reflected currently in
operations.
3. PAYABLE TO PARENT
The payable to Parent is primarily for amounts due for the purchase of
partnership investments and income tax payments made by the Parent on behalf of
Demeter.
F-14
<PAGE>
4. NET WORTH REQUIREMENT
At March 31, 1996, December 31, 1995 and 1994, Demeter held non-interest
bearing notes from the Parent that were payable on demand. These notes were
received in connection with additional capital contributions aggregating
$111,070,000, $111,070,000 and $98,070,000, respectively.
The limited partnership agreement of each commodity pool requires Demeter
to maintain its net worth at an amount not less than 10% of the capital
contributions by all partners in each pool in which Demeter is the general
partner (15% if the capital contributions to any partnership are less than
$2,500,000, or $250,000, whichever is less).
In calculating this requirement, Demeter's interests in each limited
partnership and any amounts receivable from or payable to such partnerships are
excluded from net worth. Notes receivable from the Parent are included in net
worth for purposes of this calculation.
5. SUBSEQUENT EVENTS
Management has determined to reopen DWSFF for additional investment and
will register with the Securities and Exchange Commission 60,000 Units to be
offered to investors for a limited time in a public offering.
Management has determined to terminate DWPGFII as of March 31, 1996.
DWPGFII will be liquidated and holders of units as of March 31, 1996 will
receive a final distribution equal to the net asset value per unit on that date
multiplied by their respective number of units.
In November of 1995, Demeter entered into a limited partnership agreement
as General Partner in DWR/JWH Futures Fund L.P. ("JWH"), a commodity pool which
offered units to investors in an initial private offering period ending January
31, 1996 and began trading on February 1, 1996. Demeter's initial investment in
JWH was $75,000.
6. UNAUDITED INTERIM INFORMATION
The unaudited financial statement included herein and the related financial
information in the footnotes include, in the opinion of management, all
adjustments (including normal and recurring adjustments) necessary for a fair
presentation of the financial position at March 31, 1996.
F-15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
TABLE OF CONTENTS TO FORM OF LIMITED PARTNERSHIP AGREEMENT FOR DEAN WITTER
CORNERSTONE FUNDS II, III, AND IV
Page
----
<S> <C>
1. Formation; Name ............................................................................................. A-1
2. Office ...................................................................................................... A-1
3. Business .................................................................................................... A-1
4. Term; Dissolution; Fiscal Year .............................................................................. A-1
(a) Term .................................................................................................. A-1
(b) Dissolution ........................................................................................... A-2
(c) Fiscal Year ........................................................................................... A-2
5. Net Worth of General Partner ................................................................................ A-2
6. Dean Witter Cornerstone Funds Exchange Agreement ............................................................ A-2
7. Capital Contributions and Offering of Units of Limited Partnership Interest ................................. A-3
8. Allocation of Profits and Losses; Accounting; Other Matters ................................................. A-5
(a) Capital Accounts ...................................................................................... A-5
(b) Monthly Allocations ................................................................................... A-5
(c) Allocation of Profit and Loss for Federal Income Tax Purposes ......................................... A-6
(d) Definitions; Accounting ............................................................................... A-7
(e) Expenses and Limitations Thereof ...................................................................... A-7
(f) Limited Liability of Limited Partners ................................................................. A-8
(g) Return of Limited Partner's Capital Contribution ...................................................... A-8
(h) Distributions ......................................................................................... A-8
9. Management and Trading Policies ............................................................................. A-8
(a) Management of the Partnership ......................................................................... A-8
(b) Trading Managers ...................................................................................... A-9
(c) General Trading Policies .............................................................................. A-10
(d) Changes to Trading Policies ........................................................................... A-11
(e) Miscellaneous ......................................................................................... A-11
10. Audits; Reports to Limited Partners ......................................................................... A-12
11. Transfer; Redemption of Units; Exchange Privilege ........................................................... A-12
(a) Transfer .............................................................................................. A-12
(b) Redemption ............................................................................................ A-13
(c) Exchange Privilege .................................................................................... A-13
12. Admission of Additional Partners ............................................................................ A-14
13. Special Power of Attorney ................................................................................... A-14
14. Withdrawal of a Partner ..................................................................................... A-15
15. No Personal Liability for Return of Capital ................................................................. A-15
16. Indemnification ............................................................................................. A-15
(a) Indemnification by the Partnership .................................................................... A-15
(b) Indemnification by Partners ........................................................................... A-16
17. Amendments; Meetings ........................................................................................ A-16
(a) Amendments with Consent of the General Partner ........................................................ A-16
(b) Meetings .............................................................................................. A-16
(c) Amendments and Actions without Consent of the General Partner ......................................... A-16
18. Governing Law ............................................................................................... A-16
19. Miscellaneous ............................................................................................... A-16
(a) Priority among Limited Partners ....................................................................... A-16
(b) Notices ............................................................................................... A-17
(c) Binding Effect ........................................................................................ A-17
(d) Captions .............................................................................................. A-17
Annex --Request for Redemption .............................................................................. A-18
Annex --Request for Exchange ................................................................................ A-20
</TABLE>
<PAGE>
EXHIBIT A
FORM OF LIMITED PARTNERSHIP AGREEMENT
FOR DEAN WITTER CORNERSTONE FUNDS II, III, and IV
[Bracketed language] not included in Dean Witter Cornerstone Fund IV
Italicized language included only in Dean Witter Cornerstone Fund IV
This Agreement of Limited Partnership, made in New York, New York as of
[December 7, 1983, and amended as of May 11, 1984,] December 11, 1986, by and
between Demeter Management Corporation, a Delaware corporation (the "General
Partner"), and the other parties who shall execute this Agreement, whether in
counterpart, by separate instrument, or otherwise, as limited partners
(collectively "Limited Partners"; the General Partner and Limited Partners may
be collectively referred to herein as "Partners").
WITNESSETH:
WHEREAS, the parties hereto desire to form a limited partnership for the
purpose of speculative trading in commodities;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Formation; Name.
The parties hereto do hereby form a limited partnership under the New York
Uniform Limited Partnership Act, as amended and in effect on the date hereof
(the "Act"). The name of the limited partnership is DEAN WITTER CORNERSTONE
FUND__(the "Partnership"). The General Partner shall execute and file a
Certificate of Limited Partnership of the Partnership (the "Certificate of
Limited Partnership") and publish a copy of the same or a notice containing the
substance thereof in accordance with the Act and shall execute, file, record,
and publish as appropriate such amendments, assumed name certificates, and other
documents as are or become necessary or advisable as determined by the General
Partner. Each Limited Partner hereby undertakes to furnish to the General
Partner a power of attorney which may be filed with the Certificate of Limited
Partnership and any amendments thereto and such additional information as is
required from such Partner to complete such documents and to execute and
cooperate in the filing, recording, or publishing of such documents at the
request of the General Partner.
2. Office.
The principal office of the Partnership shall be Two World Trade Center,
22nd Floor, New York, New York 10048, or such other place as the General Partner
may designate from time to time.
3. Business.
The Partnership's business and general purpose is to trade, buy, sell, or
otherwise acquire, hold, or dispose of commodities (including foreign
currencies, mortgage-backed securities, money market instruments, and any other
securities or items which are now, or may hereafter be, the subject of futures
contract trading), commodity futures contracts, commodity forward contracts,
foreign exchange commitments, [exchange-traded] commodity options, spot (cash)
commodities and currencies, and any rights pertaining thereto. Initially the
Partnership's principal business is to trade, buy, sell, or otherwise acquire,
hold, or dispose of commodity interest contracts on, for, or with respect to
domestic and foreign currencies and currency-related items. The objective of the
Partnership's business is appreciation of its assets through speculative
trading.
4. Term; Dissolution; Fiscal Year.
(a) Term. The term of the Partnership shall commence upon the filing of the
Certificate of Limited Partnership in the Office of the County Clerk of New York
County, New York and the effectuation of the first of the weekly publications of
a copy of the same or a notice containing the substance thereof pursuant to the
Act and shall end upon the first to occur of the following: (i) September 30,
2025; (ii) receipt by the General Partner of an election to dissolve the
Partnership at a specified time by Limited Partners owning more than 50% of the
Units of Limited Partnership Interest then outstanding, notice of which is sent
by registered mail to
A-1
<PAGE>
the General Partner not less than 90 days prior to the effective date of such
dissolution; (iii) withdrawal, insolvency, or dissolution of the General Partner
(unless a new general partner is elected pursuant to Section 17(c)); (iv) a
decline in the Net Asset Value of a Unit of Limited Partnership Interest to less
than $250; (v) a decline in the Partnership's aggregate Net Assets to or below
$250,000; (vi) a determination by the General Partner that the Partnership's
aggregate Net Assets in relation to the operating expenses of the Partnership
make it unreasonable or imprudent to continue the business of the Partnership;
or (vii) the occurrence of any event which shall make it unlawful for the
existence of the Partnership to be continued, or (viii) upon the enactment of
any law or adoption of any rule, regulation, or policy by any regulatory
authority having jurisdiction which shall make it unlawful, unreasonable, or
imprudent for the principal business of the Partnership to be continued.
(b) Dissolution. Upon the occurrence of an event causing the termination of
the Partnership, the Partnership shall terminate and be dissolved. Dissolution,
payment of creditors, and distribution of the Partnership's assets shall be
effected as soon as practicable in accordance with the Act, except that the
General Partner and each Limited Partner (and any assignee) shall share in the
assets of the Partnership pro rata in accordance with such Partner's respective
capital account, less any amount owing by such Partner (or assignee) to the
Partnership.
(c) Fiscal Year. The fiscal year of the Partnership shall begin on [October
1 of each year and end on the following September 30,] January 1 of each year
and end on the following December 31, if such fiscal year is approved by the
Internal Revenue Service without any conditions which, in the opinion of the
General Partner, are unacceptable. If such fiscal year is disapproved or
approved subject to such conditions, the fiscal year shall be as otherwise
approved by the General Partner and the Internal Revenue Service.
5. Net Worth of General Partner.
[The General Partner's Net Worth (as defined below) was $256,498 as of
December 31, 1983.] The General Partner agrees that at all times, as long as it
remains General Partner of the Partnership, it shall maintain its Net Worth at
an amount not less than 10% of the total contributions to the Partnership by all
Partners and to any other limited partnership for which it acts as a general
partner by all partners; provided, however, that if the total contributions to
the Partnership by all Partners, or to any limited partnership for which it acts
as a general partner by all partners, are less than $2,500,000, then with
respect to the Partnership and any such limited partnership, the General Partner
shall maintain its Net Worth at an amount of at least 15% of the total
contributions to the Partnership by all Partners and of the total contributions
to any such limited partnership for which it acts as a general partner by all
partners or $250,000, whichever is the lesser; and, provided, further, that in
no event shall the General Partner's Net Worth be less than $50,000. For the
purposes of this Section 5, Net Worth shall be calculated in accordance with
generally accepted accounting principles, except as otherwise specified in this
Section 5, with all current assets based on their then current market values.
The interests owned by the General Partner in the Partnership and any other
partnerships for which it acts as a general partner shall not be included as an
asset in calculating its Net Worth, but any notes receivable from an affiliate
(as such term is defined in Regulation S-X of the rules and regulations of the
Securities and Exchange Commission ("SEC")) of the General Partner or letters of
credit may be included.
The General Partner agrees that it will not be a general partner of any
limited partnership other than the Partnership unless, at all times when it is a
general partner of any such additional limited partnership, its Net Worth shall
be at least equal to the Net Worth required by the preceding paragraph of this
Section 5.
