<PAGE>
DEAN WITTER CORNERSTONE FUND II
DEAN WITTER CORNERSTONE FUND III
DEAN WITTER CORNERSTONE FUND IV
------------------------
SUPPLEMENT
TO PROSPECTUS
DATED AUGUST 28, 1996
THIS SUPPLEMENT IS AN INTEGRAL PART OF, AND MUST BE READ TOGETHER WITH, THE
PROSPECTUS DATED AUGUST 28, 1996 (THE "PROSPECTUS"). ALL CAPITALIZED TERMS USED
IN THIS SUPPLEMENT AND NOT DEFINED HEREIN SHALL HAVE THE SAME MEANINGS AS USED
IN THE PROSPECTUS. ALL PAGE AND SECTION REFERENCES HEREIN ARE TO THE PROSPECTUS,
EXCEPT REFERENCES TO PAGES PRECEDED BY AN "S-", WHICH ARE TO THIS SUPPLEMENT.
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 "OFFERING RESTRICTED TO EXCHANGES" (PAGE 1), "RISK
FACTORS" (PAGE 9), AND "CONFLICTS OF INTEREST" (PAGE 16).
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") in one or more of the Partnerships and, with the
net proceeds of such redemption, purchase Units of one or more other
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.
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 interest trading is speculative and volatile. The Partnerships'
trading has been volatile. Such volatility could result in an investor
losing all or a substantial part of his investment.
* The Partnerships are subject to substantial charges by the Trading
Managers and DWR. Cornerstone II, Cornerstone III, and Cornerstone IV must
earn estimated annual net trading profits (after taking into account
estimated interest income based upon current rates of 5%) of 7.11%, 8.15%,
and 4.70%, respectively, of their average annual Net Assets in order to
avoid depletion or exhaustion of their assets. Investors should see
"Break-Even Analysis"on page S-11 for the effect of redemption charges,
which are not included in the above figures.
* No secondary market for Units exist. Units are only redeemable on the last
day of any month upon at least 15 days' prior written notice to the
General Partner. 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.
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 SUPPLEMENT. 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 SUPPLEMENT.
------------------------
DEAN WITTER REYNOLDS INC.
THE DATE OF THIS SUPPLEMENT IS MAY 14, 1997.
<PAGE>
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
The Cornerstone Funds........................................................... S-1
Performance Records........................................................... S-1
Selected Financial Data......................................................... S-4
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... S-5
Description of Charges to Each Partnership...................................... S-10
1. Commodity Broker........................................................... S-10
2. Trading Managers........................................................... S-10
3. Others..................................................................... S-10
4. Break-Even Analysis........................................................ S-11
Capitalization.................................................................. S-12
The Trading Managers............................................................ S-12
Dean Witter Cornerstone Fund II............................................... S-12
1. Abacus Trading Corporation............................................... S-12
2. John W. Henry & Company, Inc............................................. S-12
3. Northfield Trading L.P................................................... S-15
Dean Witter Cornerstone Fund III.............................................. S-18
1. Welton Investment Systems Corporation.................................... S-18
2. Abraham Trading Co....................................................... S-19
3. Sunrise Capital Management, Inc.......................................... S-20
Dean Witter Cornerstone Fund IV............................................... S-21
1. John W. Henry & Company, Inc............................................. S-21
2. Sunrise Capital Management, Inc.......................................... S-21
The General Partner............................................................. S-21
Certain Litigation.............................................................. S-22
Plan of Distribution and Exchange Procedure..................................... S-22
Experts......................................................................... S-22
Dean Witter Cornerstone Fund II
Dean Witter Cornerstone Fund III
Dean Witter Cornerstone Fund IV................................................. S-23
Independent Auditors' Report.................................................. S-23
Statements of Financial Condition............................................. S-24
Statements of Operations...................................................... S-24
Statements of Changes in Partners' Capital.................................... S-27
Statements of Cash Flows...................................................... S-28
Notes to Financial Statements................................................. S-29
Demeter Management Corporation.................................................. S-35
Independent Auditors' Report.................................................. S-35
Statements of Financial Condition............................................. S-36
Notes to Statements of Financial Condition.................................... S-37
(Certain information relating to the financial condition of Demeter
Management
Corporation's parent is contained in "The General Partner.")
</TABLE>
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS, OR, IN CERTAIN INSTANCES,
REPLACES PORTIONS OF, THE PROSPECTUS, AND ACCORDINGLY MUST BE
READ AS AN INTEGRAL PART OF THE PROSPECTUS.
THE CORNERSTONE FUNDS
THE FOLLOWING UPDATES AND REPLACES THE FIRST THROUGH FIFTH PARAGRAPHS UNDER
"THE CORNERSTONE FUNDS-- THE OFFERING OF UNITS" ON PAGE 19.
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 144 Monthly Closings held as of February 28, 1997. As of
March 1, 1997, there were 14,717.284 unsold Units available for Exchange.
As of February 28, 1997, Cornerstone II has sold an aggregate of 41,688.948
Units and received net proceeds of $65,588,765. Included in these numbers are
Exchanges of Units in Cornerstone III and IV for Units in Cornerstone II. As of
February 28, 1997, Cornerstone II had Net Assets of $30,377,242 and the Net
Asset Value of a Unit thereof was $3,355.64.
As of February 28, 1997, Cornerstone III has sold an aggregate of
74,400.002 Units and received net proceeds of $137,116,764. Included in these
numbers are Exchanges of Units in Cornerstone II and IV for Units in Cornerstone
III. As of February 28, 1997, Cornerstone III had Net Assets of $45,174,252 and
the Net Asset Value of a Unit thereof was $2,985.83.
As of February 28, 1997, Cornerstone IV has sold an aggregate of
100,514.123 Units and received net proceeds of $167,559,122. Included in these
numbers are Exchanges of Units in Cornerstone II and Cornerstone III for Units
in Cornerstone IV. As of February 28, 1997, Cornerstone IV had Net Assets of
$104,429,614 and the Net Asset Value of a Unit thereof was $3,596.87.
In connection with the offering of Units, the General Partner contributed
$685,975, $1,037,606 and $2,047,422 to Cornerstone II, III and IV, respectively,
and, as of February 28, 1997, 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 February 28, 1997, Cornerstone II had 3,201 Limited
Partners, Cornerstone III had 5,547 Limited Partners, and Cornerstone IV had
9,351 Limited Partners.
THE FOLLOWING UPDATES AND REPLACES THE PERFORMANCE INFORMATION CONTAINED ON
PAGES 20-23. THE FOOTNOTES ON PAGE 24 ARE AN INTEGRAL PART OF THE FOLLOWING
TABLES.
PERFORMANCE RECORDS
Performance of Dean Witter Cornerstone Fund II
Capsule I sets forth the actual performance record of Cornerstone II
from January 1, 1992 through February 28, 1997. As of the date of this
Prospectus Supplement, all funds received at Monthly Closings are being
allocated two-thirds to John W. Henry & Company, Inc. ("JWH"(R)) and one-third
to Northfield Trading L.P., and the funds allocated to JWH are allocated to its
Original Investment Program, Global Diversified Portfolio, and 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, 1992 through February 28, 1997. As of the date of this Prospectus
Supplement, all funds received at Monthly Closings are being allocated
approximately one-half to Sunrise, approximately one-quarter each to WISC and
Abraham. See "The Trading Managers--Dean Witter Cornerstone Fund III."
Performance of Dean Witter Cornerstone Fund IV
Capsule III sets forth the actual performance record of Cornerstone IV from
January 1, 1992 through February 28, 1997. 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. As of the date of this Prospectus Supplement,
all
S-1
<PAGE>
funds received by Cornerstone IV at Monthly Closings are being allocated equally
between its Trading Managers. See "The Trading Managers--Dean Witter Cornerstone
Fund IV."
------------------
INVESTORS ARE CAUTIONED THAT THE INFORMATION SET FORTH IN CAPSULES I, II
AND III AND THE FOOTNOTES THERETO 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.
TABLE
I
PERFORMANCE OF DEAN WITTER CORNERSTONE FUND II
<TABLE>
<C> <S> <C>
Type of Pool: Publicly-Offered Pool
Inception of Trading: January 1985
Aggregate Subscriptions: $65,588,765
Current Capitalization: $30,377,242
Current Net Asset Value per Unit: $3,355.64
Worst Monthly Percent Drawdown: (9.76)% (January 1992)
Worst Month-end Peak-to-Valley: (22.29)% (5 months, 1/92-5/92)
Cumulative Return Since Inception: 244.17%
</TABLE>
<TABLE>
<CAPTION>
MONTHLY RATES OF
RETURN 1997 1996 1995 1994 1993 1992
- ------------------------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
% % % % % %
January 3.58 1.98 (2.85) (3.17) (3.97) (9.76)
February 2.67 (6.13) 10.88 0.12 7.79 (6.72)
March 0.07 13.73 3.16 (0.07) (1.84)
April 4.76 4.18 (2.59) 3.10 (3.08)
May (3.14) (0.37) 3.84 0.82 (2.96)
June 2.60 (0.29) 2.50 (0.89) 8.27
July (4.06) (3.82) (3.86) 7.92 10.24
August (3.28) (0.46) (4.70) (5.45) 10.80
September 5.37 (2.52) 0.77 (1.69) (5.19)
October 10.42 (0.40) (5.31) (2.62) (1.08)
November 5.53 3.20 3.35 (0.30) 2.01
December (1.90) 4.00 (2.80) 3.87 0.34
Compound Annual
(Period) Rate of Return 6.35 11.47 26.50 (8.93) 7.81 (1.34)
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
S-2
<PAGE>
TABLE
II
PERFORMANCE OF DEAN WITTER CORNERSTONE FUND III
<TABLE>
<C> <S> <C>
Type of Pool: Publicly-Offered Pool
Inception of Trading: January 1985
Aggregate Subscriptions: $137,116,764
Current Capitalization: $45,174,252
Current Net Asset Value per Unit: $2,985.83
Worst Monthly Percent Drawdown: (15.04)% (February 1996)
Worst Month-end Peak-to-Valley: (31.35)% (52 months, 10/90-1/95)
Cumulative Return Since Inception: 206.24%
</TABLE>
<TABLE>
<CAPTION>
MONTHLY RATES OF
RETURN 1997 1996 1995 1994 1993 1992
- ------------------------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
% % % % % %
January 3.12 2.09 (7.31) (10.58) (5.57) (10.46)
February 6.63 (15.04) 1.88 (3.06) 8.96 (7.07)
March (0.93) 12.40 4.47 (2.60) (7.16)
April 9.35 2.44 (3.23) 4.13 (0.13)
May (5.33) 4.24 3.78 1.60 (0.36)
June 1.95 0.10 5.60 0.17 10.37
July (3.95) (4.17) (3.86) 4.79 11.46
August (1.06) 1.89 (6.49) (9.31) 7.63
September 4.17 0.63 3.82 (4.97) (4.16)
October 13.53 (1.66) 4.08 (6.08) (6.21)
November 5.14 6.35 0.09 (2.42) 0.44
December 1.01 9.37 (3.68) 8.32 (3.25)
Compound Annual
(Period) Rate of Return 9.95 8.24 27.50 (10.04) (4.78) (11.08)
</TABLE>
TABLE
III
PERFORMANCE OF DEAN WITTER CORNERSTONE FUND IV
<TABLE>
<C> <S> <C>
Type of Pool: Publicly-Offered Pool
Inception of Trading: January 1985
Aggregate Subscriptions: $167,555,122
Current Capitalization: $104,429,614
Current Net Asset Value per Unit: $3,596.87
Worst Monthly Percent Drawdown: (9.64)% (January 1992)
Worst Month-end Peak-to-Valley (37.85)% (18 months, 8/93-1/95)
Cumulative Return Since Inception: 268.91%
</TABLE>
<TABLE>
<CAPTION>
MONTHLY RATES OF
RETURN 1997 1996 1995 1994 1993 1992
- ------------------------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
% % % % % %
January 5.34 3.19 (7.65) (1.12) (5.29) (9.64)
February 6.55 (5.78) 6.27 (2.75) 12.92 (7.40)
March 2.80 27.02 0.29 (2.55) 1.60
April 2.97 2.39 (3.19) 0.03 (6.40)
May 1.19 (4.83) (3.65) 3.95 2.71
June (0.23) (0.62) 6.72 0.92 15.10
July (3.51) (1.06) (4.21) 5.87 7.47
August (2.69) 5.49 (3.57) (5.57) 17.25
September 0.32 (0.06) 1.66 (2.10) (4.21)
October 8.80 0.74 4.93 (7.48) (0.99)
November 4.25 (2.57) (6.82) (7.50) 0.60
December 1.76 (0.52) (2.73) (0.78) (2.40)
Compound Annual
(Period) Rate of Return 12.24 12.97 22.96 (14.27) (9.12) 10.37
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
S-3
<PAGE>
THE FOLLOWING REPLACES THE SECOND PARAGRAPH OF "FOOTNOTES TO CAPSULES I, II
AND III" ON PAGE 24.
