UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT
[X] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _____________ to _________________.
Commission file number 0-13298
DEAN WITTER CORNERSTONE FUND II
(Exact name of registrant as specified in its Limited Partnership Agreement)
NEW YORK 13-3212871
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, New York, N.Y. - 62nd Flr. 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 392-5454
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment of this Form 10K. [ X ]
State the aggregate market value of the Units of Limited Partnership Interest
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which units were sold, or the average bid
and asked prices of such units, as of a specified date within 60 days prior to
the date of filing: $29,374,661.68 at January 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1) <PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND II
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1996
<CAPTION>
Page No.
<S> <C>
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . . 1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . 2-3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . .4-5
Item 4. Submission of Matters to a Vote of Security Holders . . 5
Part II.
Item 5. Market for the Registrant's Partnership Units and
Related Security Holder Matters . . . . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 8-13
Item 8. Financial Statements and Supplementary Data. . . . . . .14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . 14
Part III.
Item 10. Directors, Executive Officers, Promoters and
Control Persons of the Registrant . . . . . . . . . . 15-18
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . 18
Item 13. Certain Relationships and Related Transactions . . . . 19
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 20
</TABLE>
<PAGE>
<TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference as
follows:
<CAPTION>
Documents Incorporated Part of Form 10-K
<S> <C>
Partnership's Registration Statement I
Form S-1, File No. 2-88587, as amended
(including the Partnership's latest
Prospectus dated August 28, 1996)
Partnership's Annual Report on Form IV
10-K for the fiscal year ended
September 30, 1984, File No. 2-88587
December 31, 1996 Annual Report
for the Dean Witter Cornerstone Funds II and IV
II, III and IV
</TABLE>
<PAGE>
PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter Cornerstone Fund
II (the "Partnership") is a New York limited partnership formed to engage
in the speculative trading of commodity futures contracts and other
commodity interests, including, but not limited to, forward contracts on
foreign currencies.
The Partnership's net asset value per unit, as of December 31, 1996,
was $3,155.36, representing an increase of 11.47 percent from the net
asset value per unit of $2,830.65 at December 31, 1995.
(b) Financial Information about Industry Segments. The
Partnership's business comprises only one segment for financial reporting
purposes, speculative trading of commodity futures contracts and other
commodity interests. The relevant financial information is presented in
Items 6 and 8.
(c) Narrative Description of Business. The Partnership is in the
business of speculative trading in futures interests, pursuant to trading
instructions provided by Abacus Trading Corporation and John W. Henry &
Company, Inc. ("JWH"), its independent trading advisors (the "Trading
Advisor(s)"). For a detailed description of the different facets of the
Partnership's business, see those portions of the Partnership's latest
Prospectus, dated August 28, 1996 (the "Prospectus"), filed as part of the
Registration Statement on Form S-1 (see "Documents Incorporated by
Reference" Page 1), set forth on the next page.
<PAGE>
Facets of Business
1. Summary 1. "Summary of the Prospectus"
(Pages 1-9).
2. Commodity Markets 2. "The Commodities Market"
(Pages 80-84).
3. Partnership's Commodity 3. "Investment Program, Use of
Trading Arrangements and Proceeds and Trading Policies"
Policies (Pages 45-47). "The
Managers" (Pages 51-74).
4. Management of the Part- 4. "The Cornerstone Funds"
nership (Pages 19-24). "The
General Partner" (Pages 160)
and "The Commodity
Broker" (Pages 79-80).
"The Limited Partnership
Agreements" (Pages 86-90).
5. Taxation of the Partnership's 5. "Material Federal Income Tax
Limited Partners Considerations" and "State
and Local Income Tax Aspects"
(Pages 92-99).
(d) Financial Information About Foreign and Domestic Operations
and Export Sales.
The Partnership has not engaged in any operations in foreign
countries; however, the Partnership (through the commodity broker) enters
into forward contract transactions where foreign banks are the contracting
party and trades in commodity interest contracts on foreign exchanges.
<PAGE>
Item 2. PROPERTIES
The executive and administrative offices are located within the
offices of Dean Witter Reynolds Inc. ("DWR"). The DWR offices utilized
by the Partnership are located at Two World Trade Center, 62nd Floor, New
York, NY 10048.
Item 3. LEGAL PROCEEDINGS
On September 6, 10, and 20, 1996, similar purported class actions
were filed in the Superior Court of the State of California, County of Los
Angeles, on behalf of all purchasers of interest in limited partnership
commodity pools sold by DWR. Named defendants include DWR, Demeter
Management Corporation ("Demeter"), Dean Witter Futures & Currency
Management Inc., Dean Witter, Discover & Co. ("DWD") (all such parties
referred to hereafter as the "Dean Witter Parties"), the Partnership,
certain other limited partnership commodity pools of which Demeter is the
general partner, and certain trading advisors (including JWH) to those
pools. Similar purported class actions were also filed on September 18
and 20, 1996, in the Supreme Court of the State of New York, New York
County, and on November 14, 1996 in the Superior Court of the State of
Delaware, New Castle County, against the Dean Witter Parties and certain
trading advisors (including JWH) on behalf of all purchasers of interests
in various limited partnership commodity pools, including the Partnership,
sold by DWR. Generally, these complaints allege, among other things, that
the defendants committed fraud, deceit, misrepresentation, breach of
fiduciary duty, fraudulent and unfair business practices, unjust
enrichment, and conversion in connection with the sale and operation of
the various limited partnership commodity pools. The complaints seek
unspecified amounts of compensatory and punitive damages and other relief.
<PAGE>
It is possible that additional similar actions may be filed and that, in
the course of these actions, other parties could be added as defendants.
The Dean Witter Parties believe that they and the Partnership have strong
defenses to, and they will vigorously contest, the actions. Although the
ultimate outcome of legal proceedings cannot be predicted with certainty,
it is the opinion of management of the Dean Witter Parties that the
resolution of the actions will not have a material adverse effect on the
financial condition or the results of operations of any of the Dean Witter
Parties or the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED
SECURITY HOLDER MATTERS
There is no established public trading market for the Units of
Limited Partnership Interest in the Partnership. The number of holders
of Units at December 31, 1996 was approximately 3,239. No distributions
have been made by the Partnership since it commenced operations on January
2, 1985. Demeter has sole discretion to decide what distributions, if any,
shall be made to investors in the Partnership. No determination has yet
been made as to future distributions.
Limited Partnership Units were registered for sale to the public in
certain Canadian provinces.