The requirements of the preceding two paragraphs of this Section 5 may be
modified by the General Partner at its option, without the consent of the
Limited Partners, so long as such modification does not adversely affect the
interests of the Limited Partners and the General Partner obtains an opinion of
counsel for the Partnership that such proposed modification will not adversely
affect the classification of the Partnership as a partnership for federal income
tax purposes [and], will not adversely affect the status of the Limited Partners
as limited partners under the Act, and will not violate any applicable state
securities or Blue Sky law or any rules, regulations, guidelines, or statements
of policy promulgated or applied thereunder.
6. Dean Witter Cornerstone Funds Exchange Agreement.
In order to obtain certain benefits for its Limited Partners, the
Partnership shall enter into the Dean Witter Cornerstone Funds Exchange
Agreement (the "Exchange Agreement") with the General Partner, acting in its
individual capacity, and certain other limited partnerships having the General
Partner as their general partner
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(hereafter referred to as the "Cornerstone Partnerships"), as described in the
Prospectus as defined in Section 7. In accordance with the Exchange Agreement,
the Partnership and the Cornerstone Partnerships agree, inter alia, to conduct a
combined offering of their respective Units of Limited Partnership Interest
pursuant to a single prospectus, to execute the Selling Agreement (as defined in
Section 7) relating to the offering of such Units, to coordinate the marketing,
advertising, and selling of such Units, to utilize common administrative
services, and to allocate and share the costs and expenses of the foregoing. The
General Partner, in its individual capacity, agrees to act as the administrator
in connection with the foregoing and to make advances under the Exchange
Agreement on behalf of the Partnership and shall be entitled to reimbursement
therefor. Under the Exchange Agreement, the Partnership agrees to take any
action consistent with this Agreement to redeem Units of Limited Partnership
Interest as of the last business day of each fiscal quarter and to utilize the
net proceeds of such redemption to purchase Units of Limited Partnership
Interest of other Cornerstone Partnerships (hereafter referred to as an
"Exchange"), to issue and sell Units of Limited Partnership Interest to limited
partners of Cornerstone Partnerships who timely request an Exchange of Units,
and to use its best efforts to cause a sufficient number of its Units to be
registered and qualified for sale pursuant to a current Prospectus and
Disclosure Document. The General Partner, on behalf of the Partnership, is
authorized to enter into the Exchange Agreement and to cause the Partnership to
take all necessary steps to comply with its obligations under such Agreement.
7. Capital Contributions and Offering of Units of Limited Partnership
Interest.
The General Partner is herewith contributing $1,000 to the Partnership for
which it is receiving one Unit of General Partnership Interest. At the Initial
Closing (as defined below), the General Partner shall contribute to the
Partnership such additional amount as is necessary to make the General Partner's
capital contribution equal to the sum of: (i) the lesser of $100,000 or 3% of
the first $10,000,000 in aggregate capital contributions to the Partnership by
all Partners (including the General Partner's contribution); and (ii) 1% of any
such aggregate capital contributions in excess of $10,000,000; but not less than
$50,000. Such additional contribution by the General Partner shall be evidenced
by Units of General Partnership Interest, each of which shall have an initial
value of $1,000, and no selling commission shall be payable with respect to such
Units. Thereafter, as may be required as additional Limited Partners are
admitted to the Partnership or otherwise, the General Partner shall maintain its
interest in the capital of the Partnership as stated above. The General Partner,
upon 30 days' notice to the Limited Partners, may withdraw any portion of its
interest in the Partnership that is in excess of its required interest described
above.
Interests in the Partnership, other than the General Partnership Interest
of the General Partner, shall be Units of Limited Partnership Interest ("Units"
or, individually, a "Unit"). The initial Limited Partner has contributed $1,000
in cash to the capital of the Partnership in consideration for receiving one
Unit. The initial Limited Partner agrees to withdraw as a Limited Partner at the
Initial Closing, if any, and the remaining Partners consent to such withdrawal.
The $1,000 capital contribution of the initial Limited Partner shall be returned
to him, without interest, and he shall have no further rights or obligations as
a Limited Partner.
The General Partner, on behalf of the Partnership, shall enter into a
Selling Agreement ("Selling Agreement") with Dean Witter Reynolds Inc. ("DWR")
as described in the Prospectus (as defined below). In accordance with the
Selling Agreement, the Partnership, through DWR, as the Partnership's selling
agent, shall offer Units for sale to the public at a price equal to $1,050 per
Unit during the "Initial Offering Period" defined therein. The Partnership shall
not commence operations unless and until the General Partner has accepted
subscriptions (which may include Units subscribed for by the General Partner (or
its directors or officers), for which no selling commission shall be payable),
for at least [600] 1,000 Units of the Partnership [and each of the Cornerstone
Partnerships offering Units pursuant to the Prospectus and an aggregate of 5,000
Units of such partnerships]. The initial 10 Units sold to each trading manager
for the Partnership and any additional Units purchased by such trading managers
may be included in such minimum. This "Initial Offering Period" shall last [60]
90 days which, at the discretion of the General Partner, may be extended for up
to an additional [120] 90 days. If, prior to the conclusion of the Initial
Offering Period, the Partnership [and the Cornerstone Partnerships offering
Units] shall not have sold at least [600] 1,000 Units [each or an aggregate of
5,000 Units of such partnerships], this Agreement shall terminate, all amounts
paid by subscribers for Units shall be promptly returned to them or contributed
to other Cornerstone Partnerships pursuant to the instructions of the
subscribers, and all capital contributed to the Partnership shall be returned to
the contributors thereof or contributed to other Cornerstone Partnerships as
aforesaid. Whether or not the offering of Units is successful, each subscriber
for Units during the Initial Offering Period whose subscription is not
immediately rejected by the General Partner shall be paid interest earned on
such subscriber's funds while held in escrow from the
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date of deposit of such funds with the escrow agent selected by the General
Partner and DWR to the second business day preceding the earlier of the return
of such funds to such subscriber or the date of the Initial Closing at which the
General Partner accepts such subscriber's subscription.
At the initial closing ("Initial Closing"), if any, of the offering of the
Partnership's Units as described in the Selling Agreement, the Partnership shall
issue and sell Units at $1,050 each (from which a selling commission of $50
shall be deducted and paid to DWR and a charge of $25 representing a portion of
the organizational and initial offering expenses ("Initial Offering Expenses")
shall be deducted and reimbursed to DWR ) to each subscriber whose subscription
is accepted by the General Partner; provided, however, that any Units subscribed
for prior to the conclusion of the Initial Offering Period by any of the
Partnership's initial trading managers or the General Partner (or its directors
or officers) shall be issued and sold at the Initial Closing by the Partnership
at $1,000 each and no selling commissions shall be payable with respect to such
Units. No subscriber for Units offered during the Initial Offering Period shall
become a Limited Partner, and the Partnership shall not commence trading
operations, until an amendment to the Certificate of Limited Partnership has
been filed as provided in the Act.
Subsequent to the Initial Offering Period, the Partnership will continue to
solicit subscriptions, through DWR, for unsold Units and fractions of Units (to
the third decimal place) from Limited Partners and the public on a continuing
basis (the "Continuing Offering"). The Continuing Offering may also include
Units not registered with the SEC on the date of the Initial Closing but
subsequently registered with the SEC. The Partnership shall offer such Units for
sale pursuant to the terms of the Selling Agreement and, in any event, may not
sell such Units at less than 100% of the Net Asset Value thereof. The Continuing
Offering will continue as long as registered Units are available for sale,
unless the General Partner. in its sole discretion, sooner withdraws or
otherwise discontinues the Continuing Offering. Units offered during the
Continuing Offering shall be issued and sold at a monthly closing ("Monthly
Closing"), if any, held on the first business day of each month or promptly
thereafter. The first Monthly Closing will take place during the month which
next follows the first full month after the Initial Closing. At each Monthly
Closing, the Partnership may issue and sell Units at a price per Unit equal to
[105% of the following: Net Asset Value of a Unit as of the opening of business
on the first business day of the month in which the General Partner accepts a
subscriber's subscription, increased by the percentage that the organizational
and initial expenses (excluding selling commissions) of offering the Units to
the public ("Initial Offering Expenses") reimbursed to DWR at the Initial
Closing bear to the gross proceeds (less selling commissions) received by the
Partnership and the Cornerstone Partnerships at the Initial Closing] 107.625% of
the Net Asset Value of a Unit as of the first day of the month in which the
General Partner accepts a subscriber's subscription. Such Units will be sold to
each subscriber whose subscription is accepted at a Monthly Closing by the
General Partner and a charge of 2.5% of the Net Asset Value of such Units
representing a portion of the unreimbursed Initial Offering Expenses and the
expenses of the Continuing Offering ("Continuing Offering Expenses") shall be
deducted and reimbursed to DWR and a selling commission of 5% of the Net Asset
Value of such Units (as increased by the foregoing Initial and Continuing
Offering Expense charge) shall be deducted and paid to DWR; provided, however.
that any Units subscribed for by any trading manager for the Partnership or by
the General Partner (or its directors or officers) or any Units issued to a
limited partner of a Cornerstone Partnership on an Exchange shall be issued and
sold by the Partnership at 100% of the Net Asset Value of such Units and no
selling commissions shall be payable with respect to such Units and, in the case
of a limited partner purchasing Units on an Exchange, no charge for unreimbursed
Initial Offering Expenses or Continuing Offering Expenses shall be payable with
respect to such Units. During the Continuing Offering, any subscriptions
received by DWR on the last five business days of a month and not rejected will
be held in escrow until the second Monthly Closing immediately following receipt
of such subscriptions.
The minimum subscription for a new subscriber during the Initial Offering
Period and during the Continuing Offering is $6,300 per subscriber except in the
case of an Individual Retirement Account for which the minimum subscription is
$2,000 (six and 1.905 Units, respectively, during the Initial Offering Period
and the appropriate number of whole or fractions of Units during the Continuing
Offering); provided, however, that a subscription for any of the Cornerstone
Partnerships shall be included in satisfying such minimum; and, provided,
further, that the minimum subscription for the Partnership must be at least
$2,100 or $2,000 in the case of an Individual Retirement Account. During the
Continuing Offering, the minimum subscription for subscribers who already own
Units of the Partnership or are limited partners of any Cornerstone Partnership
and desire to make additional investments shall be $1,000.
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No new subscriber for Units during the Continuing Offering shall become a
Limited Partner until an amendment to the Certificate of Limited Partnership has
been filed as provided in the Act. The aggregate of all capital contributions to
the Partnership (which shall be net of any selling commissions and
reimbursements to DWR of offering expenses) shall be available to the
Partnership to carry on its business and no interest shall be paid by the
Partnership on any such contribution.
In connection with the Continuing Offering of Units (including any offering
of newly-registered Units by the Partnership), the General Partner is authorized
to take such action and make such arrangements for the issuance and sale of
Units as it deems appropriate, including the execution of selling agreements
with DWR and such other selling agents as DWR, with the approval of the General
Partner, shall appoint and the preparation and filing of registration statements
and amendments and supplements thereto with the SEC and other appropriate
regulatory bodies.
In connection with the Partnership's offering of Units as described in the
"Prospectus" (which term shall mean the prospectus constituting a part of the
Partnership's most current Registration Statement under the Securities Act of
1933 relating to the offering of Units in the form last filed with the SEC
pursuant to its Rule 424), the General Partner, on behalf of the Partnership,
shall: (a) cause to be filed (i) one or more Registration Statements and such
amendments thereto as the General Partner deems advisable with the SEC for the
continuing registration and public offering of Units in the United States, and
(ii) the Prospectuses included in any such Registration Statements and
amendments and supplements thereto with the Commodity Futures Trading Commission
("CFTC"); (b) qualify Units for sale initially and on a continuing basis under
the Blue Sky and securities laws of such states of the United States or other
jurisdictions as the General Partner shall deem advisable; and (c) take such
action with respect to the matters described in clauses (a) and (b) as it shall
deem advisable or necessary.
