14,587.240 UNITS OF
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 "SUMMARY OF THE PROSPECTUS --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 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 interests 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 the Commodity Brokers. 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
4.25%) of 7.10%, 7.92%, and 4.63%, respectively, of their average annual
Net Assets (as defined in the Prospectus) in order to break-even (earning
profit sufficient to recoup an investor's initial investment after one
year).
* No secondary market for Units exists. 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 exist that may adversely affect the Partnerships,
including the facts that DWR and the General Partner are affiliates, fees
to DWR have not been negotiated in arm's-length transactions, and DWR
employees will receive a portion of the brokerage fees paid by the
Partnerships. See "Conflicts of Interest."
* A Partnership will not be profitable unless the Trading Managers for the
Partnership are collectively successful with their trading programs. Past
performance is not necessarily indicative of future results.
* 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 OCTOBER 14, 1998.
<PAGE>
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
Risk Factors.................................................................... S-1
Potential Inability to Trade or Report Results Because of Year 2000
Problems...................................................................... S-1
Euro Conversion Will Limit a Trading Advisor's Ability to Trade Certain
Individual Currencies and Could Result in Trading Losses...................... S-1
The Cornerstone Funds........................................................... S-1
Performance Records........................................................... S-2
Selected Financial Data......................................................... S-4
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... S-6
Description of Charges to Each Partnership...................................... S-15
1. Commodity Broker........................................................... S-15
2. Trading Managers........................................................... S-16
3. Others..................................................................... S-16
4. Break-Even Analysis........................................................ S-16
Capitalization.................................................................. S-18
The Trading Managers............................................................ S-18
Dean Witter Cornerstone Fund II............................................... S-18
1. Abacus Trading Corporation............................................... S-18
2. John W. Henry & Company, Inc............................................. S-18
3. Northfield Trading L.P................................................... S-24
Dean Witter Cornerstone Fund III.............................................. S-26
1. Welton Investment Corporation............................................ S-26
2. Abraham Trading Co....................................................... S-27
3. Sunrise Capital Management, Inc.......................................... S-28
Dean Witter Cornerstone Fund IV............................................... S-29
1. John W. Henry & Company, Inc............................................. S-29
2. Sunrise Capital Management, Inc.......................................... S-29
The General Partner............................................................. S-29
Directors and Officers of the General Partner................................. S-30
The Commodity Brokers........................................................... S-31
Description of the Commodity Brokers.......................................... S-31
Brokerage Arrangements........................................................ S-32
Related Risk Factors.......................................................... S-32
Certain Litigation.............................................................. S-33
Plan of Distribution and Exchange Procedure..................................... S-33
Material Federal Income Tax Considerations...................................... S-34
Experts......................................................................... S-34
Dean Witter Cornerstone Fund II
Dean Witter Cornerstone Fund III
Dean Witter Cornerstone Fund IV
Independent Auditors' Report.................................................. S-35
Statements of Financial Condition and Statements of Operations................ S-36
Statements of Changes in Partners' Capital.................................... S-39
Statements of Cash Flows...................................................... S-40
Notes to Financial Statements................................................. S-41
Demeter Management Corporation
Independent Auditors' Report.................................................. S-47
Statements of Financial Condition............................................. S-48
Notes to Statements of Financial Condition.................................... S-49
(Certain information relating to the financial condition of Demeter
Management
Corporation's parent is contained in "The General Partner.")
Amended Annex A-Request for Exchange............................................ A-1
</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.
RISK FACTORS
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION UNDER "RISK
FACTORS--RISKS RELATING TO THE PARTNERSHIPS" ON PAGES 12-13.
POTENTIAL INABILITY TO TRADE OR REPORT RESULTS BECAUSE OF YEAR 2000
PROBLEMS. Commodity pools, like financial and business organizations and
individuals around the world, depend on the smooth functioning of computer
systems. Many computer systems in use today cannot recognize the computer code
for the year 2000, but revert to 1900 or some other date. This is commonly known
as the "Year 2000 Problem." The Partnerships could be adversely affected if
computer systems used by them or any third party with whom they have a material
relationship do not properly process and calculate date-related information and
data concerning dates on or after January 1, 2000. Such a failure could have a
negative impact on the handling or determination of futures trades and prices
and the services provided the Partnerships.
Morgan Stanley Dean Witter & Co. ("MSDW"), the parent of Demeter, began its
planning in response to the Year 2000 Problem in 1995 and currently has several
hundred employees working on such response. It has developed its own Year 2000
compliance plan to deal with the problem and had the plan approved by the
company's executive management, Board of Directors and Information Technology
Department. Demeter is co-ordinating with MSDW in taking steps that both believe
are reasonably designed to address the Year 2000 Problem with respect to
Demeter's computer systems that relate to the Partnerships. This includes
hardware and software upgrades, systems consulting and computer maintenance.
Beyond the challenge facing internal computer systems, the systems failure
of any of the third parties with whom the Partnerships have a material
relationship--the futures exchanges and clearing organizations through which
they trade, Carr Futures, Inc. ("CFI"), the Partnerships' clearing commodity
broker (see "The Commodity Brokers" in this Supplement), and their respective
Trading Managers--could result in a material financial risk to the Partnerships.
Regarding the futures exchanges, all US futures exchanges will be subject to the
monitoring of the CFTC for their Year 2000 preparedness and the major foreign
futures exchanges are also expected to be subject to market-wide testing of
their Year 2000 compliance during 1999. With respect to CFI and each of the
Trading Managers, Demeter intends to monitor their progress throughout 1999 in
their Year 2000 compliance and, where applicable, to test its external interface
with CFI and the Trading Managers.
Finally, MSDW has begun developing various "contingency plans" in the event
that the systems of such third parties fail, and Demeter intends to consult
closely with MSDW in implementing those plans. MSDW has also recently reported
that its development of such contingency plans is proceeding on schedule.
Despite the best efforts of both Demeter and MSDW, however, there can be no
assurance that the above steps will be sufficient to avoid any adverse impact to
the Partnerships, whether from failures in their own computer systems or those
of CFI, a Trading Manager or other third party.
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION UNDER "RISK FACTORS--
RISKS RELATING TO THE TRADING MANAGERS" ON PAGES 13-15.
EURO CONVERSION WILL LIMIT A TRADING ADVISOR'S ABILITY TO TRADE CERTAIN
INDIVIDUAL CURRENCIES AND COULD RESULT IN TRADING LOSSES. On January 1, 1999,
eleven countries in the European Union intend to establish fixed conversion
rates on their existing sovereign currencies and convert to a common single
currency (the "euro"). During a three-year transition period, the existing
sovereign currencies will continue to exist but only as a fixed denomination of
the euro. Conversion to the euro will prevent each Trading Advisor from trading
in certain currencies and thereby limit their ability to take advantage of
potential market opportunities that might otherwise have existed had separate
currencies been available to trade, and could result in losses with respect to
those positions.
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 162 Monthly Closings held through September 1, 1998. As of
September 1, 1998, there were 14,587.240 unsold Units available for Exchange.
As of September 1, 1998, Cornerstone II had sold an aggregate of 41,701.582
Units and received net proceeds of $65,634,485. Included in these numbers are
Exchanges of Units in Cornerstone III and IV for Units in Cornerstone II. As of
September 1, 1998, Cornerstone II had Net Assets of $31,914,993 and the Net
Asset Value of a Unit thereof was $4,097.18.
As of September 1, 1998, Cornerstone III had sold an aggregate of
74,405.186 Units and received net proceeds of $137,132,762. Included in these
numbers are Exchanges of Units in Cornerstone II and IV for Units
S-1
<PAGE>
in Cornerstone III. As of September 1, 1998, Cornerstone III had Net Assets of
$44,221,368 and the Net Asset Value of a Unit thereof was $3,420.33.
As of September 1, 1998, Cornerstone IV had sold an aggregate of
100,626.349 Units and received net proceeds of $168,025,776. Included in these
numbers are Exchanges of Units in Cornerstone II and Cornerstone III for Units
in Cornerstone IV. As of September 1, 1998, Cornerstone IV had Net Assets of
$124,630,335 and the Net Asset Value of a Unit thereof was $4,942.29.
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 September 1, 1998, 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 September 1, 1998, Cornerstone II had 2,739 Limited
Partners, Cornerstone III had 4,727 Limited Partners, and Cornerstone IV had
8,037 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, 1993 through August 31, 1998. 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"Registered) and one-third to
Northfield Trading L.P. ("Northfield"), 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, 1993 through August 31, 1998. As of the date of this Prospectus
Supplement, all funds received at Monthly Closings are being allocated
approximately one-half to Sunrise Capital Management, Inc. ("Sunrise"), and
approximately one-quarter each to Welton Investment Corporation ("WIC") and
Abraham Trading Company ("ATC"). 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, 1993 through August 31, 1998. Since the commencement of trading on
May 1, 1987, Cornerstone IV's trading has been directed by its two initial
Trading Managers, JWH and Sunrise. As of the date of this Prospectus Supplement,
all 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.
S-2
<PAGE>
CAPSULE 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: $65,634,485
Current Capitalization: $31,919,504
Current Net Asset Value per Unit: $4,097.18
Worst Monthly Percent Drawdown: (11.74)% (9/89)
Worst Month-end Peak-to-Valley: (32.70)% (16 months, 7/88-10/89)
Cumulative Return Since Inception: 320.22%
</TABLE>
<TABLE>
<CAPTION>
MONTHLY RATES OF
RETURN 1998 1997 1996 1995 1994 1993
- ------------------------- ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
% % % % % %
January (1.75) 3.58 1.98 (2.85) (3.17) (3.97)
February (0.93) 2.67 (6.13) 10.88 0.12 7.79
March (1.49) 1.51 0.07 13.73 3.16 (0.07)
April (2.92) (0.53) 4.76 4.18 (2.59) 3.10
May 4.49 (0.95) (3.14) (0.37) 3.84 0.82
June 6.57 (2.46) 2.60 (0.29) 2.50 (0.89)
July (0.64) 4.83 (4.06) (3.82) (3.86) 7.92
August 6.79 0.00 (3.28) (0.46) (4.70) (5.45)
September (1.13) 5.37 (2.52) 0.77 (1.69)
October 2.47 10.42 (0.40) (5.31) (2.62)
November 1.71 5.53 3.20 3.35 (0.30)
December 5.33 (1.90) 4.00 (2.80) 3.87
Compound Annual
(Period) Rate of Return 9.99 18.05 11.47 26.50 (8.93) 7.81
<CAPTION>
(8 Months)
</TABLE>
CAPSULE 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: $137,132,762
Current Capitalization: $44,224,864
Current Net Asset Value per Unit: $3,420.33
Worst Monthly Percent Drawdown: (18.28)% (2/89)
Worst Month-end Peak-to-Valley: (32.35)% (9 months, 2/89-10/89)
Cumulative Return Since Inception: 250.80%
</TABLE>
<TABLE>
<CAPTION>
MONTHLY RATES OF
RETURN 1998 1997 1996 1995 1994 1993
- ------------------------- ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
% % % % % %
January (0.95) 3.12 2.09 (7.31) (10.58) (5.57)
February 4.08 6.63 (15.04) 1.88 (3.06) 8.96
March 2.70 (1.31) (0.93) 12.40 4.47 (2.60)
April (2.63) (1.60) 9.35 2.44 (3.23) 4.13
May 1.40 1.81 (5.33) 4.24 3.78 1.60
June 0.75 1.11 1.95 0.10 5.60 0.17
July (1.31) 7.33 (3.95) (4.17) (3.86) 4.79
August 9.93 (6.45) (1.06) 1.89 (6.49) (9.31)
September 0.64 4.17 0.63 3.82 (4.97)
October (4.50) 13.53 (1.66) 4.08 (6.08)
November 1.52 5.14 6.35 0.09 (2.42)
December 2.37 1.01 9.37 (3.68) 8.32
Compound Annual
(Period) Rate of Return 14.26 10.24 8.24 27.50 (10.04) (4.78)
<CAPTION>
(8 Months)
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
S-3
<PAGE>
CAPSULE III
PERFORMANCE OF DEAN WITTER CORNERSTONE FUND IV
<TABLE>
<C> <S> <C>
Type of Pool: Publicly-Offered Pool
Inception of Trading: May 1987
Aggregate Subscriptions: $168,017,769
Current Capitalization: $124,622,328
Current Net Asset Value per Unit: $4,942.29
Worst Monthly Percent Drawdown: (21.04)% (9/89)
Worst Month-end Peak-to-Valley (45.21)% (3 months, 7/89-9/89)
Cumulative Return Since Inception: 406.90%
</TABLE>
<TABLE>
<CAPTION>
MONTHLY RATES OF
RETURN 1998 1997 1996 1995 1994 1993
- ------------------------- ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
% % % % % %
January (1.58) 5.34 3.19 (7.65) (1.12) (5.29)
February (3.16) 6.55 (5.78) 6.27 (2.75) 12.92
March 2.51 1.45 2.80 27.02 0.29 (2.55)
April (3.44) 1.23 2.97 2.39 (3.19) 0.03
May 4.89 (5.54) 1.19 (4.83) (3.65) 3.95
June 11.31 1.36 (0.23) (0.62) 6.72 0.92
July 0.37 8.45 (3.51) (1.06) (4.21) 5.87
August 0.78 2.68 (2.69) 5.49 (3.57) (5.57)
September 0.45 0.32 (0.06) 1.66 (2.10)
October 3.12 8.80 0.74 4.93 (7.48)
November 4.15 4.25 (2.57) (6.82) (7.50)
December 4.38 1.76 (0.52) (2.73) (0.78)
Compound Annual
(Period) Rate of Return 11.43 38.41 12.97 22.96 (14.27) (9.12)
<CAPTION>
(8 Months)
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
THE FOLLOWING UPDATES AND SUPPLEMENTS "FOOTNOTES TO CAPSULES I, II AND III"
ON PAGE 24.
The Worst Monthly Percent Drawdown and the Worst Month-end Peak-to-Valley,
as set forth in Capsules I, II, and III, represent the largest such amounts
since each Partnership commenced operations.
"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 six months ended June 30, 1998 and 1997 (unaudited) and the years ended
December 31, 1997, 1996, 1995, 1994 and 1993. For the complete financial
statements of the Partnerships, see pages F-1-F-15 of the Prospectus and pages
S-35-S-46 of this Prospectus Supplement. For performance information with
respect to each Partnership, see "The Cornerstone Funds--Performance Records."