<PAGE>
<TABLE>
Item 6. SELECTED FINANCIAL DATA (in dollars)
<CAPTION>
For the Years Ended December 31,
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Total Revenues
(including interest) 6,449,790 11,604,765 830,882 5,262,886 2,460,421
Net Income (Loss) 3,047,462 7,882,659 (3,095,555) 2,101,347 (564,790)
Net Income (Loss)
Per Unit (Limited
& General Partners) 324.71 592.90 (219.47) 178.05 (30.96)
Total Assets 30,046,842 31,558,306 32,062,117 32,511,448 27,333,796
Total Limited Partners'
Capital 28,360,195 30,213,505 30,885,515 31,331,000 26,013,019
Net Asset Value Per
Unit of Limited
Partnership Interest 3,155.36 2,830.65 2,237.75 2,457.22 2,279.17
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity. The Partnership's assets are deposited in separate
commodity trading accounts with DWR, the commodity broker, and are used
by the Partnership as margin to engage in trading commodity futures
contracts and forward contracts on foreign currencies. DWR holds such
assets in either designated depositories or in securities approved by the
Commodity Futures Trading Commission ("CFTC") for investment of customer
funds. The Partnership's assets held by DWR may be used as margin solely
for the Partnership's trading. Since the Partnership's sole purpose is
to trade in commodity futures contracts and other commodity interests, it
is expected that the 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. 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 the Partnership from promptly liquidating
its commodity futures positions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world currencies
have low trading volume and are illiquid which may prevent the Partnership
from trading in potentially profitable markets or prevent the Partnership
from promptly liquidating unfavorable positions in such markets and
subjecting it to substantial losses.<PAGE>
Either of these market conditions could result in restrictions on
redemptions.
Market Risk. The Partnership trades futures, options and forward
contracts in interest rates, stock indices, commodities and currencies.
In entering into these contracts there exists a risk to the Partnership
(market risk) that such contracts may be significantly influenced by
market conditions, such as interest rate volatility, resulting in such
contracts being less valuable. If the markets should move against all of
the futures interest positions held by the Partnership at the same time,
and if the Trading Advisors were unable to offset futures interest
positions of the Partnership, the Partnership could lose all of its assets
and the Limited Partners would realize a 100% loss. The Partnership has
established Trading Policies, which include standards for liquidity and
leverage which help control market risk. Both the Trading Advisors and
Demeter monitor the Partnership's trading activities on a daily basis to
ensure compliance with the Trading Policies. Demeter may (under terms of
the Management Agreements) override the trading instructions of a Trading
Advisor to the extent necessary to comply with the Partnership's Trading
Policies.
Credit Risk. In addition to market risk, the Partnership is subject
to credit risk in that a counterparty may not be able to meet its
obligations to the Partnership. The counterparty of the Partnership for
futures contracts traded in the United States and most foreign exchanges
on which the Partnership trades is the clearinghouse associated with such
exchange. In general, a clearinghouse is backed by the membership of the
exchange and will act in the event of non-performance by one of its
members or one of its member's customers, and as such, should
<PAGE>
significantly reduce this credit risk. In cases where the Partnership
trades on exchanges where the clearinghouse is not funded or guaranteed by
the membership or where the exchange is a "principals' market" in which
performance is the responsibility of the exchange member and not the
exchange or a clearinghouse, or when the Partnership enters into off-
exchange member and not the exchange or a clearinghouse, or when the
Partnership enters into off-exchange contracts with a counterparty, the
sole recourse of the Partnership will be the clearinghouse, the exchange
member or the off-exchange contract counterparty, as the case may be. or
when the Partnership enters into off-exchange contracts with a
counterparty, the sole recourse of the Partnership will be the
clearinghouse or the counterparty as the case may be. With respect to
futures contracts, 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 Partnership. DWR employees also from time to time
serve on supervisory or management committees of such exchanges. If DWR
believed that there was a problem with the creditworthiness of an exchange
on which the Partnership deals, it would so advise Demeter. With respect
to exchanges of which DWR is not a member, DWR acts only through clearing
brokers it has determined to be creditworthy. If DWR believed that a
clearing broker with which it deals on behalf of clients were not
creditworthy, it would terminate its relationship with such broker.
While DWR monitors the creditworthiness and risks involved in
dealing on the various exchanges (and their clearinghouses) and with other
exchange members, there can be no assurance that an exchange (or its
clearinghouse) or other exchange member will be able to meet its
obligations to the Partnership. DWR has not undertaken to indemnify the
<PAGE>
Partnership against any loss. Further, the law is unclear, particularly
with respect to trading in various non-U.S. jurisdictions, as to whether
DWR has any obligation to protect the Partnership from any liability in
the event that an exchange or its clearinghouse or another exchange member
defaults on its obligations on trades effected for the Partnership. See
"Financial Instruments", under Notes to Financial Statements - to the
Partnership's Financial Statements in its 1996 Annual Report to Partners,
incorporated by reference in this Form 10-K.
Although DWR monitors the creditworthiness of the foreign exchanges
and clearing brokers with which it does business for clients, DWR does not
have the capability to precisely quantify the Partnership's exposure to
risks inherent in its trading activities on foreign exchanges, and, as a
result, the risk is not monitored by DWR on an individual client basis
(including the Partnership). In this regard, DWR must clear its customer
trades through one or more other clearing brokers on each exchange where
DWR is not a clearing member. Such other clearing brokers calculate the
net margin requirements of DWR in respect of the aggregate of all of DWR's
customer positions carried in DWR's omnibus account with that clearing
broker. Similarly, DWR calculates a net margin requirement for the
exchange-traded futures positions of each of its customers, including the
Partnership. Neither DWR nor DWR's respective clearing brokers on each
foreign futures exchange calculates the margin requirements of an
individual customer, such as the Partnership, in respect of the customer's
aggregate contract positions on any particular exchange. With respect to
forward contract trading, the Partnership trades with only those
counterparties which Demeter, together with DWR, have determined to be
creditworthy. As set forth in the Partnership's Trading Policies, in
determining creditworthiness, Demeter and DWR consult with the Corporate
<PAGE>
Credit Department of DWR. Currently, the Partnership deals solely with
DWR as its counterparty on forward contracts. While DWR and Demeter
monitor creditworthiness and risk 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
Partnership.
Capital Resources. The Partnership does not have, nor does it
expect to have, any capital assets. Redemptions of additional Units in
the future will impact the amount of funds available for investments in
commodity futures, forward contracts on foreign currencies and other
commodity interests in subsequent periods. As redemptions are at the
discretion of Limited Partners, it is not possible to estimate the amount
and therefore, the impact of future redemptions.
Results of Operations. As of December 31, 1996, the Partnership's
total capital was $29,046,170 a decrease of $1,782,718 from the
Partnership's total capital of $30,828,888 at December 31, 1995. For the
year ended December 31, 1996, the Partnership generated net income of
$3,047,462, total subscriptions aggregated $155,468 and total redemptions
aggregated $4,985,648.
For the year ended December 31, 1996, the Partnership's total
trading revenues including interest income were $6,449,790. The
Partnership's total expenses for the year were $3,402,328 resulting in net
income of $3,047,462. The value of an individual unit in the Partnership
increased from $2,830.65 at December 31, 1995 to $3,155.36 at December 31,
1996.
As of December 31, 1995, the Partnership's total capital was
$30,828,888 a decrease of $543,114 from the Partnership's total capital of
$31,372,002 at December 31, 1994. For the year ended December 31, 1995,
<PAGE>
the Partnership generated net income of $7,882,659, total subscriptions
aggregated $178,837 and total redemptions aggregated $8,604,610.
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 value of an individual unit in the Partnership
increased from $2,237.75 at December 31, 1994 to $2,830.65 at December 31,
1995.
