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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from _____________ to
_________________.
Commission file number 0-13298
DEAN WITTER CORNERSTONE FUND II
(Exact name of registrant as specified in its Limited Partnership
Agreement)
NEW YORK 13-3212871
(State or other jurisdiction of
(I.R.S. Employer
incorporation of organization)
Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, New York, N.Y. - 62nd Flr.
10048 (Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code
(212) 392-5454
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
on which
registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10-K. [X]
State the aggregate market value of the Units of Limited
Partnership Interest held by non-affiliates of the registrant.
The aggregate market value shall be computed by reference to the
price at which units were sold, or the average bid and asked
prices of such units, as of a specified date within 60 days prior
to the date of filing: $29,158,138.09 at January 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
DEAN WITTER CORNERSTONE FUND II
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
Page No.
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . .
. . . . . 1
Part I .
Item 1.Business. . . . . . . . . . . . . . . . . . . .
. . . . 2-5
Item 2.Properties. . . . . . . . . . . . . . . . . . .
. . . . 5
Item 3.Legal Proceedings. . . . . . . . . . . . . . .
. . . . . 5-7
Item 4.Submission of Matters to a Vote of Security
Holders . . . 7
Part II.
Item 5.Market for the Registrant's Partnership Units
and
Related Security Holder Matters . . . . . . . . . .
. . . 8-10
Item 6.Selected Financial Data . . . . . . . . . . . .
. . . .. 11
Item 7.Management's Discussion and Analysis of
Financial
Condition and Results of Operations. . . . . . . . .
. . 12-19
Item 8.Financial Statements and Supplementary Data . .
. . . . 19
Item 9.Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . .
.. . . 20
Part III.
Item 10. Directors, Executive Officers, Promoters and
Control Persons of the Registrant . . . . . . .
. . 21-26
Item 11. Executive Compensation . . . . . . . . . . . .
. . . 26
Item 12. Security Ownership of Certain Beneficial
Owners
and Management . . . . . . . . . . . . . . . .
. . . . . . 26
Item 13. Certain Relationships and Related
Transactions . . . 27
Part IV.
Item14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . .
. . . . 28
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by
reference as follows:
Documents Incorporated Part
of Form 10-K
Partnership's Registration Statement
I
Form S-1, File No. 2-88587, as amended
(including the Partnership's latest
Prospectus dated August 28, 1996
together with the supplement to the
Prospectus dated May 14, 1997).
Partnership's Annual Report on Form
IV
10-K for the fiscal year ended
September 30, 1984, File No. 2-88587
December 31, 1997 Annual Report
for the Dean Witter Cornerstone Funds II
and IV
II, III and IV
PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter
Cornerstone Fund II (the "Partnership") is a New York
limited partnership formed to engage in the speculative
trading of commodity futures contracts and other
commodity interests, including, but not limited to,
forward contracts on foreign currencies. The
Partneship's General Partner is Demeter Management
Corporation ("Demeter"). Demeter is a wholly-owned
subsidiary of Morgan Stanley, Dean Witter, Discover &
Co. ("MSDWD").
Through July 31, 1997, the sole commodity broker
for the Partnership's transactions was Dean Witter
Reynolds Inc. ("DWR"), also a subsidiary of MSDWD. On
July 31, 1997, DWR closed the sale of its institutional
futures business and foreign currency trading
operations to Carr Futures, Inc. ("Carr"), a subsidiary
of Credit Agricole Indosuez. Following the sale, Carr
became the clearing commodity broker for the
Partnership's futures and futures options trades and
the counterparty on the Partnership's foreign currency
trades. DWR will continue to serve as the non-clearing
commodity broker for the Partnership with Carr
providing all clearing services for the Partnership's
transactions.
The Partnership's net asset value per unit, as of
December 31, 1997, was $3,724.92, representing an
increase of 18.05 percent from the net asset value per
unit of $3,155.36 at December 31, 1996. For a more
detailed description of the Partnership's business, see
subparagraph (c).
(b) Financial Information about Industry Segments.
The Partnership's business comprises only one segment
for financial reporting purposes, speculative trading
of futures interests. The relevant financial
information is presented in Items 6 and 8.