(a) "Monthly Rate of Return" is the percentage change in Net Asset Value
per Unit from one month to another.
SELECTED FINANCIAL DATA
THE FOLLOWING UPDATES AND REPLACES "SELECTED FINANCIAL DATA" ON PAGE 25.
The following are the results of operations of Cornerstone II, III and IV
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992. For the
complete financial statements of the Partnerships, see page F-2 of the
Prospectus and page S-23 of this Prospectus Supplement. For performance
information with respect to each Partnership, see "The Cornerstone
Funds--Performance Records."
<TABLE>
<CAPTION>
DEAN WITTER CORNERSTONE FUND II
-------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized 7,321,679 11,081,716 (878,688) 2,539,342 7,025,818
Net change in unrealized (2,051,673) (947,973) 556,567 2,029,459 (5,295,641)
----------- ----------- ----------- ----------- -----------
Total Trading Results 5,270,006 10,133,743 (322,121) 4,568,801 1,730,177
Interest income (DWR) 1,179,784 1,471,022 1,153,003 694,085 730,244
----------- ----------- ----------- ----------- -----------
Total Revenues 6,449,790 11,604,765 830,882 5,262,886 2,460,421
----------- ----------- ----------- ----------- -----------
EXPENSES
Brokerage commissions (DWR) 1,719,932 1,864,093 2,336,047 1,773,947 1,757,227
Management fees 1,167,223 1,307,872 1,346,905 1,157,221 1,051,459
Incentive fees 329,590 381,720 -- 19,886 461
Transaction fees and costs 170,971 160,238 194,384 141,974 146,367
Common Administrative Expenses 14,612 8,183 49,101 68,511 69,697
Amortization of organization costs -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Expenses 3,402,328 3,722,106 3,926,437 3,161,539 3,025,211
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 3,047,462 7,882,659 (3,095,555) 2,101,347 (564,790)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER UNIT FOR PERIOD
Limited Partners 324.71 592.90 (219.47) 178.05 (30.96)
General Partner 324.71 592.90 (219.47) 178.05 (30.96)
TOTAL ASSETS AT END OF PERIOD 30,046,842 31,558,306 32,062,117 32,511,448 27,333,796
TOTAL NET ASSETS AT THE END OF PERIOD 29,046,170 30,828,888 31,372,002 31,941,373 26,579,165
NET ASSET VALUE PER UNIT AT THE END OF PERIOD
Limited Partners 3,155.36 2,830.65 2,237.75 2,457.22 2,279.17
General Partner 3,155.36 2,830.65 2,237.75 2,457.22 2,279.17
<CAPTION>
DEAN WITTER CORNERSTONE FUND III
-------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized 8,925,181 14,260,042 913,869 (627,751) 8,714,136
Net change in unrealized (2,997,491) 561,437 (1,350,056) 3,815,157 (10,192,893)
----------- ----------- ----------- ----------- -----------
Total Trading Results 5,927,690 14,821,479 (436,187) 3,187,406 (1,478,757)
Interest income (DWR) 1,657,400 2,061,461 1,744,148 1,445,561 1,771,620
----------- ----------- ----------- ----------- -----------
Total Revenues 7,585,090 16,882,940 1,307,961 4,632,967 292,863
----------- ----------- ----------- ----------- -----------
EXPENSES
Brokerage commissions (DWR) 2,772,496 3,499,743 4,417,718 4,587,865 5,203,792
Management fees 1,629,715 1,828,013 2,014,028 2,375,033 2,536,398
Incentive fees -- -- -- -- --
Transaction fees and costs 379,973 502,332 434,287 348,493 390,742
Common Administrative Expenses 24,702 21,158 122,423 150,937 154,323
Amortization of organization costs -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Expenses 4,806,886 5,851,246 6,988,456 7,462,328 8,285,255
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 2,778,204 11,031,694 (5,680,495) (2,829,361) (7,992,392)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER UNIT FOR PERIOD
Limited Partners 206.83 541.04 (219.67) (109.91) (286.23)
General Partner 206.83 541.04 (219.67) (109.91) (286.23)
TOTAL ASSETS AT END OF PERIOD 43,137,470 48,156,795 48,308,274 57,323,283 61,615,811
TOTAL NET ASSETS AT THE END OF PERIOD 42,035,358 46,949,674 47,002,453 56,156,693 60,300,087
NET ASSET VALUE PER UNIT AT THE END OF PERIOD
Limited Partners 2,715.51 2,508.68 1,967.64 2,187.31 2,297.22
General Partner 2,715.51 2,508.68 1,967.64 2,187.31 2,297.22
</TABLE>
S-4
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
DEAN WITTER CORNERSTONE FUND IV
-------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
REVENUES $ $ $ $ $
<S> <C> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 10,304,825 27,041,974 (10,447,878) (4,335,118) 34,953,946
Net change in unrealized 5,260,377 (198,148) (1,726,877) 717,487 (16,706,667)
----------- ----------- ----------- ----------- -----------
Total Trading Results 15,565,202 26,843,826 (12,174,755) (3,617,631) 18,247,279
Interest income (DWR) 3,924,420 4,912,698 4,129,344 2,937,637 2,509,220
----------- ----------- ----------- ----------- -----------
Total Revenues 19,489,622 31,756,524 (8,045,411) (679,994) 20,756,499
----------- ----------- ----------- ----------- -----------
EXPENSES
Management fees 3,904,737 4,575,372 4,952,206 4,945,676 3,806,489
Incentive fees -- -- 7,659 1,400,473 1,415,723
Brokerage commissions (DWR) 3,781,486 2,776,225 5,336,659 6,634,741 4,544,067
Transaction fees and costs 222,993 168,718 339,083 398,959 264,789
Common Administrative Expenses 47,685 39,890 228,633 223,551 192,980
Amortization of organization costs -- -- -- -- 800
----------- ----------- ----------- ----------- -----------
Total Expenses 7,956,901 7,560,205 10,864,240 13,603,400 10,224,848
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 11,532,721 24,196,319 (18,909,651) (14,283,394) 10,531,651
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER UNIT FOR PERIOD
Limited Partners 367.93 529.66 (383.89) (270.10) 278.32
General Partner 367.93 529.66 (383.89) (270.10) 278.32
TOTAL ASSETS AT END OF PERIOD 97,292,310 105,362,851 112,210,624 127,032,391 109,126,365
TOTAL NET ASSETS AT THE END OF PERIOD 95,496,244 103,667,011 109,892,266 125,200,630 104,024,062
NET ASSET VALUE PER UNIT AT THE END OF PERIOD
Limited Partners 3,204.66 2,836.73 2,307.07 2,690.96 2,961.06
General Partner 3,204.66 2,836.73 2,307.07 2,690.96 2,961.06
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION UNDER THE SUBCAPTION
"RESULTS OF OPERATIONS" ON PAGES 26-33.
CORNERSTONE II
Results of Operations for 1996. Cornerstone II 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. Cornerstone 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, Cornerstone 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.
Cornerstone 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
S-5
<PAGE>
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. Cornerstone II recorded strong gains
during September primarily as a result of long crude oil futures positions as
energy prices continued to trend 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
Cornerstone II. 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 Partnership'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.
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.
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. During 1996, a reduction in U.S. Treasury bill
rates and in the size of the Partnership resulted in a decrease in interest
income to the Partnership.
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 Trading Managers. These expenses declined in the aggregate in
1996 as a result of the presence of more long-term price trends in futures
markets in which the Partnership's Trading Managers concentrate their
participation, as well as a reduction of the 3/4 of 1% monthly cap on aggregate
commissions and transaction fees and costs to 13/20 of 1% on September 1, 1996.
Management fees are charged at a 4% annual rate of Net Assets and fluctuate
based only on the size of the Partnership's Net Assets. These fees decreased in
1996 as a result of the reduction in the Partnership's assets. Incentive fees
are only paid on an annual basis or on any redeemed Units on a monthly basis if
the Partnership is profitable on a cumulative basis since the last annual period
for which incentive fees were paid. Incentive fees were paid in 1996.
Common administrative expenses are used to pay legal, accounting, auditing,
printing, and distribution costs. These expenses increased during 1996 as a
result of increased audit and tax audit fees and expenses.
CORNERSTONE III
Results of Operations for 1996. Cornerstone III 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, Cornerstone 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 Partnership losses during March.
In April, Cornerstone 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 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, Cornerstone 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
S-6
<PAGE>
recorded in the energy and metal 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 Cornerstone III's long positions. Smaller gains were
recorded in the energy and metals markets. Cornerstone 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.
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.
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. A reduction in U.S. Treasury bill rates during 1996,
coupled with a decline in Partnership's assets, resulted in a decrease in
interest income paid to the Partnership.
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 Trading Managers. Brokerage commissions and transaction fees
and costs decreased in the aggregate in 1996 due to a reduction in the
Partnership's Net Assets, as well as a reduction of the 3/4 of 1% monthly cap on
aggregate commissions and transaction fees and costs to 13/20 of 1% on September
1, 1996.
Management fees 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
decreased in 1996 as a result of the reduction in Partnership assets. Incentive
fees are only paid on an annual basis or on any redeemed Units on a monthly
basis if the Partnership is profitable on a cumulative basis since the last
annual period for which incentive fees were paid. Incentive fees were not paid
in 1996.
Common administrative expenses are used to pay legal, accounting, auditing,
printing, and distribution costs. These expenses increased in 1996 as a result
of increased audit and tax audit fees and expenses.
CORNERSTONE IV
Results of Operations for 1996. Cornerstone IV 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, Cornerstone 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, Cornerstone 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 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. Cornerstone 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
S-7
<PAGE>
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. Cornerstone 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. Cornerstone 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.
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.
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. During 1996, the interest income to the Partnership
decreased due to a decline of interest rates on U.S. Treasury Bills and a
reduction in the Partnership's assets.
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. Brokerage commissions and transaction
fees and costs increased in the aggregate in 1996 due to increased trading by
the Partnership's Trading Managers (although the 3/4 of 1% monthly cap on
aggregate commissions and transaction fees and costs was reduced to 13/20 of 1%
on September 1, 1996).
Management fees 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
decreased in 1996 as a result of the reduction in Partnership assets. Incentive
fees are only paid on an annual basis or on any redeemed Units on a monthly
basis if the Partnership is profitable on a cumulative basis since the last
annual period for which incentive fees were paid. No incentive fees were paid in
1996.
Common administrative expenses are used to pay legal, accounting, auditing,
printing, and distribution costs. These expenses increased in 1996 as a result
of increased audit and tax audit fees and expenses.
Each of the three Partnerships recorded profits for 1996 primarily by
taking advantage of price trends in the currency markets between September and
November. Cornerstone 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 Managers' 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 III, removed CCA Capital Management,
Inc. ("CCA"), as a Trading Manager to Cornerstone III. All assets formerly
managed by CCA were reallocated evenly between two new Trading Managers for
Cornerstone III, Abraham Trading Company and Welton Investment Systems
Corporation. The General Partner believes that Cornerstone III has benefited
from this mix of Trading Managers, and will continue to do so given the
opportunity for trending market conditions.