As of December 31, 1994, the Partnership's total capital was
$31,372,002 a decrease of $569,371 from the Partnership's total capital
of $31,941,373 at December 31, 1993. For the year ended December 31,
1994, the Partnership incurred a net loss of $3,095,555, total
subscriptions aggregated $7,098,104 and total redemptions aggregated
$4,571,920.
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 value of an individual unit in the
Partnership decreased from $2,457.22 at December 31, 1993 to $2,237.75 at
December 31, 1994.
The Partnership's overall performance record represents varied
results of trading in different commodity markets. For a further
description of trading results, refer to the letter to the Limited
Partners in the accompanying 1996 Annual Report to Partners, incorporated
by reference in this Form 10-K. The Partnership's gains and losses are
allocated among its Limited Partners for income tax purposes.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item appears in the attached 1996
Annual Report to Partners and is incorporated by reference in this Annual
Report on Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT
General Partner
Demeter, a Delaware corporation, was formed on August 18, 1977 to
act as a commodity pool operator and is registered with the CFTC as a
commodity pool operator and currently is a member of the National Futures
Association ("NFA") in such capacity. Demeter is wholly-owned by DWD and
is an affiliate of DWR. DWD, DWR and Demeter may each be deemed to be
"promoters" and/or a "parent" of the Partnership within the meaning of the
federal securities laws.
Dean Witter Reynolds Inc.
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, the American Stock Exchange, the Chicago Board Options Exchange,
and other major securities exchanges, 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 371 branch offices with approximately 9,080
account executives servicing individual and institutional client accounts.
<PAGE>
Directors and Officers of the General Partner
The directors and officers of Demeter as of December 31, 1996 are
as follows:
Richard M. DeMartini, age 44, is the Chairman of the Board and a
Director of Demeter. Mr. DeMartini is also the Chairman of the Board and
a Director of Dean Witter Futures & Currency Management Inc. ("DWFCM"), a
registered commodity trading advisor. 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 DWR, and has
served as an officer of DWR for the past five years. Mr. DeMartini has
been with DWD and its affiliates for 22 years.
Mark J. Hawley, age 53, is President and a Director of Demeter. Mr.
Hawley joined DWR in February 1989 and currently serves as 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 Demeter and DWFCM. Mr.
Volpe joined DWR as a Senior Vice President and Controller in September
<PAGE>
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 was associated with Arthur
Anderson & Co. and prior to his departure he served as audit manager in
the financial services division.
Joseph G. Siniscalchi, age 51, is a Director of Demeter. 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 Dean Witter Financial 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 55, is a Director of Demeter. 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 54, is a Director of Demeter. 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 commodity
interests trading.
Robert E. Murray, age 36, is a Director of Demeter. Mr. Murray is
currently a Senior Vice President of the DWR Managed Futures Division and
is a Director and 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
<PAGE>
for the development and maintenance of the proprietary Fund Management
System utilized by Demeter 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 Demeter. Ms. Behnke joined DWR in 1991 as Assistant Vice
President of Financial Reporting and is currently First Vice President and
Director of Financial Reporting and Managed Futures Accounting in the
Capital Markets division of DWR. From August 1988 to September 1990, Ms.
Behnke was Assistant Controller of L.F. Rothschild & Co. and from
September 1986 to August 1988, she was associated with Carteret Savings
Bank as Assistant Vice President - Financial Analysis. From April 1982 to
September 1986, Ms. Behnke was an auditor at Arthur Andersen & Co.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers. As a
limited partnership, the business of the Partnership is managed by Demeter
which is responsible for the administration of the business affairs of the
Partnership but receives no compensation for such services.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - As of
December 31, 1996, there were no persons as beneficial owners of more than
5 percent of the Units of Limited Partnership Interest in the Partnership.
(b) Security Ownership of Management - At December 31, 1996,
Demeter owned 217.400 Units of General Partnership Interest in the
Partnership representing a 2.36 percent interest in the Partnership.
(c) Changes in Control - None
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of "Notes to
Financial Statements", in the accompanying 1996 Annual Report to Partners,
incorporated by reference in this Form 10-K. In its capacity as the
Partnership's retail commodity broker, DWR received commodity brokerage
commissions (paid and accrued by the Partnership) of $1,719,932 for the
year ended December 31, 1996.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of independent public
accountants, all appearing in the accompanying 1996 Annual Report to
Partners, are incorporated by reference in this Form 10-K:
- Report of Deloitte & Touche LLP, independent auditors, for the
years ended December 31, 1996, 1995 and 1994.
- Statements of Financial Condition as of December 31, 1996 and
1995.
- Statements of Operations, Changes in Partners' Capital, and
Cash Flows for the years ended December 31, 1996, 1995 and
1994.
- Notes to Financial Statements.
With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the 1996 Annual Report to
Partners is not deemed to be filed with this report.
2. Listing of Financial Statement Schedules
No financial statement schedules are required to be filed with this
report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Partnership during the
last quarter of the period covered by this report.
(c) Exhibits
Refer to Exhibit Index on Page E-1.
<PAGE>
SIGNATURES
Pursuant to the requirement of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DEAN WITTER CORNERSTONE FUND II
(Registrant)
BY: Demeter Management Corporation,
General Partner
March 24, 1997 BY: /s/ Mark J. Hawley
Mark J. Hawley, Director and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Demeter Management Corporation.
BY: /s/ Mark J. Hawley March 24, 1997
Mark J. Hawley, Director and
President
/s/ Richard M. DeMartini March 24, 1997
Richard M. DeMartini, Director
and Chairman of the Board
/s/ Lawrence Volpe March 24, 1997
Lawrence Volpe, Director
/s/ Laurence E. Mollner March 24, 1997
Laurence E. Mollner, Director
/s/ Joseph G. Siniscalchi March 24, 1997
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 24, 1997
Edward C. Oelsner III, Director
/s/ Robert E. Murray, March 24, 1997
Robert E. Murray, Director
/s/ Patti L. Behnke March 24, 1997
Patti L. Behnke, Chief Financial
Officer and Principal Accounting
Officer
<PAGE>
EXHIBIT INDEX
ITEM METHOD OF FILING
- - 3. Limited Partnership Agreement of
the Partnership, dated as of
December 7, 1983, as amended as (1)
of May 11, 1984.
- - 10. Management Agreement among the
Partnership, Demeter and A.O.
Management, Inc. (former name
of Abacus Trading Corporation),
dated as of November 18, 1983. (2)
- - 10. Management Agreement among the
Partnership, Demeter and JWH
dated November 15, 1983. (3)
- - 10. Dean Witter Cornerstone Funds
Exchange Agreement, dated as of
May 31, 1984. (4)
- - 10. Amended and restated Customer Agreement Between the
Partnership and DWR, dated as of September 1, 1996. (5)
- - 13. December 31, 1996 Annual Report to Limited Partners. (6)
(1) Incorporated by reference to Exhibit 3.01 of the Partnership's Annual
Report on Form 10-K for the fiscal year ended September 30, 1984 (File No. 0-
13298).
(2) Incorporated by reference to Exhibit 10.01 of the Partnership's Annual
Report on Form 10-K for the fiscal year ended September 30, 1984 (File No. 0-
13298).
(3) Incorporated by reference to Exhibit 10.03 of the Partnership's Annual
Report on Form 10-K for the fiscal year ended September 30, 1984 (File No. 0-
13298).