(c) Narrative Description of Business. The
Partnership is in the business of speculative trading
in futures interests, pursuant to trading instructions
provided by Northfield Trading L.P. ("Northfield") and
John W. Henry & Company, Inc. ("JWH"), its independent
trading advisors (the "Trading Advisor(s)"). Effective
March 1, 1997 Abacus Trading Corporation ("Abacus") was
removed as a trading advisor to the Partnership. All
assets formally managed by Abacus were allocated to
Northfield during April 1997. For a detailed
description of the different facets of the
Partnership's business, see those portions of the
Partnership's latest Prospectus, dated August 28, 1996
(the "Prospectus"), together with the supplement to the
Prospectus dated May 14, 1997 (the
"Supplement"), filed as part of a post effective
amendment to the Registration Statement on Form S-1
(see "Documents Incorporated by Reference" Page 1), set
forth on the next page.
Facets of Business
1. Summary 1. "Summary of the
Prospectus"
(Pages 1-9 of the
Prospectus and pages S-12 and
S-22 of the
Supplement).
2. Commodity Markets 2. "The Commodities
Market"
(Pages 80-84 of
the
Prospectus).
3. Partnership's Commodity 3. "Investment
Program, Trading
Arrangements and Use of Trading
Policies Policies" (Pages
45- 47 of the
Prospectus) and "The
Managers" (Pages 51-74
of the
Prospectus and
Pages S-12 -
S-21 of
the Supplement).
4. Management of the Part- 4. "The Cornerstone
nership Funds"
(Pages 19-24 of
the
Prospectus and
Pages
S-1 - S-3 of the
Supplement). "The
General Partner"
(Pages 77-79 of the
Prospectus
and Pages S-21 -
S- 22 of the
Supplement) and "The Commodity
Broker"
(Pages 79-80 of
the Prospectus).
"The Limited
Partnership
Agreements" (Pages 86- 90 of
the
Prospectus).
5. Taxation of the Partnership's 5. "Material
Federal Limited
Partners Income Tax
Considerations" and
"State and Local
Income Tax Aspects"
(Pages 92-99 of the
Prospectus).
(d) Financial Information About Foreign and Domestic
Operations
and Export Sales.
The Partnership has not engaged in any operations
in foreign countries; however, the Partnership (through
the commodity brokers) enters into forward contract
transactions where foreign banks are the contracting
party and trades in futures interests on foreign
exchanges.
Item 2. PROPERTIES
The executive and administrative offices are
located within the offices of DWR. The DWR offices
utilized by the Partnership are located at Two World
Trade Center, 62nd Floor, New York, NY 10048.
Item 3. LEGAL PROCEEDINGS
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 & Currency Management Inc., ("DWFCM"), MSDWD,
(all such parties referred to hereafter as the "Dean
Witter Parties"), the Partnership, certain other
limited partnership commodity pools of which Demeter is
the general partner, and certain trading advisors
(including JWH) to those pools. 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 Partnership, 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 Partnership
have strong defenses to, and they will vigorously
contest, the actions. Although the ultimate outcome of
legal proceedings cannot be predicted with certainty,
it is the opinion of management of the Dean Witter
Parties that the resolution of the actions will not
have a material adverse effect on the financial
condition or the results of operations of any of the
Dean Witter Parties or the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS
AND RELATED
SECURITY HOLDER MATTERS
There is no established public trading market for
the Units of Limited Partnership Interest in the
Partnership. The number of holders of Units at
December 31, 1997 was approximately 2,904. No
distributions have been made by the Partnership since
it commenced operations on January 2, 1985. Demeter has
sole discretion to decide what distributions, if any,
shall be made to investors in the Partnership. No
determination has yet been made as to future
distributions.
Limited Partnership Units were registered for sale
to the public in certain Canadian provinces.
Dean Witter Cornerstone Fund I ("Cornerstone I");
Dean Witter Cornerstone Fund II ("Cornerstone II"), and
Dean Witter Cornerstone Fund III ("Cornerstone III")
collectively registered 250,000 Units pursuant to a
Registration Statement on Form S-1, which became
effective on May 31, 1984 (the "Registration
Statement") (SEC File Numbers 2-88587; 88587-01; 88587-
02). As contemplated in the Registration Statement, an
additional fund, Dean Witter Cornerstone Fund IV
("Cornerstone IV" and, collectively with Cornerstone I,
Cornerstone II and Cornerstone III, the "Partnerships")
was
registered pursuant to Post-Effective Amendment No. 5
to the Registration Statement, which became effective
on February 6 1987.
The managing underwriter for the Partnerships is DWR.