Since they began trading in 1985 through February 28, 1997, Cornerstone II
and III have increased by 244.2% (a compound annualized return of 10.7%) and
206.2% (a compound annualized return of 9.6%), respectively. Since it began
trading in 1987 through February 28, 1997, Cornerstone IV has increased by
268.9% (a compound annualized return of 14.2%).
S-8
<PAGE>
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION STARTING AT THE FIFTH
PARAGRAPH OF PAGE 35 AND ENDING ON PAGE 36.
At December 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:
Commitments to Purchase.......................... 18,287,000 118,163,000 93,583,000
Commitments to Sell.............................. 70,723,000 59,405,000 118,029,000
Options Written.................................. -- 18,613,000 --
Commodity Futures:
Commitments to Purchase.......................... 6,346,000 17,683,000 --
Commitments to Sell.............................. 14,596,000 22,811,000 --
Options Written.................................. -- 18,407,000 --
Foreign Futures:
Commitments to Purchase.......................... 57,075,000 62,344,000 --
Commitments to Sell.............................. 8,798,000 22,390,000 --
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase.......................... 26,688,000 420,000 208,140,000
Commitments to Sell.............................. 18,334,000 1,379,000 205,227,000
</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 net unrealized gains on open contracts are reported as a component of
"Equity in Commodity futures trading accounts"on the Statements of Financial
Condition and, at December 31, 1996, totaled $1,316,434 for Cornerstone II,
$2,580,803 for Cornerstone III, and $5,330,520 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.
For Cornerstone III, the $2,580,803 net unrealized gain on open contracts
at December 31, 1996, $2,589,289 related to exchange-traded futures contracts
and $(8,487) related to off-exchange-traded forward currency contracts.
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.
Exchange-traded futures contracts held by the Partnerships at December 31,
1996 mature through June 1998 for Cornerstone II, June 1997 for Cornerstone III,
and March 1997 for Cornerstone IV. Off-exchange-traded forward currency
contracts held by the Partnerships at December 31, 1996 mature through March
1997 for each of Cornerstone II and Cornerstone IV and January 1997 for
Cornerstone III.
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 and
variations in value are settled 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, which totaled at December 31,
1996, $29,851,316, $43,176,300 and $97,006,924 for Cornerstone II, Cornerstone
III and Cornerstone IV, respectively. With respect to the Partnerships'
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 contracts, the Partnerships are at risk to the ability
of DWR, the counterparty on all such contracts, to perform.
S-9
<PAGE>
For the year ended December 31, 1996, the average fair value of financial
instruments held for trading purposes was as follows:
<TABLE>
<CAPTION>
CORNERSTONE II
-----------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
CORNERSTONE III
-----------------------------------
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
</TABLE>
<TABLE>
<CAPTION>
CORNERSTONE IV
-----------------------------------
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
</TABLE>
See "Selected Financial Data" and "Independent Auditors' Report."
Inflation has not been, and is not expected to be, a major factor in the
Partnerships' operations.
DESCRIPTION OF CHARGES TO EACH PARTNERSHIP
THE FOLLOWING UPDATES AND REPLACES THE SECOND SENTENCE UNDER "RISK
FACTORS--RISKS RELATING TO THE PARTNERSHIPS--SUBSTANTIAL CHARGES TO EACH
PARTNERSHIP" ON PAGE 12.
For the years ended December 31, 1996, 1995 and 1994: (i) Cornerstone II
had total expenses of $3,402,328, $3,722,106, and $3,926,437, respectively; (ii)
Cornerstone III had total expenses of $4,806,886, $5,851,246, and $6,988,456,
respectively; and (iii) Cornerstone IV had total expenses of $7,956,901,
$7,560,205, and $10,864,240, respectively.
THE FOLLOWING UPDATES THE INFORMATION UNDER "DESCRIPTION OF CHARGES TO EACH
PARTNERSHIP--1. COMMODITY BROKER," "--2. TRADING MANAGERS," AND "--3. OTHERS" ON
PAGES 39-41.
For the year ended December 31, 1996, Cornerstone II, Cornerstone III, and
Cornerstone IV paid brokerage commissions of $1,719,932, $2,772,496, and
$3,781,486, respectively.
For the year ended December 31, 1996, Cornerstone II, Cornerstone III, and
Cornerstone IV paid aggregate management fees of $1,167,223, $1,629,715, and
$3,904,737, respectively.
For the year ended December 31, 1996, Cornerstone II, Cornerstone III, and
Cornerstone IV paid aggregate incentive fees of $329,590, $0, and $0,
respectively.
For the year ended December 31, 1996, Cornerstone II, Cornerstone III, and
Cornerstone IV incurred common administrative expenses of $14,612, $24,702, and
$47,685, respectively; none incurred any extraordinary expenses.
For the year ended December 31, 1996, Cornerstone II, Cornerstone III, and
Cornerstone IV incurred transaction fees and costs of $170,971, $379,973, and
$222,993, respectively.
S-10
<PAGE>
THE FOLLOWING UPDATES THE BREAK EVEN INFORMATION UNDER "SUMMARY OF THE
PROSPECTUS--THE DEAN WITTER CORNERSTONE FUNDS" ON PAGES 1-7, AND UPDATES AND
REPLACES "DESCRIPTION OF CHARGES TO EACH PARTNERSHIP--4. BREAK EVEN ANALYSIS" ON
PAGES 42-43 TO REFLECT A CURRENT SELLING PRICE.
4. BREAK EVEN ANALYSIS
Based upon the annual fees and expenses of Cornerstone II, Cornerstone III
and Cornerstone IV from January 1, 1992 through February 28, 1997, the
Partnerships will be required to earn estimated annual net trading profits
(after taking into account estimated interest income based upon current rates
of 5%) of 7.11%, 8.15% and 4.70%, respectively, per year of their average
annual Net Assets in order for a Limited Partner to break-even (earning
profits sufficient to recoup its investment) upon redemption after one year.
Based upon the selling price as of February 28, 1997, Cornerstone II,
Cornerstone III and Cornerstone IV must earn estimated net trading profits of
$238.47, $243.25 and $168.94 per Unit, respectively, in order for a Limited
Partner to recoup its investment upon redemption of a Unit after one year after
payment by the Partnership of its expenses (as calculated below).
<TABLE>
<CAPTION>
CORNERSTONE II CORNERSTONE III CORNERSTONE IV
-------------- --------------- --------------
<S> <C> <C> <C>
$ $ $
Selling Price per Unit (as of February 28, 1997)
(1)................................................ 3,355.64 2,985.83 3,596.87
Management Fee (2)................................. 139.82 124.41 149.87
Brokerage Commissions (3).......................... 210.06 209.31 149.27
Less: Interest Income (4).......................... (134.23) (119.43) (143.87)
Transaction Costs (5).............................. 18.12 23.59 8.99
Administrative Expenses (6)........................ 4.70 5.37 4.68
Incentive Fee (7).................................. -- -- --
Amount of Trading Income Required for a Limited
Partner to Recoup its Investment at the End of
One Year......................................... 238.47 243.25 168.94
Percentage of Selling Price........................ 7.11% 8.15% 4.70%
</TABLE>
- ------------------------------------
(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.
(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. Effective September 1, 1996, aggregate
commissions and transaction fees and costs with respect to each Trading
Manager's allocated Net Assets have been capped at 13/20 of 1% per month (a
maximum 7.8% annual rate) (in the case of Trading Managers which employ
multiple trading systems in trading on behalf of a Partnership, the
foregoing 13/20 of 1% cap is applied on a per trading system basis).
Brokerage commissions have averaged 6.26%, 7.82% and 4.15% of average annual
Net Assets of Cornerstone II, III and IV, respectively. For purposes of the
above table, brokerage commissions, except for Cornerstone III, were assumed
to be the foregoing percentages. For Cornerstone III, such rate was reduced
to 7.01% in conformity with the new cap.
(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%, 0.79% and 0.25% 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. Effective September 1, 1996, aggregate transaction
fees and costs and brokerage commissions have been capped at 13/20 of 1% per
month of a Partnership's month-end Net Assets allocated to each Trading
Manager.
(6) Administrative expenses have averaged 0.14%, 0.18% and 0.13% 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 each Trading Manager's trading
profits are assumed to equal expenses.
S-11
<PAGE>
CAPITALIZATION
THE FOLLOWING UPDATES AND REPLACES "CAPITALIZATION" ON PAGES 47-48.
The following table sets forth the actual capitalization of the
Partnerships as of February 28, 1997. Since unsold Units may only be sold in
Exchanges, which requires a redemption of Units from one Partnership and the
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
FEBRUARY 28,
TITLE OF CLASS 1997
- -------------------------------------------------------------------------------------- -------------
<S> <C>
Cornerstone II:
Limited Partnership Interest........................................................ 29,647,726
General Partnership Interest........................................................ 729,516
-------------
Total............................................................................ 30,377,242
-------------
-------------
Cornerstone III:
Limited Partnership Interest........................................................ 44,033,359
General Partnership Interest........................................................ 1,140,893
-------------
Total............................................................................ 45,174,252
-------------
-------------
Cornerstone IV:
Limited Partnership Interest........................................................ 102,131,612
General Partnership Interest........................................................ 2,298,002
-------------
Total............................................................................ 104,429,614
-------------
-------------
</TABLE>
THE TRADING MANAGERS
MATERIAL CHANGES RELATING TO EACH TRADING MANAGER, IF ANY, ARE PROVIDED
BELOW. PERFORMANCE CAPSULES ARE SHOWN FOR NORTHFIELD TRADING L.P.
("NORTHFIELD"), WELTON INVESTMENT SYSTEMS CORPORATION ("WELTON"), AND ABRAHAM
TRADING CO. ("ATC") AND NO OTHERS BECAUSE NORTHFIELD BECAME A TRADING
MANAGER TO CORNERSTONE II ON APRIL 16, 1997 AND WELTON AND ATC BECAME
TRADING MANAGERS TO CORNERSTONE III ON JULY 1, 1996.
DEAN WITTER CORNERSTONE FUND II
1. ABACUS TRADING CORPORATION
(CURRENT ALLOCATION -- 0%)
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION RELATING TO ABACUS
TRADING CORPORATION BEGINNING ON PAGE 51.
Effective February 28, 1997, Abacus Trading Corporation ceased to be a
Trading Manager for Cornerstone II.
2. JOHN W. HENRY & COMPANY, INC. ("JWH"(R))
(CURRENT ALLOCATION -- 76.18%)
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION RELATING TO JWH
BEGINNING ON PAGE 54.
Mr. Peter F. Karpen is no longer a principal of JWH.
Ms. Kenton serves on the Managed Futures Association Trading and Markets
Committee.
Mr. James E. Johnson is no longer a principal of JWH.
Ms. Hardy resigned from her position with JWH described in the Prospectus,
effective April 30, 1997. She may continue with JWH on a part-time basis to
assist with transition issues.
Ms. Twist announced her resignation from JWH on January 15, 1997, but will
continue in her present capacity for the time being.
S-12
<PAGE>
Mr. Julius A. Staniewicz, age 38, is the senior strategist in JWH's Product
Development Department and a member of the Operating and Investment Policy
Committees of JWH. He is also President of JWH Asset Management, Inc. and JWH
Financial Products, Inc. Prior to joining JWH in March of 1992, Mr. Staniewicz
was employed with Shearson Lehman Brothers as a financial consultant starting in
April 1991. Prior to that, beginning in 1990, Mr. Staniewicz was a vice
president of Phoenix Asset Management, a commodity pool operator and introducing
broker, where he helped develop futures funds for syndication and institutional
investors. From 1986 to 1989, Mr. Staniewicz worked in the managed futures
department at Prudential-Bache Securities, Inc., as an assistant vice president
and co-director of managed futures. In this capacity, Mr. Staniewicz oversaw all
aspects of forming and offering futures funds, including the selection and
monitoring of CTAs. Mr. Staniewicz received a B.A. in Economics from Cornell
University.