S-4
<PAGE>
<TABLE>
<CAPTION>
DEAN WITTER CORNERSTONE FUND II
-----------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ $ $ $ $ $ $
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized 2,139,556 2,263,382 6,363,803 7,321,679 11,081,716 (878,688) 2,539,342
Net change in unrealized (240,295) (333,627) 687,245 (2,051,673) (947,973) 556,567 2,029,459
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Trading Results 1,899,261 1,929,755 7,051,048 5,270,006 10,133,743 (322,121) 4,568,801
Interest income (DWR) 598,276 628,176 1,228,298 1,179,784 1,471,022 1,153,003 694,085
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Revenues 2,497,537 2,557,931 8,279,346 6,449,790 11,604,765 830,882 5,262,886
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES
Brokerage commissions
(DWR) 706,483 662,114 1,383,112 1,719,932 1,864,093 2,336,047 1,773,947
Management fees 587,455 566,449 1,159,248 1,167,223 1,307,872 1,346,905 1,157,221
Incentive fees 78,138 92,628 650,800 329,590 381,720 -- 19,886
Transaction fees and costs 65,144 61,846 128,692 170,971 160,238 194,384 141,974
Common administrative
expenses 19,256 21,824 41,330 14,612 8,183 49,101 68,511
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 1,456,476 1,404,861 3,363,182 3,402,328 3,722,106 3,926,437 3,161,539
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 1,041,061 1,153,070 4,916,164 3,047,462 7,882,659 (3,095,555) 2,101,347
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER UNIT
FOR PERIOD
Limited Partners 136.23 118.40 569.56 324.71 592.90 (219.47) 178.05
General Partner 136.23 118.40 569.56 324.71 592.90 (219.47) 178.05
TOTAL ASSETS AT END OF
PERIOD 30,845,121 28,447,526 31,431,023 30,046,842 31,558,306 32,062,117 32,511,448
TOTAL NET ASSETS AT END OF
PERIOD 30,406,668 27,895,862 30,487,741 29,046,170 30,828,888 31,372,002 31,941,373
NET ASSET VALUE PER UNIT
AT END OF PERIOD
Limited Partners 3,861.15 3,273.76 3,724.92 3,155.36 2,830.65 2,237.75 2,457.22
General Partner 3,861.15 3,273.76 3,724.92 3,155.36 2,830.65 2,237.75 2,457.22
</TABLE>
<TABLE>
<CAPTION>
DEAN WITTER CORNERSTONE FUND III
-----------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ $ $ $ $ $ $
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Trading Profit (Loss):
Realized 3,823,062 6,703,472 7,439,669 8,925,181 14,260,042 913,869 (627,751)
Net change in unrealized (453,235) (1,271,432) (642,508) (2,997,491) 561,437 (1,350,056) 3,815,157
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Trading Results 3,369,827 5,432,040 6,797,161 5,927,690 14,821,479 (436,187) 3,187,406
Interest income (DWR) 857,814 899,908 1,786,271 1,657,400 2,061,461 1,744,148 1,445,561
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Revenues 4,227,641 6,331,948 8,583,432 7,585,090 16,882,940 1,307,961 4,632,967
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES
Brokerage commissions
(DWR) 1,092,856 1,184,270 2,294,914 2,772,496 3,499,743 4,417,718 4,587,865
Management fees 836,091 877,608 1,728,062 1,629,715 1,828,013 2,014,028 2,375,033
Transaction fees and costs 110,653 114,093 229,570 379,973 502,332 434,287 348,493
Common administrative
expenses 32,174 36,352 69,344 24,702 21,158 122,423 150,937
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 2,071,774 2,212,323 4,321,890 4,806,886 5,851,246 6,988,456 7,462,328
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 2,155,867 4,119,625 4,261,542 2,778,204 11,031,694 (5,680,495) (2,829,361)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER UNIT
FOR PERIOD
Limited Partners 159.39 269.44 278.01 206.83 541.04 (219.67) (109.91)
General Partner 159.39 269.44 278.01 206.83 541.04 (219.67) (109.91)
TOTAL ASSETS AT END OF
PERIOD 42,116,609 44,021,549 41,782,326 43,137,470 48,156,795 48,308,274 57,323,283
TOTAL NET ASSETS AT END OF
PERIOD 41,428,457 43,247,401 41,114,374 42,035,358 46,949,674 47,002,453 56,156,693
NET ASSET VALUE PER UNIT
AT END OF PERIOD
Limited Partners 3,152.91 2,984.95 2,993.52 2,715.51 2,508.68 1,967.64 2,187.31
General Partner 3,152.91 2,984.95 2,993.52 2,715.51 2,508.68 1,967.64 2,187.31
</TABLE>
S-5
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
DEAN WITTER CORNERSTONE FUND IV
-----------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ $ $ $ $ $ $
(UNAUDITED) (UNAUDITED)
REVENUES
<S> <C> <C> <C> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 4,527,313 17,204,603 42,691,318 10,304,825 27,041,974 (10,447,878) (4,335,118)
Net change in unrealized 9,923,628 (5,601,735) (3,515,408) 5,260,377 (198,148) (1,726,877) 717,487
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Trading Results 14,450,941 11,602,868 39,175,910 15,565,202 26,843,826 (12,174,755) (3,617,631)
Interest income (DWR) 2,302,693 2,048,277 4,200,571 3,924,420 4,912,698 4,129,344 2,937,637
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Revenues 16,753,634 13,651,145 43,376,481 19,489,622 31,756,524 (8,045,411) (679,994)
----------- ----------- ----------- ----------- ----------- ----------- -----------
EXPENSES
Brokerage commissions
(DWR) 1,202,871 1,478,595 2,656,715 3,781,486 2,776,225 5,336,659 6,634,741
Management fees 2,333,334 2,052,759 4,287,974 3,904,737 4,575,372 4,952,206 4,945,676
Incentive fees 1,618,729 -- 1,594,371 -- -- 7,659 1,400,473
Transaction fees and costs 60,647 90,957 171,578 222,993 168,718 339,083 398,959
Common administrative
expenses 62,565 70,539 134,041 47,685 39,890 228,633 223,551
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 5,278,146 3,692,850 8,844,679 7,956,901 7,560,205 10,864,240 13,603,400
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 11,475,488 9,958,295 34,531,802 11,532,721 24,196,319 (18,909,651) (14,283,394)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) PER UNIT
FOR PERIOD
Limited Partners 450.05 332.32 1,230.81 367.93 529.66 (383.89) (270.10)
General Partner 450.05 332.32 1,230.81 367.93 529.66 (383.89) (270.10)
TOTAL ASSETS AT END OF
PERIOD 128,752,384 99,747,507 121,378,550 97,292,310 105,362,851 112,210,624 127,032,391
TOTAL NET ASSETS AT END OF
PERIOD 124,990,218 98,528,333 118,409,744 95,496,244 103,667,011 109,892,266 125,200,630
NET ASSET VALUE PER UNIT
AT END OF PERIOD
Limited Partners 4,885.52 3,536.98 4,435.47 3,204.66 2,836.73 2,307.07 2,690.96
General Partner 4,885.52 3,536.98 4,435.47 3,204.66 2,836.73 2,307.07 2,690.96
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING REPLACES THE FIRST PARAGRAPH UNDER "LIQUIDITY" ON PAGE 26.
Liquidity. The assets of each Partnership are deposited with Dean Witter
Reynolds ("DWR") as non-clearing broker and with Carr Futures, Inc. ("CFI") as
clearing broker (see "The Commodity Brokers" on pages
S-31-S-32) in separate futures interest trading accounts established for each
Trading Manager and are used by each Partnership as margin to engage in trading.
Such assets are held in either non-interest bearing bank accounts or in
securities approved by the CFTC for investment of customer funds. See
"Investment Program, Use of Proceeds and Trading Policies." Each Partnership's
assets held by DWR and CFI may be used as margin solely for such Partnership's
trading. Since each Partnership's sole purpose is to trade in commodity
interests, it is expected that each Partnership will continue to own such liquid
assets for margin purposes.
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION UNDER THE SUBCAPTION
"RESULTS OF OPERATIONS" ON PAGES 26-34.
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
S-6
<PAGE>
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 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.
For the year ended December 31, 1996, the Partnership's total trading
revenues, including interest income, were $6,449,790. The Partnership's total
expenses for the year were $3,402,328, resulting in net income of $3,047,462.
The Net Asset Value of a Unit increased from $2,830.65 at December 31, 1995 to
$3,155.36 at December 31, 1996.
Results of Operations for 1997. Cornerstone II recorded gains during
January from a strengthening in the value of the U.S. dollar relative to the
Japanese yen and German mark. Additional profits were recorded as gold prices
declined to their lowest levels in over three years. Profits were recorded
during February due to the continued strengthening in the value of the U.S.
dollar relative to most major world currencies. Additional gains were recorded
from an upward trend in coffee prices, as well as a downward move in gas and oil
prices. During March, Cornerstone II recorded gains as the value of the U.S.
dollar continued to strengthen versus the Japanese yen and Singapore dollar.
Additional gains were experienced from a continued upward move in coffee prices.
Losses were experienced during April from short positions in interest rate
futures markets as domestic bond prices rallied late in the month after showing
signs of trending lower previously. Smaller losses were experienced from long
corn futures positions as prices in this market moved lower. In May, losses were
experienced from transactions involving the Japanese yen and Singapore dollar.
Smaller losses were recorded in the energy markets as oil prices moved in a
short-term volatile pattern. These losses were partially offset by gains
recorded from continued strengthening in coffee prices, as well as global stock
index futures prices. Cornerstone II recorded losses during June as coffee
prices reversed sharply lower, thus giving back a portion of previous months'
profits. Additional losses were experienced from trading crude oil futures as
oil prices continued to move without consistent direction.
Significant gains were recorded during July from long U.S., Japanese and
Australian bond futures positions as global interest rate futures prices trended
higher. Additional gains were recorded in currencies from short positions in the
German mark and Swiss franc as the value of these currencies decreased relative
to the U.S. dollar. Small losses were experienced during August as gains
recorded from short positions in the Malaysian ringgit and Singapore dollar were
more than offset by losses experienced from long positions in U.S. and European
interest rate futures. During September, losses were recorded from trendless
price movement in coffee, sugar and cocoa futures. Additional losses were
experienced in the energy and agricultural markets as
S-7
<PAGE>
prices in these markets also moved without consistent direction. Smaller losses
were experienced from transactions involving the Swiss franc, British pound and
Japanese yen.
Cornerstone II recorded profits during October from long positions in the
British pound as its value increased relative to the U.S. dollar, and from short
positions in the Singapore and Australian dollars as the value of the U.S.
dollar strengthened versus these Pacific Rim currencies. Smaller gains were
recorded from long positions in corn and soybean oil futures. Gains were
recorded during November from short positions in the Japanese yen. Australian
dollar and Malaysian ringgit as the value of these currencies declined versus
the U.S. dollar due to economic uncertainty in Asia. Short gold futures
positions resulted in smaller profits as gold prices broke below $300 an ounce
for the first time in over twelve years. Significant gains were recorded from
short positions in most Pacific Rim currencies, particularly the Japanese yen
and Singapore dollar, as the economic turmoil in the Far East continued. Smaller
profits were recorded from short crude oil futures positions as prices declined
on news of increased supplies.
For the year ended December 31, 1997, the Partnership's total trading
revenues, including interest income, were $8,279,346. The Partnership's total
expenses for the year were $3,363,182, resulting in net income of $4,916,164.
The Net Asset Value of a Unit increased from $3,155.36 at December 31, 1996 to
$3,724.92 at December 31, 1997.
Results of Operations for the Six Months Ended June 30, 1998. During the
first half of 1998, the Partnership recorded a gain in Net Asset Value per Unit.
The most significant gains were recorded in the currency markets from short
positions in the South African rand as its value declined significantly relative
to the U.S. dollar during May and June. Additional currency gains were recorded
from short Japanese yen positions as the value of the yen also moved sharply
lower versus the U.S. dollar during May and June amid concerns about the
Japanese economy. Additional profits were recorded in the energy markets from
short positions in crude oil futures as oil prices moved lower throughout a
majority of the first half of the year. Smaller gains were recorded in soft
commodities from short positions in coffee and sugar futures as prices in these
markets moved downward during the second quarter. These gains were partially
offset by losses incurred in the financial futures markets primarily from
trading Nikkei Index futures as Japanese equity prices moved in a short-term
volatile pattern throughout the first quarter amid uncertainty regarding an
economic stimulus package. Losses were also recorded from choppy price movement
in U.S. bond futures as domestic bond prices experienced trendless movement
throughout a majority of the first six months of the year. Smaller losses were
recorded in metals during January from short gold futures positions as gold
prices reversed higher after trending lower in previous months. Losses were also
recorded from long gold futures positions during May as precious metals prices
moved lower.
For the six months ended June 30, 1998, the Partnership's total trading
revenues, including interest income, were $2,497,537. Total expenses for the
period were $1,456,476, resulting in net income of $1,041,061. The Net Asset
Value of a Unit increased from $3,724.92 at December 31, 1997 to $3,861.15 at
June 30, 1998. In comparison, for the six months ended June 30, 1997, the
Partnership's total trading revenues, including interest income, were
$2,557,931; the total expenses for such period were $1,404,861, generating net
income of $1,153,070; and the Net Asset Value of a Unit increased from $3,155.36
at December 31, 1996 to $3,273.76 at June 30, 1997.
To enhance the foregoing comparison of results of operations from year to
year, prospective investors can examine, line by line, the Partnership's
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 1997, an increase in the rates on U.S.
Treasury bills resulted in an increase 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
1997 as a result of reduced monthly commission caps for the full year and the
presence of more long-term price trends in futures markets in which the
Partnership's Trading Managers concentrate their participation.
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
slightly in 1997 as a result of a reduction in the average Net Assets of the
Partnership throughout the year. 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 1997.
S-8
<PAGE>
Common administrative expenses are used to pay legal, accounting, auditing,
printing, and distribution costs. These expenses increased during 1997 as a
result of increased audit and tax audit fees and increased printing 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 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.
For the year ended December 31, 1996, the Partnership's total trading
revenues, including interest income, were $7,585,090. The Partnership's total
expenses for the year were $4,806,886, resulting in net income of $2,778,204.
The Net Asset Value of a Unit increased from $2,508.68 at December 31, 1995 to
$2,715.51 at December 31, 1996.
Result of Operations for 1997. Cornerstone III recorded profits during
January due primarily to an increase in coffee prices during the month.
Additional profits were recorded from a strengthening in the value of the U.S.
dollar versus most major European currencies and the Japanese yen. Significant
gains were recorded during February as increasing price trends in coffee and the
U.S. dollar continued throughout the month. As a result, profits were recorded
from long coffee futures positions, as well as from short positions in the Swiss
franc, German mark and Japanese yen. Performance during March resulted in losses
as many of the markets that produced gains during January and February
experienced trend reversals and choopy price movements. The most significant
losses were recorded in the currency markets as the value of most European
currencies reversed higher relative to the U.S. dollar.
S-9
<PAGE>
Cornerstone III recorded losses during April as trendless price movements
that began in March continued. The most significant losses were recorded from
short positions in U.S. interest rate futures. Smaller losses were recorded in
the currency, metals and agricultural markets. In May, gains were recorded from
a continued upward trend in coffee prices. Additional gains were recorded from
an increase in copper and zinc prices. Gains in June were recorded as the value
of the Japanese yen moved higher versus the U.S. dollar. Additional profits were
recorded from long global stock index futures positions as global equity prices
trended higher.
During July, profits were recorded from long positions in global interest
rate futures as Australian, U.S. and European bond futures prices trended
higher. Additional gains were recorded from short European currency positions as
the U.S. dollar again strengthened. A sharp trend reversal in global interest
rate futures prices during August resulted in a give-back of a portion of July's
profits. Additional losses were experienced in the currency markets as the value
of most European currencies reversed higher relative to the U.S. dollar.
September was profitable as international bond futures prices moved higher, thus
resulting in gains for Cornerstone III's long positions. Smaller gains were
recorded from a dramatic increase in natural gas futures prices during the
month.
During October, trend reversals in the value of the Mexican peso, as well
as in global interest rate futures prices, resulted in losses for Cornerstone
III. Smaller losses were experienced from long positions in Australian stock
index futures and silver futures. Cornerstone III recorded profits during
November from short Japanese yen positions as its value moved sharply lower amid
concerns over Asian economic stability. Additional currency gains were recorded
from long British pound positions as its value moved higher on news of an
interest rate increase in Great Britain. Gains were also recorded from short
gold futures positions as gold prices broke below $300 an ounce for the first
time in over twelve years. In December, profits were recorded from short
positions in crude and heating oil futures as prices declined on reports of
increasing inventories. Smaller gains were recorded from long silver futures
positions as prices moved higher and from short positions in gold futures as
gold prices continued to drop below $290 an ounce.
For the year ended December 31, 1997, the Partnership's total trading
revenues, including interest income, were $8,583,432. The Partnership's total
expenses for the year were $4,321,890, resulting in net income of $4,261,542.
The Net Asset Value of a Unit increased from $2,715.51 at December 31, 1996 to
$2,993.52 at December 31, 1997.
Results of Operations for the Six Months Ended June 30, 1998. During the
first half of 1998, the Partnership recorded a gain in Net Asset Value per Unit.
The most significant profits were recorded from long U.S. and European stock
index futures positions as prices in these markets trended consistently higher
throughout the first six months of the year. Additional profits were recorded
from long European bond futures positions as prices in these markets trended
higher during the first quarter. In energies, gains were recorded from short
crude oil futures positions as oil prices declined during January and February,
as tensions eased in the Middle East, and again during May and June on reports
of increasing supplies. Smaller gains were recorded from short positions in
sugar futures as sugar prices trended lower between January and April. A portion
of these gains was offset by losses recorded in the metals markets from long
silver futures positions as silver prices reversed lower during March after
trending steadily higher during January and February and from short gold futures
positions as gold prices reversed higher during January. Smaller losses were
recorded in currencies from transactions involving the British pound, as its
value moved in a trendless pattern throughout a majority of the first half of
the year, and from short German mark positions as its value moved higher versus
the U.S. dollar during April.
For the six months ended June 30, 1998, the Partnership's total trading
revenues, including interest income, were $4,227,641. Total expenses for the
period were $2,071,774, resulting in net income of $2,155,867. The Net Asset
Value of a Unit increased from $2,993.52 at December 31, 1997 to $3,152.91 at
June 30, 1998. In comparison, for the six months ended June 30, 1997, the
Partnership's total trading revenues, including interest income, were
$6,331,948; the total expenses for such period were $2,212,323, generating net
income of $4,119,625; and the Net Asset Value of a Unit increased from $2,715.51
at December 31, 1996 to $2,984.95 at June 30, 1997.
To enhance the foregoing comparison of results of operations from year to
year, prospective investors can examine, line by line, the Partnership's
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 1997, an increase in the rates on U.S.
Treasury bills resulted in an increase in interest income to the Partnership.
S-10
<PAGE>
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
1997 as a result of reduced monthly commission caps for the full year and the
presence of more long-term price trends in futures markets in which the
Partnership's Trading Managers concentrate their participation.
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
increased in 1997 as a result of an increase in the average Net Assets of the
Partnership. 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 1997.
Common administrative expenses are used to pay legal, accounting, auditing,
printing, and distribution costs. These expenses increased in 1997 as a result
of increased audit and tax audit fees and increased printing 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 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.
S-11
<PAGE>
For the year ended December 31, 1996, the Partnership's total trading
revenues, including interest income, were $19,489,622. The Partnership's total
expenses for the year were $7,956,901, resulting in net income of $11,532,721.
The Net Asset Value of a Unit increased from $2,836.73 at December 31, 1995 to
$3,204.66 at December 31, 1996.