(4) Incorporated by reference to Exhibit 10.04 of the Partnership's Annual
Report on Form 10-K for the fiscal year ended September 30, 1984 (File No. 0-
13298).
(5) Incorporated by reference to Exhibit 10.01(d) to Post-Effective
Amendment No. 23 to the Partnership's Registration Statement on Form S-1
(File No. 2-88587) filed on August 26, 1996.
(6) Filed herewith.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Dean
Witter Cornerstone Fund II and is qualified in its entirety by references
to such financial instruments.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 28,509,266
<SECURITIES> 0
<RECEIVABLES> 97,815
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,046,842<F1>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,046,842<F2>
<SALES> 0
<TOTAL-REVENUES> 6,449,790<F3>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,402,328
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,047,462
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,047,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,047,462
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>In addition to cash and receivables, total assets include net unrealized
gain on open contracts of $1,316,434 and due from DWR of $123,327.
<F2>Liabilities include redemptions payable of $442,706, accrued incentive
fees of $316,750, accrued management fees of $99,352, accrued brokerage
commissions of $83,967, common administrative expenses payable of
$52,339 and accrued transaction fees and costs of $5,558.
<F3>Total revenues includes realized trading revenue of $7,321,679, net
change in unrealized of ($2,051,673) and interest income of $1,179,784.
</FN>
</TABLE>
<PAGE>
Cornerstone
Funds
December 31, 1996
Annual Report
[LOGO] DEAN WITTER
<PAGE>
DEAN WITTER
Two World Trade Center
62nd Floor
New York, NY 10048
Telephone (212) 392-8899
DEAN WITTER CORNERSTONE FUNDS
ANNUAL REPORT
1996
Dear Limited Partner:
This marks the twelfth annual report for Dean Witter Cornerstone Funds II and
III and the tenth for Dean Witter Cornerstone Fund IV. The Net Asset Value per
Unit for each of the three Cornerstone Funds on December 31, 1996 was as
follows:
<TABLE>
<CAPTION>
% CHANGE
FUNDS N.A.V. FOR YEAR
----- --------- --------
<S> <C> <C>
Cornerstone Fund II $3,155.36 11.5%
CornerstoneFund III $2,715.51 8.2%
Cornerstone Fund IV $3,204.66 13.0%
</TABLE>
CORNERSTONE FUND IV ("FUND IV"), the currency Fund, recorded gains during
January as short positions in the Japanese yen profited from a decline in value
relative to the U.S. dollar. Smaller gains were recorded from transactions
involving the New Zealand dollar and Swedish krona. Losses from trading in the
British pound, Swiss franc and Italian lira offset a portion of these gains.
During February, Fund IV experienced losses as a result of a dramatic reversal
in the previous downward move in the value of the Japanese yen and most major
European currencies relative to the U.S. dollar. Small gains from long
positions in the Australian dollar offset a portion of the month's overall
losses. Gains were recorded during March from long Australian dollar positions
as its value trended higher versus the U.S. dollar and other world currencies.
Short Japanese yen positions also profited as its value moved lower relative to
the U.S. dollar.
During April, Fund IV recorded gains from short positions in the German mark,
as well as in the Swiss and French francs, as the value of these currencies
declined relative to the U.S. dollar. A portion of these gains was offset by
losses recorded from previously established short positions in the Japanese
yen, as the value of the yen moved higher. In May, gains were recorded as the
value of the Australian dollar continued to move higher versus other major
world currencies. Additional gains were experienced from long British pound
positions as its value also moved
<PAGE>
higher, and from short positions in the Swiss franc as its value declined
versus the U.S. dollar. These gains were partially offset by losses from choppy
movement in the value of the Japanese yen and German mark. Fund IV experienced
small losses in June as the value of the Australian dollar reversed lower
relative to other world currencies. Short-term volatility in the value of the
New Zealand dollar and Swiss franc resulted in smaller losses being recorded. A
majority of these losses was offset by gains recorded from short positions in
the Japanese yen.
Losses were recorded during July from short Japanese yen positions as its value
moved sharply higher versus the U.S. dollar. Additional losses were recorded
from short Swiss franc positions as its value moved higher following a brief
move lower. During August, losses were recorded as a result of trend reversals
and choppy movement in the value of most major currencies relative to the U.S.
dollar. The most significant losses were recorded from previously established
short Australian dollar positions, and from long positions in the French franc
and German mark. Fund IV recorded small profits in September as the downward
trend in the value of the Japanese yen relative to the U.S. dollar re-emerged.
Smaller gains were recorded from long New Zealand dollar positions as its value
moved higher versus the U.S. dollar and other world currencies. These gains
were partially offset by losses experienced from trading in the German mark,
Australian dollar and Swiss franc.
Significant gains were recorded during October due primarily to a dramatic
increase in the value of the British pound relative to the U.S. dollar and
other major currencies. Additional gains were recorded from short Japanese yen
positions as its value continued to trend lower. During November, gains were
recorded as the value of the British pound continued its climb versus the U.S.
dollar. Additional gains were recorded from short Swiss franc positions as its
value decreased versus the U.S. dollar, and from long Australian dollar
positions, as its value finished the month higher relative to the U.S. dollar
and certain European currencies. Fund IV recorded gains during December as a
result of short Swiss franc and Japanese yen positions as the value of these
currencies continued their recent trend lower relative to the U.S. dollar.
These gains were
partially offset by losses recorded from long Australian dollar positions as
its value reversed sharply lower early in the month.
<PAGE>
CORNERSTONE FUND II ("FUND II"), a diversified Fund, recorded gains during
January as short positions in the Japanese yen profited from a decline in value
relative to the U.S. dollar. Additional gains were recorded from long positions
in European bonds as prices moved higher. Losses were experienced during
February due primarily to a sharp trend reversal in the value of the Japanese
yen relative to the U.S. dollar. Additional losses were recorded as a result of
short-term volatile price movement in crude oil futures. Smaller losses were
experienced in soft commodities and financial futures. Fund II recorded small
gains in March primarily from long crude oil futures positions. Additional
gains were recorded from transactions involving the Australian dollar and
Japanese yen. Losses recorded in the financial futures, metals and agricultural
markets offset a majority of these gains.
During April, Fund II recorded gains from short positions in the Swiss franc,
German mark and French franc as the value of these currencies moved lower
relative to the U.S. dollar. Additional gains were recorded in the
agricultural, energy and metals markets. Losses were experienced during May due
primarily to choppy price movement in non-U.S. interest rate futures.
Additional losses were recorded from previously established long crude oil
futures positions as prices reversed lower. A portion of these losses was
offset by gains recorded in the currency and agricultural markets. In June,
gains were recorded from short positions in copper futures as prices declined
sharply on news of significant losses incurred in copper by Sumitomo
Corporation. Additional gains were experienced in the soft commodities and
currency markets.