All Units subscribed for shall be issued subject to the collection of good
funds. If, at any time, good funds representing payment for Units are not made
available to the Partnership because such subscriber has provided bad funds in
the form of a bad check or draft or otherwise to DWR which in turn has deposited
the subscription amount with the escrow agent, the Partnership shall cancel the
Units issued to such subscriber represented by such bad funds, and the General
Partner shall file an amendment to the Partnership's Certificate of Limited
Partnership reflecting such cancellation. Any losses or profits sustained by the
Partnership as a result thereof in connection with its commodity trading
allocable to such cancelled Units shall be deemed a decrease or increase in Net
Assets and allocated among the remaining Partners as described in Section 8.
Each Partner agrees to reimburse the Partnership for any expense or loss
(including any trading loss) incurred in connection with the issuance and
cancellation of any such Units issued to such subscriber.
8. Allocation of Profits and Losses; Accounting; Other Matters.
(a) Capital Accounts. A capital account shall be established for each
Partner. The initial balance of each Partner's capital account shall be the
amount of a Partner's initial capital contribution to the Partnership (which
shall be net of any selling commission).
(b) Monthly Allocations. As of the close of business (as determined by the
General Partner) on the last day of each calendar month ("Determination Date")
during each fiscal year of the Partnership, the following determinations and
allocations shall be made:
(1) The Net Assets of the Partnership (as defined in Section 8(d)(1)),
before accrual of monthly management fees and annual incentive fees payable
to any trading manager, shall be determined.
(2) Accrued monthly management fees shall then be charged against Net
Assets.
(3) Accrued incentive fees, if any, shall be charged against Net
Assets.
(4) Any increase or decrease in Net Assets (after the adjustments in
subparagraphs (2) and (3) above), over those of the immediately preceding
Determination Date (or, in the case of the first Determination Date, the
Initial Closing), shall then be credited or charged to the capital accounts
of each Partner in the ratio that the balance of each account bears to the
balance of all accounts.
(5) The amount of any distribution to a Partner, any amount paid to a
Partner on redemption of Units, any amount deemed received by a Partner on
an Exchange of Units pursuant to Section 11(c) hereof, and any amount paid
to the General Partner upon withdrawal of its interest in the Partnership
shall be charged to that Partner's capital account.
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(c) Allocation of Profit and Loss for Federal Income Tax Purposes. As of
the end of each fiscal year, the Partnership's realized profit or loss shall be
allocated among the Partners pursuant to the following subparagraphs for federal
income tax purposes. Such allocations of profit and loss will be pro rata from
net capital gain or loss and net operating income or loss realized by the
Partnership. For United States federal income tax purposes, a distinction will
be made between net short-term gain or loss and net long-term gain or loss.
(1) Items of ordinary income, such as interest or credits in lieu of
interest, and expense, such as monthly management fees, incentive fees,
extraordinary expenses, and the Partnership's proportionate share of Common
Administrative Expenses (as defined and determined pursuant to the Exchange
Agreement) shall be allocated pro rata among the Partners based on their
respective capital accounts (exclusive of these items of ordinary income or
expense) as of the end of each month in which the items of ordinary income
or expense accrued.
(2) Net realized capital gain or loss from the Partnership's trading
activities shall be allocated as follows:
(aa) For the purpose of allocating the Partnership's net realized
capital gain or loss among the Partners, there shall be established an
allocation account with respect to each outstanding Unit. The initial
balance of each allocation account shall be the amount paid to the
Partnership for each Unit (which shall be net of any selling
commission). Allocation accounts shall be adjusted as of the end of
each fiscal year and as of the date a Partner completely redeems his
Units as follows:
(i) Each allocation account shall be increased by the amount
of income allocated to the holder of the Unit pursuant to
subparagraph (c)(1) above and subparagraph (cc) below.
(ii) Each allocation account shall be decreased by the
amount of expense or loss allocated to the holder of the Unit
pursuant to subparagraph (c)(1) above and subparagraph (ee) below
and by the amount of any distribution the holder of the Unit has
received with respect to the Unit (other than on redemption of
Units).
(iii) When a Unit is redeemed or Exchanged, the allocation
account with respect to such Unit shall be eliminated.
(bb) Net realized capital gain shall be allocated first to each
Partner who has partially redeemed his Units or Exchanged less than
all his Units during the fiscal year up to the excess, if any, of the
amount received upon redemption of the Units or the amount deemed
received on Exchange of the Units over the allocation account
attributable to the redeemed or Exchanged Units.
(cc) Net realized capital gain remaining after the allocation
thereof pursuant to subparagraph (bb) shall be allocated next among
all Partners whose capital accounts are in excess of the Units'
allocation accounts (after the adjustments in subparagraph (bb)) in
the ratio that each such Partner's excess bears to all such Partners'
excesses. In the event that gain to be allocated pursuant to this
subparagraph (cc) is greater than the excess of all such Partners'
capital accounts over all such allocation accounts, the excess will be
allocated among all Partners in the ratio that each Partner's capital
account bears to all Partners' capital accounts.
(dd) Net realized capital loss shall be allocated first to each
Partner who has partially redeemed his Units or Exchanged less than
all his Units during the fiscal year up to the excess, if any, of the
allocation account attributable to the redeemed or Exchanged Units
over the amount received upon redemption of the Units or the amount
deemed received on Exchange of the Units.
(ee) Net realized capital loss remaining after the allocation
thereof pursuant to subparagraph (dd) shall be allocated next among
all Partners whose Units' allocation accounts are in excess of their
capital accounts (after the adjustments in subparagraph (dd)) in the
ratio that each such Partner's excess bears to all such Partners'
excesses. In the event that loss to be allocated pursuant to this
subparagraph (ee) is greater than the excess of all such allocation
accounts over all such Partners' capital accounts, the excess loss
will be allocated among all Partners in the ratio that each Partner's
capital account bears to all Partners' capital accounts.
(3) The tax allocations prescribed by this Section 8(c) shall be made
to each holder of a Unit whether or not the holder is a substituted Limited
Partner. In the event that a Unit has been assigned, the allocations
prescribed by this Section 8(c) shall be made with respect to such Unit
without regard to the assignment, except that in the year of assignment the
allocations prescribed by this Section 8(c) shall be divided between the
assignor and the assignee based on the number of months each held the
assigned Unit. For
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purposes of this Section 8(c), tax allocations shall be made to the General
Partner's General Partnership Interest on a Unit-equivalent basis.
(4) The allocation of profit and loss for federal income tax purposes
set forth herein is intended to allocate taxable profits and loss among
Partners generally in the ratio and to the extent that net profit and net
loss are allocated to such Partners under Section 8(b) hereof so as to
eliminate, to the extent possible, any disparity between a Partner's
capital account and his allocation account with respect to each Unit then
outstanding, consistent with the principles set forth in Section 704(c)(2)
of the Internal Revenue Code of 1954, as amended (the "Code").
(d) Definitions; Accounting.
(1) Net Assets. The Partnership's "Net Assets" shall mean the total
assets of the Partnership, including all cash and cash equivalents (valued
at cost), accrued interest, and the market value of all open commodity
positions and other assets of the Partnership less (a) one-half of the
brokerage commissions that would be payable with respect to the closing of
each open commodity position and (b) all other liabilities of the
Partnership including incentive fees accrued or payable. The above
specified items will be determined in accordance with the principles
specified in this Section 8(d)(1) and, where no principle is specified, in
accordance with generally accepted accounting principles consistently
applied under the accrual basis of accounting. The market value of a
commodity futures contract traded on a commodity exchange shall mean the
settlement price on the commodity exchange on which the particular
commodity futures contract is traded by the Partnership on the day with
respect to which Net Assets are being determined, provided, that if a
contract could not be liquidated on such day due to the operation of daily
limits or other rules of the commodity exchange upon which that contract is
traded or otherwise, the settlement price on the first subsequent day on
which the contract could be liquidated shall be the market value of such
contract for such day. The market value of a commodity forward contract or
a commodity futures contract traded on a foreign exchange shall mean its
market value as determined by the General Partner on a basis consistently
applied.
(2) Net Asset Value. The "Net Asset Value" of a Unit shall mean the
Net Assets allocated to capital accounts represented by Units of Limited
Partnership Interest divided by the number of such Units outstanding on the
date of calculation.
(e) Expenses and Limitations Thereof. DWR, the selling agent for the Units
and the initial commodity broker for the Partnership, shall initially pay all of
the Initial Offering Expenses. At the Initial Closing, if any, the Partnership
shall reimburse DWR for its share of Initial Offering Expenses incurred by DWR.
subject to any limitations set forth in the next paragraph. If the minimum
number of Units are not subscribed for prior to the conclusion of the Initial
Offering Period and no Initial Closing is held, DWR shall pay all such Initial
Offering Expenses and shall not be reimbursed therefor.
At the Initial Closing, the Partnership will reimburse DWR for Initial
Offering Expenses by paying out of its gross proceeds (less selling commissions)
the same percentage that Initial Offering Expenses reimbursable at the Initial
Closing bear to the aggregate gross proceeds (less selling commissions) received
from subscribers for Units of the Partnership and the Cornerstone Partnerships
at the Initial Closing an amount equal to $25 per Unit. During the Continuing
Offering, DWR will be reimbursed by the Partnership for unreimbursed Initial
Offering Expenses and [the expenses of the Continuing Offering ("Continuing
Offering Expenses")] Continuing Offering Expenses by having Limited Partners
investing during the Continuing Offering purchase Units at a price per Unit
equal to [105% of the following: Net Asset Value of a Unit, increased by the
percentage that Initial Offering Expenses reimbursed to DWR at the Initial
Closing bear to the aggregate gross proceeds (less selling commissions) received
by the Partnership and the Cornerstone Partnerships at the Initial Closing.
107.625% of the Net Asset Value of a Unit as of the first day of the month in
which the General Partner accepts a subscriber's subscription. The additional
amount (2.5% of Net Asset Value) paid per Unit over Net Asset Value (after
deducting selling commissions) shall be paid by the Partnership to DWR at the
Monthly Closing when such Units are issued and sold. If there are any excess
funds after payment to DWR of Initial or Continuing Offering Expenses, such
excess will be contributed by DWR to the Partnership and will be deemed a
contribution of capital to the Partnership for which no Units will be issued. In
no event, however, may DWR be reimbursed by the Partnership for Initial and
Continuing Offering Expenses (including selling commissions) in an amount which
exceeds 15% of the aggregate gross proceeds of the offering of Units (including
selling commissions) received by the Partnership. Units registered subsequent to
the Initial Closing may be offered by
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the General Partner at such price as may reflect expenses of offering such Units
but, in any event, at not less than 100% of the Net Asset Value thereof.
Except as specified otherwise in the Selling Agreement, DWR shall be paid
$50, as selling commission, from each Unit sold during the Initial Offering
Period; thereafter, during the Continuing Offering, DWR shall be paid from the
offering price of each Unit sold, as selling commission, an amount equal to 5%
of the Net Asset Value of each Unit sold (as increased by the Initial and
Continuing Offering Expense charge referred to above). If DWR has appointed
other selling agents ("Additional Sellers"), DWR may compensate such Additional
Sellers for each Unit sold by them by paying to such Additional Sellers up to
80%, to be determined by DWR from time to time, of the $50 (or 5%, as the case
may be) selling commission on each Unit. DWR also may pay to the Additional
Sellers and to employees of DWR who are futures commission merchants,
introducing brokers, or associated persons registered with the CFTC a portion of
the brokerage commissions paid to DWR by the Partnership, on the terms and
conditions set forth in the Prospectus.