Mr. John A.F. Ford, age 56, is the director of marketing and is a member of
the Operating Committee of JWH.
Ms. Wendy B. Goodyear, age 34, is director of the office of the chairman.
Ms. Melanie A. Caldwell, age 42, is human resources and administrative
director and a member of the Operating Committee of JWH (NFA registration
pending).
Mr. Andrew D. Willard, age 50, is director of technology at JWH and a
member of the Operating Committee of JWH.
Mr. Mark W. Sprankel, age 31, is an assistant vice president of JWH (NFA
registration pending).
Mr. Matthew J. Driscoll, age 30, is an assistant vice president of JWH (NFA
registration pending).
LEGAL AND ETHICAL CONCERNS
There neither now exists nor has there ever previously been any
administrative, civil, or criminal action against JWH or its principals which is
material, except that in September 1996, JWH was named as a co-defendant in
purported class action lawsuits filed in the California Superior Court, Los
Angeles County and in the New York Supreme Court, New York County. In November
1996, JWH was named as a co-defendant in a purported class action complaint
filed in the Superior Court of the State of Delaware, New Castle County that
contained the same allegations as the New York and California complaints.
Additional complaints containing the same allegations as the earlier California
complaints were filed in California in March 1997. The actions, which seek
unspecified damages, purport to be brought on behalf of investors in certain DWR
commodity pools, some of which are advised by JWH, and are primarily directed at
DWR's alleged fraudulent selling practices in connection with the marketing of
those pools. These actions are the same matters as those discussed under
"Certain Litigation" below. JWH is essentially alleged to have aided and abetted
or directly participated with DWR in those practices. JWH believes the
allegations against it are without merit; it intends to contest these
allegations vigorously and is convinced that it will be shown to have acted
properly and in the best interest of investors.
JWH and Mr. Henry may engage in discretionary trading for their own
accounts, and may trade for the purpose of testing new investment programs and
concepts, as long as such trading does not amount to a breach of fiduciary duty.
In the course of such trading, JWH and Mr. Henry may take positions in their own
accounts which are the same or opposite from client positions due to testing a
new quantitative model or program, a neutral allocation system, and/or trading
pursuant to individual discretionary methods, and on occasion orders may get
better fills than the client accounts. Records for these accounts will not be
made available to clients. Employees and principals of JWH (other than Mr.
Henry) are not permitted to trade on a discretionary basis in futures, options
on futures or forward contracts. However, such principals and employees may
invest in investment vehicles that trade futures, options on futures, or forward
contracts, when an independent trader manages trading in that vehicle, and in
the JWH Employee Fund, L.P., for which JWH acts as the commodity trading
advisor. The records of these accounts also will not be made available to
clients.
THE OPERATING COMMITTEE
The Operating Committee is the senior management group at JWH and is
responsible for the development and implementation of JWH's long-term strategies
and objectives. The Operating Committee also coordinates and oversees JWH's
daily operations.
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THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN "TRADING
TECHNIQUES" ON PAGE 57.
THE JWH INVESTMENT PHILOSOPHY
The basis of the JWH investment philosophy is that prices for all financial
instruments reflect human reactions to external events. Accordingly, it can be
expected that a series of political, economic, social or environmental events
will create patterns of price movements, or trends. When a sequence of similar
events is repeated at a later time, the price trends often reoccur. JWH programs
attempt to capture the profit opportunities created by sustained market
movements.
By conducting analysis on historic price data for commodity markets, the
firm's founder, John W. Henry, developed proprietary systems designed to
identify important price trends and determine optimal entry and exit points.
JWH's comprehensive research has also led to the development of quantitative
models which suggest the appropriate content and weighting for each position in
a global portfolio.
The investment philosophy of JWH is supported by intensive risk management
and continuing research to enhance the application of the underlying
methodologies. Risk is measured and managed in a variety of ways. Within client
portfolios, individual positions are monitored on a stand-alone and
portfolio-weighted basis. Positions are matched with stop-loss provisions which
are altered regularly to reflect changing market conditions.
For more than a decade, JWH has recognized the importance of global
trading. Financial markets around the world are increasingly interrelated, with
actions in one country's markets often influencing markets in other parts of the
world. Many of the JWH investment programs maintain positions in a variety of
worldwide markets in seeking to achieve material benefits from the opportunities
presented.
Although price trends are the ultimate product of markets, there are
procedures built into JWH's programs that have been designed to affect trading
efficiency and preserve client capital. JWH's research on these and other issues
has materially improved risk-adjusted performance for clients over the past few
years.
A DISCIPLINED INVESTMENT PROCESS
Regardless of recent performance in any one market, or widely held opinions
on future market direction, JWH maintains a disciplined investment process. The
consistent application of JWH's investment techniques facilitates the ability to
participate in rising or falling markets without bias.
The first step in the JWH investment process is the identification of
sustained price movements--or trends--in a given market. While there are many
ways to identify trends, JWH uses mathematical models that attempt to
distinguish real trends from interim volatility. It also presumes that trends
often exceed in duration the expectation of the general marketplace.
JWH's historical performance demonstrates that, because trends often last
longer than most market participants expect, significant returns can be
generated from positions held over a long period of time. As such, JWH attempts
to pare losing positions relatively quickly while allowing profitable positions
to mature. Most losing positions are closed within a few days or weeks, while
others--those where a profitable trend continues--are retained. 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 investment methods have been profitable. Large profits on a few
trades in positions that typically exist for several months have produced
favorable results overall. Generally, most losing positions are liquidated
within weeks. The maximum equity retracement JWH has experienced in any single
program was nearly sixty percent. Clients should understand that similar or
greater drawdowns are possible in the future.
To reduce exposure to volatility in any particular market, most JWH
programs participate in several markets at one time. In total, JWH participates
in up to 60 markets, encompassing interest rates, foreign exchange, and
commodities such as agricultural products, energy and precious metals. Most
investment programs maintain a consistent portfolio composition to allow
opportunities in as many market trends as possible.
Throughout the investment process, risk controls are maintained to reduce
the possibility of an extraordinary loss in any one market. Proprietary research
is conducted on an ongoing basis to refine the JWH investment strategies and
attept to reduce volatility while maintaining the potential for excellent
performance.
JWH at its sole discretion may override computer-generated 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
quantitative models also include the determination of leverage, commencement of
trading an account, contracts and contract months, and effective trade
execution.
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PHYSICAL OR CASH COMMODITIES
In addition to futures contracts, JWH may from time to time for certain
clients trade spot and forward contracts on physical or cash commodities,
including specifically gold bullion, when it believes that such markets offer
comparable or superior market liquidity or a greater ability to execute
transactions at a single price. Such transactions, as opposed to futures
transactions, relate to the purchase and sale of specific physical commodities.
Whereas futures contracts are generally uniform except for price and delivery
time, cash contracts may differ from each other with respect to such terms as
quantity, grade, mode of shipment, terms of payment, penalties, risk of loss and
the like. There is no limitation on the daily price movements of spot or forward
contracts transacted through banks, brokerage firms or dealers, and those
entities are not required to continue to make markets in any commodity. In
addition, the CFTC does not comprehensively regulate such transactions, which
are subject to the risk of the foregoing entities' failure, inability or refusal
to perform with respect to such contracts. No such trading has previously been
undertaken on behalf of the Partnerships, nor will any such trading be
undertaken on behalf of the Partnerships without the consent of the General
Partner. It has not been determined at this time whether any such trading will
be undertaken on behalf of the Partnerships in the future.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN "THE
ORIGINAL INVESTMENT PROGRAM" ON PAGE 59.
The Original Investment Program. The Original Investment Program, the first
program offered by JWH, offers access to a spectrum of worldwide financial and
nonfinancial futures markets using a disciplined trend identification investment
approach. The program has enjoyed an improved risk/reward profile since 1992,
when the sector allocation was altered and enhanced risk management procedures
were implemented. The Original Investment Program utilizes a long-term
quantitative approach which always maintains a position, either long or short,
in every market traded by the program.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN "THE GLOBAL
DIVERSIFIED PORTFOLIO" ON PAGE 59.
The Global Diversified Portfolio. The Global Diversified Portfolio is JWH's
most diversified program, trading futures and forwards in up to 60 markets. The
Global Diversified Portfolio is designed to identify and capitalize on long-term
price movements in a spectrum of financial and nonfinancial markets using a
systematic approach. The program does not maintain continuous positions and, in
fact, may take a neutral stance (i.e., no position) if a long-term trend fails
to develop or during periods of non-trending markets.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN
"INTERNATIONAL FOREIGN EXCHANGE PROGRAM" ON PAGE 59.
The International Foreign Exchange Program. The International Foreign
Exchange Program (Forex) is designed to identify and capitalize on intermediate
and long-term price movements in a broad range of major and minor currencies on
the interbank market. Positions are taken as outrights against the U.S. dollar,
or cross rates, which eliminate the position quickly--i.e. a neutral stance is
taken--if long-term trends fail to continue or during periods of nontrending
markets.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN THE THIRD
AND FOURTH PARAGRAPHS OF "OTHER JWH PROGRAMS" BEGINNING ON PAGE 59.
As of February 28, 1997, the aggregate amount of funds under management
pursuant to the Original Investment Program was $272,852,659; the aggregate
amount of funds under management pursuant to the Global Diversified Portfolio
was $164,152,336; and the aggregate amount of funds under management pursuant to
the International Foreign Exchange Program was $76,868,713. As of February 28,
1997, the aggregate amount of all funds under management pursuant to all JWH
programs was approximately $2.1 billion.
As of February 28, 1997, JWH was managing approximately $17,860,456, 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.
3. NORTHFIELD TRADING L.P.
(CURRENT ALLOCATION -- 23.82%)
Beginning April 16, 1997, Northfield Trading L.P. ("Northfield") became a
Trading Manager for
Cornerstone II.
Northfield is a Delaware limited partnership with its principal place of
business at 3333 S. Wadsworth Boulevard, Suite D-318, Lakewood, Colorado 80227.
Northfield was formed in August 1990. The limited
S-15
<PAGE>
partnership was formed to use emerging computer technology to develop systematic
approaches to trading. Northfield became registered in March 1990 as a commodity
trading advisor and in November 1990 as commodity pool operator with the
Commodity Futures Trading Commission, and is a trading advisor and commodity
pool operator member of the National Futures Association, the futures industry
self-regulatory organization. Northfield is not affiliated with the General
Partner or DWR or any of the other Trading Managers for the Partnership.
PRINCIPALS OF NORTHFIELD
Northfield Investment L.P. ("NILP"), the general partner of Northfield, is
a Delaware limited partnership, whose general partner is Northfield Investment
Company, an entity owned equally by Douglas Bry and Philip Spertus, and whose
limited partners are Douglas Bry, Philip Spertus and members of their families.
NILP's sole function is to serve as the general partner of Northfield.
Douglas Bry, age 44, is the President of Northfield. Mr. Bry has an
extensive history, dating from 1972, in analyzing and understanding complex
databases through the use of computerized statistical approaches. In January
1987, Mr. Bry and Philip Spertus formed Technical Trading Strategies, Inc.