Results of Operations for 1997. Cornerstone IV recorded strong gains during
January from a significant move higher in the value of the U.S. dollar. As a
result, profits were recorded from short positions in the Japanese yen, Swiss
and French francs, as well as the German mark. During February, a continued
strengthening in the value of the U.S. dollar resulted in significant profits
from short positions in the Singapore dollar, most European currencies, and the
Japanese yen. Gains were recorded during March as the U.S. dollar continued to
move higher versus most Asian currencies. Profits were recorded from short
positions in the Singapore dollar and Japanese yen. The Fund also benefited from
a strengthening in the Malaysian ringgit.
A continued decline in the value of the Japanese yen relative to the U.S.
dollar resulted in additional profits during April. Smaller gains were recorded
from short Singapore dollar and French franc positions. Losses were recorded
during May due primarily to short positions in the Singapore dollar and Japanese
yen as the value of these currencies reversed higher early in the month. Smaller
losses were recorded from long Japanese yen positions established mid-month, as
the value of the yen decreased during late May. Cornerstone IV recorded gains
during June from long Japanese yen positions established in late May as the
value of the yen moved higher versus the U.S. dollar. Additional gains were
recorded from transactions involving the German mark.
Significant gains were recorded during July from short positions in the
German mark, New Zealand and Singapore dollars. Smaller profits were recorded
from short positions in the French franc and Malaysian ringgit. Cornerstone IV
recorded gains during August due primarily to the Asian currency crisis, thus
resulting in profits from short positions in the Malaysian ringgit and Singapore
dollar. During September, a continued decline in the value of the Malaysian
ringgit and Singapore dollar resulted in profits. Smaller gains were recorded
from long positions in the Norwegian krona and German mark as the value of these
currencies increased versus the U.S. dollar.
Cornerstone IV recorded gains during October from short positions in the
Singapore and Australian dollars, as the value of the U.S. dollar strengthened
versus these Pacific Rim currencies. Smaller profits were recorded from long
British pound positions as its value moved higher late in the month. During
November, strong profits were recorded from short positions in Pacific Rim
currencies as the value of the Japanese yen, Singapore dollar, Malaysian ringgit
and Australian dollar weakened relative to the U.S. dollar due to economic
uncertainty in the Asian financial markets. As the economic turmoil in the Far
East continued during December, significant profits were recorded from short
positions in Pacific Rim currencies, particularly the Singapore dollar,
Malaysian ringgit and Australian dollar.
For the year ended December 31, 1997, the Partnership's total trading
revenues, including interest income, were $43,376,481. The Partnership's total
expenses for the year were $8,844,679, resulting in net income of $34,531,802.
The Net Asset Value of a Unit increased from $3,204.66 at December 31, 1996 to
$4,435.47 at December 31, 1997.
Results of Operations for the Six Months Ended June 30, 1998. During the
first half of 1998, the Partnership recorded a gain in Net Asset Value per Unit.
The most significant profits were recorded during May and June from short South
African rand positions as the value of this currency fell significantly lower
relative to the U.S. dollar. Additional gains were recorded from short New
Zealand dollar positions as its value also decreased versus the U.S. dollar
during March, May and June. Short Japanese yen positions also proved profitable
as the value of the yen weakened versus other major currencies in reaction to
the economic and political turmoil plaguing Japan. These gains were partially
offset by losses recorded during April and May from short German mark positions
as the value of the mark reversed higher after moving lower in March. Smaller
losses were experienced from transactions involving the British pound as its
value moved without consistent direction for a majority of the first half of the
year.
For the six months ended June 30, 1998, the Partnership's total trading
revenues, including interest income, were $16,753,634. Total expenses for the
period were $5,278,146, resulting in net income of $11,475,488. The Net Asset
Value of a Unit increased from $4,435.47 at December 31, 1997 to $4,885.52 at
June 30, 1998. In comparison, for the six months ended June 30, 1997, the
Partnership's total trading revenues, including interest income, were
$13,651,145; the total expenses for such period were $3,692,850, generating net
income of $9,958,295; and the Net Asset Value of a Unit increased from $3,204.66
at December 31, 1996 to $3,536.98 at June 30, 1997.
S-12
<PAGE>
To enhance the foregoing comparisons of results of operations from year to
year, prospective investors can examine, line by line, the Partnership's
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 1997, the interest income to the Partnership
increased due to an increase in the Partnership's Net Assets and an increase in
the rates on U.S. Treasury bills.
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
1997 as a result of reduced monthly commission caps for the full year and the
presence of more long-term price trends in futures markets in which the
Partnership's Trading Managers concentrate their participation.
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
increased in 1997 as a result of an increase in the average Net Assets of the
Partnership. 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 1997.
Common administrative expenses are used to pay legal, accounting, auditing,
printing, and distribution costs. These expenses increased in 1997 as a result
of increased audit and tax audit fees and increased printing expenses.
Each of the three Partnerships recorded profits for 1997 primarily by
taking advantage of price trends in the currency markets early in the year.
Since they began trading in 1985 through August 31, 1998, the Net Asset
Values per Unit of Cornerstone II and III have increased by 320.2% (a compound
annualized return of 11.1%) and 250.8% (a compound annualized return of 9.6%),
respectively. Since it began trading in 1987 through August 31, 1998, the Net
Asset Value per Unit of Cornerstone IV has increased by 406.9% (a compound
annualized return of 15.4%).
THE FOLLOWING REPLACES THE FIRST FOUR PARAGRAPHS ON PAGE 35 UNDER
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--FINANCIAL INSTRUMENTS."
There can be no assurance that a clearinghouse, exchange or other exchange
member will meet its obligations to the Partnerships, and the Partnerships are
not indemnified against a default by such parties from the General Partner or
DWR. Further, the law is unclear as to whether a commodity broker has any
obligation to protect its customers from loss in the event of an exchange,
clearinghouse or other exchange member default on trades effected for the
broker's customers; any such obligation on the part of the broker appears even
less clear where the default occurs in a non-US jurisdiction.
The General Partner deals with these credit risks of the Partnerships in
several ways. First, it monitors each Partnership's credit exposure to each
exchange on a daily basis, calculating not only the amount of margin required
for it but also the amount of its unrealized gains at each exchange, if any. The
Commodity Brokers inform each Partnership, as with all their customers, of its
net margin requirements for all its existing open positions, but do not break
that net figure down, exchange by exchange. The General Partner, however, has
installed a system which permits it to monitor each Partnership's potential
margin liability, exchange by exchange. The General Partner is then able to
monitor the individual Partnership's potential net credit exposure to each
exchange by adding the unrealized trading gains on that exchange, if any, to the
Partnership's margin liability thereon.
Second, each Partnership's trading policies limit the amount of Partnership
Net Assets that can be committed at any given time to futures contracts and
require, in addition, a certain minimum amount of diversification in the
Partnership's trading, usually over several different products. One of the aims
of such trading policies has been to reduce the credit exposure of any
Partnership to any single exchange and, historically, such Partnership exposure
has typically amounted to only a small percentage of its total Net Assets. On
those relatively few occasions where a Partnership's credit exposure may climb
above that level, the General Partner deals with the situation on a case by case
basis, carefully weighing whether the increased level of credit exposure
remained appropriate.
Third, the General Partner has secured, with respect to CFI acting as the
clearing broker for the Partnerships, a guarantee by Credit Agricole Indosuez,
CFI's parent, of the payment of the "net liquidating value" of the transactions
(futures, options and forward contracts) in each Partnership's account. As of
December 31,1997,
S-13
<PAGE>
Credit Agricole Indosuez, which had total equity of approximately $6.28 billion
and it is currently rated AA2 by Moody's.
With respect to forward contract trading, the Partnerships trade with only
those counterparties which the General Partner, together with DWR, have
determined to be creditworthy. At the date of the Prospectus, the Partnerships
deal only with CFI as their counterparty on forward contracts. The guarantee by
CFI's parent, discussed above, covers these forward contracts.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION STARTING AT THE FIFTH
PARAGRAPH OF PAGE 35 AND ENDING ON PAGE 36.
At June 30, 1998, open futures, options and forward contracts were as
follows:
<TABLE>
<CAPTION>
CORNERSTONE II CORNERSTONE III CORNERSTONE IV
--------------- --------------- ---------------
<S> <C> <C> <C>
$ $ $
EXCHANGE-TRADED FUTURES CONTRACTS:
Financial Futures:
Commitments to Purchase.......................... 45,422,000 122,408,000 --
Commitments to Sell.............................. 7,218,000 31,187,000 --
Options Written.................................. -- 52,599,000 --
Commodity Futures:
Commitments to Purchase.......................... 1,818,000 7,475,000 --
Commitments to Sell.............................. 13,913,000 26,339,000 --
Options Written.................................. -- 866,000 --
Foreign Futures:
Commitments to Purchase.......................... 43,703,000 98,266,000 --
Commitments to Sell.............................. 46,423,000 46,681,000 --
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase.......................... 37,819,000 24,223,000 275,653,000
Commitments to Sell.............................. 73,791,000 34,530,000 476,596,000
</TABLE>
A portion of the amounts indicated as off-balance sheet risk in forward
currency contracts is offset by 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 June 30, 1998, totaled $1,763,384 for Cornerstone II,
$1,485,060 for Cornerstone III, and $11,738,740 for Cornerstone IV.
For Cornerstone II, of the $1,763,384 net unrealized gain on open contracts
at June 30, 1998, $744,856 related to exchange-traded futures contracts and
$1,018,528 related to off-exchange-traded forward currency contracts.
For Cornerstone III, of the $1,485,060 net unrealized gain on open
contracts at June 30, 1998, $1,264,297 related to exchange-traded futures
contracts and $220,763 related to off-exchange-traded forward currency
contracts.
For Cornerstone IV, of the $11,738,740 net unrealized gain on open
contracts at June 30, 1998, all related to off-exchange-traded forward currency
contracts.
The contract amounts in the above table represent each Partnership's extent
of involvement in a particular class of financial instrument, but not the credit
risk associated with counterparty non-performance. The credit risk associated
with these instruments is limited to the amounts reflected in each Partnership's
Statement of Financial Condition.
Exchange-traded futures contracts held by the Partnerships at June 30, 1998
mature through June 1999 for Cornerstone II and Cornerstone III.
Off-exchange-traded forward currency contracts held by the Partnerships at June
30, 1998 mature through September 1998 for each of Cornerstone II, Cornerstone
III and Cornerstone IV.
The Partnerships also have credit risk because DWR and CFI act as the
futures commission merchants or the counterparties, with respect to most of the
Partnerships' assets. Exchange-traded futures and futures styled options
contracts are marked to market on a daily basis, with variations in value
settled on a daily basis. Each of DWR and CFI, as a futures commission merchant
for each Partnership's exchange-traded futures and futures styled options
contracts, is required, pursuant to CFTC regulations, to segregate from their
own assets, and for the sole benefit of their commodity customers, all funds
held by them with respect to exchange-traded futures and futures styled options
contracts, including an amount equal to the net unrealized gain on all open
futures and futures styled options contracts, which funds, in the aggregate,
totaled, at June 30, 1998, $29,652,022,
S-14
<PAGE>
$42,020,223 and $116,634,568 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
forward currency contracts, the Partnerships are at risk to the ability of CFI,
the sole counterparty on all such contracts, to perform. CFI's parent, Credit
Agricole Indosuez, has guaranteed to each Partnership payment of the net
liquidating value of the transactions in the Partnership's account with CFI
(including forward currency contracts).
For the six months ended June 30, 1998, 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........................................... 23,042,000 18,153,000
Commodity Futures........................................... 4,030,000 13,173,000
Foreign Futures............................................. 32,710,000 18,537,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS................ 44,433,000 66,146,000
</TABLE>
<TABLE>
<CAPTION>
CORNERSTONE III
-----------------------------------
ASSETS LIABILITIES
------------ ------------
$ $
<S> <C> <C>
EXCHANGE-TRADED CONTRACTS:
Financial Futures........................................... 69,901,000 18,786,000
Options on Financial Futures................................ -- 30,619,000
Commodity Futures........................................... 6,533,000 25,401,000
Options on Commodity Futures................................ -- 326,000
Foreign Futures............................................. 75,410,000 27,048,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS................ 38,831,000 47,042,000
</TABLE>
<TABLE>
<CAPTION>
CORNERSTONE IV
-----------------------------------
ASSETS LIABILITIES
------------ ------------
$ $
<S> <C> <C>
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS................ 366,771,000 502,262,000
</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 six months ended June 30, 1998 and the years ended December 31,
1997, 1996 and 1995: (i) Cornerstone II had total expenses of $1,456,477,
$3,363,182, $3,402,328, and $3,722,106, respectively; (ii) Cornerstone III had
total expenses of $2,071,774, $4,321,890, $4,806,886, and $5,851,246,
respectively; and (iii) Cornerstone IV had total expenses of $5,278,147,
$8,844,679, $7,956,901, and $7,560,205, respectively.
THE FOLLOWING UPDATES AND SUPPLEMENTS "DESCRIPTION OF CHARGES TO EACH
PARTNERSHIP--1. COMMODITY BROKER" ON PAGE 39.
As more fully described under "The Commodity Brokers" on pages S-31-32, DWR
sold its institutional futures and foreign currency trading operations in 1997
to Carr Futures, Inc. ("CFI"). Since that transaction, DWR has served as the
non-clearing commodity broker for the Partnerships, and CFI has served as the
clearing commodity broker for the Partnerships' commodity interests trades and
as the counterparty on the Partnerships' foreign currency forward contracts.
S-15
<PAGE>
DWR, as the non-clearing commodity broker for the Partnerships, continues
to charge each Partnership a roundturn brokerage commission for each commodity
interest contract traded equal to 80% of DWR's published non-member rate (which
is currently an average rate of $72), which DWR may change from time to time. In
addition, CFI, as the clearing commodity broker, now charges the Partnerships
the transaction fees and costs incurred on each trade executed on behalf of the
Partnerships, including floor brokerage fees, exchange fees, clearinghouse fees,
NFA fees, "give up" fees, any taxes (other than income taxes), any third party
clearing costs, costs associated with taking delivery of commodity interests,
and fees for execution of forward contract transactions. The aggregate
transaction fees and costs and brokerage commissions continue to be capped at
13/ 20 of 1% per month (a 7.8% annual rate) of each Partnership's Net Assets at
month-end allocated to each Trading Manager. In addition, these fees and costs
continue to be subject to the 14% annual cap on aggregate brokerage commissions,
transaction fees and costs, and net excess interest and compensating balance
benefits.
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 six months ended June 30, 1998, Cornerstone II, Cornerstone III,
and Cornerstone IV paid brokerage commissions of $706,483, $1,092,856 and
$1,202,871, respectively.
For the six months ended June 30, 1998, Cornerstone II, Cornerstone III,
and Cornerstone IV paid aggregate management fees of $587,455, $836,091 and
$2,333,334, respectively.
For the six months ended June 30, 1998, Cornerstone II, Cornerstone III,
and Cornerstone IV incurred aggregate incentive fees of $78,138, $0, and
$1,618,729, respectively.
For the six months ended June 30, 1998, Cornerstone II, Cornerstone III,
and Cornerstone IV incurred common administrative expenses of $19,256 $32,174,
and $62,565, respectively; none incurred any extraordinary expenses.
For the six months ended June 30, 1998, Cornerstone II, Cornerstone III,
and Cornerstone IV incurred transaction fees and costs of $65,143, $110,653 and
$60,647, respectively.
THE FOLLOWING UPDATES THE BREAK EVEN INFORMATION UNDER "SUMMARY OF THE
PROSPECTUS--THE DEAN WITTER CORNERSTONE FUNDS" ON PAGES 1-2 AND 6, 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, 1993 through August 31, 1998, the
Partnerships will be required to earn estimated annual net trading profits
(after taking into account estimated interest income based upon current rates of
4.25%) of 7.10%, 7.92% and 4.63%, 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 August 31, 1998, Cornerstone II,
Cornerstone III and Cornerstone IV must earn estimated net trading profits of
$290.78, $270.77 and $228.66 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).
S-16
<PAGE>
<TABLE>
<CAPTION>
CORNERSTONE II CORNERSTONE III CORNERSTONE IV
-------------- --------------- --------------
<S> <C> <C> <C>
$ $ $
Selling Price per Unit (as of August 31, 1998)
(1)................................................ 4,097.18 3,420.33 4,942.29
Management Fee (2)................................. 170.72 142.51 205.93
Brokerage Commissions (3).......................... 235.59 219.24 176.93
Less: Interest Income (4).......................... (139.30) (116.29) (168.04)
Transaction Costs (5).............................. 19.67 20.18 7.91
Administrative Expenses (6)........................ 4.10 5.13 5.93
Incentive Fee (7).................................. -- -- --
Amount of Trading Income Required for a Limited
Partner to Recoup its Investment at the End of
One Year......................................... 290.78 270.77 228.66
Percentage of Selling Price........................ 7.10% 7.92% 4.63%
<FN>
- ------------------------------
(1) Units of each Partnership are offered for sale in Exchanges at Monthly
Closings to be held as of the last day of each month at a purchase price
equal to 100% of the Net Asset Value of the Unit.
(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
brokerage commissions and transaction fees and costs with respect to each
Trading Manager's allocated Net Assets were 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 5.82%, 7.23% and 3.58% of average annual
Net Assets of Cornerstone II, III and IV, respectively. For purposes of the
above table, the rates utilized reflect the reduced brokerage commissions
which would have been paid had the new monthly cap been employed earlier. As
such, brokerage commissions were assumed to be 5.75%, 6.41% and 3.58% for
Cornerstone II, III and IV, respectively.