[Pursuant to the Selling Agreement, the Partnership may pay DWR a reduced
selling commission of $25 per Unit during the Initial Offering Period, and 2.5%
during the Continuing Offering, in the case of any subscription for $1,000,000
or more from any one subscriber.]
After the Initial Closing and the commencement of trading operations, the
Partnership's assets will be delivered to DWR, deposited in a separate commodity
trading account and held in non-interest bearing accounts or invested in
securities approved by the CFTC for investment of customer funds. In any event,
DWR will credit the Partnership at month-end with interest income on 80% of the
Partnership's average daily Net Assets for the month at a rate equal to the
average yield on the 13-week U.S. Treasury Bills issued during such month. For
purposes of such interest payments, Net Assets shall not include monies due the
Partnership on or with respect to forward contracts and other commodity
interests but not actually received by it from banks, brokers, dealers, and
other persons. The Partnership will not receive interest income on the balance
of its assets held by DWR. The Partnership's assets held by DWR may be used as
margin solely for the Partnership's trading. The Partnership shall bear all
commodity brokerage commissions and, except as otherwise described in the
Prospectus, shall be obligated to pay all liabilities incurred by it, including,
without limitation, all expenses incurred in connection with its trading
activities and fees payable to its trading managers. Appropriate reserves may be
created, accrued, and charged against Net Assets for contingent liabilities, if
any, as of the date any such contingent liability becomes known to the General
Partner.
(f) Limited Liability of Limited Partners. Each Unit, when purchased by a
Limited Partner, shall be fully paid and nonassessable. No Limited Partner shall
be liable for the Partnership's obligations in excess of the capital contributed
by him and his share of profits, if any, and any distributions and amounts
received upon redemption or deemed received on an Exchange of Units together
with interest thereon.
(g) Return of Limited Partner's Capital Contribution. Except to the extent
that a Limited Partner shall have the right to withdraw capital through
redemption of Units in accordance with the terms of this Agreement, no Limited
Partner shall have any right to demand the return of his capital contribution or
any profits added thereto, except upon termination and dissolution of the
Partnership. In no event shall a Limited Partner be entitled to demand or
receive property other than cash.
(h) Distributions. The General Partner shall have sole discretion in
determining what distributions (other than on redemption of Units), if any, the
Partnership will make to its Partners. All distributions shall be pro rata in
accordance with the respective capital accounts of the Partners.
9. Management and Trading Policies.
(a) Management of the Partnership. Except as may be otherwise specifically
provided herein, the General Partner, to the exclusion of all Limited Partners,
shall conduct and manage the business of the Partnership, including, without
limitation, the investment of the funds of the Partnership. Except as provided
herein, no Partner shall be entitled to any salary, draw, or other compensation
from the Partnership. Each Limited Partner hereby undertakes to furnish to the
General Partner such additional information as may be determined by the General
Partner to be required or appropriate for the Partnership to open and maintain
an account or accounts with commodity brokerage firms for the purpose of trading
in commodity futures contracts and other commodity interests.
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The General Partner shall have fiduciary responsibility for the safekeeping
of all of the funds and assets of the Partnership, whether or not in its
immediate possession or control, and the General Partner shall not employ, or
permit another to employ, such funds or assets in any manner except for the
benefit of the Partnership.
(b) Trading Managers. The General Partner, on behalf of the Partnership,
may retain trading managers to make all trading decisions for the Partnership
and may delegate complete trading discretion to such trading managers; provided,
however, that the General Partner may override any trading instructions which
the General Partner, in its sole discretion, determines to be in violation of
any trading policy of the Partnership, as set forth below, or as and to the
extent necessary, upon the failure of a trading manager to comply with a request
of the General Partner to make the necessary amount of funds available to the
Partnership within five days of such request, to fund distributions,
redemptions, Exchanges, or reapportionments among trading managers or to pay the
expenses of the Partnership; provided, further, that the General Partner may
make trading decisions at any time at which a trading manager shall become
incapacitated or some other emergency shall arise as a result of which such
trading manager shall be unable or unwilling to act and the General Partner has
not yet retained a successor trading manager.
The General Partner intends to retain initially two or more trading
managers for the Partnership and may increase or decrease the number of trading
managers for the Partnership as it determines from time to time. Immediately
after the Initial Closing, the General Partner shall apportion the consideration
received from the sale of Units in approximately equal proportions among the
trading managers retained to manage funds for the Partnership and shall divide
funds contributed to the Partnership during the Continuing Offering equally
among the then trading managers for the Partnership; provided, however, that the
General Partner shall have the right to reapportion such funds among the trading
managers for the Partnership upon the occurrence of certain events described in
the Prospectus. Each trading manager retained by the General Partner shall be
solely responsible for investing the funds apportioned from time to time to such
trading manager by the General Partner and shall have no responsibility with
respect to funds apportioned to other trading managers of the Partnership.
The maximum period covered by any contract with or relating to a trading
manager shall not exceed [two] three years from the end of the month in which
such agreement becomes effective (except that each management agreement referred
to below may have a term not exceeding [two] three years from the end of the
month in which the Partnership commences trading operations), and such
agreements shall be terminable upon [15] 60 days' prior written notice by the
General Partner; provided, however, that any such agreement may provide for
automatic renewal for additional one-year terms unless either the Partnership or
the trading manager, upon written notice given not less than [60 days] six
months prior to the original termination date or any extended termination date,
notifies the other party of its intention not to renew. The Partnership shall
not enter into any agreement with DWR or its affiliates (other than the Selling
Agreement and the Exchange Agreement) which has a term of more than one-year and
which does not provide that it shall be terminable without penalty upon 60 days'
prior written notice by the General Partner; provided, however, that any such
agreement may provide for automatic renewal for additional one-year terms unless
either the Partnership or DWR or its affiliates, upon written notice given not
less than 60 days prior to the original termination date or any extended
termination date, notifies the other party of its intention not to renew.
Subject to the foregoing paragraph, the General Partner is hereby
authorized, on behalf of the Partnership, to enter into the form of management
agreement described in the Prospectus (the "Management Agreement") with the
trading managers described therein and with such other trading managers as the
General Partner may from time to time desire to retain, pursuant to which
agreement each trading manager shall have complete discretion to make commodity
trading decisions with respect to the funds allocated to such trading manager
and under which the General Partner shall have no authority to intervene in such
trading decisions except as described therein. The General Partner is further
authorized: (a) to terminate a Management Agreement at its discretion in
accordance with its terms and to employ other trading managers on behalf of the
Partnership from time to time on such terms as the General Partner may approve;
(b) to enter into the Customer Agreement described in the Prospectus (the
"Customer Agreement") with DWR; and (c) to cause the Partnership to pay to DWR
brokerage fees at the rates provided for in the Customer Agreement, being
initially the rates listed in the Prospectus which equal 80% of DWR's published
non-member commission rates, and substantially equivalent rates for trading on
the interbank foreign currency forward market, which rates DWR may change from
time to time.
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(c) General Trading Policies. The General Partner shall require all trading
managers retained by the Partnership to follow the trading policies set forth
below:
1. [Each trading manager will diversify its futures contract holdings
in order to avoid reliance on one or a few commodities and will trade those
futures contracts that, in its opinion, have sufficient liquidity to enable
the Partnership to enter and close out positions without causing undue
price movements.] Each trading manager may trade in markets which have low
trading volume and which are illiquid. Each trading manager normally will
not establish new positions in a futures contract for any one commodity
where the original margin therefor, when added to the original margin on
deposit for all open positions in futures contracts for such commodity,
irrespective of the delivery month, exceeds 15% (II); 20% (III); 20% (IV)*
of the Net Assets being managed by such trading manager. If a trading
manager invests in interbank foreign currency forward contracts, similar
principles will apply. In no event will a trading manager commit more than
20% (II); 25% (III); 35% (IV)* of the Net Assets being managed by such
trading manager for margin in any one commodity, irrespective of the
delivery month. For purposes of this restriction, gold and silver bullion
and coins will be considered one commodity and the soybean complex,
consisting of soybeans, soybean oil, and soybean meal, will be considered
one commodity.
2. Certain of the exchanges on which the Partnership trades and DWR,
the Partnership's commodity broker, will require the Partnership to make
margin deposits of not less than 125% of the exchange minimum levels
applicable to individuals or, where there are no exchange minimums (as on
the interbank foreign currency forward market), the commodity broker's
minimums. Each trading manager will not initiate additional positions in
any commodity if such additional positions would result in aggregate net
long or net short positions for all commodities requiring as margin more
than 55% (II); 65% (III); 65% (IV)* of the Net Assets managed by such
trading manager. Under certain market conditions, such as an abrupt
increase in margins required by a commodity exchange or its clearinghouse
or an inability to liquidate open positions because of daily price
fluctuation limits or both, the trading manager may be required to commit
as margin in excess of the foregoing limit. In such event, the trading
manager will reduce its open positions to comply with the foregoing limit
before initiating new positions.
[3. Each trading manager will only invest funds for the Partnership
where sufficient volume exists, in the opinion of the trading manager, for
liquidating positions either on appropriate exchanges or on the interbank
foreign currency forward market.]
**4. When a trading manager seeks to establish positions in foreign
currencies on the interbank foreign currency forward market, each of the
banks utilized will have a minimum combined capital and surplus of not less
than $100,000,000.00.
**4. The Partnership will trade currencies in the interbank and
forward contract markets only with banks, brokers, dealers, and other
financial institutions which the General Partner, in conjunction with DWR,
has determined to be creditworthy.
[5. Because open positions in a futures or forward contract normally
will be closed out before the first notice day for making or taking
delivery of the cash item, the Partnership normally will not make or take
delivery, except as required to match trades and close out a position on
the interbank foreign currency forward market. No assurance can be given
that delivery will never occur, but each trading manager will make every
effort to avoid the Partnership's taking or making delivery. Each trading
manager will not take a position in any commodity during the delivery month
of that contract, except to match trades to close out a position on the
interbank foreign currency forward market or liquidate trades in a limit
market.]
6. The Partnership will not employ the trading technique commonly known
as "pyramiding," in which the speculator uses unrealized profits on
existing positions in a given commodity due to favorable price movement as
margin specifically to buy or sell additional positions in the same or a
related commodity.
7. [Each trading manager will not, without the prior express written
consent of the General Partner,] Each trading manager may employ the
trading techniques known as "spreads" and "straddles" on behalf of the
Partnership[, except to liquidate trades in a limit market or to hedge cash
commodity transactions]. The terms "spread" and "straddle" describe a
transaction involving the simultaneous holding of
- - ----------
*Percentage varies by Partnership, as noted in parentheses.
**On January 14, 1987, the General Partner deleted the first Trading Policy No.
4 and replaced it with the second Trading Policy No. 4.
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commodity futures or forward contracts for the same or a related commodity
but for different delivery dates in which the trader expects to earn
profits from a widening or narrowing movement of the prices of the two
contracts.
[8. The Partnership will not engage in cash commodity transactions
unless the cash commodity is fully hedged.]
9. The Partnership will not purchase, sell, or trade securities
(except securities approved by the CFTC for investment of customer funds).
10. The Partnership will not borrow (except for margin purposes) or
lend money. The Partnership will not permit "churning" of the Partnership's
assets.