("TTS"), an Illinois corporation of which Mr. Bry is the President. In
conjunction with Mr. Spertus and through TTS, Mr. Bry developed and marketed the
"Volatility Breakout System," a trading methodology that was offered for sale to
the public. In December 1987, Douglas Bry and Philip Spertus formed Northfield
Trading Company ("NTC"), also an Illinois corporation of which Mr. Bry is
President. NTC's primary business was to provide brokerage services to customers
by introducing their accounts to clearing firms on a commission basis. NTC also
provided discretionary trading advice to customers, and licensed proprietary
trading software to introducing brokers and CTAs. Mr. Bry, an attorney,
graduated from Beloit College in 1974 with a B.A. in Philosophy and Sociology
and obtained his J.D. from the University of Colorado in 1978. He is presently
licensed to practice in the Federal and State Courts of Pennsylvania and
Colorado. From September 1978 until June 1982, he was a trial attorney with the
Defender Association of Philadelphia, and from June 1982 through January 1987,
he was a Senior Trial Deputy with the Colorado State Public Defender. Mr. Bry
began trading futures for his own account in 1985 and became registered with the
CFTC as a CTA in 1986. In January 1996, Mr. Bry was elected to a two-year term
on the Board of Directors of the Managed Futures Association and currently
serves as Chairperson of the Developing CTA/CPO Advisory Council. In January
1997, he was elected to serve on the Board of Directors of the National Futures
Association in the CTA category.
Philip Spertus, age 62, is Vice President of Northfield. Mr. Spertus
graduated from the Massachusetts Institute of Technology in 1956. From 1979 to
1992, Mr. Spertus served in various senior capacities, including positions of
Chairman and President, with Intercraft Industries Inc., a multinational
manufacturer of picture frames and related products. In 1992, Intercraft
Industries was sold to Newell Corporation and Mr. Spertus assumed the position
of Vice President with Newell until late 1993. Philip Spertus owned a special
seat and was a registered Broker/Dealer and member of the Chicago Board of
Options Exchange from August 1984 through February 1986. He has traded futures
for his own account since 1983 but is not currently doing so. Mr. Spertus serves
as Chairman of both TTS and NTC.
Jeffrey Metcalfe, age 32, is the Director of Trading Operations. Mr.
Metcalfe joined Northfield's trading staff in November 1992 and was promoted to
his current position as Director of Trading Operations in August 1996. Mr.
Metcalfe holds a B.A. in International Relations from Boston University and a
Master of International Management with an emphasis in International Finance
from the American Graduate School of International Management (Thunderbird). His
prior experience includes three years as manager of the federal funds trading
desk for the United States Trust Co. in Boston, Massachusetts.
John H. Sells, age 44, is the Senior Programmer at Northfield. Mr. Sells
graduated from the University of Illinois in 1975 with a B.S. in Computer
Science. His 20 years of professional software development include: Operating
and Data Management Systems at NCR Corporation, Communications and High
Performance Optical Disk Systems at Storage Technology Corporation, Office
Automation Systems at NBI, Inc., and CAE/CAD (Computer Aided
Engineering/Computer Aided Design) tools for Printed Circuit Board and ASIC
(Application Specified Integrated Circuit) development at Daisy/Cadnetix, Inc.
He commenced employment with Northfield on October 1, 1990.
Jacquelyn Watters, age 32, serves on the Administrative Coordination
Committee of Northfield. Ms. Watters graduated with honors in Business Economics
from Colorado State University in 1986. From August 1987 to May 1988, she was
employed as an Order Specialist with Lind-Waldock & Company, a discount futures
commission merchant, and was involved in the training of new employees. Ms.
Watters has extensive experience with the mechanics of trading commodity
interests and joined NTC in June 1988 with responsibility
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for trading operations. She has been an Associated Person of Northfield since
its inception, serving as Director of Operations and Director of Trading. In
January, 1996, Ms. Watters was named Chief Operating Officer and a principal of
Northfield. In August 1996, Ms. Watters resigned to pursue personal interests,
but remains with Northfield in her current capacity.
THE NORTHFIELD TRADING SYSTEM
Douglas Bry has sole management authority over the day to day activities of
Northfield and is primarily responsible for its nondiscretionary, technical
trading program.
Northfield makes trading decisions pursuant to a multiple-system, technical
approach (the "Diversified Program") that was conceived, tested and refined by
Douglas Bry and Philip Spertus. The approach is fully computerized and
nondiscretionary. Money management principles are a critical element in the
Diversified Program and have been carefully constructed and are rigorously
applied to minimize risk exposure and to protect asset appreciation.
Northfield's approach is purely technical. A technical approach utilizes
price action itself as analyzed by charts, numerical indicators, pattern
recognition, or other techniques designed to provide information about market
direction. Since sustained price moves offer the greatest opportunity for profit
with the least amount of risk, Northfield has focused on studying the
characteristics of "random" versus "non-random" market behavior. The resulting
systems are highly sensitive to changes in price discretion and volatility, and
often detect non-random behavior before a trend is obvious. In order to validate
the trading methodology, extensive testing was conducted on over 13 years of
price history in more than 50 markets worldwide.
Northfield is very sensitive to the risk of "curve-fitting" results to
particular markets or time periods, and, as a result, utilizes a similar
approach in each market that it trades. The decision to subject all markets to
similar trading rules has led to the identification of techniques that work
independent of the market to which they are applied.
Northfield implements its systems via proprietary software that generates
and prints orders, monitors the markets in real time, and keeps track of
positions. The selection of trades is not subject to intervention by
Northfield's principals. No override of the Diversified Program will take place
absent extraordinary circumstances which Northfield believes threaten the
customer's capital, such as an outbreak of war, a major natural disaster or a
threat to the integrity of exchange clearing systems. A full-time staff of
computer programmers works with the principals of Northfield to refine existing
systems and develop new ones.
PAST PERFORMANCE OF NORTHFIELD
Northfield 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 II allocated to Northfield are allocated to the
Diversified Program.
INVESTORS ARE CAUTIONED THAT THE INFORMATION SET FORTH IN THE FOLLOWING
CAPSULE PERFORMANCE SUMMARY, AND THE SUMMARIES ON PAGES S-19 AND S-20, ARE NOT
INDICATIVE OF, AND MAY HAVE NO BEARING ON, ANY TRADING RESULTS WHICH MAY BE
ATTAINED BY THE TRADING MANAGER OR A PARTNERSHIP IN THE FUTURE, SINCE PAST
RESULTS ARE NOT A GUARANTEE OF FUTURE RESULTS AND OTHER TRADING MANAGER(S) WILL
BE INVESTING FUNDS OF SUCH PARTNERSHIP. THERE CAN BE NO ASSURANCE THAT THE
TRADING MANAGER 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 INTERESTS TRADING.
The rates of return set forth in the Northfield performance Capsule are
based on the fully-funded subset of Northfield accounts managed pursuant to the
Diversified Program. This means that (i) Northfield is managing some accounts
which are fully-funded and others which are funded at less than 100%, (ii) the
value of the fully-funded accounts included in the subset constitutes at least
10% of "nominal account size," which is the cash and other margin qualifying
assets ("actual funds") plus the amount by which the account's trading level
exceeds the actual funds ("notional funds"); and (iii) there are no material
differences in gross trading profit (loss) between the fully-funded subset and
the nominal account size.
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From January 1991 to February 1991, the performance represents that of a
single client account with pro-forma adjustments included. From March 1991 to
the present period, the performance is a composite of customer accounts.
NORTHFIELD TRADING L.P.
DIVERSIFIED PROGRAM
AS OF FEBRUARY 28, 1997
Name of CTA: Northfield Trading L.P.
Name of Program: Diversified Program
Inception of Client Trading by CTA: July 1989
Inception of Client Trading in Program: July 1989
Number of Open Accounts: 64
Aggregate Assets Overall (excluding notional): $85,010,599
Aggregate Assets Overall (including notional): $161,670,147
Aggregate Assets in Program (excluding notional): $85,010,599
Aggregate Assets in Program (including notional): $161,670,147
Largest Monthly Drawdown(1): (11.6)%--(9/92)
Largest Peak-to-Valley Drawdown(2): (27.0)%--(12/91--1/93)
1997 year-to-date return (2 months)(3): 4.3%
1996 annual return: 18.4%
1995 annual return: 9.1%
1994 annual return: 14.0%
1993 annual return: 40.2%
1992 annual return: (19.0)%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
NOTES TO CAPSULE PERFORMANCE OF NORTHFIELD TRADING L.P.
(1)LARGEST MONTHLY DRAWDOWN: Represents the largest loss experienced by
Northfield in any calendar month expressed as a percentage of Beginning Net
Asset Value.
(2)LARGEST PEAK-TO-VALLEY MONTHLY DRAWDOWN: Represents the greatest cumulative
percentage decline in month-end net asset value due to losses sustained by
Northfield during any period in which the initial month-end net asset value is
not equaled or exceeded by a subsequent month-end net asset value.
(3)ANNUAL RATE OF RETURN: Represents the cumulative compounded rate for return
for each year or portion thereof. It is computed by applying successively the
respective monthly rate of return for each month beginning with the first month
presented in each period and represents the net percentage change since the
beginning of the period presented.
DEAN WITTER CORNERSTONE FUND III
1. WELTON INVESTMENT SYSTEMS CORPORATION (CURRENT ALLOCATION -- 30.53%)
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN THE THIRD
PARAGRAPH OF "DIVERSIFIED PORTFOLIO" ON PAGE 63.
As of February 28, 1997, the aggregate amount of funds under management
pursuant to the Diversified Portfolio program was $39,344,127. As of February
28, 1997, the aggregate amount of funds under management pursuant to all
Welton programs was $52,409,041.
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<PAGE>
THE FOLLOWING UPDATES AND REPLACES CAPSULE A ON PAGE 64. THE NOTES
CONTAINED ON PAGE 66 ARE AN INTEGRAL PART OF THE FOLLOWING CAPSULE. CAPSULES B,
C, AND D ARE NOT UPDATED BECAUSE SAID PORTFOLIOS DO NOT TRADE FOR CORNERSTONE
III.
CAPSULE A
WELTON INVESTMENT SYSTEMS CORPORATION
DIVERSIFIED PORTFOLIO
AS OF FEBRUARY 28, 1997
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: 17
Aggregate Assets Overall (excluding notional): $52,409,041
Aggregate Assets Overall (including notional): $65,702,225
Aggregate Assets in Program (excluding notional): $39,344,127
Aggregate Assets in Program (including notional): $46,505,084
Largest Monthly % Drawdown: (15.94)%--(2/96)
Largest Month-End Peak-to-Valley: (25.96)%--(1/96-8/96)
1997 year-to-date return (2 months): 8.78%
1996 annual return: 7.17%
1995 annual return: 36.35%
1994 annual return: 2.38%
1993 annual return: 47.90%
1992 annual return (9 months): (4.28)%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
2. ABRAHAM TRADING CO.
(CURRENT ALLOCATION -- 25.11%)
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION RELATING TO ABRAHAM
TRADING CO. ON PAGE 67.
Mark E. Abraham, age 24, Salem Abraham's cousin, is registered with the
CFTC as an associated person of ATC and is a member of the NFA. He attended the
University of Texas in Austin from August 1991 through May 1995 where he
received a B.B.A. degree in Finance. He joined ATC full-time in May 1995 as
Salem Abraham's research assistant. Although not a principal, in his role as
research assistant, Mark has worked with Salem setting up research programs and
testing various trading ideas.
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION RELATING TO ABRAHAM
TRADING CO. ON PAGE 69.
DESCRIPTION OF ORDERS AND ORDER PLACEMENT
ATC determines the timing and method by which orders are placed and will
place all orders for futures contracts directly with the FCM's trading desk or
floor brokers. ATC also will select the types of orders placed. Order
placement will vary in accordance with the type of market encountered and the
type of order that can be used on the exchange or market on which a
particular commodity interest is traded.
ATC trades all customer accounts in parallel, making equivalent trades for
all accounts and apportioning the number of each commodity interest traded
ratably among the accounts in a neutral manner based on the capital in each
account.
Since all trading methods and strategies utilized by ATC are
proprietary and confidential, the foregoing discussion is necessarily of a
general nature.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN THE LAST
PARAGRAPH ON PAGE 69.
As of February 28, 1997, the aggregate amount of funds under ATC's
management was $113,334,880.
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<PAGE>
THE FOLLOWING UPDATES AND REPLACES CAPSULE A ON PAGE 70. THE NOTES
CONTAINED ON PAGE 70 ARE AN INTEGRAL PART OF THE FOLLOWING CAPSULE.