(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 at 4.25%, by
using an average of the blended rate for the five most recent weekly auction
rates for three-month U.S. Treasury bills and adjusting for the historical
rate that DWR earned in excess of such amount.
(5) Transaction fees and costs have averaged 0.48%, 0.59% and 0.16% 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 were 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 0.10%, 0.15% and 0.12% 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.
</FN>
</TABLE>
S-17
<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 August 31, 1998. 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 is no difference insofar as sharing of profits and losses is
concerned between Units of Limited Partnership Interest and Units of General
Partnership Interest.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
AS OF
AUGUST 31,
TITLE OF CLASS 1998
- -------------------------------------------------------------------------------------- -------------
<S> <C>
$
Cornerstone II:
Limited Partnership Interest........................................................ 31,028,776
General Partnership Interest........................................................ 890,728
-----------
Total............................................................................ 31,919,504
-----------
-----------
Cornerstone III:
Limited Partnership Interest........................................................ 42,917,946
General Partnership Interest........................................................ 1,306,918
-----------
Total............................................................................ 44,224,864
-----------
-----------
Cornerstone IV:
Limited Partnership Interest........................................................ 121,464,752
General Partnership Interest........................................................ 3,157,576
-----------
Total............................................................................ 124,622,328
-----------
-----------
</TABLE>
THE TRADING MANAGERS
CERTAIN CHANGES RELATING TO THE TRADING MANAGERS ARE PROVIDED BELOW.
PERFORMANCE CAPSULES ARE SHOWN ONLY FOR NORTHFIELD TRADING L.P. ("NORTHFIELD"),
WELTON INVESTMENT CORPORATION ("WIC," FORMERLY, WELTON INVESTMENT SYSTEMS
CORPORATION), 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"REGISTERED)
(CURRENT ALLOCATION -- 82.89%)
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION RELATING TO JWH
BEGINNING ON PAGE 54.
The following persons have changed titles and/or positions as follows:
Mr. Kevin Koshi is executive vice president.
Mr. David M. Kozak is general counsel, vice president and secretary.
Ms. Elisabeth A.M Kenton is chief administrative officer, director of
compliance and senior vice
president.
Mr. Mark Mitchell is vice chairman and counsel to the firm.
Mr. Chris Deakins is director of investor services and vice president.
S-18
<PAGE>
The following persons have been added as principals of JWH:
Mr. Verne O. Sedlacek is the chief operating officer and a member of the
Investment Policy Committee of JWH. Mr. Sedlacek is responsible for the
day-to-day management of the firm. He is also the president of Westport Capital
Management Corporation and the president and a director of Global Capital
Management Limited. Prior to joining JWH in July 1998, Mr. Sedlacek was the
executive vice president and chief financial officer of Harvard Management
Company, Inc., a wholly-owned subsidiary of Harvard University, which at the
time of his departure managed approximately $14 billion of University-related
funds. He joined Harvard Management Company in March, 1983 and was responsible
for managing the areas of personnel, budgets, systems, performance analysis,
contracts, credit, compliance, custody, operations, cash management, securities
lending and market risk evaluation. Mr. Sedlacek currently serves on the Board
of Directors of the FIA, and the Chicago Mercantile Exchange, and is a member of
the Global Markets Advisory Committee of the CFTC. Mr.Sedlacek received his A.B.
in Economics from Princeton University, an M.B.A in Accounting from New York
University, and his C.P.A. from the State of New York in 1978.
Dr. Mark S. Rzepczynski is the director of research and trading and a
member of the Investment Policy Committee of JWH. He is responsible for
overseeing research and trading functions at the firm. Prior to joining JWH, Dr.
Rzepczynski's last management responsibility was as vice president and director
of taxable credit and quantitative research in the fixed income division of
Fidelity Management and Research. While at Fidelity from May 1995 to April 1998,
he oversaw credit and quantitative research recommendations for all Fidelity
taxable fixed income funds. From April 1993 to April 1995, Dr. Rzepczynski was a
portfolio manager and director of research for CSI Asset Management, Inc., a
fixed income money management subsidiary of Prudential Insurance. Dr.
Rzepczynski has a B.A. (Cum Laude) Honors in Economics from Loyola University of
Chicago, and an A.M. and Ph.D. in Economics from Brown University.
Mr. Matt Driscoll is chief trader, vice president and a member of the
Investment Policy Committee of JWH. He is responsible for the supervision and
administration of all aspects of order execution strategies and implementation
of trading policies and procedures. Mr. Driscoll joined JWH in March 1991 as a
member of its trading department. Since joining the firm, he has held positions
of increasing responsibility as they relate to the development and
implementation of JWH's trading strategies and procedures. In 1993, Mr. Driscoll
was promoted to manager of JWH's overseas trading desk. He has played a major
role in the development of JWH's 24 hour trading operation. Mr. Driscoll
attended Pace University.
Mr. Julius A. Staniewicz is the senior strategist in JWH's Research and
Product Development Department and a member of the Investment Policy Committee
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 CPO 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.
Ms. Eilene Nicoll is the vice president of trading administration and is a
member of the Investment Policy Committee of JWH. Prior to joining JWH in July
1997, Ms. Nicoll was a vice president beginning in January 1997 at Commercial
Materials, L.L.C., a newly organized corporation which had not yet begun
operations by the time she left in July 1997. She was a vice president and
director at West Course Capital, Inc., a CTA, from January 1994 until it
dissolved in December 1996. At West Course Capital, Inc. Ms. Nicoll was
responsible for operations and administration. Prior to joining West Course
Capital, Inc. she was a vice president at REFCO, Inc. from May 1991 to December
1993. While at REFCO, she was also a principal of Nikkhah & Nicoll Asset
Management, Inc., a CPO. From January 1991 to May 1991, Ms. Nicoll was employed
by Moore Capital Management, Inc., where she was involved in all aspects of the
commodity trading advisor business, including administration, marketing, and
allocation of proprietary capital. Ms. Nicoll was at Shearson Lehman Brothers
from January 1987 to December 1990 as vice president-futures. Ms. Nicoll
received her B.A. in psychology from Brooklyn College.
Mr. Paul D. Braica, C.P.A., is the managing director of administration of
JWH. He is also treasurer of JWH Financial Products, Inc. Since joining JWH in
April, 1996, Mr. Braica has held positions of increasing responsibility in
internal audit, risk management and administration. Prior to joining JWH, he was
employed with Ernst & Young LLP as an Auditor from December 1994 to March 1996
and as a Tax Manager from July 1986 to September 1993. From October 1993 to
November 1994 he was the director of fund accounting at Organizer
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Systems, Inc. Mr. Braica received his B.A. in Economics from Gettysburg College,
his M.B.A. from Rutgers University and his M.S. in Taxation from Seton Hall
University.
Mr. Kevin J. Treacy is a vice president of JWH. Prior to joining JWH in
September 1997, Mr. Treacy was the chief financial officer of Kenmar Advisory
Corp. ("Kenmar"), a registered CPO, from August 1993 to August 1997. While at
Kenmar, Mr. Treacy was also a principal of multiple Kenmar affiliates which were
registered as CTAs, CPOs and as an Introducing Broker. At Kenmar, he was
responsible for corporate finance and administration for the firm and its
affiliates. Beginning in September 1986, Mr. Treacy worked for E.S. Jacobs &
Co., a corporation specializing in leveraged buyouts and venture capital
investments, where he held positions of increasing responsibility, lastly as the
firm's financial officer until July 1993. He received his Bachelor of Commerce
and Masters in Accounting from University College Dublin.
Ms. Florence Y. Sofer is director of marketing of JWH. She is responsible
for the development and implementation of strategic marketing and communications
programs. Ms. Sofer joined JWH as a marketing manager in June 1997 from GAM
Funds, Inc. where she was a marketing manager from June 1994 to May 1997. From
October 1993 to June 1994, Ms. Sofer relocated from Washington, D.C. to New
York, New York. She received her B.A. in Economics and International Relations
from The American University and an M.B.A. with an emphasis in marketing from
George Washington University.
Mr. Andrew D. Willard is director of technology at JWH and a member of the
Operating Committee of JWH.
Mr. William G. Kelley is a vice president of JWH.
Mr. Robert Lendrim is a vice president of JWH.
Ms. Lynn R. Lubell is a vice president of JWH.
Ms. Wendy B. Goodyear is an assistant vice president of JWH.
Mr. Mark W. Sprankel is an assistant vice president of JWH.
Mr. Kenneth S. Webster, C.P.A., is an assistant vice president and manager
of investment support of JWH.
Mr. Michael P. Flannery is an assistant vice president of JWH.
The following persons are no longer principals or employees of JWH: David
R. Bailin, Peter F. Karpen, James E. Johnson, Jr., Mary Beth Hardy, Glenda G.
Twist, John A.F. Ford, Michael D. Gould, Jack M. Ryng, C.P.A., Chris J.
Lautenslager, Barry S. Fox, Michael J. Scoyni and Melanie Caldwell.
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
class action lawsuits filed in the California Superior Court, Los Angeles County
and in the New York Supreme Court, New York County. Additional complaints
containing essentially the same allegations as the earlier California complaints
were filed in California in March 1997. The California complaints were
consolidated in May 1997. The New York complaints were consolidated in July
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; on occasion their orders may
receive better fills than 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
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manages trading in that vehicle, and in the JWH Employee Fund, L.P., for which
JWH is the CTA. The records of these accounts also will not be made available to
clients.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN "THE
INVESTMENT POLICY COMMITTEE" ON PAGE 57:
Investment Policy Committee
The Investment Policy Committee ("IPC") is a senior level advisory group,
broadly responsible for evaluating and overseeing the firm's trading policies.
The IPC provides a forum for shared responsibility for the development and
implementation of investment policies. The IPC meets periodically to discuss
issues relating to implementation of the firm's investment process and its
application to markets, including research on new investments and strategies in
relation to the trading models JWH employs. Typical issues analyzed by the IPC
include liquidity, position size, capacity, performance cycles, and new product
and market strategies. The IPC also examines regularly the impact of changing
market conditions on the firm's strategic allocation program, a multi-program
trading strategy which is currently part of an exclusivity arrangement with one
client.
Composition of the IPC, and participation in its discussions and its
decisions by non-members, may vary over time. All recommendations of the IPC are
subject to final approval by the chairman. The IPC does not make particular
trading decisions.
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN "TRADING
TECHNIQUES" BEGINNING ON PAGE 57.
THE JWH 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
attempt 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. This could occur for example, when
JWH determines that markets are illiquid or erratic, such as may occur during
holiday seasons. 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.
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
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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.
EURO
JWH forsees no reason why it would not be ready to accept and process data
related to the Euro before January 1, 1999. A management working group is
responsible for planning and preparing for the Euro conversion. The group meets
on a regular basis to review information as it becomes available on this issue,
determine what actions are necessary and establish policies and monitor tasks as
appropriate. If unanticipated difficulties arise in connection with the
conversion, JWH will notify the Partnerships.
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 one
of JWH's most diversified programs. 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 eliminates dependence on the dollar. Forex attempts to
take a position if a trend is identified and attempts to 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 "OTHER JWH
PROGRAMS" BEGINNING ON PAGE 59.
OTHER JWH PROGRAMS
In addition to the Original Investment Program, the Global Diversified
Portfolio and the International Foreign Exchange Program, JWH currently operates
eight different programs for U.S. and foreign investors, none of which are
utilized by JWH for Cornerstone II or Cornerstone IV. Each program is operated
separately and independently. These programs are intermediate and long-term,
quantitative, trend-analysis models designed to achieve speculative rates of
return.
The World Financial Perspective began trading client capital in 1987 and
seeks to capitalize on market opportunities by holding positions from multiple
currency perspectives, including the British pound, German mark, Japanese yen,
Swiss franc, and the U.S. dollar. This program always maintains a position--long
or short--in every market it trades. JWH began trading client capital in the
Financial and Metals portfolio in 1984. This program is designed to identify and
capitalize on intermediate and long-term price movements in four major market
sectors -- currencies, metals, interest rates and stock indexes -- using a
systematic approach to ensure
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disciplined investment decisions. The G-7 Currency Portfolio, which began
trading client capital in 1991, invests in the highly liquid currencies of the
Group of Seven industrialized nations and Switzerland. Not all of these
currencies are traded at all times. Because this program excludes minor
currencies, which may be less liquid, and maintains a lower degree of leverage,
the performance characteristics are different from those of the International
Foreign Exchange Program. Using a more conservative approach compared to the
leverage used in the other JWH programs, the International Currency and Bond
Portfolio, which began trading client capital in 1993, targets the long end of
interest rate and currency futures of major industrialized nations. Foreign
exchange positions are held both as outrights--trading positions taken in
foreign currencies versus the U.S. dollar--and cross rates--trading foreign
currencies against each other. The Global Financial Portfolio began trading
client capital in June 1994 and offers access to a small group of energy and
financial markets, including global currencies, interest rates, and stock
indices. The Worldwide Bond Program, which began trading client capital in 1996,
invests through financial futures in the long-term portion of global interest
rate markets, including the U.S. 30-year bond, U.S. 10-year note, British long
gilt, the French, German and Italian bond and Australian 10-year bond. This
program is not limited to investments that have the potential to profit in a
stable or declining interest rate environment; rather, the program attempts to
capitalize on dominant trends, whether rising or falling, in bond markets around
the world. The Dollar Program began trading client capital in 1996 and
specializes in the foreign exchange sector using outright trading, an approach
that has significantly contributed to the success of other JWH programs. The
Dollar Program trades four of the world's major currencies Japanese yen, German
mark, Swiss franc, and British pound -- versus the U.S. dollar, and does not
participate in cross rates. The JWH Global AnalyticsTM Family of Programs, which
began trading client capital in June 1997, is an integrated investment system
consisting of a family of programs, collectively known as JWH Global
AnalyticsTM. The family of programs combines different trend identification
methodologies into a single, broadly diversified investment portfolio. JWH
Global AnalyticsTM trades a wide range of financial and commodity markets.
Certain energy and agricultural contracts not previously available through other
JWH investment programs are also included.
InterRateTM began trading client capital in 1988 and closed in 1996. This
program was designed to enhance returns available in short-term instruments
investing in U.S. treasury bills to provide both secure income and collateral
for a portfolio of interbank forward and exchange-traded futures contracts. The
Yen Financial Portfolio, which began trading client capital in 1992 and closed
in 1996, offered investors access to a select group of Japanese financial
futures markets which historically have presented some of the most favorable
profit opportunities for JWH. The Delevered Yen Financial and Metals Profile,
which began trading in 1995 and closed in 1996, was opened at the request of a
client. This program was traded at approximately one half of the leverage of the
Financial and Metals Portfolio and was traded from the perspective of the
Japanese yen.
As of August 31, 1998, the aggregate amount of funds under management
pursuant to the Original Investment Program was approximately $362 million; the
aggregate amount of funds under management pursuant to the Global Diversified
Portfolio was approximately $197 million (the assets under management for this
program includes the two Exclusive Fund Accounts traded pursuant to the same
trading methodology but pursuant to different leverage; for information on these
accounts, see "JWH Exclusive Fund Accounts," below); and the aggregate amount of
funds under management pursuant to the International Foreign Exchange Program
was $104 million. As of August 31, 1998, the aggregate amount of all funds under
management pursuant to all JWH programs was approximately $2.2 billion.
As of August 31, 1998, JWH was managing approximately $26,458,451 of
Cornerstone II pursuant to its Original Investment Program and Global
Diversified Portfolio. 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.
JWH EXCLUSIVE FUND ACCOUNTS
Pursuant to a special JWH multi-program trading strategy that is currently
the subject of an exclusive arrangement with one client operating two funds (the
"Exclusive Fund Accounts"), JWH can make various discretionary trading
adjustments for the accounts of those funds, including ongoing allocations and
reallocations of fund assets among the investment programs and periodic trading
leverage adjustments. As a result of a change made to these accounts on May 8,
1998, these accounts have traded differently than the other accounts in the
respective JWH investment programs. These modified programs are not currently
available for investment by other clients.
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THE FOLLOWING IS ADDED BEFORE "DEAN WITTER CORNERSTONE III" ON PAGE 60.
3. NORTHFIELD TRADING L.P.
(CURRENT ALLOCATION -- 17.11%)
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 3609 S. Wadsworth, Suite 250, Denver, Colorado 80235-2110.
Northfield was formed in August 1990. The limited 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 CFTC, 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.
There have been no administrative, civil or criminal actions, pending, on
appeal or concluded against Northfield or its principals during the five years
preceding the date of this Prospectus.
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 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. 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 June
1997, Mr. Bry was elected to a second two-year term on the Board of Directors of
the Managed Funds Association and currently serves as Chairperson of the
Emerging Manager Council. In January 1997, he was elected to the National
Futures Association's Board of Directors in the Commodity Trading Advisor
category and in February 1998, he was elected to the Executive Committee of the
National Futures Association.
Philip Spertus 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 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.
Northfield and its principals may trade commodity interests for their own
proprietary accounts. Such trades may or may not be in accordance with the
Northfield trading system described below.