11. Each trading manager will engage in trading options on futures
contracts or physical commodities only with the prior express written
consent of the General Partner.
(d) Changes to Trading Policies. Trading policies described in subsection
(c) may be changed at the discretion of the General Partner, except that the
General Partner shall not approve any material change in the Partnership's
trading policies numbered (1), (2), (3), (6), (8), (9), and (10) without
obtaining prior written approval of Limited Partners owning more than 50% of the
Units then owned by Limited Partners.
(e) Miscellaneous. The General Partner may take such other actions as it
deems necessary or desirable to manage the business of the Partnership,
including, but not limited to, the following: opening bank accounts and paying
or authorizing the payment of distributions to the Partners and the expenses of
the Partnership, such as management and incentives fees to any trading manager,
brokerage commissions, legal, auditing, and accounting fees, printing fees, and
registration and other fees of governmental agencies.
The General Partner shall keep at the principal office of the Partnership
such books and records relating to the business of the Partnership as it deems
necessary or advisable or as are required by the Commodity Exchange Act, as
amended (the "CEAct"), and the rules and regulations thereunder. To the extent
required by CFTC regulations, such books and records shall be available to
Limited Partners or their authorized attorneys or agents for inspection and
copying during normal business hours of the Partnership and, upon request,
copies shall be sent to any Limited Partner upon payment by him of reasonable
reproduction and distribution costs. Any Subscription Agreement and Power of
Attorney executed by a Limited Partner in connection with his purchase of Units
shall be retained by the General Partner for not less than six years.
The Partnership shall make no loans. No person may receive, directly or
indirectly, any advisory, management, or incentive fee for investment advice who
shares or participates in commodity brokerage commissions from transactions with
the Partnership. No broker may pay, directly or indirectly, rebates or give-ups
to the General Partner or any trading manager, and such prohibitions may not be
circumvented by any reciprocal business arrangements. Assets of the Partnership
shall not be commingled with assets of any other entity. Margin deposits and
deposits of assets with a commodity broker shall not constitute commingling.
Subject to Section 5 hereof, the General Partner may engage in other
business activities and shall not be required to refrain from any other activity
or disgorge any profits from any such activity, whether as general partner of
additional partnerships for investment in commodity futures or forward contracts
or otherwise. The General Partner may engage and compensate, on behalf of the
Partnership, from funds of the Partnership such persons, firms, or corporations,
including any affiliated person or entity, as the General Partner in its sole
judgment shall deem advisable for the conduct and operation of the business of
the Partnership; provided, however, that, except as described herein and in the
Prospectus, the General Partner shall not engage any person, firm, or
corporation which is an affiliate of the General Partner to perform services for
the Partnership without obtaining the affirmative vote of Limited Partners
owning more than 50% of the Units then owned by Limited Partners; and provided
further, that the General Partner, in the exercise of its fiduciary duty to the
Limited Partners, shall make a good faith determination that (i) the affiliate
which it proposes to engage to perform such services is qualified to do so
(considering the prior experience of the affiliate or the individuals employed
thereby), and (ii) the terms and conditions of the agreement pursuant to which
such affiliate is to perform services for the Partnership are no less favorable
to the Partnership than could be obtained from equally-qualified unaffiliated
third parties, or are otherwise determined by the General Partner to be fair and
reasonable to the Partnership and the Limited Partners. Nothing contained in the
preceding sentence shall prohibit the General Partner from acting as the
administrator under the Exchange Agreement and receiving reimbursement from the
Partnership for expenses advanced on behalf of the Partnership.
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No person dealing with the General Partner shall be required to determine
its authority to make any undertaking on behalf of the Partnership or to
determine any fact or circumstances bearing upon the existence of its authority.
The General Partner, its officers, directors, and employees and each
person, if any, who controls the General Partner, shall not be liable,
responsible, or accountable in damages or otherwise to the Partnership or to any
of the Partners, their successors or assigns, except by reason of acts of, or
omissions due to, bad faith, misconduct, or negligence, or for not having acted
in good faith in the reasonable belief that its actions were in, or not opposed
to, the best interests of the Partnership.
10. Audits; Reports to Limited Partners.
The Partnership's books shall be audited annually by an independent public
accountant selected by the General Partner. The Partnership shall use its best
efforts to cause each Partner to receive: (a) within 90 days after the close of
each fiscal year an annual report containing audited financial statements
(including a statement of income and a statement of financial condition) of the
Partnership for the fiscal year then ended, prepared in accordance with
generally accepted accounting principles and accompanied by a report of the
independent public accountant which audited such statements, and such other
information as the CFTC may from time to time require; and (b) within 90 days
after the close of each fiscal year such tax information relating to the
Partnership as is necessary for such Partner to complete his federal income tax
return. In addition, the General Partner shall report or cause to be reported
monthly to the Limited Partners such financial and other information with
respect to the Partnership as the CFTC by regulation from time to time may
require in such monthly reports. The General Partner also shall report to the
Limited Partners, when, as, and in the form required, all such other information
as the CFTC from time to time may require under the CEAct to be given to
participants in commodity pools such as the Partnership. In addition, if any of
the following events occurs, notice of such event shall be mailed to each
Limited Partner within seven business days after the occurrence of the event:
(i) a decrease in the Net Asset Value of a Unit as of the end of any month to
50% or less of the Net Asset Value for such Unit as of the most recent
fiscal-year end most recently reported; (ii) any change in trading managers;
(iii) any change in commodity brokers; (iv) any change in general partners; (v)
any change in the Partnership's fiscal year; or (vi) any material change in the
Partnership's trading policies. Such notice shall describe the voting rights of
Limited Partners, as set forth in Section 17 hereof. As used herein, "material
change in the Partnership's trading policies" does not include changes in
commodities traded or modifications or additions to, or deletions from, any
trading manager's trading system. In addition to such notice, the General
Partner shall not approve any material change in the Partnership's trading
policies specified in Section 9(d) without obtaining prior written approval of
Limited Partners owning more than 50% of the Units then owned by Limited
Partners. The Net Asset Value of a Unit shall be determined daily and the most
recent Net Asset Value calculation shall be promptly supplied by the General
Partner in writing to any Limited Partner after receipt of a request in writing
to such effect.
11. Transfer; Redemption of Units; Exchange Privilege.
(a) Transfer. A Limited Partner may transfer, assign, dispose, pledge, or
encumber his Units only as provided in this Section 11(a). No such transferee,
pledgee, assignee, or secured creditor shall become a substituted Limited
Partner unless the General Partner first consents to such substitution in
writing, which consent the General Partner may withhold in its sole discretion.
Any transfer or assignment of Units which is permitted hereunder shall be
effective as of the end of the month in which such transfer or assignment is
made; provided, however, that the Partnership need not recognize any transfer,
assignment, or pledge until it has received at least 30 days' prior written
notice thereof from the transferor, assignor, or pledgor, which notice shall set
forth the address and social security or taxpayer identification number of the
transferee, assignee, or pledgee and the number of Units transferred, assigned,
or pledged and shall be signed by the transferor, assignor, or pledgor. No
transfer or assignment shall be permitted unless the General Partner is
satisfied that (i) such transfer or assignment would not be in violation of the
Act and (ii) notwithstanding such transfer or assignment, the Partnership shall
continue to be classified as a partnership rather than as an association taxable
as a corporation under the Code. No transfer or assignment of Units shall be
effective or recognized by the Partnership if such transfer or assignment would
result in the termination of the Partnership for federal income tax purposes and
any attempted transfer or assignment in violation hereof shall be ineffective to
transfer or assign any such Units. Any transferee or assignee of Units who has
not been admitted to the Partnership as a substituted Limited Partner shall not
have any of the rights of a Limited Partner, except that the assignee shall
receive that share of capital and profits and shall have that right of
redemption to which his assignor would otherwise have been entitled and shall
remain subject to the other terms of this Agreement
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binding upon Limited Partners. The transferor or assignor shall bear all costs
(including any attorneys' fees) related to such transfer or assignment.
Certificates representing Units may bear appropriate legends to the foregoing
effects.
In the event that the General Partner consents to the admission of a
substituted Limited Partner pursuant to this Section 11(a), the General Partner
is hereby authorized to execute, file, record, and publish such amendments to
this Agreement and to the Partnership's Certificate of Limited Partnership as
may be necessary to reflect such substitution of a Limited Partner.
(b) Redemption. Except as set forth below, a Limited Partner (or any
assignee thereof) may withdraw, effective as of the last business day of any
month, all or part of his capital contribution and undistributed profits, if
any, by requiring the Partnership to redeem all or part of his Units (provided
written notice is given at least fifteen days prior to the redemption date) at
the then applicable Net Asset Value on the Redemption Date (as defined below),
reduced as hereinafter described (such withdrawal being herein referred to as
"Redemption"). No redemptions will be permitted by a Limited Partner before the
first month-end which occurs more than 180 days after a person first becomes a
limited partner of the Partnership or any Cornerstone Partnership. A redemption
may be made only in whole Units or in multiples of $1,000 unless a Limited
Partner is redeeming his entire interest in the Partnership.
Redemptions shall be effective as of the last business day of the first
month ending after a Request for Redemption in proper form has been received by
the General Partner ("Redemption Date"), provided, that all liabilities,
contingent or otherwise, of the Partnership, except any liability to Partners on
account of their capital contributions, have been paid or there remains property
of the Partnership sufficient to pay them. As used herein, "Request for
Redemption" shall mean a letter in the form specified by the General Partner,
sent by a Limited Partner (or any assignee thereof) to a DWR branch office and
received by the General Partner at least fifteen days prior to the Redemption
Date. A form of Request for Redemption is annexed hereto. Additional forms of
Request for Redemption may be obtained by written request to the General Partner
or from a local DWR branch office. Upon Redemption, a Limited Partner (or any
assignee thereof) shall receive from the Partnership for each Unit redeemed an
amount equal to the Net Asset Value thereof (as defined in Section 8(d)(2)) as
of the Redemption Date, less any amount owing by such Partner (and his assignee,
if any) to the Partnership pursuant to Section 16(b). If Redemption is requested
by an assignee, all amounts owed to the Partnership under Section 16(b) by the
Partner to whom such Unit was sold as well as all amounts owed by all assignees
of such Unit shall be deducted from the Net Asset Value of such Unit upon
Redemption. The General Partner shall endeavor to pay Redemptions within 10, and
no later than 20, business days after the Redemption Date, except that under
special circumstances, including, but not limited to, the inability on the part
of the Partnership to liquidate commodity positions or the default or delay in
payments due the Partnership from commodity brokers, banks, or other persons,
the Partnership may delay payment to Partners requesting Redemption of the
proportionate part of the Net Asset Value of the Units represented by the sums
which are the subject of such default or delay. Unless redeemed in connection
with an Exchange, Redemptions will be made by credit to the Limited Partner's
customer account with DWR or by check mailed to the Limited Partner if such
account is closed.
(c) Exchange Privilege. Except as set forth below, a Limited Partner (or
any assignee thereof) may redeem his Units effective as of the last business day
of any fiscal quarter of the Partnership and authorize the General Partner to
use the net proceeds of such Redemption to purchase Units of another Cornerstone
Partnership (such transfers between partnerships being herein referred to as an
"Exchange"). No Exchanges will be permitted by a Limited Partner before the
first fiscal quarter-end which occurs more than 180 days after a person first
becomes a limited partner of the Partnership or any Cornerstone Partnership. An
Exchange may be made only in whole Units or in multiples of $1,000 unless a
Limited Partner is liquidating his entire interest in the Partnership.