Fund II recorded losses during July from short corn and soybean futures
positions as prices moved sharply higher early in the month. Additional losses
were experienced from short positions in the Japanese yen and Swiss franc as
the value of these currencies moved higher versus the U.S. dollar. Losses were
recorded in August from long German mark positions as its value moved lower
relative to the U.S. dollar. Additional losses were recorded from short
positions in coffee futures as prices reversed higher. Gains in the energy and
financial futures markets offset a portion of these losses. Fund II recorded
strong gains during September primarily as a result of long crude oil futures
positions as energy prices continued to trend
<PAGE>
higher. Additional gains were recorded from long European and Japanese bond
futures positions as prices moved higher during the month. Smaller gains were
experienced in the agricultural, currency and metals markets.
Significant gains were recorded during October as a result of a continued
upward price trend in global interest rate futures. Long positions in the
British pound and short positions in the Japanese yen also provided profits for
the Fund. Smaller gains were experienced in the agricultural markets. Gains
were recorded in November as European, U.S. and Japanese bond futures
maintained their upward trend. A dramatic move higher in the value of the
British pound resulted in additional gains for the Fund's long positions.
Smaller gains were recorded in the metals and energy markets. Losses were
recorded in December due primarily to a sharp reversal lower in global interest
rate futures prices. Smaller losses were experienced from trading in soft
commodities. A portion of these losses was offset by gains in the energy,
currency and agricultural markets.
CORNERSTONE FUND III ("FUND III"), also a diversified Fund, recorded profits
during January primarily from long positions in eurodollar futures as interest
rate futures prices increased. Additional gains were recorded from short
Japanese yen positions as its value decreased relative to the U.S. dollar.
Losses recorded in soft commodities, energies and agriculturals offset a
portion of these gains. In February, Fund III recorded significant losses due
primarily to a sharp reversal lower in global bond futures prices. Additional
losses were recorded from previously established short positions in the
Japanese yen as its value increased suddenly relative to the U.S. dollar.
Losses were experienced during March from trading in the financial futures
markets as both global interest rate and stock index futures prices moved in a
short-term volatile pattern. Trading gains experienced in the energy and
currency markets offset a portion of the overall Fund losses during March.
In April, Fund III recorded strong gains as long positions in corn futures
profited from an upward move in prices. Gains were also recorded from short
positions in the German mark and Swiss franc as the value of these currencies
moved lower versus the U.S. dollar. Smaller gains were recorded in the energy
markets. In May, losses were recorded due primarily to long positions in
<PAGE>
coffee futures as prices moved lower late in the month. Additional losses were
recorded from a sharp reversal lower in copper prices. Smaller losses were
experienced in the energy and financial futures markets. Gains in the currency
and agricultural markets helped to mitigate these losses. During June, gains
were recorded from short copper futures positions as prices moved dramatically
lower on news of severe losses recorded in copper by Sumitomo Corporation. Long
natural gas and crude oil futures positions also profited, as prices finished
the month higher. These gains were partially offset by losses in U.S. and
Japanese interest rate futures.
During July, Fund III recorded losses due to trendless price movement in
several market complexes. The most significant losses were recorded in the
agricultural and currency markets. Smaller losses were recorded in the energy
and metals markets. Losses were recorded in August primarily from short
positions in coffee futures as prices reversed higher. Additional losses were
recorded in the metals and currency markets. Gains recorded in the energy
markets, due to an upward trend in oil prices, helped to offset these losses.
Strong gains were recorded during September as previously established long
crude and heating oil futures positions profited from a continued upward price
trend. Additional gains were recorded from long European and Japanese bond
futures positions as prices moved steadily higher.
Significant gains were recorded during October due primarily to long positions
in the British pound and short positions in the Japanese yen. Gains were also
recorded in financial futures as global bond futures prices continued to trend
higher. Smaller gains were recorded in the agricultural and soft commodities
markets. Gains in November were recorded as European and U.S. bond futures
profited from a continued upward trend in global interest rate futures prices.
A continued move higher in the value of the British pound resulted in
additional gains for Fund III's long positions. Smaller gains were recorded in
the energy and metals markets. Fund III recorded gains in December from short
positions in the Swiss franc and Japanese yen as the value of these currencies
continued to move lower versus the U.S. dollar. Additional gains were recorded
from trading natural and unleaded gas futures. A portion of these gains was
offset by losses in the financial futures and soft commodities markets.
<PAGE>
Each of the three Cornerstone Funds recorded profits for the year primarily by
taking advantage of price trends in the currency markets between September and
November. Cornerstone Funds II and III also profited from trading in the energy
and financial futures markets during this same time period. These gains,
coupled with smaller gains in the currency and commodity markets during the
second quarter, as well as from the Trading Advisors' ability to limit losses
from trend reversals and choppy price movement earlier in the year, contributed
to each of the Fund's success in 1996.
Effective July 1, 1996, Demeter Management Corporation, General Partner to
Cornerstone Fund III, removed CCA Capital Management, Inc. ("CCA"), as a
Trading Advisor to Fund III. All assets formerly managed by CCA were
reallocated evenly between two new Trading Advisors for Fund III, Abraham
Trading Company ("Abraham") and Welton Investment Systems Corporation
("Welton"). We believe the Fund has benefited from this mix of advisors, and
will continue to do so given the opportunity for trending market conditions.
Since they began trading in 1985, Cornerstone Funds II and III have increased
by 223.6% (a compound annualized return of 10.4%), and 178.5% (a compound
annualized return of 9.0%), respectively. Since it began trading in 1987,
Cornerstone Fund IV has increased by 228.7% (a compound annualized return of
13.0%).
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048, or your Dean Witter Account Executive.
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is not a
guarantee of future results.