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
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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.
As of August 31, 1998, the aggregate amount of funds under Northfield's
management was approximately $60 million ("notional funds" excluded). As of
August 31, 1998, Northfield was managing approximately $5,461,053 of Cornerstone
II.
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 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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NORTHFIELD TRADING L.P.
DIVERSIFIED PROGRAM
AS OF AUGUST 31, 1998
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: 27
Aggregate Assets Overall (excluding notional): $60,449,844
Aggregate Assets Overall (including notional): $97,676,898
Aggregate Assets in Program (excluding notional): $60,449,844
Aggregate Assets in Program (including notional): $97,676,898
Largest Monthly Drawdown(1): (9.8)%--(1/93)
Worst Peak-to-Valley Drawdown(2): (27.0)%--(12/91--1/93)
1998 year-to-date return (8 months)(3): (0.7)%
1997 annual return: 2.5%
1996 annual return: 18.4%
1995 annual return: 9.1%
1994 annual return: 14.0%
1993 annual return: 40.2%
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 during the preceding five fiscal years
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 during the preceding five fiscal
years 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 CORPORATION (FORMERLY, WELTON INVESTMENT SYSTEMS
CORPORATION)
(CURRENT ALLOCATION -- 33.74%)
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION RELATING TO WELTON
INVESTMENT CORPORATION BEGINNING ON PAGE 60.
Welton Investment Corporation ("WIC") is a Delaware corporation which was
merged in July 1997 from Welton Investment Systems Corporation, a California
corporation originally formed in 1988.
The following persons have changed titles and/or positions as follows:
Dr. Patrick L. Welton is the Chief Executive Officer and Chairman of WIC.
Ms. Annette L. Welton is a co-founder of WIC, a Director, Chief Operational
Officer and Chief Financial Officer.
Mr. Jerry M. Harris is the Senior Vice President of WIC.
WIC and its principals trade futures options and securities for their own
accounts and provide management services to other clients. Investments made on
behalf of WIC, its principals, and its clients, as well as any policies related
thereto, will remain confidential. In the course of such trading, WIC or its
principals may take positions in their own accounts which are in the same market
and in the same direction as positions advocated for clients. In a case where
WIC or its principals place the same trade orders for their accounts as they do
for
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their clients in a single block order with a brokerage firm, the brokerage firm
shall allocate the trade fill prices assigned to each account in a manner
consistent with that firm's policy. This equalizes the likelihood of WIC or its
principals receiving a superior or inferior price compared to any of their
clients or, in the case of a partial fill of a block order, equalizes the
likelihood of WIC or its principals receiving a trade that some customers will
not receive or vice versa.
As of August 31, 1998, the aggregate amount of funds under management
pursuant to the Diversified Portfolio program was approximately $163 million
("notional funds" excluded). As of August 31, 1998, the aggregate amount of
funds under management pursuant to all WIC's programs was approximately $192
million ("notional funds" excluded). As of August 31, 1998, WIC was managing
approximately $14,998,005 of Cornerstone III pursuant to its Diversified
Portfolio program.
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 THOSE PORTFOLIOS DO NOT TRADE FOR CORNERSTONE
III.
WELTON INVESTMENT CORPORATION
DIVERSIFIED PORTFOLIO
AS OF AUGUST 31, 1998
Name of CTA: Welton Investment 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: 52
Aggregate Assets Overall (excluding notional): $192,000,000
Aggregate Assets Overall (including notional): $283,000,000
Aggregate Assets in Program (excluding notional): $163,000,000
Aggregate Assets in Program (including notional): $254,000,000
Largest Monthly % Drawdown*: (15.94)%--(2/96)
Largest Month-End Peak-to-Valley*: (25.96)%--(1/96-8/96)
1998 year-to-date return (8 months): 14.20%
1997 annual return: 23.62%
1996 annual return: 7.17%
1995 annual return: 36.35%
1994 annual return: 2.38%
1993 annual return: 47.90%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
* Largest Monthly % Drawdown and Largest Month-End Peak-to-Valley relate to the
preceding five fiscal years.
2. ABRAHAM TRADING CO.
(CURRENT ALLOCATION -- 22.87%)
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION RELATING TO ABRAHAM
TRADING CO. ON PAGE 67.
Craig L. Caudle is no longer an employee of ATC. Edward C. Abraham is no
longer involved in the day-to-day trading and marketing of the firm, but remains
as an employee.
There have been no administrative, civil or criminal actions, pending, on
appeal or concluded against ATC or its principals during the five years
preceding the date of this Prospectus.
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.
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THE FOLLOWING UPDATES AND REPLACES THE INFORMATION CONTAINED IN THE LAST
PARAGRAPH ON PAGE 69.
As of August 31, 1998, the aggregate amount of funds under ATC's management
was approximately $57 million. As of August 31, 1998, ATC was managing
approximately $10,163,372 of Cornerstone III pursuant to its Diversified
Program.
THE FOLLOWING UPDATES AND REPLACES CAPSULE A ON PAGE 70. THE NOTES
CONTAINED ON PAGE 70 ARE AN INTEGRAL PART OF THE FOLLOWING CAPSULE.
PERFORMANCE OF ABRAHAM TRADING COMPANY
AS OF AUGUST 31, 1998
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: 6
Aggregate Assets Overall: $57,460,595
Aggregate Assets in Program: $57,460,595
Largest Monthly % Drawdown*: (13.78)%--(2/96)
Largest Month-End Peak-to-Valley* (24.44)%--(6/95-2/96)
1998 year-to-date return (8 months): 15.34%
1997 annual return: 10.89%
1996 annual return: (0.42)%
1995 annual return: 6.11%
1994 annual return: 24.22%
1993 annual return: 34.29%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
* Largest Monthly % Drawdown and Largest Month-End Peak-to-Valley relate to the
preceding five fiscal years.
THE FOLLOWING UPDATES AND SUPPLEMENTS THE NOTES TO CAPSULE A ON PAGE 70.
ATC uses the "Fully Funded Subset" method to calculate its composite
performance, including largest monthly drawdown and largest peak-to-valley
drawdown. "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.
(CURRENT ALLOCATION -- 43.39%)
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 PROGRAMS
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 twenty different
markets. These markets may include, but are not limited to, precious and
industrial metals, grains, petroleum products, soft commodities, interest rate
futures, stock indicies (including S&P 500), currencies and their crossrates.
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The Sunrise CIMCO -- Diversified Financial Program was designed by Sunrise
to participate exclusively 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 foreign bonds, notes and Euro products), stock indicies (including S&P
500), precious and industrial metals (including gold, silver and copper) and
crude oil are also traded in this program. These commodity interests are traded
on futures exchanges but may also be traded in the interbank or cash markets
when appropriate.
The Sunrise Currency Program follows approximately twelve different major
and minor currency markets, which may include, but are not limited to, the
Japanese yen, British pound, German Deutsche mark, Swiss franc, Canadian dollar,
Australian dollar, Spanish peseta, Italian lira, Swedish krona, New Zealand
dollar, French franc, and South African rand. 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 for the Currency
Program, major and minor currencies are traded as crossrates selectively against
each other and/or as outrights against the U.S. dollar.
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 ON PAGE 73 AND THE FIRST PARAGRAPH ON PAGE 74.
As of August 31, 1998, the aggregate amount of funds under management
pursuant to the Diversified Program was $95.4 million and $66.6 million pursuant
to the CIMCO portfolio. As of August 31, 1998, the aggregate amount under
management pursuant to all Sunrise's programs was $468.3 million.
As of August 31, 1998, Sunrise was managing approximately $19,283,709 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 -- 63.75%)
THE FOLLOWING UPDATES AND REPLACES THE FIRST SENTENCE OF THE SECOND
PARAGRAPH OF THE INFORMATION RELATING TO JOHN W. HENRY & COMPANY, INC. ON PAGE
74.
As of August 31, 1998, JWH was managing approximately $79,446,475 of
Cornerstone IV pursuant to its International Foreign Exchange Program.
2. SUNRISE CAPITAL MANAGEMENT, INC.
(CURRENT ALLOCATION -- 36.25%)
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 5 and 25% 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 August 31, 1998, Sunrise was managing approximately $45,175,853 of
Cornerstone IV pursuant to the Sunrise Currency Program.
THE GENERAL PARTNER
THE FOLLOWING UPDATES AND SUPPLEMENTS THE INFORMATION UNDER "THE GENERAL
PARTNER" ON PAGE 78.
The General Partner and DWR are each wholly-owned subsidiaries of Morgan
Stanley Dean Witter & Co. ("MSDW"). MSDW was created in 1997 when Dean Witter,
Discover & Co. (which at that time was the parent company of DWR and the General
Partner) merged with Morgan Stanley Group Inc. Each of MSDW, DWR and
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the General Partner may be deemed to be a "parent" and "promoter" of the
Partnerships within the meaning of the federal securities laws.
As reflected in MSDW's 1997 Annual Report and Form 10-Q for the quarter
ended August 31, 1998, MSDW had total shareholders' equity of $13,956 million
and total assets of $302,287 million as of November 30, 1997 (audited) and total
shareholders' equity of $13,642 million and total assets of $360,929 million as
of August 31, 1998 (unaudited). Additional financial information regarding MSDW
is included in the financial statements filed as part of such Annual Report and
Form 10-Q. MSDW 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 MSDW at 1585 Broadway, New York, New
York 10036 (Attn: Investor Relations).
THE FOLLOWING UPDATES AND REPLACES THE INFORMATION UNDER "DIRECTORS AND
OFFICERS OF THE GENERAL PARTNER" ON PAGE 78-79.
DIRECTORS AND OFFICERS OF THE GENERAL PARTNER
Richard M. DeMartini, age 46, is the Chairman of the Board and a Director
of the General Partner. Mr. DeMartini is also Chairman of the Board and a
Director of Dean Witter Futures & Currency Management Inc. ("DWFCM"). Mr.
DeMartini is president and chief operating officer of DWR's Individual Asset
Management Group. He was named to this position in May of 1997 and is
responsible for Dean Witter InterCapital, Van Kampen American Capital, insurance
services, managed futures, unit trust, investment consulting services, Dean
Witter Realty, and NOVUS Financial Corporation. Mr. DeMartini is a member of the
MSDW management committee, a director of the InterCapital funds, a trustee of
the TCW/DW funds and a trustee of the Van Kampen American Capital and Morgan
Stanley retail funds. Mr. DeMartini has been with DWR his entire career, joining
the firm in 1975 as an financial advisor. He served as a branch manager,
regional director, and national sales director, before being appointed president
and chief operating officer of the Dean Witter Consumer Markets. In 1988 he was
named president and chief operating officer of Sears' Consumer Banking Division
and in January 1989 he became president and chief operating officer of Dean
Witter Capital. Mr. DeMartini has served as chairman of the board of the Nasdaq
Stock Market, Inc. and vice chairman of the board of the National Association of
Securities Dealers, Inc. A native of San Francisco, Mr. DeMartini holds a
bachelor's degree in marketing from San Diego State University.
Mark J. Hawley, age 55, is President and a Director of the General Partner.
Mr. Hawley is also President and a Director of DWFCM. Mr. Hawley joined DWR in
February 1989 as Senior Vice President and is currently the Executive Vice
President and Director of DWR's Product Management for Individual Asset
Management. In this capacity, Mr. Hawley is responsible for directing the
activities of the firm's Managed Futures, Insurance, and Unit Investment Trust
Business. From 1978 to 1989, Mr. Hawley was a member of the senior management
team at Heinold Asset Management, Inc., a CPO, and was responsible for a variety
of projects in public futures funds. From 1972 to 1978, Mr. Hawley was a Vice
President in charge of institutional block trading for the Mid-West at Kuhn Loeb
& Company.
Lawrence Volpe, age 51, is a Director of the General Partner and DWFCM. Mr.
Volpe joined DWR as a Senior Vice President and Controller in September 1983. In
May 1998 Mr. Volpe began taking on special assignments for DWR and relinquishing
certain day-to-day responsibilities. From July 1979 to September 1983, he was
associated with E.F. Hutton & Company Inc. and prior to his departure, held the
positions of First Vice President and Assistant Controller. From 1970 to July
1979, he served as audit manager in the financial services division of Arthur
Andersen & Co.
Joseph G. Siniscalchi, age 53, is a Director of the General Partner. Mr.
Siniscalchi joined DWR in July 1984 as a First Vice President, Director of
General Accounting. He is currently Senior Vice President and Controller of the
Financial Markets Division of DWR. From February 1980 to July 1984, Mr.
Siniscalchi was Director of Internal Audit at Lehman Brothers Kuhn Loeb, Inc.
Edward C. Oelsner III, age 56, is a Director of the General Partner. Mr.
Oelsner is currently an Executive Vice President and head of the Product
Development Group at Dean Witter InterCapital Inc., an affiliate of DWR. Mr.
Oelsner joined DWR in 1981 as a Managing Director in DWR's Investment Banking
Department specializing in coverage of regulated industries and, subsequently,
served as head of the DWR Retail Products Group. Prior to joining DWR, Mr.
Oelsner held positions at The First Boston Corporation as a member of the
Research and Investment Banking Departments from 1967 to 1981. Mr. Oelsner
received his M.B.A. in Finance from the Columbia University Graduate School of
Business in 1966 and an A.B. in Politics from Princeton University in 1964. Mr.
Oelsner joined DWR in March 1981 as a Managing Director in the Corporate Finance
Department. He
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currently manages DWR's Retail Products Group within the Corporate Finance
Department. While Mr. Oelsner has extensive experience in the securities
industry, he has no experience in futures interests trading.
Robert E. Murray, age 37, is a Director of the General Partner. Mr. Murray
is also a Director of DWFCM. Mr. Murray is currently a Senior Vice President of
DWR's Managed Futures Department and is the Senior Administrative Officer of
DWFCM. Mr. Murray began his career at DWR in 1984 and is currently the Director
of the Managed Futures Department. In this capacity, Mr. Murray is responsible
for overseeing all aspects of the firm's Managed Futures Department. Mr. Murray
currently serves as a Director of the Managed Funds Association, an industry
association for investment professionals in futures, hedge funds and other
alternative investments. Mr. Murray graduated from Geneseo State University in
May 1983 with a B.A. degree in Finance.
Lewis A. Raibley, III, age 37, is Vice President and Chief Financial
Officer of the General Partner. Mr. Raibley is currently Senior Vice President
and Controller in the Individual Asset Management Group of MSDW. From July 1997
to May 1998, Mr. Raibley served as Senior Vice President and Director in the
Internal Reporting Department of MSDW and prior to that, from 1992 to 1997, he
served as Senior Vice President and Director in the Financial Reporting and
Policy Division of Dean Witter Discover & Co. ("DWD"). He has been with DWD and
its affiliates since June 1986.
Laurence E. Mollner is no longer a Director of the General Partner and
Patti L. Behnke is no longer a Vice President and Chief Financial Officer of the
General Partner.
The General Partner and its officers and directors may, from time to time,
trade commodity interest contracts for their own proprietary accounts. The
records of trading in such accounts will not be made available to Limited
Partners for inspection.
There have been no administrative, civil or criminal actions against the
General Partner or any of its principals within the five years preceding the
date of this Prospectus which the General Partner believes would be material to
an investors' decision to Exchange Units.
As of August 31, 1998 the General Partner had contributed a total of
$3,771,003 to Cornerstone II, III and IV in order to meet its minimum capital
requirements. Such contribution is evidenced by approximately 217.400 units of
general partnership interest of Cornerstone II, 382.103 units of general
partnership interest of Cornerstone III and 638.889 units of general partnership
interest of Cornerstone IV. Each such unit of general partnership interest has a
net asset value equal to the Net Asset Value of a Unit of Limited Partnership
Interest of the respective Partnership. The General Partner has agreed to make
additional contributions to each Partnership so that the General Partner's
aggregate capital contribution will at all times be equal to the sum of (i) the
lesser of $100,000 or 3% of the first $10,000,000 in aggregate capital
contributions to such Partnership by all partners (including the General
Partner's contribution) and (ii) 1% of any such aggregate capital contributions
in excess of $10,000,000; but not less than $50,000. The General Partner and its
principals are not obligated to purchase Units of Limited Partnership Interest
and do not presently own any Units of Cornerstone II. A principal of the General
Partner owns 2.750 Units of Cornerstone III and 4.856 Units of Cornerstone IV.
THE FOLLOWING UPDATES AND REPLACES "THE COMMODITY BROKER" ON PAGES 79-80.
THE COMMODITY BROKERS
DESCRIPTION OF THE COMMODITY BROKERS
Dean Witter Reynolds Inc. ("DWR"), a Delaware corporation, acts as the
Partnerships' non-clearing commodity broker, and Carr Futures, Inc. ("CFI" and,
together with DWR, the "Commodity Brokers"), a Delaware corporation, acts as the
clearing broker for the Partnerships' commodity interests trades and as the
counterparty on the Partnerships' foreign currency forward contracts. DWR also
serves as the non-clearing commodity broker for all but one of the other
commodity pools for which Demeter serves as general partner and commodity pool
operator, and CFI serves as the clearing broker and foreign currency forward
counterparty for such commodity pools.