The offering for Cornerstone I originally
commenced on May 31, 1984, and 18,679.643 Units of
Cornerstone I were sold prior to its dissolution on
December 31, 1991. The offering for Cornerstone II and
Cornerstone III also originally commenced on May 31,
1984 and currently continues, with 41,701.582 and
74,400.002 Units of Cornerstone II and Cornerstone III,
respectively, sold through December 31, 1997. The
offering for Cornerstone IV originally commenced on
February 6, 1987 and currently continues, with
100,579.559 Units sold through December 31, 1997.
Through December 31, 1997, an aggregate of 235,360.786
Units of the Partnership have been sold, leaving
14,639.214 Units remaining available for sale as of
January 1, 1998.
The aggregate offering amount registered was
$262,496,000, based upon the initial offering price of
$1,050 per Unit ($1,000 initial Net Asset Value per
Unit, plus a $50 per Unit sales charge on all but 80
Units sold to the Partnerships' initial trading
managers) during the initial offering periods of May
31, 1984 through November 30, 1984 with respect to
Cornerstone I,
Cornerstone II and Cornerstone III, and February 6,
1987 through May 6, 1987 with respect to Cornerstone
IV.
After the respective initial offering periods,
Units in the Partnerships were sold at 107.625% of net
asset value per Unit, including a charge for offering
expenses of 2.5% of net asset value per Unit, and a
sales charge of 5% of the sum of the net asset value
per Unit and the charge for offering expenses, during
the "Continuing Offering".
The aggregate price of Units sold through December
31, 1997 with respect to Cornerstone II is $65,604,519.
Effective September 30, 1994, Cornerstone II,
Cornerstone III and Cornerstone IV were closed to new
investors; Units have been sold since then solely in
"Exchanges" with existing investors, at 100% of net
asset value per Unit. DWR has been paying all expenses
in connection with the offering of Units since
September 30, 1994, without reimbursement.
Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
1997 1996 1995 1994
1993
Total Revenues
(including interest) 8,279,346 6,449,790 11,604,765 830,882
5,262,886
Net Income (Loss) 4,916,164 3,047,462 7,882,659
(3,095,555) 2,101,347
Net Income (Loss)
Per Unit (Limited
& General Partners) 569.56 324.71 592.90
(219.47) 178.05
Total Assets 31,431,0233 30,046,842 31,558,306 32,062,117
32,511,448
Total Limited Partners'
Capital 29,677,943 28,360,195 30,213,505 30,885,515
31,331,000
Net Asset Value Per
Unit of Limited
Partnership Interest3,724.92 3,155.36 2,830.65 2,237.75
2,457.22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity. The Partnership's assets are deposited
in separate commodity trading accounts with DWR and
Carr, the commodity brokers, and are used by the
Partnership as margin to engage in trading commodity
futures contracts and forward contracts on foreign
currencies. DWR and Carr hold such assets at either
designated depositories or in securities approved by
the Commodity Futures Trading Commission ("CFTC") for
investment of customer funds. The Partnership's assets
held by DWR and Carr may be used as margin solely for
the Partnership's trading. Since the Partnership's
sole purpose is to trade in commodity futures contracts
and other commodity interests, it is expected that the
Partnership will continue to own such liquid assets for
margin purposes.
The Partnership's investment in commodity futures
contracts and other commodity interests may be
illiquid. If the price for a futures contract for a
particular commodity has increased or decreased by an
amount equal to the "daily limit", positions in the
commodity can neither be taken nor liquidated unless
traders are willing to effect trades at or within the
limit. Commodity futures
prices have occasionally moved the daily limit for
several consecutive days with little or no trading.
Such market conditions could prevent the Partnership
from promptly liquidating
its commodity futures positions.
There is no limitation on daily price moves in
trading forward contracts on foreign currencies. The
markets for some world currencies have low trading
volume and are illiquid, which may prevent the
Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly
liquidating unfavorable positions in such markets and
subjecting it to substantial losses. Either of these
market conditions could result in restrictions on
redemptions.
Market Risk. The Partnership trades futures,
options and forward contracts in interest rates, stock
indices, commodities and currencies. In entering into
these contracts there exists a risk to the Partnership
(market risk) that such contracts may be significantly
influenced by market conditions, such as interest rate
volatility, resulting in such contracts being less
valuable. If the markets should move against all of
the futures interest positions held by the Partnership
at the same time, and if the
Trading Advisors were unable to offset futures interest
positions
of the Partnership, the Partnership could lose all of
its assets and the Limited Partners would realize a
100% loss. The Partnership has established Trading
Policies, which include standards for liquidity and
leverage which help control market risk. Both the
Trading Advisors and Demeter monitor the Partnership's
trading activities on a daily basis to ensure
compliance with the Trading Policies. Demeter may
(under terms of the Management Agreements) override the
trading instructions of a Trading Advisor to the extent
necessary to comply with the Partnership's Trading
Policies.