An Exchange shall be effective as of the last business day of the first
fiscal quarter ending after a Request for Exchange in proper form has been
received by the General Partner ("Exchange Date"), provided, that the
Partnership has assets sufficient to discharge its liabilities and to redeem
Units on the Exchange Date. As used herein, "Request for Exchange" shall mean a
letter in the form specified by the General Partner, sent by a Limited Partner
(or any assignee thereof) to a DWR branch office and received by the General
Partner at least fifteen days prior to the Exchange Date. A form of Request for
Exchange is annexed hereto. Additional forms of Request for Exchange may be
obtained by written request to the General Partner or from a local DWR
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branch office. Upon requesting an Exchange by the Partnership, a Limited Partner
shall have authorized the General Partner to redeem the number or dollar amount
of Units specified therein and to utilize the net proceeds of such Redemption to
purchase an amount of Units (which may be less than a whole Unit) of the
Cornerstone Partnership specified in the Request for Exchange. The General
Partner shall cause the net proceeds of the Redemption to be delivered to the
Cornerstone Partnership issuing and selling Units to the redeeming Limited
Partner and shall cause to be mailed to such Limited Partner, within 20 business
days after such Exchange Date, a written confirmation thereof.
At the next Monthly Closing following each Exchange Date, the Partnership
shall issue and sell Units with a total Net Asset Value equal to the net
proceeds of redemptions from limited partners of Cornerstone Partnerships
requesting Units of the Partnership on an Exchange, provided, that the General
Partner, in its capacity as a general partner of such Cornerstone Partnerships,
has (i) timely received a properly executed Request for Exchange verifying that
such Units being Exchanged are owned by the person requesting such Exchange and
acknowledging that the limited partner remains eligible to purchase Units, and
(ii) caused the net proceeds from Units being redeemed to be transferred to the
Partnership in payment of such Units. Each Unit to be purchased with the net
proceeds of a redemption of Units from a Cornerstone Partnership shall be issued
and sold by the Partnership at the next Monthly Closing following the end of its
fiscal quarter at a price per Unit equal to 100% of the Net Asset Value of a
Unit as of the opening of business on the first business day of the month next
following the relevant Exchange Date and no selling commissions or charges for
Continuing Offering Expenses shall be paid by the person acquiring such Units.
Each Limited Partner understands that the General Partner will endeavor to
have Units of Cornerstone Partnerships registered and qualified for sale
pursuant to a current Prospectus immediately prior to each Exchange Date, but
there can be no assurance that any or a sufficient number of Units will be
available for sale on the Exchange Date. If Units are not registered or
qualified for sale under either federal or applicable state securities laws, the
General Partner will not be able to effect an Exchange for the Limited Partner.
Furthermore, certain states may impose significant burdens on, or alter the
requirements for, qualifying Units for sale and, in such cases, the General
Partner may elect not to continue to qualify Units for sale in such state or
states, and a resident thereof would not be eligible to Exchange his Units. In
the event that not all Requests for Exchange can be processed because an
insufficient number of Units are available for sale on an Exchange Date, the
General Partner is hereby authorized to allocate Units in any manner which it
deems is reasonable under the circumstances and may allocate a substantial
portion of such Units to new subscribers for Units.
The General Partner, on behalf of the Partnership and each Partner, is
authorized to execute, file, record. and publish such amendments to this
Agreement and to the Partnership's Certificate of Limited Partnership as may be
necessary to reflect any Redemption pursuant to the foregoing Section 11(b) and
any Exchange pursuant to this Section 11(c).
12. Admission of Additional Partners.
At any time, the General Partner, at its option, may admit additional
Limited Partners, each of which newly-admitted Limited Partners shall contribute
cash to the capital of the Partnership for each Unit to be acquired in the
amount specified in Sections 6, 7 or 11(c), as the case may be. The General
Partner, at its option, may admit any transferee or assignee of Units as a
substituted Limited Partner in accordance with Section 11(a). Additional general
partners may not be admitted to the Partnership except as described in Sections
14 and 17(c).
13. Special Power of Attorney.
Each Limited Partner, by the execution of this Agreement, does irrevocably
constitute and appoint the General Partner, with full power of substitution, as
his true and lawful attorney-in-fact, in his name, place, and stead, to execute,
acknowledge, swear to, file, and record in his behalf in the appropriate public
offices and publish: (a) this Agreement and the Certificate of Limited
Partnership; (b) all instruments which the General Partner deems necessary or
appropriate to reflect any amendment, change, or modification of this Agreement
or the Certificate of Limited Partnership made in accordance with terms of this
Agreement; (c) certificates of assumed name; and (d) all instruments which the
General Partner deems necessary or appropriate to qualify the Partnership to do
business as a foreign limited partnership in other jurisdictions. The Power of
Attorney granted herein shall be irrevocable and deemed to be a power coupled
with an interest and shall survive the incapacity, death, dissolution,
liquidation, or termination of a Limited Partner. Each Limited Partner hereby
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agrees to be bound by any representation made by the General Partner and by any
successor thereto acting in good faith pursuant to such Power of Attorney, and
each Limited Partner hereby waives any and all defenses which may be available
to contest, negate, or disaffirm the action of the General Partner and any
successor thereto taken in good faith under such Power of Attorney. Each Limited
Partner agrees to execute a special Power of Attorney on a document separate
from this Agreement. In the event of any conflict between this Agreement and any
instruments filed by such attorney-in-fact pursuant to the Power of Attorney
granted in this Section 13, this Agreement shall control.
14. Withdrawal of a Partner.
The Partnership shall terminate and be dissolved upon the withdrawal,
insolvency, or dissolution of the General Partner (unless a new general partner
is elected pursuant to Section 17(c)). The General Partner shall not withdraw
from the Partnership without giving the Limited Partners 90 days' prior written
notice. The death, incompetency, withdrawal, insolvency, bankruptcy,
termination, liquidation, or dissolution of a Limited Partner shall not
terminate or dissolve the Partnership, and such Limited Partner, his estate,
custodian, or personal representative shall have no right to withdraw, exchange,
or value such Limited Partner's interest in the Partnership except as provided
in Section 11. Each Limited Partner (and any assignee of such Partner's
interest) expressly agrees: (a) that Section 73 of the Partnership Law of the
State of New York, entitled "Rights of retiring or estate of deceased partner
when the business is continued," shall not apply to his interest in the
Partnership, and he expressly waives any right and benefit thereunder; and (b)
that in the event of his death, he waives on behalf of himself and his estate
and he directs the legal representative of his estate and any person interested
therein to waive the furnishing of any inventory, accounting, or appraisal of
the assets of the Partnership and any right to an audit or examination of the
books of the Partnership.
15. No Personal Liability for Return of Capital.
The General Partner shall not be personally liable for the return or
repayment of all or any portion of the capital or profits of any Partner (or
assignee), it being expressly agreed that any such return of capital or profits
made pursuant to this Agreement shall be made solely from the assets (which
shall not include any right of contribution from the (`.General Partner) of the
Partnership
16. Indemnification.
(a) Indemnification by the Partnership. The Partnership shall indemnify,
defend, and hold harmless the General Partner and its officers, directors,
employees and each person, if any, who controls, is controlled by, or is under
common control with, the General Partner and the directors, officers, and
employees of any such person from and against any loss, liability, damage, cost,
or expense (including legal fees and expenses incurred in defense of any
demands, claims, or lawsuits) actually and reasonably incurred arising from
actions or omissions concerning the business or activities undertaken by or on
behalf of the Partnership, including, without limitation, any demands, claims,
or lawsuits initiated by a Limited Partner (or assignee), provided, that a court
of competent jurisdiction upon entry of a final judgment shall find (or, if no
final judgment is entered, an opinion is rendered to the Partnership by
independent counsel, who shall be other than counsel to the Partnership or the
General Partner) to the effect that the conduct that was the basis for such
liability was not the result of bad faith, misconduct, or negligence and was
done in a good faith belief that it was in, or not opposed to, the best
interests of the Partnership. Notwithstanding the foregoing, no indemnification
of the General Partner or its affiliates by the Partnership shall be permitted
for losses resulting from liabilities incurred for violation of federal or state
securities laws in connection with the registration, offer, or sale of Units.
Furthermore, in any action or proceeding brought by a Limited Partner in the
right of the Partnership to which the General Partner or any of its officers,
directors, employees, and controlling persons is a party defendant, any such
person shall be indemnified only to the extent and subject to the conditions
specified in the Act. Nothing contained in this Section 16(a) shall increase the
liability of any Limited Partner to the Partnership beyond the amount of his
capital and profits, if any, in the Partnership, including amounts received on
distributions and redemptions and deemed received on Exchanges and interest
thereon. All rights to indemnification and payment of legal fees and expenses
shall not be affected by the termination of the Partnership or the withdrawal,
insolvency, or dissolution of the General Partner. The Partnership shall not
incur the cost of that portion of liability insurance which insures the General
Partner and its affiliates for any liability as to which the General Partner and
its affiliates are prohibited from being indemnified.
A-15
<PAGE>
(b) Indemnification by Partners. In the event that the Partnership is made
a party to any claim, dispute, or litigation or otherwise incurs any loss or
expense as a result of, or in connection with, any Partner's (or assignee's)
obligations or liabilities unrelated to the Partnership's business, such Partner
(or assignees cumulatively) shall indemnify and reimburse the Partnership for
all loss and expense incurred, including reasonable attorneys' fees.
17. Amendments; Meetings.
(a) Amendments with Consent of the General Partner. If, at any time during
the term of the Partnership, the General Partner shall deem it necessary or
desirable to amend this Agreement, such amendment shall be effective only if
embodied in an instrument signed by the General Partner and by Limited Partners
owning more than 50% of the Units then outstanding or, if such amendment is an
amendment which revises Section 8(c) of this Agreement in order for such section
to comply with final regulations promulgated by the Internal Revenue Service
under Section 704(b) of the Code, signed by the General Partner, and if made in
accordance with, and to the extent permissible under, the Act. Any such
supplemental or amendatory agreement shall be adhered to and have the same
effect from and after its effective date as if the same had originally been
embodied in, and formed a part of, this Agreement; provided, however, that no
such supplemental or amendatory agreement shall, without the consent of all
Partners affected thereby, change or alter the provisions of this proviso,
reduce the capital account of any Partner, or modify the percentage of profits,
losses, or distributions to which any Partner is entitled.
(b) Meetings. Any Limited Partner, upon written request addressed to the
General Partner, at such Limited Partner's expense, shall be entitled to obtain
from the General Partner a list of the names and addresses of record of all
Limited Partners and the number of Units owned by each. Upon receipt of a
written request, signed by Limited Partners owning at least 10% of the Units
then owned by Limited Partners, that a meeting of the Partnership be called to
vote upon any matter upon which all Limited Partners may vote pursuant to this
Agreement, the General Partner, by written notice to each Limited Partner of
record mailed within 15 days after such receipt, shall call a meeting of the
Partnership. Such meeting shall be held at least 30 but not more than 50 days
after the mailing of such notice, and such notice shall specify the date, a
reasonable place and time, and the purpose of such meeting.