DWR is a principal operating subsidiary of MSDW, which is a publicly-owned
company. DWR is a financial services company which provides to its individual,
corporate and institutional clients services as a broker in securities and
commodity interests, a dealer in corporate, municipal and government securities,
an investment adviser, and an agent in the sale of life insurance and various
other products and services. DWR is a member firm of the New York Stock
Exchange, the American Stock Exchange, the Chicago Board Options Exchange, other
major securities exchanges, and the National Association of Securities Dealers,
Inc. ("NASD"). DWR is registered with the CFTC as a futures commission merchant
and is a member of the NFA in such capacity. DWR
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is currently servicing its clients through a network of 415 offices nationwide
with over 10,000 financial advisors servicing individual and institutional
client accounts.
CFI is a subsidiary of Credit Agricole Indosuez, which had total equity of
approximately $6.28 billion at December 31, 1997 and which is itself a
subsidiary of Caisse Nationale de Credit Agricole, one of the ten largest banks
in the world. CFI's parent has guaranteed to each Partnership payment of the net
liquidating value of the transactions in the Partnership's account with CFI. CFI
has been registered under the CEAct as a futures commission merchant and has
been a member of the NFA in such capacity since August 1987. CFI's global
headquarters is located at 10 South Wacker Drive, Suite 1100, Chicago, Illinois
60606. CFI acts as a commodity broker to individuals, corporate and
institutional clients and is a clearing member of the Chicago Board of Trade,
the Chicago Mercantile Exchange, the Commodity Exchange Inc., and other major
commodities exchanges.
In 1997, following the merger of the parent of DWR and Morgan Stanley Group
Inc., DWR sold its institutional futures business and foreign currency trading
operations (including futures exchange and clearinghouse memberships, equipment,
records and relevant personnel) to CFI. The sale did not involve or otherwise
affect the operations or personnel of DWR's Managed Futures Department or
Demeter Management Corporation, the general partner of the Partnerships. Because
DWR no longer maintained a futures clearing and foreign currency business, and
so as to provide continuity of trading operations, the Partnerships' futures
clearing and foreign currency accounts (along with the accounts of Demeter's
other commodity pools), were transferred to CFI. While CFI now acts as the
counterparty on the Partnerships' foreign currency trades and acts as the
clearing broker for the Partnerships' futures contracts and futures options
trades, DWR acts as the non-clearing commodity broker for the Partnerships and
continues to hold most (70-80%) of the Partnerships' assets.
BROKERAGE ARRANGEMENTS
In light of DWR's role as the non-clearing commodity broker and CFI's role
as the clearing commodity broker, the Partnership's brokerage arrangements
discussed in "Conflicts of Interest--Relationship of the General Partner to the
Commodity Broker" and "--Customer Agreement with DWR" and "Description of
Charges to Each Partnership--1. Commodity Broker" should be read to reflect such
change.
RELATED RISK FACTORS
THE FOLLOWING UPDATES "RISK FACTORS--SPECIAL RISKS ASSOCIATED WITH FORWARD
TRADING" ON PAGE 10.
The risks relating to the principal on the forward trades should now be
read as applying solely to CFI, which, as described above, is the counterparty
on the Partnerships' foreign currency forward contract trades.
THE FOLLOWING REPLACES THE FOURTH SENTENCE OF THE FIRST PARAGRAPH UNDER
"RISK FACTORS--SPECIAL RISKS ASSOCIATED WITH TRADING ON FOREIGN EXCHANGES" ON
PAGE 10.
The General Partner attempts to monitor and control the credit exposure of
trading on foreign exchanges. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Instruments" beginning
on page S-13.
THE FOLLOWING REPLACES "RISK FACTORS--THE PARTNERSHIPS HAVE CREDIT RISKS TO
DWR" ON PAGE 11.
THE PARTNERSHIPS HAVE CREDIT RISK TO THE COMMODITY BROKERS. The
Partnerships have credit risk because DWR and CFI act as the futures commission
merchants or the counterparty with respect to most of the Partnerships' assets.
Exchange-traded futures and futures styled options contracts are marked to
market on a daily basis, with variations in value credited or charged to a
Partnership's account on a daily basis. Each of DWR and CFI, as a futures
commission merchant for each Partnership's exchange-traded futures contracts, is
required, pursuant to CFTC regulations, to segregate from its own assets, and
for the sole benefit of its commodity customers, all funds held by it with
respect to exchange-traded futures and futures styled options contracts,
including an amount equal to the net unrealized gain on all open futures and
futures styled options contracts. With respect to a Partnership's
off-exchange-traded foreign currency forward contracts with CFI, there are no
daily settlements of variations in value. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Instruments" beginning on page S-13.
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THE FOLLOWING SECTION IS TO BE INSERTED BEFORE "THE COMMODITIES MARKET" ON
PAGE 80.
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,
Dean Witter Futures and Currency Management Inc., MSDW (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. On June
16, 1997, the plaintiffs in the above actions filed a consolidated amended
complaint, alleging, among other things, that the defendants committed fraud,
deceit, negligent misrepresentation, various violations of the California
Corporations Code, intentional and negligent breach of fiduciary duty,
fraudulent and unfair business practices, unjust enrichment, and conversion in
the sale and operation of the various limited partnerships commodity 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. A consolidated and amended complaint in
the action pending in the Supreme Court of the State of New York was filed on
August 13, 1997, alleging that the defendants committed fraud, breach of
fiduciary duty, and negligent misrepresentation in the sale and operation of the
various limited partnership commodity pools. On December 16, 1997, upon motion
of the plaintiffs, the action pending in the Superior Court of the State of
Delaware was voluntarily dismissed without prejudice. 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.
At any given time, CFI is involved in various legal actions. On July 31,
1992, a CFTC Administrative Law Judge ("ALJ") ordered CFI to pay a former client
of the firm approximately $1.7 million in damages, plus interest and costs,
based upon certain alleged misrepresentations made by a former account
executive. Al Baraka Investment and Development Corp. vs. Indosuez Carr Futures,
Inc. (CFTC Docket No. 91-R-126). On May 3, 1993, the CFTC issued an Order of
Summary Affirmance, which affirmed the ALJ's decision, and the U.S. Court of
Appeals for the Seventh Circuit affirmed the CFTC order in June, 1994.
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 CFI or any of its
principals, which CFI 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 September 1, 1998, 14,587.240 unsold Units of Limited Partnership
Interest were available for purchase pursuant to Exchanges.
S-33
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUPPLEMENTS THE INFORMATION UNDER "MATERIAL FEDERAL INCOME
TAX CONSIDERATIONS" ON PAGES 92-99.
The recently enacted Taxpayer Relief Act of 1997, among other things,
provides that long-term capital gains for individual Limited Partners are taxed
at a maximum marginal rate of 20%. Prospective investors should consult their
tax advisors regarding this change and other changes in federal, state and local
tax laws.
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, 1997 and 1996, 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, 1997 and the statement of financial condition of
Demeter Management Corporation as of November 30, 1997 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 MSDW.
S-34
<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, 1997
and 1996 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,
1997. These financial statements are the responsibility of the Partnerships'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dean Witter Cornerstone Fund II, Dean
Witter Cornerstone Fund III and Dean Witter Cornerstone Fund IV, as of December
31, 1997 and 1996 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
February 17, 1998
New York, New York
S-35
<PAGE>
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
---------- ---------------------------
1998 1997 1996
---------- ---------- ----------
(UNAUDITED)
ASSETS $ $ $
<S> <C> <C> <C>
Equity in Commodity futures trading accounts:
Cash 28,907,166 29,293,294 28,509,266
Net unrealized gain on open contracts 1,763,384 2,003,679 1,316,434
---------- ---------- ----------
Total Trading Equity 30,670,550 31,296,973 29,825,700
Interest receivable (DWR) 100,800 106,167 97,815
Due from DWR 73,771 27,883 123,327
---------- ---------- ----------
Total Assets 30,845,121 31,431,023 30,046,842
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accrued incentive fees 78,138 618,270 316,750
Redemptions payable 220,487 199,022 442,706
Accrued management fees 102,351 104,350 99,352
Common administrative expenses payable 37,477 21,640 52,339
Accrued brokerage commissions (DWR) -- -- 83,967
Accrued transaction fees and costs -- -- 5,558
---------- ---------- ----------
Total Liabilities 438,453 943,282 1,000,672
---------- ---------- ----------
PARTNERS' CAPITAL
Limited Partners (7,657.634, 7,967.401 and
8,987.942 Units, respectively) 29,567,255 29,677,943 28,360,195
General Partner (217.400 Units) 839,413 809,798 685,975
---------- ---------- ----------
Total Partners' Capital 30,406,668 30,487,741 29,046,170
---------- ---------- ----------
Total Liabilities and Partners' Capital 30,845,121 31,431,023 30,046,842
---------- ---------- ----------
---------- ---------- ----------
NET ASSET VALUE PER UNIT 3,861.15 3,724.92 3,155.36
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------- ----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
$ $
REVENUES (UNAUDITED) (UNAUDITED) $ $ $
<S> <C> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 2,139,556 2,263,382 6,363,803 7,321,679 11,081,716
Net change in unrealized (240,295) (333,627) 687,245 (2,051,673) (947,973)
---------- ---------- ---------- ---------- ----------
Total Trading Results 1,899,261 1,929,755 7,051,048 5,270,006 10,133,743
Interest income (DWR) 598,276 628,176 1,228,298 1,179,784 1,471,022
---------- ---------- ---------- ---------- ----------
Total Revenues 2,497,537 2,557,931 8,279,346 6,449,790 11,604,765
---------- ---------- ---------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 706,483 662,114 1,383,112 1,719,932 1,864,093
Management fees 587,455 566,449 1,159,248 1,167,223 1,307,872
Incentive fees 78,138 92,628 650,800 329,590 381,720
Transaction fees and costs 65,144 61,846 128,692 170,971 160,238
Common administrative expenses 19,256 21,824 41,330 14,612 8,183
---------- ---------- ---------- ---------- ----------
Total Expenses 1,456,476 1,404,861 3,363,182 3,402,328 3,722,106
---------- ---------- ---------- ---------- ----------
NET INCOME 1,041,061 1,153,070 4,916,164 3,047,462 7,882,659
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Income Allocation:
Limited Partners 1,011,446 1,127,331 4,792,341 2,976,870 7,753,763
General Partner 29,615 25,739 123,823 70,592 128,896
Net Income per Unit:
Limited Partners 136.23 118.40 569.56 324.71 592.90
General Partner 136.23 118.40 569.56 324.71 592.90
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-36
<PAGE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
---------- ---------------------------
1998 1997 1996
---------- ---------- ----------
$
ASSETS (UNAUDITED) $ $
<S> <C> <C> <C>
Equity in Commodity futures trading accounts:
Cash 40,755,926 39,762,715 40,587,011
Net unrealized gain on open contracts 1,485,060 1,938,295 2,580,803
Net option premiums (434,870) (158,765) (291,412)
---------- ---------- ----------
Total Trading Equity 41,806,116 41,542,245 42,876,402
Interest receivable (DWR) 144,065 145,100 138,367
Due from DWR 166,428 94,981 122,701
---------- ---------- ----------
Total Assets 42,116,609 41,782,326 43,137,470
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 422,473 429,759 680,730
Accrued management fees 139,503 138,480 142,387
Common administrative expenses payable 126,176 99,713 137,548
Accrued brokerage commissions (DWR) -- -- 129,098
Accrued transaction fees and costs -- -- 12,349
---------- ---------- ----------
Total Liabilities 688,152 667,952 1,102,112
---------- ---------- ----------
PARTNERS' CAPITAL
Limited Partners (12,757.648, 13,352.334 and
15,097.603 Units, respectively) 40,223,720 39,970,539 40,997,752
General Partner (382.103 Units) 1,204,737 1,143,835 1,037,606
---------- ---------- ----------
Total Partners' Capital 41,428,457 41,114,374 42,035,358
---------- ---------- ----------
Total Liabilities and Partners' Capital 42,116,609 41,782,326 43,137,470
---------- ---------- ----------
---------- ---------- ----------
NET ASSET VALUE PER UNIT 3,152.91 2,993.52 2,715.51
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------- ----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
$ $
REVENUES (UNAUDITED) (UNAUDITED) $ $ $
<S> <C> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 3,823,062 6,703,472 7,439,669 8,925,181 14,260,042
Net change in unrealized (453,235) (1,271,432) (642,508) (2,997,491) 561,437
---------- ---------- ---------- ---------- ----------
Total Trading Results 3,369,827 5,432,040 6,797,161 5,927,690 14,821,479
Interest income (DWR) 857,814 899,908 1,786,271 1,657,400 2,061,461
---------- ---------- ---------- ---------- ----------
Total Revenues 4,227,641 6,331,948 8,583,432 7,585,090 16,882,940
---------- ---------- ---------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 1,092,856 1,184,270 2,294,914 2,772,496 3,499,743
Management fees 836,091 877,608 1,728,062 1,629,715 1,828,013
Transaction fees and costs 110,653 114,093 229,570 379,973 502,332
Common administrative expenses 32,174 36,352 69,344 24,702 21,158
---------- ---------- ---------- ---------- ----------
Total Expenses 2,071,774 2,212,323 4,321,890 4,806,886 5,851,246
---------- ---------- ---------- ---------- ----------
NET INCOME 2,155,867 4,119,625 4,261,542 2,778,204 11,031,694
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Income Allocation:
Limited Partners 2,094,965 4,016,671 4,155,313 2,699,171 10,824,963
General Partner 60,902 102,954 106,229 79,033 206,731
Net Income per Unit:
Limited Partners 159.39 269.44 278.01 206.83 541.04
General Partner 159.39 269.44 278.01 206.83 541.04
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-37
<PAGE>
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
----------- ----------------------------
1998 1997 1996
----------- ----------- ----------
$
ASSETS (UNAUDITED) $ $
<S> <C> <C> <C>
Equity in Commodity futures trading accounts:
Cash 116,634,568 119,181,131 91,656,399
Net unrealized gain on open contracts 11,738,740 1,815,112 5,330,520
----------- ----------- ----------
Total Trading Equity 128,373,308 120,996,243 96,986,919
Interest receivable (DWR) 379,076 382,307 305,391
----------- ----------- ----------
Total Assets 128,752,384 121,378,550 97,292,310
----------- ----------- ----------
----------- ----------- ----------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Incentive fees payable 2,192,552 1,594,371 --
Redemptions payable 1,018,602 899,127 1,269,513
Accrued management fees 427,338 403,011 322,552
Common administrative expenses payable 123,674 72,297 126,007
Accrued brokerage commissions (DWR) -- -- 74,340
Accrued transaction fees and costs -- -- 3,654
----------- ----------- ----------
Total Liabilities 3,762,166 2,968,806 1,796,066
----------- ----------- ----------
PARTNERS' CAPITAL
Limited Partners (24,944.941, 26,057.228 and
29,160.287 Units, respectively) 121,868,915 115,575,973 93,448,822
General Partner (638.889 Units) 3,121,303 2,833,771 2,047,422
----------- ----------- ----------
Total Partners' Capital 124,990,218 118,409,744 95,496,244
----------- ----------- ----------
Total Liabilities and Partners' Capital 128,752,384 121,378,550 97,292,310
----------- ----------- ----------
----------- ----------- ----------
NET ASSET VALUE PER UNIT 4,885.52 4,435.47 3,204.66
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
$ $
REVENUES (UNAUDITED) (UNAUDITED) $ $ $
<S> <C> <C> <C> <C> <C>
Trading Profit (Loss):
Realized 4,527,313 17,204,603 42,691,318 10,304,825 27,041,974
Net change in unrealized 9,923,628 (5,601,735) (3,515,408) 5,260,377 (198,148)
---------- ---------- ---------- ---------- ----------
Total Trading
Results 14,450,941 11,602,868 39,175,910 15,565,202 26,843,826
Interest income (DWR) 2,302,693 2,048,277 4,200,571 3,924,420 4,912,698
---------- ---------- ---------- ---------- ----------
Total Revenues 16,753,634 13,651,145 43,376,481 19,489,622 31,756,524
---------- ---------- ---------- ---------- ----------
EXPENSES
Brokerage commissions
(DWR) 1,202,871 1,478,595 2,656,715 3,781,486 2,776,225
Management fees 2,333,334 2,052,759 4,287,974 3,904,737 4,575,372
Incentive fees 1,618,729 -- 1,594,371 -- --
Transaction fees and costs 60,647 90,957 171,578 222,993 168,718
Common administrative
expenses 62,565 70,539 134,041 47,685 39,890
---------- ---------- ---------- ---------- ----------
Total Expenses 5,278,146 3,692,850 8,844,679 7,956,901 7,560,205
---------- ---------- ---------- ---------- ----------
NET INCOME 11,475,488 9,958,295 34,531,802 11,532,721 24,196,319
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net Income Allocation:
Limited Partners 11,187,956 9,745,978 33,745,453 11,297,656 23,857,922
General Partner 287,532 212,317 786,349 235,065 338,397
Net Income per Unit:
Limited Partners 450.05 332.32 1,230.81 367.93 529.66
General Partner 450.05 332.32 1,230.81 367.93 529.66
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-38
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<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, 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
Offering of Units 94.328 314,932 -- 314,932
Net Income -- 4,792,341 123,823 4,916,164
Redemptions (1,114.869) (3,789,525) -- (3,789,525)
----------- ------------ ---------- ------------
Partners' Capital, December 31, 1997 8,184.801 29,677,943 809,798 30,487,741
Offering of Units 8.044 29,966 -- 29,966
Net Income -- 1,011,446 29,615 1,041,061
Redemptions (317.811) (1,152,100) -- (1,152,100)
----------- ------------ ---------- ------------
Partners' Capital, June 30, 1998 7,875.034 29,567,255 839,413 30,406,668
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
DEAN WITTER CORNERSTONE FUND III
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
Offering of Units 1.841 5,000 -- 5,000
Net Income -- 4,155,313 106,229 4,261,542
Redemptions (1,747.110) (5,187,526) -- (5,187,526)
----------- ------------ ---------- ------------
Partners' Capital, December 31, 1997 13,734.437 39,970,539 1,143,835 41,114,374
Offering of Units 5.184 15,998 -- 15,998
Net Income -- 2,094,965 60,902 2,155,867
Redemptions (599.870) (1,857,782) -- (1,857,782)