Sincerely,
/s/ Mark J. Hawley
Mark J. Hawley
President
Demeter Management Corporation
General Partner
<PAGE>
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, 1996
and 1995 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, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 17, 1997
New York, New York
<PAGE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
$ $
<S> <C> <C>
ASSETS
Equity in Commodity futures trading
accounts:
Cash 28,509,266 28,057,189
Net unrealized gain on open contracts 1,316,434 3,368,107
---------- ----------
Total Trading Equity 29,825,700 31,425,296
Due from DWR 123,327 25,525
Interest receivable (DWR) 97,815 107,485
---------- ----------
Total Assets 30,046,842 31,558,306
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 442,706 134,889
Accrued incentive fees 316,750 307,567
Accrued management fees 99,352 104,238
Accrued brokerage commissions (DWR) 83,967 94,453
Common administrative expenses payable 52,339 81,314
Accrued transaction fees and costs 5,558 6,957
---------- ----------
Total Liabilities 1,000,672 729,418
---------- ----------
PARTNERS' CAPITAL
Limited Partners (8,987.942 and
10,673.698 Units, respectively) 28,360,195 30,213,505
General Partner (217.400 Units) 685,975 615,383
---------- ----------
Total Partners' Capital 29,046,170 30,828,888
---------- ----------
Total Liabilities and Partners'
Capital 30,046,842 31,558,306
========== ==========
NET ASSET VALUE PER UNIT 3,155.36 2,830.65
========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
$ $ $
REVENUES
Trading Profit (Loss):
Realized 7,321,679 11,081,716 (878,688)
Net change in unrealized (2,051,673) (947,973) 556,567
---------- ---------- ----------
Total Trading Results 5,270,006 10,133,743 (322,121)
Interest income (DWR) 1,179,784 1,471,022 1,153,003
---------- ---------- ----------
Total Revenues 6,449,790 11,604,765 830,882
---------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 1,719,932 1,864,093 2,336,047
Management fees 1,167,223 1,307,872 1,346,905
Incentive fees 329,590 381,720 --
Transaction fees and costs 170,971 160,238 194,384
Common administrative expenses 14,612 8,183 49,101
---------- ---------- ----------
Total Expenses 3,402,328 3,722,106 3,926,437
---------- ---------- ----------
NET INCOME (LOSS) 3,047,462 7,882,659 (3,095,555)
========== ========== ==========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 2,976,870 7,753,763 (3,050,650)
General Partner 70,592 128,896 (44,905)
NET INCOME (LOSS) PER UNIT:
Limited Partners 324.71 592.90 (219.47)
General Partner 324.71 592.90 (219.47)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
$ $
<S> <C> <C>
ASSETS
Equity in Commodity futures trading
accounts:
Cash 40,587,011 42,294,365
Net unrealized gain on open contracts 2,580,803 5,578,294
Net option premiums (291,412) --
---------- ----------
Total Trading Equity 42,876,402 47,872,659
Interest receivable (DWR) 138,367 159,680
Due from DWR 122,701 124,456
---------- ----------
Total Assets 43,137,470 48,156,795
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 680,730 639,349
Accrued management fees 142,387 158,630
Common administrative expenses payable 137,548 222,036
Accrued brokerage commissions (DWR) 129,098 166,128
Accrued transaction fees and costs 12,349 20,978
---------- ----------
Total Liabilities 1,102,112 1,207,121
---------- ----------
PARTNERS' CAPITAL
Limited Partners (15,097.603 and 18,332.818 Units,
respectively) 40,997,752 45,991,101
General Partner (382.103 Units) 1,037,606 958,573
---------- ----------
Total Partners' Capital 42,035,358 46,949,674
---------- ----------
Total Liabilities and Partners'
Capital 43,137,470 48,156,795
========== ==========
NET ASSET VALUE PER UNIT 2,715.51 2,508.68
========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
$ $ $
REVENUES
Trading Profit (Loss):
Realized 8,925,181 14,260,042 913,869
Net change in unrealized (2,997,491) 561,437 (1,350,056)
---------- ---------- ----------
Total Trading Results 5,927,690 14,821,479 (436,187)
Interest income (DWR) 1,657,400 2,061,461 1,744,148
---------- ---------- ----------
Total Revenues 7,585,090 16,882,940 1,307,961
---------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 2,772,496 3,499,743 4,417,718
Management fees 1,629,715 1,828,013 2,014,028
Transaction fees and costs 379,973 502,332 434,287
Common administrative expenses 24,702 21,158 122,423
---------- ---------- ----------
Total Expenses 4,806,886 5,851,246 6,988,456
---------- ---------- ----------
NET INCOME (LOSS) 2,778,204 11,031,694 (5,680,495)
========== ========== ==========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 2,699,171 10,824,963 (5,594,569)
General Partner 79,033 206,731 (85,926)
NET INCOME (LOSS) PER UNIT:
Limited Partners 206.83 541.04 (219.67)
General Partner 206.83 541.04 (219.67)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- -----------
$ $
<S> <C> <C>
ASSETS
Equity in Commodity futures trading
accounts:
Cash 91,656,399 104,927,961
Net unrealized gain on open contracts 5,330,520 70,143
---------- -----------
Total Trading Equity 96,986,919 104,998,104
Interest receivable (DWR) 305,391 364,747
---------- -----------
Total Assets 97,292,310 105,362,851
========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 1,269,513 1,044,804
Accrued management fees 322,552 349,039
Common administrative expenses payable 126,007 267,788
Accrued brokerage commissions (DWR) 74,340 32,580
Accrued transaction fees and costs 3,654 1,629
---------- -----------
Total Liabilities 1,796,066 1,695,840
---------- -----------
PARTNERS' CAPITAL
Limited Partners (29,160.287 and 35,905.625 Units,
respectively) 93,448,822 101,854,654
General Partner (638.889 Units) 2,047,422 1,812,357
---------- -----------
Total Partners' Capital 95,496,244 103,667,011
---------- -----------
Total Liabilities and Partners'
Capital 97,292,310 105,362,851
========== ===========
NET ASSET VALUE PER UNIT 3,204.66 2,836.73
========== ===========
</TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
$ $ $
REVENUES
Trading Profit (Loss):
Realized 10,304,825 27,041,974 (10,447,878)
Net change in unrealized 5,260,377 (198,148) (1,726,877)
---------- ---------- -----------
Total Trading Results 15,565,202 26,843,826 (12,174,755)
Interest income (DWR) 3,924,420 4,912,698 4,129,344
---------- ---------- -----------
Total Revenues 19,489,622 31,756,524 (8,045,411)
---------- ---------- -----------
EXPENSES
Management fees 3,904,737 4,575,372 4,952,206
Brokerage commissions (DWR) 3,781,486 2,776,225 5,336,659
Transaction fees and costs 222,993 168,718 339,083
Common administrative expenses 47,685 39,890 228,633
Incentive fees -- -- 7,659
---------- ---------- -----------
Total Expenses 7,956,901 7,560,205 10,864,240
---------- ---------- -----------
NET INCOME (LOSS) 11,532,721 24,196,319 (18,909,651)
========== ========== ===========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 11,297,656 23,857,922 (18,664,384)
General Partner 235,065 338,397 (245,267)
NET INCOME (LOSS) PER UNIT:
Limited Partners 367.93 529.66 (383.89)
General Partner 367.93 529.66 (383.89)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 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
Offering 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
Offering of Units 56.043 155,468 -- 155,468
Net Income -- 2,976,870 70,592 3,047,462
Redemptions (1,741.799) (4,985,648) -- (4,985,648)
---------- ----------- --------- -----------
Partners' Capital, December
31, 1996 9,205.342 28,360,195 685,975 29,046,170
========== =========== ========= ===========
<CAPTION>
DEAN WITTER CORNERSTONE FUND III
<S> <C> <C> <C> <C>
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
Offering 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
Offering of Units 3.594 8,388 -- 8,388
Net Income -- 2,699,171 79,033 2,778,204
Redemptions (3,238.809) (7,700,908) -- (7,700,908)
---------- ----------- --------- -----------
Partners' Capital, December
31, 1996 15,479.706 40,997,752 1,037,606 42,035,358
========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENT OF CHANGES IN PARTNERS' CAPITAL--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
----------- ----------- --------- -----------
$ $ $
DEAN WITTER CORNERSTONE FUND IV
<S> <C> <C> <C> <C>
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
Offering 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
Offering of Units 37.715 108,665 -- 108,665
Net Income -- 11,297,656 235,065 11,532,721
Redemptions (6,783.053) (19,812,153) -- (19,812,153)
----------- ----------- --------- -----------
Partners' Capital, December
31, 1996 29,799.176 93,448,822 2,047,422 95,496,244
=========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
$ $ $
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 3,047,462 7,882,659 (3,095,555)
Noncash item included in net income
(loss):
Net change in unrealized 2,051,673 947,973 (556,567)