CAPSULE A
PERFORMANCE OF ABRAHAM TRADING COMPANY
AS OF FEBRUARY 28, 1997
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: 10
Aggregate Assets Overall: $113,334,880
Aggregate Assets in Program: $113,334,880
Largest Monthly % Drawdown: (15.94)%--(1/91)
Largest Month-End Peak-to-Valley (27.01)%--(1/91-8/91)
1997 year-to-date return (2 months): 14.43%
1996 annual return: (0.43)%
1995 annual return: 6.12%
1994 annual return: 24.22%
1993 annual return: 34.29%
1992 annual return: (10.50)%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
THE FOLLOWING UPDATES AND SUPPLEMENTS THE NOTES ON PAGE 70.
Since January 1, 1992, ATC has used the "Fully Funded Subset" method to
calculate its composite performance, including largest monthly drawdown and
largest peak-to-valley drawdown. Prior to that date the time-weighted method was
used. "Largest peak-to-valley drawdown" means the greatest cumulative percentage
decline in month-end net asset value due to losses sustained by any account in
the program during any period in which the initial month-end net asset value is
not equaled or exceeded by a subsequent month-end net asset value. The drawdown
is expressed as a percentage of the initial month-end net asset value and
includes the period of time from the initial month-end net asset value to the
lowest month-end net asset value of such decline. "Largest monthly drawdown"
means the greatest percentage monthly decline for any account in the program
where the initial month-end net asset value is not equaled or exceeded by the
subsequent month-end net asset value.
3. SUNRISE CAPITAL MANAGEMENT, INC. ("Sunrise")
(CURRENT ALLOCATION -- 44.36%)
THE FOLLOWING REPLACES THE INFORMATION CONTAINED IN THE FIRST FOUR
PARAGRAPHS UNDER "DESCRIPTION OF SUNRISE'S TRADING APPROACH" ON PAGE 72.
Description of Sunrise's Trading Approach
Sunrise has historically traded four programs, all of which are traded in
accordance with the description below.
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 reallocated the assets of
Cornerstone III managed by Sunrise in proportions of approximately 50% pursuant
to the Diversified Program and approximately 50% to the CIMCO portfolio.
The Sunrise Diversified Program may follow approximately fifteen different
markets. These markets may include, but are not limited to, precious and
industrial metals, grains, petroleum products, soft commodities, interest rate
futures, currencies and their crossrates.
The Sunrise CIMCO portfolio was designed by Sunrise to participate in the
highly liquid financial markets. This program trades the major currencies as
outrights against the U.S.dollar and selectively against each other. Interest
rate futures, both long and short term (including U.S. and non-U.S. bonds,
notes, Eurodollars, Euromarks and Euroyen), and precious and industrial metals
(including gold, silver and copper) and crude oil are also traded in this
program.
S-20
<PAGE>
The Sunrise Currency Program follows approximately thirteen different major
and minor currency markets, which may include, but are not limited to, the
Japanese yen, British pound, Deutsche mark, Swiss franc, Canadian dollar,
Australian dollar, Spanish peseta, Italian lira, Swedish krona, New Zealand
dollar, French franc, Singapore dollar and the Malaysian ringgit. The Currency
Program trades currency futures contracts on the International Monetary Market
(IMM) Division of the Chicago Mercantile Exchange and forward currency contracts
in the interbank markets. In order to achieve adequate diversification, major
and minor currencies are traded as crossrates selectively against each other
and/or as outrights against the U.S. dollar.
The Sunrise Expanded Diversified Program provides further diversification
than the standard Diversified Program. Additional commodity interest contracts
may include industrial metals, financials, and minor currency markets.
THE FOLLOWING REPLACES THE SECOND FULL PARAGRAPH ON PAGE 73.
Trend-following trading systems, such as those employed by Sunrise, will
seldom effect 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
offer reasonable profit potential. 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.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN THE LAST
PARAGRAPH OF PAGE 73 AND THE FIRST PARAGRAPH OF PAGE 74.
As of February 28, 1997, the aggregate amount of funds under management
pursuant to the Diversified Program was $37.8 million and $69.4 million pursuant
to the CIMCO portfolio. As of February 28, 1997, the aggregate amount under
management pursuant to all Sunrise's programs was $224.5 million.
As of February 28, 1997, Sunrise was managing approximately $19,815,639 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
1. JOHN W. HENRY & COMPANY, INC.
(CURRENT ALLOCATION -- 44.99%)
THE FOLLOWING UPDATES AND REPLACES THE FIRST SENTENCE OF THE SECOND
PARAGRAPH IN THE INFORMATION RELATING TO JOHN W. HENRY & COMPANY, INC. ON PAGE
74.
As of February 28, 1997 JWH was managing approximately $48,733,998 of
Cornerstone IV.
2. SUNRISE CAPITAL MANAGEMENT, INC.
(CURRENT ALLOCATION -- 55.01%)
THE FOLLOWING UPDATES AND REPLACES THE LAST SENTENCE OF THE FIRST PARAGRAPH
OF THE INFORMATION RELATING TO SUNRISE CAPITAL MANAGEMENT, INC. ON PAGE 74.
Sunrise normally commits between 20 and 40% of an account's equity as
margin on open positions pursuant to its trading system.
THE FOLLOWING UPDATES AND REPLACES THE FIRST SENTENCE OF THE SECOND
PARAGRAPH OF THE INFORMATION RELATING TO SUNRISE CAPITAL MANAGEMENT, INC. ON
PAGE 74.
As of February 28, 1997, Sunrise was managing approximately $55,683,583 of
Cornerstone IV.
THE GENERAL PARTNER
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION UNDER "THE GENERAL
PARTNER" ON PAGE 78.
In this connection, as reflected in DWD's 1996 and 1995 Annual Reports, DWD
had total shareholders' equity of $5,164.4 million and total assets of $42,413.6
million as of December 31, 1996, and total shareholders' equity of $4,833.7
million and total assets of $38,208.2 million as of December 31, 1995.
Additional financial information regarding DWD is included in the financial
statements filed as part of such Annual Reports. 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 reports will be available for review or copying
at the offices of the SEC, 450 Fifth Street, N.W., Room 1024, 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).
S-21
<PAGE>
On February 5, 1997, DWD and Morgan Stanley Group Inc. ("Morgan Stanley")
announced a definitive agreement to merge. Under the terms of the merger
agreement unanimously approved by the Boards of Directors of both companies,
each Morgan Stanley common share will be exchanged for 1.65 common shares of
DWD. Morgan Stanley preferred shares outstanding at the date of the merger will
be exchanged for preferred shares of DWD having substantially identical terms.
The transaction, which is expected to be completed in mid-1997, is subject to
customary closing conditions, including certain regulatory approvals and the
approval of shareholders of both companies. It is anticipated that such merger
will have no material effect on the ability of Demeter to meet its obligations
as General Partner of the Partnerships.
CERTAIN LITIGATION
At any given time, DWR is involved in numerous legal actions, some of which
seek significant damages.
On May 16, 1996, an NASD arbitration panel awarded damages and costs
against DWR and one of its account executives in the amount of approximately
$1.1 million, including punitive damages, to three customers who alleged, among
other things, fraud and misrepresentation in connection with their individually
managed futures accounts (not commodity pools).
On September 6, 10, and 20, 1996, and on March 13, 1997, 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
Management Corporation, Dean Witter Futures and Currency Management Inc., Dean
Witter, Discover & Co. (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 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.
During the five years preceding the date of this Prospectus, there have
been (other than as described above) no material criminal, civil or
administrative actions pending, on appeal or concluded against DWR, Demeter or
any of their principals which DWR or Demeter believes would be material to an
investor's decision to invest in the Partnerships.
PLAN OF DISTRIBUTION AND EXCHANGE PROCEDURE
THE FOLLOWING UPDATES THE INFORMATION UNDER "SUMMARY OF THE
PROSPECTUS--PURCHASE OF UNITS PURSUANT TO AN EXCHANGE--SECURITIES AVAILABLE FOR
EXCHANGE" ON PAGE 7 AND "PLAN OF DISTRIBUTION AND EXCHANGE PROCEDURE" ON PAGE
91.
As of March 1, 1997, up to 14,717.284 unsold Units of Limited Partnership
Interest were available for purchase pursuant to Exchanges.
EXPERTS
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION UNDER "EXPERTS" ON PAGE
100.
The statements of financial condition 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 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, 1996 and the statements of financial condition of
Demeter Management Corporation as of December 31, 1996 and 1995 included in this
Prospectus Supplement, 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.
S-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To 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 the Partnerships, 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.