----------- ------------ ---------- ------------
Partners' Capital, June 30, 1998 13,139.751 40,223,720 1,204,737 41,428,457
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
DEAN WITTER CORNERSTONE FUND IV
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
Offering of Units 57.083 223,794 -- 223,794
Net Income -- 33,745,453 786,349 34,531,802
Redemptions (3,160.142) (11,842,096) -- (11,842,096)
----------- ------------ ---------- ------------
Partners' Capital, December 31, 1997 26,696.117 115,575,973 2,833,771 118,409,744
Offering of Units 41.522 178,410 -- 178,410
Net Income -- 11,187,956 287,532 11,475,488
Redemptions (1,153.809) (5,073,424) -- (5,073,424)
----------- ------------ ---------- ------------
Partners' Capital, June 30, 1998 25,583.830 121,868,915 3,121,303 124,990,218
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-39
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------------------------
1998 1997 1997 1996 1995
----------- ---------- ----------- ----------- -----------
DEAN WITTER CORNERSTONE FUND II $ $ $ $ $
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income 1,041,061 1,153,070 4,916,164 3,047,462 7,882,659
Noncash item included in net income:
Net change in unrealized 240,295 333,627 (687,245) 2,051,673 947,973
(INCREASE) DECREASE IN OPERATING ASSETS:
Interest receivable (DWR) 5,367 3,668 (8,352) 9,670 17,183
Due from DWR (45,888) 93,708 95,444 (97,802) 24,860
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Accrued incentive fees (540,132) (246,483) 301,520 9,183 307,567
Accrued management fees (1,999) (5,258) 4,998 (4,886) (1,622)
Common administrative expenses payable 15,837 (14,550) (30,699) (28,975) (29,854)
Accrued brokerage commissions (DWR) -- (2,710) (83,967) (10,486) 13,185
Accrued transaction fees and costs -- 696 (5,558) (1,399) 1,237
----------- ---------- ----------- ----------- -----------
Net cash provided by operating activities 714,541 1,315,768 4,502,305 4,974,440 9,163,188
----------- ---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 29,966 304,200 314,932 155,468 178,837
Increase (decrease) in redemptions payable 21,465 (180,703) (243,684) 307,817 (251,210)
Redemptions of units (1,152,100) (2,607,578) (3,789,525) (4,985,648) (8,604,610)
----------- ---------- ----------- ----------- -----------
Net cash used for financing activities (1,100,669) (2,484,081) (3,718,277) (4,522,363) (8,676,983)
----------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash (386,128) (1,168,313) 784,028 452,077 486,205
Balance at beginning of period 29,293,294 28,509,266 28,509,266 28,057,189 27,570,984
----------- ---------- ----------- ----------- -----------
Balance at end of period 28,907,166 27,340,953 29,293,294 28,509,266 28,057,189
----------- ---------- ----------- ----------- -----------
----------- ---------- ----------- ----------- -----------
<CAPTION>
DEAN WITTER CORNERSTONE FUND III
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 2,155,867 4,119,625 4,261,542 2,778,204 11,031,694
Noncash item included in net income:
Net change in unrealized 453,235 1,271,432 642,508 2,997,491 (561,437)
(INCREASE) DECREASE IN OPERATING ASSETS:
Net option premiums 276,105 (251,237) (132,647) 291,412 --
Interest receivable (DWR) 1,035 (5,728) (6,733) 21,313 33,368
Due from DWR (71,447) (59,977) 27,720 1,755 89,133
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Accrued management fees 1,023 2,996 (3,907) (16,243) (265)
Common administrative expenses payable 26,463 (10,677) (37,835) (84,488) (44,369)
Accrued brokerage commissions (DWR) -- (2,747) (129,098) (37,030) (34,476)
Accrued transaction fees and costs -- (4,251) (12,349) (8,629) 7,239
----------- ---------- ----------- ----------- -----------
Net cash provided by operating activities 2,842,281 5,059,436 4,609,201 5,943,785 10,520,887
----------- ---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 15,998 5,000 5,000 8,388 49,000
Increase (decrease) in redemptions payable (7,286) (313,285) (250,971) 41,381 (26,829)
Redemptions of units (1,857,782) (2,912,582) (5,187,526) (7,700,908) (11,133,473)
----------- ---------- ----------- ----------- -----------
Net cash used for financing activities (1,849,070) (3,220,867) (5,433,497) (7,651,139) (11,111,302)
----------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash 993,211 1,838,569 (824,296) (1,707,354) (590,415)
Balance at beginning of period 39,762,715 40,587,011 40,587,011 42,294,365 42,884,780
----------- ---------- ----------- ----------- -----------
Balance at end of period 40,755,926 42,425,580 39,762,715 40,587,011 42,294,365
----------- ---------- ----------- ----------- -----------
----------- ---------- ----------- ----------- -----------
<CAPTION>
DEAN WITTER CORNERSTONE FUND IV
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 11,475,488 9,958,295 34,531,802 11,532,721 24,196,319
Noncash item included in net income:
Net change in unrealized (9,923,628) 5,601,735 3,515,408 (5,260,377) 198,148
(INCREASE) DECREASE IN OPERATING ASSETS:
Interest receivable (DWR) 3,231 (22,169) (76,916) 59,356 69,406
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Accrued incentive fees 598,181 -- 1,594,371 -- --
Accrued management fees 24,327 8,146 80,459 (26,487) (22,567)
Common administrative expenses payable 51,377 (873) (53,710) (141,781) (89,342)
Accrued brokerage commissions (DWR) -- 3,276 (74,340) 41,760 32,580
Accrued transaction fees and costs -- 913 (3,654) 2,025 1,629
----------- ---------- ----------- ----------- -----------
Net cash provided by operating activities 2,228,976 15,549,323 39,513,420 6,207,217 24,386,173
----------- ---------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering of units 178,410 39,545 223,794 108,665 212,691
Increase (decrease) in redemptions payable 119,475 (588,354) (370,386) 224,709 (544,818)
Redemptions of units (5,073,424) (6,965,751) (11,842,096) (19,812,153) (30,634,265)
----------- ---------- ----------- ----------- -----------
Net cash used for financing activities (4,775,539) (7,514,560) (11,988,688) (19,478,779) (30,966,392)
----------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash (2,546,563) 8,034,763 27,524,732 (13,271,562) (6,580,219)
Balance at beginning of period 119,181,131 91,656,399 91,656,399 104,927,961 111,508,180
----------- ---------- ----------- ----------- -----------
Balance at end of period 116,634,568 99,691,162 119,181,131 91,656,399 104,927,961
----------- ---------- ----------- ----------- -----------
----------- ---------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-40
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION WITH RESPECT TO 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--Dean Witter Cornerstone Fund II, Dean Witter Cornerstone Fund
III and Dean Witter Cornerstone Fund IV (individually, a "Partnership", or
collectively, the "Partnerships") are limited partnerships organized to engage
in the speculative trading of commodity futures contracts and forward contracts
on foreign currencies. The general partner for each Partnership is Demeter
Management Corporation ("Demeter"). The non-clearing commodity broker is Dean
Witter Reynolds Inc. ("DWR"), with an unaffiliated broker, Carr Futures, Inc.
("CFI"), providing clearing and execution services. Demeter and DWR are wholly-
owned subsidiaries of Morgan Stanley Dean Witter & Co. ("MSDW").
Demeter is required to maintain a 1% minimum interest in the equity of each
Partnership and income (losses) are shared by the General and Limited Partners
based upon their proportional ownership interests.
Basis of Accounting--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements.
Revenue Recognition--Commodity futures contracts and forward contracts on
foreign currencies are open commitments until settlement date. They are valued
at market and the resulting unrealized gains and losses are reflected in income.
Monthly, DWR pays each Partnership interest income on 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' asset
"Equity in Commodity futures trading accounts" consists of cash on deposit at
DWR and CFI to be used as margin for trading and the net asset or liability
related to unrealized gains or losses on open contracts and the net option
premium paid and/or received. The asset or liability related to the unrealized
gains or losses on forward contracts is presented as a net amount in each period
due to master netting agreements.
Brokerage Commissions and Related Transaction Fees and Costs--Brokerage
commissions for each Partnership are accrued at 80% of DWR's published
non-member rates on a half-turn basis. Related transaction fees and costs are
accrued on a half-turn basis.
Through March 31, 1995, brokerage commissions were capped at 1% per month
of the adjusted Net Assets allocated to each trading program employed by a
Trading Advisor. From April 1, 1995 through August 31, 1996, the cap was reduced
to 3/4 of 1%.
As of 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
program.
Operating Expenses--Each Partnership has entered into an exchange agreement
pursuant to which certain common administrative expenses (i.e., legal, auditing,
accounting, filing fees and other related expenses) are shared by each of the
Partnerships based upon the number of Units of each Partnership outstanding
during the month in which such expenses are incurred. In addition, the
Partnerships incur monthly management fees and may incur incentive fees. Demeter
bears all other operating expenses.
Income Taxes--No provision for income taxes has been made in the
accompanying financial statements, as partners are individually responsible for
reporting income or loss based upon their respective share of each Partnership's
revenues and expenses for income tax purposes.
Distributions--Distributions, other than on redemptions of Units, are made
on a pro-rata basis at the sole discretion of Demeter. No distributions have
been made to date.
Redemptions--Limited Partners may redeem some or all of their Units at 100%
of the Net Asset Value per Unit as of the last day of any month upon fifteen
days advance notice by redemption form to Demeter.
S-41
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Exchanges--Limited Partners may transfer their investment among the
Partnerships (subject to certain restrictions outlined in the Limited
Partnership Agreement) without paying additional charges.
Dissolution of the Partnership--Each Partnership will terminate on
September 30, 2025 regardless of its financial condition at such time, upon a
decline in Net Assets to less than $250,000, a decline in the Net Asset Value
per Unit to less than $250, or under certain other circumstances defined in each
Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
Each Partnership pays brokerage commissions to DWR on trades executed on
its behalf as described in Note 1. Each Partnership's cash is on deposit with
DWR and CFI in commodity trading accounts to meet margin requirements as needed.
DWR pays interest on these funds as described in Note 1.
3. TRADING ADVISORS
Demeter, on behalf of each Partnership, retains certain commodity trading
advisors to make all trading decisions for the Partnerships. The trading
advisors for each Partnership as of June 30, 1998 were as follows:
Dean Witter Cornerstone Fund II
Northfield Trading L.P.
John W. Henry & Company, Inc. ("JWH")
Dean Witter Cornerstone Fund III
Abraham Trading Co.
Welton Investment Corporation (formerly, Welton Investment Systems
Corporation)
Sunrise Capital Management, Inc.
Dean Witter Cornerstone Fund IV
John W. Henry & Company, Inc.
Sunrise Capital Management, Inc.
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 pays 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
pays 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.
S-42
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 June 30, 1998, December 31,
1997 and 1996 open contracts were:
<TABLE>
<CAPTION>
CORNERSTONE II
---------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
---------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
$ $ $
(UNAUDITED)
<S> <C> <C> <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase.......................... 45,422,000 30,057,000 18,287,000
Commitments to Sell.............................. 7,218,000 13,539,000 70,723,000
Commodity Futures:
Commitments to Purchase.......................... 1,818,000 6,148,000 6,346,000
Commitments to Sell.............................. 13,913,000 15,082,000 14,596,000
Foreign Futures:
Commitments to Purchase.......................... 43,703,000 25,543,000 57,075,000
Commitments to Sell.............................. 46,423,000 20,799,000 8,798,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase.......................... 37,819,000 17,705,000 26,688,000
Commitments to Sell.............................. 73,791,000 46,518,000 18,334,000
<CAPTION>
CORNERSTONE III
---------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
---------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
$ $ $
(UNAUDITED)
<S> <C> <C> <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase.......................... 122,408,000 50,242,000 118,163,000
Commitments to Sell.............................. 31,187,000 21,172,000 59,405,000
Options Written.................................. 52,599,000 -- 18,613,000
Commodity Futures:
Commitments to Purchase.......................... 7,475,000 8,055,000 17,683,000
Commitments to Sell.............................. 26,339,000 31,622,000 22,811,000
Options Written.................................. 866,000 -- 18,407,000
Foreign Futures:
Commitments to Purchase.......................... 98,266,000 50,870,000 62,344,000
Commitments to Sell.............................. 46,681,000 42,064,000 22,390,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase.......................... 24,223,000 27,863,000 420,000
Commitments to Sell.............................. 34,530,000 41,794,000 1,379,000
</TABLE>
S-43
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CORNERSTONE IV
---------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
---------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
$ $ $
(UNAUDITED)
<S> <C> <C> <C>
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase.......................... -- -- 93,583,000
Commitments to Sell.............................. -- -- 118,029,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase.......................... 275,653,000 218,670,000 208,140,000
Commitments to Sell.............................. 476,596,000 427,237,000 205,227,000
</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:
<TABLE>
<CAPTION>
---------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
$ $ $
(UNAUDITED)
<S> <C> <C> <C>
Cornerstone II........................................ 1,763,384 2,003,679 1,316,434
Cornerstone III....................................... 1,485,060 1,938,295 2,580,803
Cornerstone IV........................................ 11,738,740 1,815,112 5,330,520
</TABLE>
For Cornerstone II, of the $1,763,384 net unrealized gain on open contracts
at June 30, 1998, $744,856 related to exchange-traded futures contracts and
$1,018,528 related to off-exchange-traded forward currency contracts. Of the
$2,003,679 net unrealized gain on open contracts at December 31, 1997,
$1,675,343 related to exchange-traded futures contracts and $328,336 related to
off-exchange-traded forward currency contracts. 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, of the $1,485,060 net unrealized gain on open
contracts at June 30, 1998, $1,264,297 related to exchange-traded futures
contracts and $220,763 related to off-exchange-traded forward currency
contracts. Of the $1,938,295 net unrealized gain on open contracts at December
31, 1997, $2,168,497 related to exchange-traded futures contracts and $(230,202)
related to off-exchange-traded forward currency contracts. 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.
For Cornerstone IV, of the $11,738,740 net unrealized gain on open
contracts at June 30, 1998, all related to off-exchange-traded forward currency
contracts. Of the $1,815,112 net unrealized gain on open contracts at December
31, 1997, all related to off-exchange-traded forward currency contracts. 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.
The contract amounts in the above table represent each Partnership's extent
of involvement in the particular class of financial instrument, but not the
credit risk associated with counterparty non-performance. The credit risk
associated with these instruments is limited to the amounts reflected in each
Partnership's Statements of Financial Condition.
S-44
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Exchange-traded contracts and off-exchange-traded forward currency
contracts held by the Partnerships at June 30, 1998, December 1997 and 1996
mature as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------- ------------------------------------
1998 1997 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CORNERSTONE II
Exchange-Traded Contracts....................................... June 1999 December 1998 June 1998
Off-Exchange-Traded Forward Currency Contracts.................. September 1998 March 1998 March 1997
CORNERSTONE III
Exchange-Traded Contracts....................................... June 1999 June 1998 June 1997
Off-Exchange-Traded Forward Currency Contracts.................. September 1998 March 1998 January 1997
CORNERSTONE IV
Exchange-Traded Contracts....................................... -- September 1998 March 1997
Off-Exchange-Traded Forward Currency Contracts.................. September 1998 April 1998 March 1997
</TABLE>
The Partnerships also have credit risk because DWR and CFI act as the
futures commission merchants or the counterparties, with respect to most of the
Partnerships' assets. Exchange-traded futures and futures styled options
contracts are marked to market on a daily basis, with variations in value
settled on a daily basis. Each of DWR and CFI, as a futures commission merchant
for each Partnership's exchange-traded futures and futures styled options
contracts, are required pursuant to regulations of the Commodity Futures Trading
Commission to segregate from their own assets, and for the sole benefit of their
commodity customers, all funds held by them with respect to exchange-traded
futures contracts and futures styled options, including an amount equal to the
net unrealized gain on all open futures and futures styled options contracts,
which funds totaled at June 30, 1998, December 31, 1997 and 1996, respectively,
$29,652,022, $30,968,637 and $29,851,316 for Cornerstone II, $42,020,223,
$41,931,212 and $43,176,300 for Cornerstone III, and $116,634,568, $119,181,131
and $97,006,924 for Cornerstone IV. With respect to each Partnership's
off-exchange-traded forward currency contracts, there are no daily settlements
of variations in value nor is there any requirement that an amount equal to the
net unrealized gain on open forward contracts be segregated. With respect to
those off-exchange-traded forward currency contracts, the Partnerships are at
risk to the ability of Carr, the sole counterparty on all of such contracts, to
perform. CFI's parent, Credit Agricole Indosuez, has guaranteed to the
Partnerships payment of the net liquidating value of the transactions in the
Partnerships' accounts with CFI (including foreign currency contracts).