(c) Amendments and Actions without Consent of the General Partner. At any
meeting of the Limited Partners, upon the affirmative vote (which may be in
person or by proxy) of Limited Partners owning more than 50% of the Units then
owned by Limited Partners, the following actions may be taken: (i) this
Partnership Agreement may be amended in accordance with, and only to the extent
permissible under, the Act; provided, however, that no such amendment shall,
without the consent of all Partners affected thereby, change or alter the
provisions of this proviso, reduce the capital account of any Partner, or modify
the percentage of profits, losses, or distributions to which any Partner is
entitled; (ii) the Partnership may be dissolved; (iii) the General Partner may
be removed and replaced; (iv) a new general partner or general partners may be
elected if the General Partner elects to withdraw from the Partnership, becomes
insolvent, or is dissolved; (v) any contracts with the General Partner or any of
its affiliates may be terminated on not less than 60 days' notice without
penalty; and (vi) the sale of all of the assets of the Partnership may be
approved; provided, however, that no such action shall be taken unless
independent counsel approved by Limited Partners owning more than 50% of the
Units then owned by Limited Partners shall thereafter render an opinion to the
effect that the action to be taken will not adversely affect the status of the
Limited Partners as limited partners under the Act or the classification of the
Partnership as a partnership under the federal income tax laws and to the effect
that the action is permitted under the Act (or, in lieu thereof, a court of
competent jurisdiction has rendered a final order to such effect). The term
"final order" shall mean an order which is not subject to any further court
proceedings for appeal, review, or modification.
18. Governing Law.
The validity and construction of this Agreement shall be governed by, and
construed in accordance with, the law of the State of New York (without regard
to its choice of law principles).
19. Miscellaneous.
(a) Priority among Limited Partners. Except as otherwise specifically set
forth in this Agreement, no Limited Partner shall be entitled to any priority or
preference over any other Limited Partner in regard to the affairs of the
Partnership.
A-16
<PAGE>
(b) Notices. All notices under this Agreement (other than Requests for
Redemption of Units, Requests for Exchange of Units, notices of assignment,
transfer, or pledge of Units, and reports by the General Partner to the Limited
Partners) shall be in writing and shall be effective upon personal delivery or,
if sent by registered or certified mail, postage prepaid, addressed to the last
known address of the party to whom such notice is to be given, upon the deposit
of such notice in the United States mail. Requests for Redemption of Units,
Requests for Exchange of Units, and notices of assignment, transfer, or pledge
of Units shall be effective upon timely receipt by the General Partner. Reports
by the General Partner to the Limited Partners shall be in writing and shall be
sent by first-class mail to the last known address of each Limited Partner.
(c) Binding Effect. This Agreement shall inure to the benefit of, and be
binding upon, all of the parties, their successors, assigns as permitted herein,
custodians, estates, heirs, and personal representatives. For purposes of
determining the rights of any Partner or assignee hereunder, the Partnership and
the General Partner may rely upon the Partnership's records as to who are
Partners and assignees, and all Partners and assignees agree that their rights
shall be determined and that they shall be bound thereby, including all rights
which they may have under Section 17.
(d) Captions. Captions in no way define, limit, extend, or describe the
scope of this Agreement nor the effect of any of its provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
General Partner:
(CORPORATE SEAL) Demeter Management Corporation
Attest:
___________________________________ By:___________________________________
Initial Limited Partner:
______________________________________
A-17
<PAGE>
Annex to Limited Partnership Agreement
THIS REQUEST SHOULD BE DELIVERED TO A LIMITED PARTNER'S LOCAL DWR BRANCH OFFICE
AND MUST BE RECEIVED BY THE GENERAL PARTNER AT LEAST 15 DAYS PRIOR TO THE LAST
DAY OF THE MONTH IN WHICH A REDEMPTION IS TO BE EFFECTIVE.
DEAN WITTER CORNERSTONE FUNDS
REQUEST FOR REDEMPTION
Each Partnership Will Redeem Units of Limited Partnership Interest Only in Whole
Units or in Multiples of $1,000, Unless A Limited Partner is Redeeming His
Entire Interest in Such Partnership.
_______________, 19____
(Please date)
DEAN WITTER CORNERSTONE FUNDS
c/o Demeter Management Corporation
Two World Trade Center, 62nd Floor
New York, New York 10048
Attn: Managed Futures Account Department
Dear Sirs:
I hereby request Redemption, as of the last day of the month occurring at
least 15 days after receipt of this request, as defined in and subject to all of
the terms and conditions of the Limited Partnership Agreement of the
partnership(s) specified below, of my capital account in an amount equal to the
respective Net Asset Value, as defined therein, of the following Units of
Limited Partnership Interest ("Units") of such partnership(s), less any amounts
specified in Section 11(b) of such Limited Partnership Agreement:
Specify Quantity of Units
to be Redeemed
(Check box and insert
Name of Partnership number, if applicable
- - --------------------------------------------------------------------------------
Dean Witter Cornerstone Fund II
[ ] ________Whole Units or
[ ] $__,000 of Units or
[ ] Entire Interest
---------------------------
Dean Witter Cornerstone Fund III
[ ] ________Whole Units or
[ ] $__,000 of Units or
[ ] Entire Interest
---------------------------
Dean Witter Cornerstone Fund IV
[ ]________Whole Units or
[ ] $__,000 of Units or
[ ] Entire Interest
---------------------------
A-18
<PAGE>
I understand that this Redemption shall be effective as of the last day of
the month occurring at least 15 days after this Request for Redemption is
received by the above addressee. I understand that I may not redeem any Units
before the month-end which occurs more than 180 days after I first became a
limited partner of any of the above partnerships. I (either in my individual
capacity or as an authorized representative of any entity, if applicable) hereby
represent and warrant that I am the true, lawful, and beneficial owner of the
Unit or Units (or fractions thereof) to which this Request for Redemption
relates, with full power and authority to request redemption of such Units. Such
Units are not subject to any pledge or otherwise encumbered in any fashion. My
signature has been guaranteed by a commercial bank with a correspondent in New
York, New York or by a member of a registered national securities exchange.
SIGNATURES MUST BE IDENTICAL TO NAME(S)
IN WHICH UNITS OF LIMITED PARTNERSHIP INTEREST ARE REGISTERED
- - -------------------------------- -------------------------------------------
Print DWR Account Number Type or Print Name of Partner
-------------------------------------------
Street
___________________________________________
City State Zip Code
Individual Partner(s) or assignee(s)
X__________________________________________
Signature(s) guaranteed by:
X__________________________________________
X_________________________________ X__________________________________________
Signature(s) must be guaranteed, (Signature(s) of partner(s) or assignee(s))
not notarized
Entity Partner (or assignee)
Signature(s) guaranteed by:
___________________________________________
(Name of Entity)
_________________________________
Signature(s) must be guaranteed,
not notarized
By: X_____________________________________
(Authorized officer, partner, trustee,
or custodian. If a corporation,
include certified copy of authorizing
resolution.)
If Individual Retirement Account or other self-directed employee benefit plan,
please also complete the following:
____________________________________
(Name of Plan Participant)
X_____________________________________
(Signature of Plan Participant)
A-19
<PAGE>
Annex to Limited Partnership Agreement
THIS REQUEST SHOULD BE DELIVERED TO A LIMITED PARTNER'S LOCAL DWR BRANCH OFFICE
AND MUST BE RECEIVED BY THE GENERAL PARTNER AT LEAST 15 DAYS PRIOR TO THE LAST
DAY OF THE CALENDAR MONTH IN WHICH AN EXCHANGE IS TO BE EFFECTIVE.
DEAN WITTER CORNERSTONE FUNDS
REQUEST FOR EXCHANGE
Each Partnership Will Exchange Units of Limited Partnership Interest Only in
Whole Units or in Multiples of $1,000, Unless A Limited Partner is Liquidating
His Entire Interest in Such Partnership.
______________________, 19___
(Please date)
DEAN WITTER CORNERSTONE FUNDS
c/o Demeter Management Corporation
Two World Trade Center, 62nd Floor
New York, New York 10048
Attn: Managed Futures Account Department
Dear Sirs:
I hereby request an Exchange, as of the last day of the next calendar month
occurring at least 15 days after receipt of this request, as defined in and
subject to all of the terms and conditions of the Limited Partnership Agreement
of the partnership(s) specified below. I hereby authorize Demeter Management
Corporation to redeem the following quantity of Units of Limited Partnership
Interest ("Units") set forth opposite the name of each such partnership at the
respective Net Asset Value thereof, as defined therein, less any amounts
specified in Section 11(b) of each such Limited Partnership Agreement, and to
utilize the net proceeds thereof to purchase Units in the partnership(s)
specified below.
<TABLE>
<CAPTION>
Specify Quantity of Units Specify Partnership in
to be Redeemed which Units to
Name of Partnership (Check box and insert be Purchased
in Which Units Owned number, if applicable) (Check applicable box)
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dean Witter [ ] ________Whole Units or [ ] Dean Witter Cornerstone Fund III or
Cornerstone Fund II [ ] $__,000 of Units or [ ] Dean Witter Cornerstone Fund IV
[ ] Entire Interest
----------------------------
Dean Witter [ ] ________Whole Units or [ ] Dean Witter Cornerstone Fund II or
Cornerstone Fund III [ ] $__,000 of Units or [ ] Dean Witter Cornerstone Fund IV
[ ] Entire Interest
----------------------------
Dean Witter [ ] ________Whole Units or [ ] Dean Witter Cornerstone Fund II or
Cornerstone Fund IV [ ] $__,000 of Units or [ ] Dean Witter Cornerstone Fund III
[ ] Entire Interest
----------------------------
</TABLE>
A-20
<PAGE>
I understand that this Exchange will be effective as of the last
day of the next calendar month occurring at least 15 days after this Request
for Exchange is received by the above addressee. I understand that I may not
Exchange any Units before the last business day of any calendar month which
occurs more than 180 days after I first became a limited partner of any of
the above partnerships. I (either in my individual capacity or as an
authorized representative of any entity, if applicable) hereby represent and
warrant that I am the true, lawful, beneficial owner of the Unit or Units to
which this Request for Exchange relates, with full power and authority to
request an Exchange of such Units. Such Units are not subject to any pledge
or otherwise encumbered in any fashion. My signature has been guaranteed by a
commercial bank with a correspondent in New York, New York or by a member of
a registered national securities exchange.
I hereby certify that the representations and warranties and all
other information set forth in the Subscription Agreement and Power of
Attorney delivered in connection with my initial purchase of Units being
redeemed hereby is true and correct as of the date hereof. I have received
the most recent Prospectus relating to the above partnerships delivered to
me, or any later supplement to such Prospectus relating to the specific
offering of Units which I am purchasing on this Exchange. I represent and warr
ant that I have either: (a) net worth of at least $75,000 (exclusive of home,
furnishings, and automobiles); or (b) net worth of at least $30,000
(exclusive of home, furnishings, and automobiles) and annual gross income of
at least $30,000. However, I am a resident and/or subject to regulation by
one of the following states, my net worth and/or income satisfies the
requirements of such state, (if this Exchange is by spouses as joint owners,
their joint net worth and annual income may be used to satisfy applicable
state suitability requirements;) as used below, "NW" means net worth
exclusive of home, furnishings, and automobiles; "AI" means annual gross
income; and "TI" means annual taxable income for federal income tax
purposes):
ARIZONA (a) $250,000 NW and investment may not exceed 10% of
NW, or (b) $75,000 NW, $75,000 AI and investment may
not exceed 10% of NW.
CALIFORNIA $100,000 NW and $50,000 AI.
MAINE (a) $100,000 NW, or (b) $35,000 NW and $35,000 AI.
MASSACHUSETTS (a) $175,000 NW and investment may not exceed 10% of
NW, or (b) $100,000 NW, $50,000
PENNSYLVANIA TI during the last calendar year and anticipated
during the current calendar year and investment may not
exceed 10% of NW.