(Increase) decrease in
operating assets:
Interest receivable (DWR) 9,670 17,183 (61,279)
Due from DWR (97,802) 24,860 (42,174)
Increase (decrease) in
operating liabilities:
Accrued incentive fees 9,183 307,567 (15,336)
Accrued management fees (4,886) (1,622) (1,443)
Accrued brokerage commissions (DWR) (10,486) 13,185 (972)
Common administrative expenses payable (28,975) (29,854) (14,074)
Accrued transaction fees
and costs (1,399) 1,237 (52)
---------- ---------- ----------
Net cash provided by (used for) operating
liabilities 4,974,440 9,163,188 (3,787,452)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units 155,468 178,837 7,098,104
Increase (decrease) in redemptions
payable 307,817 (251,210) 151,917
Redemptions of units (4,985,648) (8,604,610) (4,571,920)
---------- ---------- ----------
Net cash provided by (used for) financing
activities (4,522,363) (8,676,983) 2,678,101
---------- ---------- ----------
Net increase (decrease) in cash 452,077 486,205 (1,109,351)
Balance at beginning of period 28,057,189 27,570,984 28,680,335
---------- ---------- ----------
Balance at end of period 28,509,266 28,057,189 27,570,984
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
-----------------------------------
1996 1995 1994
---------- ----------- ----------
$ $ $
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) 2,778,204 11,031,694 (5,680,495)
Noncash item included in net income
(loss):
Net change in unrealized 2,997,491 (561,437) 1,350,056
(Increase) decrease in
operating assets:
Net option premiums 291,412 -- --
Interest receivable (DWR) 21,313 33,368 (79,962)
Due from DWR 1,755 89,133 (213,589)
Increase (decrease) in
operating liabilities:
Accrued management fees (16,243) (265) (30,263)
Common administrative expenses payable (84,488) (44,369) 11,260
Accrued brokerage commissions (DWR) (37,030) (34,476) 77,852
Accrued transaction fees
and costs (8,629) 7,239 4,810
---------- ----------- ----------
Net cash provided by (used for)
operating activities 5,943,785 10,520,887 (4,560,331)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units 8,388 49,000 5,299,578
Increase (decrease) in
redemptions payable 41,381 (26,829) 75,572
Redemptions of units (7,700,908) (11,133,473) (8,773,323)
---------- ----------- ----------
Net cash used for financing activities (7,651,139) (11,111,302) (3,398,173)
---------- ----------- ----------
Net decrease in cash (1,707,354) (590,415) (7,958,504)
Balance at beginning of period 42,294,365 42,884,780 50,843,284
---------- ----------- ----------
Balance at end of period 40,587,011 42,294,365 42,884,780
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
$ $ $
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 11,532,721 24,196,319 (18,909,651)
Noncash item included in net income
(loss):
Net change in unrealized (5,260,377) 198,148 1,726,877
(Increase) decrease in operating
assets:
Interest receivable (DWR) 59,356 69,406 (184,980)
Increase (decrease) in operating
liabilities:
Accrued management fees (26,487) (22,567) (41,612)
Common administrative expenses payable (141,781) (89,342) 8,605
Accrued brokerage commissions (DWR) 41,760 32,580 --
Accrued transaction fees
and costs 2,025 1,629 --
----------- ----------- -----------
Net cash provided by (used for)
operating activities 6,207,217 24,386,173 (17,400,761)
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Offering of units 108,665 212,691 20,753,129
Increase (decrease) in redemptions
payable 224,709 (544,818) 519,604
Redemptions of units (19,812,153) (30,634,265) (17,151,842)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (19,478,779) (30,966,392) 4,120,891
----------- ----------- -----------
Net decrease in cash (13,271,562) (6,580,219) (13,279,870)
Balance at beginning of period 104,927,961 111,508,180 124,788,050
----------- ----------- -----------
Balance at end of period 91,656,399 104,927,961 111,508,180
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS
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 ("Demeter"). The commodity broker is Dean Witter
Reynolds Inc. ("DWR"). Both DWR and Demeter are wholly-owned subsidiaries of
Dean Witter, Discover & Co. ("DWD").
Demeter is required to maintain a 1% minimum interest in the equity of each
Partnership and income (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-- Each Partnerships' assets
"Equity in Commodity futures trading accounts" consists of cash on deposit at
DWR to be used as margin for trading, the net asset or liability related to
unrealized gains or losses on open contracts and the net option premiums paid
and/or received. 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.
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. Related transaction fees and costs are
accrued 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. From April 1, 1995 through August 31, 1996, the cap was reduced to 3/4
of 1%.
Effective September 1, 1996, brokerage commissions and transaction fees
chargeable to each Partnership have been capped at 13/20 of 1% per month of the
Partnership's month end Net Assets (as defined in the Limited Partnership
Agreement) applied on a per trading system basis, allocated to each such
trading program.
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.
Demeter bears all other operating expenses.
INCOME TAXES--No provision for income taxes has been made in the accompanying
financial statements,
as partners are individually responsible for reporting income or loss based
upon their respective share of each Partnership's 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 Demeter. 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.
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REDEMPTIONS--Limited Partners may redeem some or all of their Units at 100% of
the Net Asset Value per Unit as of the last day of any month upon fifteen days
advance notice by redemption form to the General Partner.
EXCHANGES--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 each 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
Demeter, 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, 1996 were as follows:
Dean Witter Cornerstone Fund II
Abacus Trading Corporation
John W. Henry & Company, Inc. ("JWH")
Dean Witter Cornerstone Fund III
Abraham Trading Co.
Welton Investment Systems Corporation
Sunrise Capital Management, Inc.
Dean Witter Cornerstone Fund IV
John W. Henry & Company, Inc.
Sunrise Capital Management, Inc.
Each trading advisor owns at least ten Units in its respective Partnership, and
none is affiliated with DWR or Demeter. Compensation to the trading advisors by
the Partnerships consists of a management fee and an incentive fee as follows:
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1996 and 1995, open
contracts were:
<TABLE>
<CAPTION>
CORNERSTONE II
----------------------
CONTRACT OR NOTIONAL AMOUNT
------------------------------
1996 1995
---------- -----------
$ $
<S> <C> <C> <C> <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase 18,287,000 140,924,000
Commitments to Sell 70,723,000 3,298,000
Commodity Futures:
Commitments to Purchase 6,346,000 53,994,000
Commitments to Sell 14,596,000 10,484,000
Foreign Futures:
Commitments to Purchase 57,075,000 51,681,000
Commitments to Sell 8,798,000 1,656,000
OFF-EXCHANGE-TRADED FORWARD
CURRENCY CONTRACTS
Commitments to Purchase 26,688,000 15,585,000
Commitments to Sell 18,334,000 44,881,000
</TABLE>
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CORNERSTONE III
-----------------------
CONTRACT OR NOTIONAL AMOUNT
-------------------------------
1996 1995
----------- -----------
$ $
<S> <C> <C> <C> <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase 118,163,000 239,465,000
Commitments to Sell 59,405,000 39,640,000
Options Written 18,613,000 --
Commodity Futures:
Commitments to Purchase 17,683,000 115,420,000
Commitments to Sell 22,811,000 19,794,000
Options Written 18,407,000 --
Foreign Futures:
Commitments to Purchase 62,344,000 139,878,000
Commitments to Sell 22,390,000 22,202,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CON-
TRACTS
Commitments to Purchase 420,000 --
Commitments to Sell 1,379,000 --
<CAPTION>
CORNERSTONE IV
-----------------------
CONTRACT OR NOTIONAL AMOUNT
-------------------------------
1996 1995
----------- -----------
$ $
<S> <C> <C> <C> <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase 93,583,000 31,917,000
Commitments to Sell 118,029,000 70,298,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CON-
TRACTS
Commitments to Purchase 208,140,000 116,547,000
Commitments to Sell 205,227,000 170,990,000
</TABLE>
A portion of the amounts indicated as off-balance-sheet risk in forward
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 December 31, 1996 and 1995, respectively, $1,316,434 and
$3,368,107 for Cornerstone II, $2,580,803 and $5,578,294 for Cornerstone III
and $5,330,520 and $70,143 for Cornerstone IV.