February 17, 1997
(March 13, 1997 as to Note 5 and April 16, 1997 as to Note 6)
New York, New York
S-23
<PAGE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
ASSETS $ $ $
<S> <C> <C> <C>
Equity in Commodity futures trading accounts:
Cash 28,509,266 28,057,189 27,570,984
Net unrealized gain on open contracts 1,316,434 3,368,107 4,316,080
---------- ---------- ----------
Total Trading Equity 29,825,700 31,425,296 31,887,064
Interest receivable (DWR) 97,815 107,485 124,668
Receivable from DWR 123,327 25,525 50,385
---------- ---------- ----------
Total Assets 30,046,842 31,558,306 32,062,117
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accrued incentive fees 316,750 307,567 --
Redemptions payable 442,706 134,889 386,099
Accrued brokerage commissions (DWR) 83,967 94,453 81,268
Accrued management fees 99,352 104,238 105,860
Common administrative expenses payable 52,339 81,314 111,168
Accrued transaction fees and costs 5,558 6,957 5,720
---------- ---------- ----------
Total Liabilities 1,000,672 729,418 690,115
---------- ---------- ----------
PARTNERS' CAPITAL
Limited Partners (8,987.942,
10,673.698, and 13,802.050 Units, respectively) 28,360,195 30,213,505 30,885,515
General Partner (217.400 Units) 685,975 615,383 486,487
---------- ---------- ----------
Total Partners' Capital 29,046,170 30,828,888 31,372,002
---------- ---------- ----------
Total Liabilities and Partners' Capital 30,046,842 31,558,306 32,062,117
---------- ---------- ----------
---------- ---------- ----------
NET ASSET VALUE PER UNIT 3,155.36 2,830.65 2,237.75
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
REVENUES $ $ $ $
<S> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 7,321,679 11,081,716 (878,688) 2,539,342
Net change in unrealized (2,051,673) (947,973) 556,567 2,029,459
---------- ---------- ---------- ----------
Total Trading Results 5,270,006 10,133,743 (322,121) 4,568,801
Interest income (DWR) 1,179,784 1,471,022 1,153,003 694,085
---------- ---------- ---------- ----------
Total Revenues 6,449,790 11,604,765 830,882 5,262,886
---------- ---------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 1,719,932 1,864,093 2,336,047 1,773,947
Management fees 1,167,223 1,307,872 1,346,905 1,157,221
Transaction fees and costs 170,971 160,238 194,384 141,974
Common administrative expenses 14,612 8,183 49,101 68,511
Incentive fees 329,590 381,720 -- 19,886
---------- ---------- ---------- ----------
Total Expenses 3,402,328 3,722,106 3,926,437 3,161,539
---------- ---------- ---------- ----------
NET INCOME (LOSS) 3,047,462 7,882,659 (3,095,555) 2,101,347
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Income (Loss) Allocation:
Limited Partners 2,976,870 7,753,763 (3,050,650) 2,057,120
General Partner 70,592 128,896 (44,905) 44,227
Net Income (Loss) per Unit:
Limited Partners 324.71 592.90 (219.47) 178.05
General Partner 324.71 592.90 (219.47) 178.05
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-24
<PAGE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
ASSETS $ $ $
<S> <C> <C> <C>
Equity in Commodity futures trading accounts:
Cash 40,587,011 42,294,365 42,884,780
Net unrealized gain on open contracts 2,580,803 5,578,294 5,016,857
Net option premiums received (291,412)
----------- ----------- -----------
Total Trading Equity 42,876,402 47,872,659 47,901,637
Receivable from DWR 122,701 124,456 213,589
Interest receivable (DWR) 138,367 159,680 193,048
----------- ----------- -----------
Total Assets 43,137,470 48,156,795 48,308,274
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 680,730 639,349 666,178
Common administrative expenses payable 137,548 222,036 266,405
Accrued management fees 142,387 158,630 158,895
Accrued brokerage commissions (DWR) 129,098 166,128 200,604
Accrued transaction fees and costs 12,349 20,978 13,739
----------- ----------- -----------
Total Liabilities 1,102,112 1,207,121 1,305,821
----------- ----------- -----------
PARTNERS' CAPITAL
Limited Partners (15,097.603,
18,332.818, and 23,505.598 Units, respectively) 40,997,752 45,991,101 46,250,611
General Partner (382.103 Units) 1,037,606 958,573 751,842
Total Partners' Capital 42,035,358 46,949,674 47,002,453
----------- ----------- -----------
Total Liabilities and Partners' Capital 43,137,470 48,156,795 48,308,274
----------- ----------- -----------
----------- ----------- -----------
NET ASSET VALUE PER UNIT 2,715.51 2,508.68 1,967.64
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
REVENUES $ $ $ $
<S> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 8,925,181 14,260,042 913,869 (627,751)
Net change in unrealized (2,997,491) 561,437 (1,350,056) 3,815,157
----------- ----------- ----------- -----------
Total Trading Results 5,927,690 14,821,479 (436,187) 3,187,406
Interest income (DWR) 1,657,400 2,061,461 1,744,148 1,445,561
----------- ----------- ----------- -----------
Total Revenues 7,585,090 16,882,940 1,307,961 4,632,967
----------- ----------- ----------- -----------
EXPENSES
Brokerage commissions (DWR) 2,772,496 3,499,743 4,417,718 4,587,865
Management fees 1,629,715 1,828,013 2,014,028 2,375,033
Transaction fees and costs 379,973 502,332 434,287 348,493
Common administrative expenses 24,702 21,158 122,423 150,937
----------- ----------- ----------- -----------
Total Expenses 4,806,886 5,851,246 6,988,456 7,462,328
----------- ----------- ----------- -----------
NET INCOME (LOSS) (2,778,204) 11,031,694 (5,680,495) (2,829,361)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Income (Loss) Allocation:
Limited Partners 2,699,171 10,824,963 (5,594,569) (2,784,837)
General Partner 79,033 206,731 (85,926) (44,524)
----------- ----------- ----------- -----------
Net Income (Loss) per Unit:
Limited Partners 206.83 541.04 (219.67) (109.91)
General Partner 206.83 541.04 (219.67) (109.91)
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-25
<PAGE>
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995 1994
---------- ----------- -----------
ASSETS $ $ $
<S> <C> <C> <C>
Equity in Commodity futures trading accounts:
Cash 91,656,399 104,927,961 111,508,180
Net unrealized gain on open contracts 5,330,520 70,143 268,291
---------- ----------- -----------
Total Trading Equity 96,986,919 104,998,104 111,776,471
Interest receivable (DWR) 305,391 364,747 434,153
---------- ----------- -----------
Total Assets 97,292,310 105,362,851 112,210,624
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 1,269,513 1,044,804 1,589,622
Accrued management fees 322,552 349,039 371,606
Common administrative expenses payable 126,007 267,788 357,130
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 2,318,358
---------- ----------- -----------
PARTNERS' CAPITAL
Limited Partners (29,160.287,
35,905.625, and 46,994.002 Units, respectively) 93,448,822 101,854,654 108,418,306
General Partner (638.889 Units) 2,047,422 1,812,357 1,473,960
---------- ----------- -----------
Total Partners' Capital 95,496,244 103,667,011 109,892,266
---------- ----------- -----------
Total Liabilities and Partners' Capital 97,292,310 105,362,851 112,210,624
---------- ----------- -----------
---------- ----------- -----------
NET ASSET VALUE PER UNIT 3,204.66 2,836.73 2,307.07
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993
---------- ---------- ----------- -----------
REVENUES $ $ $ $
<S> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 10,304,825 27,041,974 (10,447,878) (4,335,118)
Net change in unrealized 5,260,377 (198,148) (1,726,877) 717,487
---------- ---------- ----------- -----------
Total Trading Results 15,565,202 26,843,826 (12,174,755) (3,617,631)
Interest income (DWR) 3,924,420 4,912,698 4,129,344 2,937,637
---------- ---------- ----------- -----------
Total Revenues 19,489,622 31,756,524 (8,045,411) (679,994)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
EXPENSES
Management fees 3,904,737 4,575,372 4,952,206 4,945,676
Brokerage commissions (DWR) 3,781,486 2,776,225 5,336,659 6,634,741
Transaction fees and costs 222,993 168,718 339,083 398,959
Common administrative expenses 47,685 39,890 228,633 223,551
Incentive fees -- -- 7,659 1,400,473
---------- ---------- ----------- -----------
Total Expenses 7,956,901 7,560,205 10,864,240 13,603,400
NET INCOME (LOSS) 11,532,721 24,196,319 (18,909,651) (14,283,394)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net Income (Loss) Allocation:
Limited Partners 11,297,656 23,857,922 (18,664,384) (14,156,711)
General Partner 235,065 338,397 (245,267) (126,683)
Net Income (Loss) per Unit:
Limited Partners 367.93 529.66 (383.89) (270.10)
General Partner 367.93 529.66 (383.89) (270.10)
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-26
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENTS 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
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
$ $ $
DEAN WITTER CORNERSTONE FUND II
------------------------------------------------------------------------
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
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
DEAN WITTER CORNERSTONE FUND III
------------------------------------------------------------------------
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
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
DEAN WITTER CORNERSTONE FUND IV
------------------------------------------------------------------------
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.
S-27
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -------------
$ $ $ $
DEAN WITTER CORNERSTONE FUND II
---------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 3,047,462 7,882,659 (3,095,555) 2,101,347
Noncash item included in net income (loss):
Net change in unrealized 2,051,673 947,973 (556,567) (2,029,459)
(INCREASE) DECREASE IN OPERATING ASSETS:
Interest receivable (DWR) 9,670 17,183 (61,279) (4,984)
Receivable from DWR (97,802) 24,860 (42,174) (5,264)
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Accrued brokerage commissions (DWR) (10,486) 13,185 (972) 360
Accrued management fees (4,886) (1,622) (1,443) 16,994
Common administrative expenses payable (28,975) (29,854) (14,074) 62,518
Accrued transaction fees and costs (1,399) 1,237 (52) (415)
Accrued incentive fees 9,183 307,567 (15,336) 15,336
------------- ------------- ------------- -------------
Net cash provided by (used for) operating activities 4,974,440 9,163,188 (3,787,452) 156,433
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 155,468 178,837 7,098,104 7,100,239
Increase (decrease) in redemptions payable 307,817 (251,210) 151,917 (279,349)
Redemptions of units (4,985,648) (8,604,610) (4,571,920) (3,839,378)
------------- ------------- ------------- -------------
Net cash provided by (used for) financing activities (4,522,363) (8,676,983) 2,678,101 2,981,512
------------- ------------- ------------- -------------
Net increase (decrease) in cash 452,077 486,205 (1,109,351) 3,137,945
Balance at beginning of period 28,057,189 27,570,984 28,680,335 25,542,390
------------- ------------- ------------- -------------
Balance at end of period 28,509,266 28,057,189 27,570,984 28,680,335
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
DEAN WITTER CORNERSTONE FUND III
---------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 2,778,204 11,031,694 (5,680,495) (2,829,361)
Noncash item included in net income (loss):
Net change in unrealized 2,997,491 (561,437) 1,350,056 (3,815,157)
(INCREASE) DECREASE IN OPERATING ASSETS:
Net option premiums 291,412 -- -- --
Interest receivable (DWR) 21,313 33,368 (79,962) 21,271
Receivable from DWR 1,755 89,133 (213,589) 32,428
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Common administrative expenses payable (84,488) (44,369) 11,260 137,662
Accrued management fees (16,243) (265) (30,263) (14,483)
Accrued brokerage commissions (DWR) (37,030) (34,476) 77,852 (65,492)
Accrued transaction fees and costs (8,629) 7,239 4,810 (5,129)
------------- ------------- ------------- -------------
Net cash provided by (used for) operating activities 5,943,785 10,520,887 (4,560,331) (6,538,261)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 8,388 49,000 5,299,578 9,819,616
Increase (decrease) in redemptions payable 41,381 (26,829) 75,572 (201,692)
Redemptions of units (7,700,908) (11,133,473) (8,773,323) (11,133,649)
------------- ------------- ------------- -------------
Net cash used for financing activities (7,651,139) (11,111,302) (3,398,173) (1,515,725)
------------- ------------- ------------- -------------
Net (decrease) in cash (1,707,354) (590,415) (7,958,504) (8,053,986)
Balance at beginning of period 42,294,365 42,884,780 50,843,284 58,897,270
------------- ------------- ------------- -------------
Balance at end of period 40,587,011 42,294,365 42,884,780 50,843,284
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
DEAN WITTER CORNERSTONE FUND IV
---------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 11,532,721 24,196,319 (18,909,651) (14,283,394)
Noncash item included in net income (loss):
Net change in unrealized (5,260,377) 198,148 1,726,877 (717,487)
(INCREASE) DECREASE IN OPERATING ASSETS:
Interest receivable (DWR) 59,356 69,406 (184,980) (18,641)
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Accrued management fees (26,487) (22,567) (41,612) 51,567
Common administrative expenses payable (141,781) (89,342) 8,605 206,517
Accrued brokerage commissions (DWR) 41,760 32,580 -- (120,420)
Accrued transaction fees and costs 2,025 1,629 -- (6,924)
Accrued incentive fees -- -- -- (3,722,665)
------------- ------------- ------------- -------------
Net cash provided by (used for) operating activities 6,207,217 24,386,173 (17,400,761) (18,611,447)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 108,665 212,691 20,753,129 46,450,637
Increase (decrease) in redemptions payable 224,709 (544,818) 519,604 321,383
Redemptions of units (19,812,153) (30,634,265) (17,151,842) (10,990,675)
------------- ------------- ------------- -------------
Net cash provided by (used for) financing activities (19,478,779) (30,966,392) 4,120,891 35,781,345
------------- ------------- ------------- -------------
Net increase (decrease) in cash (13,271,562) (6,580,219) (13,279,870) 17,169,898
Balance at beginning of period 104,927,961 111,508,180 124,788,050 107,618,152
------------- ------------- ------------- -------------
Balance at end of period 91,656,399 104,927,961 111,508,180 124,788,050
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-28
<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 (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 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--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.
Effective September 1, 1996, brokerage commissions and transaction fees
chargeable to the 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
system.
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.
S-29
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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, 1996 were as
follows:
Dean Witter Cornerstone Fund II
Abacus Asset Management Inc.
John W. Henry & Company, Inc.
Dean Witter Cornerstone Fund III
Welton Investment Systems Corporation
Abraham Trading Co.
Sunrise Capital Management
Dean Witter Cornerstone Fund IV
John W. Henry & Company, Inc.