For the six months ended June 30, 1998 and years ended December 31, 1997
and 1996 the average fair value of financial instruments held for trading
purposes was as follows:
<TABLE>
<CAPTION>
CORNERSTONE II
-----------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
FOR THE SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------------------
(UNAUDITED) 1997 1996
---------------------------- ---------------------------- ----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- ----------- ----------- -----------
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
EXCHANGE-TRADED
CONTRACTS:
Financial Futures... 23,042,000 18,153,000 32,004,000 25,556,000 48,469,000 47,433,000
Commodity Futures... 4,030,000 13,173,000 14,417,000 12,696,000 24,459,000 22,228,000
Foreign Futures..... 32,710,000 18,537,000 26,042,000 10,396,000 43,821,000 14,875,000
OFF-EXCHANGE-TRADED
FORWARD CURRENCY
CONTRACTS............. 44,433,000 66,146,000 36,907,000 46,749,000 38,522,000 44,536,000
</TABLE>
S-45
<PAGE>
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
CORNERSTONE III
-----------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
FOR THE SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------------------
(UNAUDITED) 1997 1996
---------------------------- ---------------------------- ----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- ----------- ----------- -----------
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
EXCHANGE-TRADED
CONTRACTS:
Financial Futures... 69,901,000 18,786,000 82,881,000 46,462,000 105,128,000 74,480,000
Options on Financial
Futures............. -- 30,619,000 698,000 64,639,000 -- 10,138,000
Commodity Futures... 6,533,000 25,401,000 26,095,000 21,377,000 44,276,000 18,531,000
Options on Commodity
Futures............. -- 326,000 1,117,000 4,712,000 -- 2,763,000
Foreign Futures..... 75,410,000 27,048,000 44,764,000 26,219,000 80,000,000 27,228,000
Options on Foreign
Futures............. -- -- 7,229,000 -- -- --
OFF-EXCHANGE-TRADED
FORWARD CURRENCY
CONTRACTS............. 38,831,000 47,042,000 12,599,000 13,558,000 233,000 354,000
<CAPTION>
CORNERSTONE IV
-----------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED
FOR THE SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------------------
(UNAUDITED) 1997 1996
---------------------------- ---------------------------- ----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- ----------- ----------- -----------
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
EXCHANGE-TRADED
FINANCIAL
Futures Contracts..... -- -- 34,008,000 57,577,000 67,114,000 125,331,000
OFF-EXCHANGE-TRADED
FORWARD CURRENCY
CONTRACTS............. 366,771,000 502,262,000 299,407,000 414,754,000 334,452,000 334,461,000
</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., MSDW (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. On June
16, 1997, the plaintiffs in the above actions filed a consolidated amended
complaint alleging, among other things, that the defendants committed fraud,
deceit, negligent misrepresentation, various violations of the California
Corporations Code, intentional and negligent breach of fiduciary duty,
fraudulent and unfair business practices, unjust enrichment, and conversion in
the sale and operation of the various limited partnerships commodity 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. A consolidated and amended
complaint in the action pending in the Supreme Court of the State of New York
was filed on August 13, 1997, alleging that the defendants committed fraud,
breach of fiduciary duty, and negligent misrepresentation in the sale and
operation of the various limited partnership commodity pools. On December 16,
1997, upon motion of the plaintiffs, the action pending in the Supreme Court of
the State of Delaware was voluntarily dismissed without prejudice 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.
S-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Demeter Management Corporation:
We have audited the accompanying statement of financial condition of Demeter
Management Corporation (a wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co.) (the "Company") as of November 30, 1997. This statement
of financial condition is the responsibility of the Company's management. Our
responsibility is to express an opinion on this statement of financial condition
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of financial condition is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of financial condition. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement of financial
condition presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such statement of financial condition presents fairly, in all
material respects, the financial position of Demeter Management Corporation as
of November 30, 1997 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
January 12, 1998
New York, New York
S-47
<PAGE>
DEMETER MANAGEMENT CORPORATION
(WHOLLY-OWNED SUBSIDIARY OF MORGAN STANLEY DEAN WITTER & CO. ("MSDW"))
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
ASSETS 1998 1997
------------ ------------
(UNAUDITED)
$ $
<S> <C> <C>
Investments in affiliated partnerships (Note 2) 25,218,889 22,016,069
Receivable from affiliated partnership 27,705 968
Income taxes receivable -- 429,885
------------ ------------
Total Assets 25,246,594 22,446,922
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Payable to MSDW (Note 3) 17,831,371 17,995,100
Income taxes payable 1,290,426 --
Accrued expenses 28,828 34,072
------------ ------------
Total Liabilities 19,150,625 18,029,172
------------ ------------
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 5,945,969 4,267,750
------------ ------------
117,165,969 115,487,750
Less: Notes receivable from MSDW (Note 4) (111,070,000) (111,070,000)
------------ ------------
Total Stockholder's Equity 6,095,969 4,417,750
------------ ------------
Total Liabilities and Stockholder's Equity 25,246,594 22,446,922
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
S-48
<PAGE>
DEMETER MANAGEMENT CORPORATION
(WHOLLY-OWNED SUBSIDIARY OF MORGAN STANLEY DEAN WITTER & CO.)
NOTES TO STATEMENTS OF FINANCIAL CONDITION
(THE INFORMATION WITH RESPECT TO 1998 IS UNAUDITED)
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Demeter Management Corporation ("Demeter") is a wholly-owned subsidiary of
Morgan Stanley Dean Witter & Co. ("MSDW").
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, 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., 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 Global Perspective Portfolio L.P., Dean Witter
World Currency Fund L.P., Dean Witter Institutional Account II L.P., DWFCM
International Access Fund L.P., Dean Witter Anchor Institutional Balanced
Portfolio Account L.P. ("Anchor"), Dean Witter Spectrum Global Balanced L.P.
(formerly, Dean Witter Spectrum Balanced L.P.), Dean Witter Spectrum Select L.P.
(formerly, Dean Witter Select Futures Fund L.P.) ("DWSFF"), Dean Witter Spectrum
Strategic L.P., Dean Witter Spectrum Technical L.P., DWR Chesapeake L.P., DWR
Institutional Balanced Portfolio Account III L.P., DWR/JWH Futures Fund L.P. and
Morgan Stanley Tangible Asset Fund L.P. ("MSTAF").
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 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.
Demeter reopened DWPSF for additional investment and on May 12, 1997 DWPSF
registered with the SEC 50,000 units which were offered to investors for a
limited time in a public offering.
On July 31, 1997, Demeter entered into a limited partnership agreement as
general partner in MSTAF. On November 4, 1997, MSTAF registered with the SEC
5,000,000 units to be offered to investors for a limited time in a public
offering.
On September 18, 1997, Demeter ceased trading activities in Anchor and
distributed approximately 87% of Anchor's assets. Demeter will distribute the
remainder of Anchor's assets in 1998.
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 MSDW.
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
2. INVESTMENTS IN AFFILIATED PARTNERSHIPS
The limited partnership agreement of each commodity pool requires Demeter to
maintain a general partnership interest in each partnership, generally in an
amount equal to, but not less than, 1 percent of the aggregate capital
contributed to the partnership by all partners.
The total assets, liabilities and partners' capital of all the funds managed by
Demeter at August 31, 1998 and November 30, 1997 were as follows:
<TABLE>
<CAPTION>
AUGUST 31,
1998 NOVEMBER 30,
(UNAUDITED) 1997
-------------- --------------
<S> <C> <C>
$ $
Total assets................................................... 1,344,153,766 1,195,307,516
Total liabilities.............................................. 28,701,317 19,346,113
Total partners' capital........................................ 1,315,452,449 1,175,961,403
</TABLE>
Demeter's investments in the above limited partnerships are carried at market
value with changes in such market value reflected currently in operations.
S-49
<PAGE>
3. PAYABLE TO MSDW
The payable to MSDW is primarily for amounts due for the purchase of partnership
investments.
4. NET WORTH REQUIREMENT
At August 31, 1998 and November 30, 1997 Demeter held non-interest bearing notes
from MSDW 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 MSDW 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 Dean Witter Reynolds, Inc. ("DWR") an affiliate of
Demeter. Named defendants include DWR, Demeter, Dean Witter Futures and Currency
Management Inc., MSDW (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. On June 16,
1997, the plaintiffs in the above actions filed a consolidated amended
complaint, alleging, among other things, that the defendants committed fraud,
deceit, negligent misrepresentation, various violations of the California
Corporations Code, intentional and negligent breach of fiduciary duty,
fraudulent and unfair business practices, unjust enrichment, and conversion in
the sale and operation of the various limited partnerships commodity 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. A
consolidated and amended complaint in the action pending in the Supreme Court of
the State of New York was filed on August 13, 1997, alleging that the defendants
committed fraud, breach of fiduciary duty, and negligent misrepresentation in
the sale and operation of the various limited partnership commodity pools. On
December 16, 1997, upon motion of the plaintiffs, the action pending in the
Superior Court of the State of Delaware was voluntarily dismissed without
prejudice. 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.
S-50
<PAGE>
AMENDED ANNEX A TO LIMITED PARTNERSHIP AGREEMENT
THIS REQUEST SHOULD BE DELIVERED TO A LIMITED PARTNER'S LOCAL DWR BRANCH OFFICE
AND MUST BE RECEIVED BY THE GENERAL PARTNER AT LEAST 15 DAYS PRIOR TO THE LAST
DAY OF THE CALENDAR MONTH IN WHICH AN EXCHANGE IS TO BE EFFECTIVE.
DEAN WITTER CORNERSTONE FUNDS
REQUEST FOR EXCHANGE
EACH PARTNERSHIP WILL EXCHANGE UNITS OF LIMITED PARTNERSHIP INTEREST ONLY IN
WHOLE UNITS OR IN
MULTIPLES OF $1,000, UNLESS A LIMITED PARTNER IS LIQUIDATING HIS ENTIRE INTEREST
IN SUCH PARTNERSHIP.
___________________________, 19___
(Please date)
DEAN WITTER CORNERSTONE FUNDS
c/o Demeter Management Corporation
Two World Trade Center, 62nd Floor
New York, New York 10048
Attn: Managed Futures Account Department
Dear Sirs:
I hereby request an Exchange, as of the last day of the next calendar month
occurring at least 15 days after receipt of this request, as defined in and
subject to all of the terms and conditions of the Limited Partnership Agreement
of the partnership(s) specified below. I hereby authorize Demeter Management
Corporation to redeem the following quantity of Units of Limited Partnership
Interest ("Units") set forth opposite the name of each such partnership at the
respective Net Asset Value thereof, as defined therein, less any amounts
specified in Section 11(b) of each such Limited Partnership Agreement, and to
utilize the net proceeds thereof to purchase Units in the partnership(s)
specified below.
<TABLE>
<CAPTION>
SPECIFY QUANTITY OF UNITS SPECIFY PARTNERSHIP IN
TO BE REDEEMED WHICH UNITS TO
(CHECK BOX AND INSERT BE PURCHASED
NAME OF PARTNERSHIP NUMBER, IF APPLICABLE (CHECK APPLICABLE BOX)
- ------------------------ ----------------------------- -------------------------------------
<S> <C> <C>
Dean Witter / / --------- Whole Units or / / Dean Witter Cornerstone Fund III or
Cornerstone Fund II / / $ --,000 of Units or / / Dean Witter Cornerstone Fund IV
/ / Entire Interest
-----------------------------
Dean Witter / / --------- Whole Units or / / Dean Witter Cornerstone Fund II or
Cornerstone Fund III / / $ --,000 of Units or / / Dean Witter Cornerstone Fund IV
/ / Entire Interest
-----------------------------
Dean Witter / / --------- Whole Units or / / Dean Witter Cornerstone Fund II or
Cornerstone Fund IV / / $ --,000 of Units or / / Dean Witter Cornerstone Fund III
/ / Entire Interest
-----------------------------
</TABLE>
A-1
<PAGE>
I understand that this Exchange will be effective as of the last day of the
next calendar month occurring at least 15 days after this Request for Exchange
is received by the above addressee. I understand that I may not Exchange any
Units before the last business day of any calendar month which occurs more than
180 days after I first became a limited partner of any of the above
partnerships. I (either in my individual capacity or as an authorized
representative of any entity, if applicable) hereby represent and warrant that I
am the true, lawful, beneficial owner of the Unit or Units to which this Request
for Exchange relates, with full power and authority to request an Exchange of
such Units. Such Units are not subject to any pledge or otherwise encumbered in
any fashion.
I hereby certify that the representations and warranties and all other
information set forth in the Subscription Agreement and Power of Attorney
delivered in connection with my initial purchase of Units being redeemed hereby
is true and correct as of the date hereof. I have received the Prospectus, dated
August 28, 1996, and the Supplement to Prospectus, dated October 14, 1998,
relating to the above partnerships delivered to me, or any later supplement to
such Prospectus relating to the specific offering of Units which I am purchasing
on this Exchange. I represent and warrant that I have either: (a) net worth of
at least $75,000 (exclusive of home, furnishings, and automobiles); or (b) net
worth of at least $30,000 (exclusive of home, furnishings, and automobiles) and
annual gross income of at least $30,000. However, if I am a resident and/or
subject to regulation by one of the following states, my net worth and/or income
satisfies the requirements of such state (if this Exchange is by spouses as
joint owners, their joint net worth and annual income may be used to satisfy
applicable state suitability requirements; as used below, "NW" means net worth
exclusive of home, furnishings, and automobiles; "AI" means annual gross income;
and "TI" means annual taxable income for federal income tax purposes):
<TABLE>
<S> <C>
ARIZONA (a) $250,000 NW and investment may not exceed 10% of NW, or (b) $75,000 NW, $75,000
AI and investment may not exceed 10% of NW.
CALIFORNIA $100,000 NW and $50,000 AI.
MAINE (a) $100,000 NW, or (b) $35,000 NW and $35,000 AI.
MASSACHUSETTS (a) $175,000 NW and investment may not exceed 10% of NW, or (b) $100,000 NW,
PENNSYLVANIA $50,000. TI during the last calendar year and anticipated during the current
calendar year and investment may not exceed 10% of NW.
MICHIGAN (a) Solely as to Michigan residents who purchased Units in any of the Partnerships
on or before May 3, 1992: (i) $100,000 NW and investment may not exceed 10% of NW,
or (ii) $50,000 NW, $50,000 AI and investment may not exceed 10% of NW; (b) solely
as to Michigan residents who purchased Units in any of the Partnerships, or who
purchased Units in any of the Partnerships on or after May 4, 1992: (i) $225,000 NW
and investment may not exceed 10% of NW, or (ii) $60,000 NW, $60,000 AI and
investment may not exceed 10% of NW.
VERMONT (1) Solely as to Vermont residents who purchased Units in any of the Partnerships
prior to May 31, 1993: (a) $75,000 NW, or (b) $30,000 NW and $30,000 AI; (2) solely
as to Vermont residents who purchased Units in any of the Partnerships on or after
May 31, 1993: (a) $150,000 NW, or (b) $45,000 NW and $45,000 AI.
WASHINGTON (a) $150,000 NW, or (b) $45,000 NW and $45,000 AI.
</TABLE>
I authorize Demeter Management Corporation, pursuant to the aforementioned
Power of Attorney, to take all such further actions and file all such further
documents, pursuant to said Power of Attorney and in accordance with the terms
thereof, as may be necessary to effectuate the transactions described herein.
A-2
<PAGE>
SIGNATURES MUST BE IDENTICAL TO NAME(S)
IN WHICH UNITS OF LIMITED PARTNERSHIP INTEREST ARE REGISTERED
<TABLE>
<S> <C>
- --------------------------------------------- --------------------------------------------------------
Print DWR Account Number Type or Print Name of Partner
--------------------------------------------------------
Street
--------------------------------------------------------
City State Zip Code
Individual Partner(s) or assignee(s)
X_______________________________________________________
X_______________________________________________________
X_______________________________________________________
(Signature(s) of partner(s) or assignee(s))
Entity Partner (or assignee)
--------------------------------------------------------
(Name of Entity)
By: X___________________________________________________
(Authorized officer, partner, trustee, or custodian.
If a corporation, include certified
copy of authorizing resolution.)
</TABLE>
If Individual Retirement Account or other self-directed employee benefit plan,
please also complete the following:
<TABLE>
<S> <C>
______________________________________________________
(Name of Plan Participant)
X ____________________________________________________
(Signature of Plan Participant)
</TABLE>
A-3
<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
October 14, 1998. The Supplement is an integral part of, and must be read
together with, the Prospectus.
October 14, 1998