Credit Risk. In addition to market risk, in
entering into futures, options and forward contracts
there is a credit risk to the Partnership that the
counterparty on a contract will not be able to meet its
obligations to the Partnership. The ultimate
counterparty of the Partnership for futures contracts
traded in the United States and most foreign exchanges
on which the Partnership trades is the clearinghouse
associated with such exchange. In general, a
clearinghouse is backed by the membership of the
exchange and will act in the event of non-performance
by one of its members or one of its member's customers,
and, as such,
should significantly reduce this credit risk. For
example, a clearinghouse may cover a default by (i)
drawing upon a defaulting member's mandatory
contributions and/or non-defaulting members'
contributions to a clearinghouse guarantee fund,
established lines or letters of credit with banks,
and/or the clearinghouse's surplus capital and other
available assets of the exchange and clearinghouse, or
(ii) assessing its members. In cases where the
Partnership trades on a foreign exchange where the
clearinghouse is not funded or guaranteed by the
membership or where the exchange is a "principals'
market" in which performance is the responsibility of
the exchange member and not the exchange or a
clearinghouse, or when the Partnership enters into off-
exchange contracts with a counterparty, the sole
recourse of the Partnership will be the clearinghouse,
the exchange member or the off-exchange contract
counterparty, as the case may be.
There can be no assurance that a clearinghouse,
exchange or other exchange member will meet its
obligations to the Partnership, and the Partnership is
not indemnified against a default by such parties from
Demeter or MSDWD 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.
Demeter deals with the credit risks of all
partnership's for which it serves as General Partner 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. Demeter, however, has installed
a system which permits it to monitor each partnership's
potential margin liability, exchange by exchange.
Demeter 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, as discussed earlier, 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 has climbed above that level, Demeter
has dealt with the situations on a case by case basis,
carefully weighing whether the increased level of
credit exposure remained appropriate. Demeter expects
to continue to deal with such situations in a similar
manner in the future.
Third, Demeter has secured, with respect to Carr
acting as the clearing broker for the partnerships, a
guarantee by Credit Agricole Indosuez, Carr'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, Credit Agricole Indosuez' total capital was over
$3.25 billion and it is currently rated AA2 by Moody's.
With respect to forward contract trading, the
partnerships trade with only those counterparties which
Demeter, together with
DWR, have determined to be creditworthy. At the date
of this filing, the partnerships deal only with Carr as
their counterparty on forward contracts. The guarantee
by Carr's parent, discussed above, covers these forward
contracts.
See "Financial Instruments" under Notes to
Financial Statements in the Partnership's 1997 Annual
Report to Partners, incorporated by reference in this
Form 10-K.
Capital Resources. The Partnership does not have,
nor does it expect to have, any capital assets.
Redemptions and exchanges of additional Units of
Limited Partnership Interest in the future will affect
the amount of funds available for investments in
subsequent periods. As redemptions are at the
discretion of Limited Partners, it is not possible to
estimate the amount and therefore, the impact of future
redemptions.
Results of Operations. As of December 31, 1997,
the Partnership's total capital was $30,487,741, an
increase of $1,441,571 from the Partnership's total
capital of $29,046,170, at December 31, 1996. For the
year ended December 31, 1997, the Partnership generated
net income of $4,916,164, total subscriptions
aggregated $314,932 and total redemptions aggregated
$3,789,525.
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 value of an
individual unit in the Partnership increased from
$3,155.36 at December 31, 1996 to $3,724.92 at
December 31, 1997.
As of December 31, 1996, the Partnership's total
capital was $29,046,170, a decrease of $1,782,718 from
the Partnership's total capital of $30,828,888 at
December 31, 1995. For the year ended December 31,
1996, the Partnership generated net income of
$3,047,462, total subscriptions aggregated $155,468 and
total redemptions aggregated $4,985,648.
For the year ended December 31, 1996, the
Partnership's total trading revenues, including
interest income, were $6,449,790. The Partnership's
total expenses for the year were $3,402,328, resulting
in net income of $3,047,462. The value of an
individual unit in the Partnership increased from
$2,830.65 at December 31, 1995 to $3,155.36 at December
31, 1996.