Sunrise Capital Management
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 1/3of 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, 1995, and
1994, open contracts were:
S-30
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CORNERSTONE II
---------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
---------------------------------------------
DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
$ $ $
<S> <C> <C> <C>
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS
Commitments to Purchase........................ 18,287,000 140,924,000 7,734,000
Commitments to Sell............................ 70,723,000 3,298,000 --
Commodity Futures:
Commitments to Purchase........................ 6,346,000 53,994,000 23,692,000
Commitments to Sell............................ 14,596,000 10,484,000 14,973,000
Foreign Futures:
Commitments to Purchase........................ 57,075,000 51,681,000 8,655,000
Commitments to Sell............................ 8,798,000 1,656,000 161,925,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase........................ 26,688,000 15,585,000 28,327,000
Commitments to Sell............................ 18,334,000 44,881,000 32,192,000
<CAPTION>
CORNERSTONE III
---------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
---------------------------------------------
DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
$ $ $
<S> <C> <C> <C>
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS
Commitments to Purchase........................ 118,163,000 239,465,000 54,158,000
Commitments to Sell............................ 59,405,000 39,640,000 204,207,000
Options Written................................ 18,613,000 -- --
Commodity Futures:
Commitments to Purchase........................ 17,683,000 115,420,000 48,926,000
Commitments to Sell............................ 22,811,000 19,794,000 14,006,000
Options Written................................ 18,407,000 -- --
Foreign Futures:
Commitments to Purchase........................ 62,344,000 139,878,000 116,919,000
Commitments to Sell............................ 22,390,000 22,202,000 169,271,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase........................ 420,000 -- 29,664,000
Commitments to Sell............................ 1,379,000 -- 84,416,000
<CAPTION>
CORNERSTONE IV
---------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
---------------------------------------------
DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
$ $ $
<S> <C> <C> <C>
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS
Commitments to Purchase........................ 93,583,000 31,917,000 --
Commitments to Sell............................ 118,029,000 70,298,000 --
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase........................ 208,140,000 116,547,000 504,027,000
Commitments to Sell............................ 205,227,000 170,990,000 645,892,000
</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 December 31, 1996, 1995, and
S-31
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1994, respectively, $1,316,434, $3,368,107 and $4,316,080 for Cornerstone II,
$2,580,803, $5,578,294 and $5,016,857 for Cornerstone III and $5,330,520,
$70,143 and $268,291 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. 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, 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. Net unrealized gain on open contracts at December 31, 1995 of
$5,578,294 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 $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 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 December 1996, 1995, and 1994 mature as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
<S> <C> <C> <C>
1996 1995 1994
-------------- -------------- --------------
CORNERSTONE II
Exchange-Traded Contracts....................................... June 1998 December 1996 September 1995
Off-Exchange-Traded Forward Currency Contracts.................. March 1997 December 1996 March 1995
CORNERSTONE III
Exchange-Traded Contracts....................................... June 1997 December 1996 May 1995
Off-Exchange-Traded Forward Currency Contracts.................. January 1997 January 1996 March 1995
CORNERSTONE IV
Exchange-Traded Contracts....................................... March 1997 March 1996 --
Off-Exchange-Traded Forward Currency Contracts.................. March 1997 January 1996 March 1995
</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 the Partnerships' 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 December 31, 1996, 1995 and 1994,
respectively, $29,851,316, $31,506,001 and $31,866,995 for Cornerstone II,
$43,176,300, $47,872,659 and $48,673,471 for Cornerstone III, and $97,006,924,
$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
S-32
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
-----------------------------------------------------------------
FOR THE YEAR ENDED
1996 1995
----------------------------- -----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
$ $ $ $
<S> <C> <C> <C> <C>
EXCHANGE-TRADED CONTRACTS:
Financial Futures...................................... 48,469,000 47,433,000 75,146,000 7,443,000
Commodity Futures...................................... 24,459,000 22,228,000 36,847,000 12,456,000
Foreign Futures........................................ 43,821,000 14,875,000 62,270,000 57,113,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS........... 38,522,000 44,536,000 16,455,000 23,929,000
CORNERSTONE III
-----------------------------------------------------------------
FOR THE YEAR ENDED
1996 1995
----------------------------- -----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
$ $ $ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures...................................... 105,128,000 74,480,000 125,222,000 74,782,000
Options on Financial Futures........................... -- 10,138,000 -- --
Commodity Futures...................................... 44,276,000 18,531,000 67,127,000 16,871,000
Options on Commodity Futures........................... -- 2,763,000 -- --
Foreign Futures........................................ 80,000,000 27,228,000 122,725,000 68,993,000
Options on Foreign Futures............................. -- 584 -- --
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS........... 233,000 354,000 8,899,000 25,325,000
CORNERSTONE IV
-----------------------------------------------------------------
FOR THE YEAR ENDED
1996 1995
----------------------------- -----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
$ $ $ $
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS.............. 67,114,000 125,331,000 10,215,000 22,213,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS........... 334,452,000 334,461,000 273,150,000 311,898,000
</TABLE>
5. LEGAL MATTERS
On September 6, 10, and 20, 1996, and on March 13, 1997, 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 and Currency Management Inc., 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
Parternship, 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 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
S-33
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
6. SUBSEQUENT EVENTS
Effective April 16, 1997, Northfield Trading L.P. became a Trading Manager
for Cornerstone II. Effective February 28, 1997, Abacus Trading Corporation
ceased to be a Trading Manager for Cornerstone II.
On February 5, 1997, DWD and Morgan Stanley Group Inc. ("Morgan Stanley")
announced a definitive agreement to merge. Under the terms of the merger
agreement unanimously approved by the Boards of Directors of both companies,
each Morgan Stanley common share will be exchanged for 1.65 common shares of
DWD. Morgan Stanley preferred shares outstanding at the date of the merger will
be exchanged for preferred shares of DWD having substantially identical terms.
The transaction, which is expected to be completed in mid-1997, is intended to
be a tax-free exchange and accounted for as a pooling of interest and is subject
to customary closing conditions, including certain regulatory approvals and the
approval of shareholders of both companies.
S-34
<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, Discover &
Co.) (the "Company") as of December 31, 1996 and 1995. 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, 1996 and 1995 in conformity with generally accepted accounting
principles.
February 17, 1997
(March 13, 1997 as to Note 5 and March 27, 1997 as to Note 6)
New York, New York
S-35
<PAGE>
DEMETER MANAGEMENT CORPORATION
(WHOLLY-OWNED SUBSIDIARY OF DEAN WITTER, DISCOVER & CO. ("DWD"))
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
ASSETS 1996 1995
------------ ------------
$ $
<S> <C> <C>
Investments in affiliated partnerships (Note 2) 18,955,507 17,788,814
Receivable from affiliated partnership 1,049 1,154
------------ ------------
Total Assets 18,956,556 17,789,968
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Payable to DWD (Note 3) 15,762,235 15,157,797
Income taxes payable 114,218 156,337
Accrued expenses 30,379 32,579
------------ ------------
Total Liabilities 15,906,832 15,346,713
------------ ------------
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
Additional paid-in capital 111,170,000 111,170,000
Retained earnings 2,899,724 2,293,255
------------ ------------
114,119,724 113,513,255
Less: Notes receivable from DWD (Note 4) (111,070,000) (111,070,000)
------------ ------------
Total Stockholder's Equity 3,049,724 2,443,255
------------ ------------
Total Liabilities and Stockholder's Equity 18,956,556 17,789,968
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
S-36
<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. ("DWD").
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.), Dean
Witter Principal Plus Fund L.P. ("DWPPF"), Dean Witter Principal Plus Fund
Management L.P., Dean Witter Portfolio Strategy Fund L.P. (formerly Dean Witter
Principal Secured Futures Fund L.P.) ("DWPSF"), 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.
("DWIBP I"), Dean Witter Institutional Account II L.P., DWFCM International
Access Fund L.P., Dean Witter Anchor Institutional Balanced Portfolio Account
L.P., Dean Witter Spectrum Balanced L.P., Dean Witter Spectrum Strategic L.P.,
Dean Witter Spectrum Technical L.P., DWR Chesapeake L.P., DWR Institutional
Balanced Portfolio Account III L.P., and DWR/JWH Futures Fund L.P. ("DWR/JWH").
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 30, 1995 DWDFF
registered with the Securities and Exchange Commission (the "SEC") 75,000 units
which were offered to investors for a limited time in a public offering.
Demeter terminated Dean Witter Principal Guaranteed Fund III L.P. ("DWPGF
III") as of September 30, 1995. DWPGF III received the guarantee payment
necessary to bring the net asset value per unit to $1,000, and all units were
redeemed.
Demeter reopened DWPPF for additional investment and on November 8, 1995
DWPPF registered with the SEC 75,000 units which were offered to investors for a
limited time in a public offering.
In November of 1995, Demeter entered into a limited partnership agreement
as General Partner in DWR/ JWH, 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 DWR/JWH was $75,000.
Demeter terminated Dean Witter Principal Guaranteed Fund II L.P. ("DWPGF
II") as of March 31, 1996. DWPGF II was liquidated and holders of units as of
March 31, 1996 received a final distribution equal to the net asset value per
unit on that date multiplied by their respective number of units.
On July 31, 1996, with the Net Asset Value of DWPSF above $1,000 per unit,
the letter of credit arrangement which assured investors who redeemed their
units on July 31, 1996 a minimum Net Asset Value of $1,000 per unit expired. On
August 1, 1996, that partnership was renamed "Dean Witter Portfolio Strategy
Fund L.P." and will continue trading in a non-guaranteed format. As a result,
both the reduction of interest income of 1.125% per annum for the letter of
credit fee paid by Dean Witter Reynolds Inc. ("DWR") and the letter of credit
fee of 1% of new appreciation have been eliminated.
Demeter reopened DWSFF for additional investment and on August 13, 1996
DWSFF registered with the SEC 60,000 Units which are being offered to investors
for a limited time in a public offering.
On August 20, 1996, Demeter ceased trading activities in DWIBP I and
distributed approximately 97% of DWIBP I's assets. At that time, there were open
forward positions maturing through December 1996. DWIBP I will liquidate and
distribute its remaining assets in 1997.
Income Taxes--The results of operations of Demeter are included in the
consolidated federal income tax return of DWD, computed on a separate company
basis and due to DWD.
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.
S-37
<PAGE>
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 December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995
-------------- --------------
$ $
<S> <C> <C>
Total assets................................................... 1,084,660,072 1,091,082,360
Total liabilities.............................................. 27,893,698 20,934,451
Total partners' capital........................................ 1,056,766,374 1,070,147,909
</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 DWD
The payable to DWD is primarily for amounts due for the purchase of
partnership investments.
4. NET WORTH REQUIREMENT
At December 31, 1996 and 1995, Demeter held non-interest bearing notes from
DWD that were payable on demand. These notes were received in connection with
additional capital contributions aggregating $111,070,000.
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 DWD are included in net worth for
purposes of this calculation.
5. LEGAL MATTERS
On September 6, 10, and 20, 1996, and on March 13, 1997, 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 and Currency Management Inc., DWD (all such parties referred
to hereafter as the "Dean Witter Parties"), certain limited partnership
commodity pools of which Demeter is the general partner, and certain trading
advisors 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 on behalf of all purchasers of interests in various limited partnership
commodity pools 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 the course of these
actions, other parties could be added as defendants. The Dean Witter Parties
believe that they 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.
6. SUBSEQUENT EVENTS
On February 5, 1997, DWD and Morgan Stanley Group Inc. ("Morgan Stanley")
announced a definitive agreement to merge. The new company will be named Morgan
Stanley, Dean Witter, Discover & Co. Under the terms of the merger agreement
unanimously approved by the Boards of Directors of both companies, each Morgan
Stanley common share will be exchanged for 1.65 common shares of DWD. Morgan
Stanley preferred
S-38
<PAGE>
shares outstanding at the date of the merger will be exchanged for preferred
shares of DWD having substantially identical terms. The transaction, which is
expected to be completed in mid-1997, is intended to be a tax-free exchange and
accounted for as a pooling of interest and is subject to customary closing
conditions, including certain regulatory approvals and the approval of
shareholders of both companies.
On March 27, 1997, Demeter filed with the SEC on Form S-1 a Registration
Statement in order to register 50,000 units of DWPSF to be offered to investors
for a limited time in a public offering.
S-39
<PAGE>
DEAN WITTER CORNERSTONE FUND II
DEAN WITTER CORNERSTONE FUND III
DEAN WITTER CORNERSTONE FUND IV
SUPPLEMENT TO THE PROSPECTUS DATED AUGUST 28, 1996
The Prospectus dated August 28, 1996 is supplemented by a Supplement dated
May 14, 1997. The Supplement is an integral part of, and must be read together
with, the Prospectus.
May 14, 1997