For Cornerstone II, of the $1,316,434 net unrealized gain on open contracts at
December 31, 1996, $1,342,050 related to exchange-traded futures contracts and
$(25,616) 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.
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For Cornerstone III, of the $2,580,803 net unrealized gain on open contracts at
December 31, 1996, $2,589,289 related to exchange-traded futures contracts and
$(8,486) related to off-exchange-traded forward currency contracts. The net
unrealized gain on open contracts at December 31, 1995 of 5,578,294 related
entirely to exchange traded futures.
For Cornerstone IV, of the $5,330,520 net unrealized gain on open contracts at
December 31, 1996, $5,350,525 related to exchange-traded futures contracts and
$(20,005) 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 contract amounts in the above table represent each 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 each
Partnerships' Statement of Financial Condition.
Exchange-traded contracts and off-exchange-traded forward currency contracts
held by the Partnerships at December 31, 1996 and 1995 mature as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
CORNERSTONE II
Exchange-Traded Contracts June 1998 December 1996
Off-Exchange-Traded Forward Currency Contracts March 1997 December 1996
CORNERSTONE III
Exchange-Traded Contracts June 1997 December 1996
Off-Exchange-Traded Forward Currency Contracts January 1997 January 1996
CORNERSTONE IV
Exchange-Traded Contracts March 1997 March 1996
Off-Exchange-Traded Forward Currency Contracts March 1997 January 1996
</TABLE>
The Partnerships also have credit risk because DWR acts as the futures
commission merchant or the sole counterparty, with respect to most of the
Partnerships' assets. 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 each 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
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
unrealized gain on all open futures contracts, which funds totaled at December
31, 1996 and 1995 respectively, $29,851,316 and $31,506,001 for Cornerstone II,
$43,176,300 and $47,872,659 for Cornerstone III, and $97,006,924 and
$105,462,448 for Cornerstone IV. With respect to each Partnership's off-
exchange-traded forward currency contracts, there are no daily settlements of
variations in value nor is there any requirement that an amount equal to the
net unrealized gain on open forward contracts be segregated. With respect to
those off-exchange-traded forward currency contracts, the Partnerships are at
risk to the ability of DWR, the counterparty on all of such contracts, to
perform.
For the years ended December 31, 1996 and 1995 the average fair value of
financial instruments held for trading purposes was as follows:
<TABLE>
<CAPTION>
CORNERSTONE II 1996
- -------------- ----------------------
ASSETS LIABILITIES
---------- -----------
$ $
<S> <C> <C>
EXCHANGE-TRADED CONTRACTS:
Financial Futures 48,469,000 47,433,000
Commodity Futures 24,459,000 22,228,000
Foreign Futures 43,821,000 14,875,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 38,522,000 44,536,000
<CAPTION>
1995
----------------------
ASSETS LIABILITIES
---------- -----------
$ $
<S> <C> <C>
EXCHANGE-TRADED CONTRACTS:
Financial Futures 75,146,000 7,443,000
Commodity Futures 36,847,000 12,456,000
Foreign Futures 62,270,000 57,113,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 16,455,000 23,929,000
</TABLE>
<TABLE>
<CAPTION>
CORNERSTONE III 1996
- --------------- -----------------------
ASSETS LIABILITIES
----------- -----------
$ $
<S> <C> <C>
EXCHANGE-TRADED CONTRACTS:
Financial Futures 105,128,000 74,480,000
Options on Financial Futures -- 10,138,000
Commodity Futures 44,276,000 18,531,000
Options on Commodity Futures -- 2,763,000
Foreign Futures 80,000,000 27,228,000
Options on Foreign Futures -- 584
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 233,000 354,000
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------
ASSETS LIABILITIES
----------- -----------
$ $
<S> <C> <C>
EXCHANGE-TRADED CONTRACTS:
Financial Futures 125,222,000 74,782,000
Commodity Futures 67,127,000 16,871,000
Foreign Futures 122,725,000 68,993,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 8,899,000 25,325,000
<CAPTION>
CORNERSTONE IV 1996
- -------------- -----------------------
ASSETS LIABILITIES
----------- -----------
$ $
<S> <C> <C>
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS 67,114,000 125,331,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 334,452,000 334,461,000
<CAPTION>
1995
-----------------------
ASSETS LIABILITIES
----------- -----------
$ $
<S> <C> <C>
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS 10,215,000 22,213,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 273,150,000 311,898,000
</TABLE>
5. LEGAL MATTERS
On September 6, 10, and 20, 1996, similar purported class actions were filed in
the Superior Court of the State of California, County of Los Angeles, on behalf
of all purchasers of interests in limited partnership commodity pools sold by
DWR. Named defendants include DWR, Demeter, Dean Witter Futures & Currency
Management Inc., DWD (all such parties referred to hereafter as the "Dean
Witter Parties"), the Partnerships, certain other limited partnership commodity
pools of which Demeter is the general partner, and certain trading advisors
(including JWH) to those pools. Similar purported class actions were also filed
on September 18, and 20, 1996, in the Supreme Court of the State of New York,
New York County, and on November 14, 1996 in the Superior Court of the State of
Delaware, New Castle County, against the Dean Witter Parties and certain
trading advisors (including JWH) on behalf of all purchasers of interests in
various limited partnership commodity pools, including the Partnerships, sold
by DWR. Generally, these complaints allege, among other things, that the
defendants committed fraud, deceit, misrepresentation, breach of fiduciary
duty, fraudulent and unfair business practices, unjust enrichment, and
conversion in connection with the sale and operation of the various limited
partnership commodity pools. The complaints seek unspecified amounts of
compensatory and punitive damages and other relief. It is possible that
additional similar actions may be filed and that, in
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
the course of these actions, other parties could be added as defendants. The
Dean Witter Parties believe that they and the Partnerships have strong defenses
to, and they will vigorously contest, the actions. Although the ultimate
outcome of legal proceedings cannot be predicted with certainty, it is the
opinion of management of the Dean Witter Parties that the resolution of the
actions will not have a material adverse effect on the financial condition or
the results of operations of any of the Dean Witter Parties or the
Partnerships.
<PAGE>
DEAN WITTER REYNOLDS INC.
Two World Trade Center
62nd Floor
New York, NY 10048
FIRST-CLASS MAIL
ZIP + 4 PRESORT
U.S. POSTAGE PAID
BROOKLYN, NY
PERMIT NO. 148