MICHIGAN (a) SOLELY AS TO MICHIGAN RESIDENTS WHO PURCHASED
UNITS IN ANY OF THE PARTNERSHIPS ON OR BEFORE MAY 3,
1992: (i) $100,000 NW and investment may not exceed
10% of NW, or (ii) $50,000 NW, $50,000 AI and
investment may not exceed 10% of NW; (b) SOLELY AS TO
MICHIGAN RESIDENTS WHO PURCHASED UNITS IN ANY OF THE
PARTNERSHIPS, OR WHO PURCHASED UNITS IN ANY OF THE
PARTNERSHIPS ON OR AFTER MAY 4, 1992: (i) $225,000 NW
and investment may not exceed 10% of NW, or (ii)
$60,000 NW, $60,000 AI and investment may not
exceed 10% of NW.
VERMONT (1) SOLELY AS TO VERMONT RESIDENTS WHO PURCHASED UNITS
IN ANY OF THE PARTNERSHIPS PRIOR TO MAY 31, 1993: (a)
$75,000 NW, or (b) $30,000 NW and $30,000 AI; (2)
SOLELY AS TO VERMONT RESIDENTS WHO PURCHASED UNITS IN
ANY OF THE PARTNERSHIPS ON OR AFTER MAY 31, 1993: (a)
$150,000 NW, or (b) $45,000 NW and $45,000 AI.
WASHINGTON (a) $150,000 NW, or (b) $45,000 NW and $45,000 AI.
I authorize Demeter Management Corporation, pursuant to the aforementioned
Power of Attorney, to take all such further actions and file all such further
documents, pursuant to said Power of Attorney and in accordance with the
terms thereof, as may be necessary to effectuate the transactions described
herein.
A-21
<PAGE>
SIGNATURES MUST BE IDENTICAL TO NAME(S)
IN WHICH UNITS OF LIMITED PARTNERSHIP INTEREST ARE REGISTERED
- - ----------------------------- ---------------------------------------------
Print DWR Account Number Type or Print Name of Partner
---------------------------------------------
Street
---------------------------------------------
City State Zip Code
Individual Partner(s) or assignee(s)
X
----------------------------------------------
Signature(s) guaranteed by: X
----------------------------------------------
X
- - ----------------------------- ----------------------------------------------
Signature(s) must be guaranteed, (Signature(s) of partner(s) or assignee(s))
not notarized
Entity Partner (or assignee)
Signature(s) guaranteed by:
----------------------------------------------
(Name of Entity)
- - ------------------------------
Signature(s) must be guaranteed,
not notarized
By: X
----------------------------------------
(Authorized officer, partner, trustee,
or custodian. If a corporation, include
certified copy of authorizing resolution.)
If Individual Retirement Account or other self-directed employee benefit
plan, please also complete the following:
----------------------------------------------
(Name of Plan Participant)
X
---------------------------------------------
(Signature of Plan Participant)
A-22
<PAGE>
PART II
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
The following documents are made a part of this Registration Statement.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
#1.01 --Form of Selling Agreement between each of Dean Witter Cornerstone Funds I,
II and III and Dean Witter Reynolds Inc.
#1.02 --Form of Additional Sellers Agreement between Dean Witter Reynolds Inc.
and additional selling agents (included as an annex to Exhibit 1.01, form of
Selling Agreement).
#1.03 --Amendment No. 1 to Selling Agreement between each of Dean Witter Cor-
nerstone Funds I, II and III and Dean Witter Reynolds Inc.
#1.04 --Form of Amendment No. 2 to Selling Agreement between each Registrant and
Dean Witter Reynolds Inc.
#1.05 --Form of Amendment No. 3 to Selling Agreement between each Registrant and
Dean Witter Reynolds Inc.
#1.06 --Form of Amendment No. 4 to Selling Agreement between each Registrant and
Dean Witter Reynolds Inc.
#1.07 --Form of Amendment No. 5 to the Selling Agreement between each Registrant
and Dean Witter Reynolds Inc.
#3.01 --Form of Limited Partnership Agreement of each Registrant with forms of
Request for Redemption and Request for Exchange annexed thereto (included
as Exhibit A to the Prospectus).
#3.02 --Form of Amendment No. 1 to Form of Limited Partnership Agreement of each
Registrant with forms of Request for Redemption and Request for Exchange
annexed thereto.
#5.01 --Opinion of counsel to each of Dean Witter Cornerstone Funds I, II and III
relating to the legality of the Units (including consent).
#5.02 --Opinion of counsel to each of Dean Witter Cornerstone Fund IV relating to the
legality of the Units (including consent).
#8.01 --Letter of counsel to each of Dean Witter Cornerstone Funds I, II and III relating to federal income
tax matters (including consent).
#8.02 --Letter of counsel to Dean Witter Fund Cornerstone IV relating to federal
income tax matters (including consent).
#10.01 --Form of Customer Agreement between each of Dean Witter Cornerstone
Funds I, II and III and Dean Witter Reynolds Inc.
#10.01(a) --Form of Customer Agreement between Dean Witter Cornerstone Fund IV and
Dean Witter Reynolds Inc.
#10.01(b) --Form of Amendment to Customer Agreement between each Registrant and
Dean Witter Reynolds Inc.
#10.01(c) --Form of Amendment No. 2 to Customer Agreement between each Registrant
and Dean Witter Reynolds Inc.
#10.02 --Form of Management Agreement among each of Dean Witter Cornerstone
Funds I, II and III, Demeter Management Corporation and the trading man-
agers of each such partnership.
#+10.02(a) --Management Agreement among Dean Witter Cornerstone Fund I, Demeter
Management Corporation and Commodity Monitors, Inc.
<FN>
- - -----------
# Previously filed
* Filed herewith
+ No longer used by the Partnerships
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
#+10.02(b) --Management Agreement among Dean Witter Cornerstone Fund III, Demeter
Management Corporation and I.C.S.C., Inc.
#10.02(c) --Management Agreement among Dean Witter Cornerstone Fund III, Demeter
Management Corporation and Computerized Commodity Advisory, Inc.
#10.02(d) --Form of Management Agreement among Dean Witter Cornerstone Fund IV,Demeter Management Corporation and
the trading managers of the Partnership.
#10.02(e) --Management Agreement among Dean Witter Cornerstone Fund IV, DemeterManagement Corporation and John W.
Henry & Co., Inc.
#10.02(f) --Management Agreement among Dean Witter Cornerstone Fund IV, Demeter Management Corporation and Sunrise
Commodities, Inc.
#+10.03(a) --Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of Units that is
an individual or joint owner, corporation, partnership, or trust.
#+10.03(a)(1) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an individual or joint owner,
corporation, partnership or trust.
#+10.03(a)(2) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an individual or joint owner,
corporation, partnership or trust.
#+10.03(a)(3) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an individual or joint owner,
corporation, partnership or trust.
#+10.03(a)(4) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an individual or joint owner.
corporation, partnership or trust.
#+10.03(b) --Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of Units that is
an Individual Retirement Account or other self-directed employee benefit
plan.
#+10.03(b)(1) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an Individual Retirement Account or other self-directed
employee benefit plan.
#+10.03 (b)(2) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an Individual Retirement Account or other self-directed
employee benefit plan.
#+10.03 (b)(3) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an Individual Retirement Account or other self-directed
employee benefit plan.
#+10.03(b)(4) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is an Individual Retirement Account or other self-directed
employee benefit plan.
#+10.03(c) --Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of Units that is
a custodianship for minors.
#+10.03 (c)(1) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is a custodianship for minors.
#+10.03(c)(2) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is a custodianship for minors.
<FN>
- - -------------
# Previously filed
* Filed herewith
+ No longer used by the Partnerships
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
#+10.03(c)(3) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is a custodianship for minors.
#+10.03(c)(4) --Amendment to Form of Subscription Agreement and Power of Attorney to be executed by each purchaser of
Units that is a custodianship for minors.
#+10.03(d) --Form of Subscription Agreement and Power of Attorney to be executed by all purchasers of Units.
#10.04 --Form of Escrow Agreement among Demeter Management Corporation, Dean Witter Reynolds Inc. and Chemical
Bank.
#10.04(a) --Form of Amendment No. 1 to Escrow Agreement among Demeter Management Corporation, Dean Witter Reynolds
Inc. and Chemical Bank.
#10.05 --Certificate of Limited Partnership, as amended, of each of Dean Witter Cornerstone Funds I, II and
III.
#10.05(a) --Certificate of Limited Partnership of Dean Witter Cornerstone Fund IV.
#10.06 --Form of Dean Witter Cornerstone Funds Exchange Agreement among Dean Witter Cornerstone Funds I, II and
III and Demeter Management Corporation.
#10.06(a) --Form of Amendment No. 1 to Dean Witter Cornerstone Funds Exchange Agreement among all Registrants and
Demeter Management Corporation.
#10.06(b) --Form of Amendment No. 2 to Dean Witter Cornerstone Funds Exchange Agreement among all Registrants and
Demeter Management Corporation.
*23.01 --Consent of Independent Auditors.
<FN>
- - ------------
# Previously filed
* Filed herewith
+ No longer used by the Partnerships
</TABLE>
(B) FINANCIAL STATEMENTS.
Included in the Prospectus:
Affirmation of General Partner
Dean Witter Cornerstone Fund II
Dean Witter Cornerstone Fund III
Dean Witter Cornerstone Fund IV
Independent Auditors' Report
Statements of Financial Condition
Statements of Operations
Statements of Cash Flows
Statements of Changes in Partners' Capital
Notes to Financial Statements
Demeter Management Corporation
Independent Auditors' Report
Statements of Financial Condition
Notes to Statements of Financial Condition
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Post- Effective Amendment No. 22 to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and State of New York on
the 7th day of June, 1996.
DEAN WITTER CORNERSTONE FUND II
DEAN WITTER CORNERSTONE FUND III
DEAN WITTER CORNERSTONE FUND IV
BY: DEMETER MANAGEMENT CORPORATION,
General Partner
By:
/s/ Mark J. Hawley
------------------------------
Mark J Hawley. President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 22 to the Registration Statement has been signed
by the following persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURES TITLE DATE
DEMETER MANAGEMENT CORPORATION General Partner
By: /s/ Mark J. Hawley President and Director of June 7, 1996
-------------------------------------------------- the General Partner
Mark J Hawley
/s/ Richard M. DeMartini Director and Chairman of June 7, 1996
- - ----------------------------------------------------- the Board of the
Richard M. DeMartini General Partner
- - ------------------------------------------------------ Director of the General June , 1996
Laurence R. Mollner Partner
/s/ Lawrence E. Volpe
- - ------------------------------------------------------ Director of the General June 7, 1996
Lawrence E. Volpe Partner
Director of the General June , 1996
- - ------------------------------------------------------ Partner
Joseph G. Siniscalchi
Director of the General June , 1996
- - ------------------------------------------------------ Partner
Edward C. Oelsner, III
/s/ Robert E. Murray Director of the General June 7, 1996
- - -------------------------------------------------------
Robert E. Murray Partner
/s/ Patti L. Behnke Vice President and June 7, 1996
- - ------------------------------------------------------- Chief Financial
Patti L. Behnke and Principal
Accounting
Officer of the
General Partner
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE NO.
23.01 --Consent of Independent Auditors...................
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post Effective Amendment No. 22 to Registration
No. 2-88587 of Dean Witter Cornerstone Fund II, III and IV of our report dated
February 21, 1996 relating to the financial statements of Dean Witter
Cornerstone Fund II, III and IV and our report dated March 1, 1996 relating to
the statements of financial condition of Demeter Management Corporation
appearing in the Prospectus, which is part of such Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
New York, New York
June 7, 1996