As of December 31, 1995, the Partnership's total
capital was $30,828,888, a decrease of $543,114 from
the Partnership's total capital of $31,372,002 at
December 31, 1994. For the year ended December 31,
1995, the Partnership generated net income of
$7,882,659, total subscriptions aggregated $178,837 and
total redemptions aggregated $8,604,610.
For the year ended December 31, 1995, the
Partnership's total trading revenues, including
interest income, were $11,604,765. The Partnership's
total expenses for the year were $3,722,106 resulting
in net income of $7,882,659. The value of an
individual unit in the Partnership increased from
$2,237.75 at December 31, 1994 to $2,830.65 at December
31, 1995.
The Partnership's overall performance record
represents varied results of trading in different
commodity markets. For a further description of
trading results, refer to the letter to the Limited
Partners in the accompanying 1997 Annual Report to
Partners, incorporated by reference in this Form 10-K.
The Partnership's gains and losses are allocated among
its Limited Partners for income tax purposes.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item appears in
the attached 1997 Annual Report to Partners and is
incorporated by reference in this Annual Report on Form
10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS OF THE REGISTRANT
General Partner
Demeter, a Delaware corporation, was formed on
August 18, 1977 to act as a commodity pool operator and
is registered with the CFTC as a commodity pool
operator and currently is a member of the National
Futures Association ("NFA") in such capacity. Demeter
is wholly-owned by MSDWD and is an affiliate of DWR.
MSDWD, DWR and Demeter may each be deemed to be
"promoters" and/or a "parent" of the Partnership within
the meaning of the federal securities laws.
On July 21, 1997, MSDWD, the sole shareholder of
Demeter, appointed a new Board of Directors consisting
of Richard M. DeMartini, Mark J. Hawley, Lawrence
Volpe, Joseph G. Siniscalchi, Edward C. Oelsner III,
and Robert E. Murray.
Dean Witter Reynolds Inc.
DWR is a financial services company which provides
to its individual, corporate and institutional clients
services as a broker in securities and commodity
interest contracts, a dealer in corporate, municipal
and government securities, an investment adviser and an
agent in the sale of life insurance and various
other products and services. DWR is a member firm of
the New York Stock Exchange, the American Stock
Exchange, the Chicago Board Options Exchange, and other
major securities exchanges.
DWR is registered with the CFTC as a futures
commission merchant and is a member of the NFA in such
capacity. DWR is currently servicing its clients
through a network of 401 branch offices with
approximately 10,155 account executives servicing
individual and institutional client accounts.
Directors and Officers of the General Partner
The directors and officers of Demeter as of
December 31, 1997 are as follows:
Richard M. DeMartini, age 45, is the Chairman of
the Board and a Director of Demeter. 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 MSDWD'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 MSDWD 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 Dean Witter his entire career, joining the
firm in 1975 as an account executive. 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 54, is President and a
Director of Demeter. 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 Managed
Futures Department. 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 50, is a Director of Demeter
and DWFCM. Mr. Volpe joined DWR as a Senior Vice
President and Controller in September 1983, and
currently holds those positions. From July 1979 to
September 1983, he was associated with E.F. Hutton &
Company Inc. and prior to his departure, held the
positions of First Vice President and Assistant
Controller. From 1970 to July 1979, he was associated
with Arthur Anderson & Co. and prior to his departure
served as audit manager in the financial services
division.
Joseph G. Siniscalchi, age 52, is a Director of
Demeter. Mr. Siniscalchi joined DWR in July 1984 as a
First Vice President, Director of General Accounting
and served as a Senior Vice President and Controller
for DWR's Securities division through 1997. He is
currently Executive Vice President and Director of the
Operations Division of DWR. From February 1980 to July
1984,
Mr. Siniscalchi was Director of Internal Audit at
Lehman Brothers Kuhn Loeb, Inc.
Edward C. Oelsner, III, age 55, is a Director of
Demeter. 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.
Robert E. Murray, age 37, is a Director of
Demeter. 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
Product Development for the Managed Futures Department.
He is responsible for the development and maintenance
of the proprietary Fund
Management System utilized by DWFCM and Demeter in
organizing information and producing reports for
monitoring clients' accounts. Mr. Murray currently
serves as a Director of the Managed Funds Association.
Mr. Murray graduated from Geneseo State University in
May 1983 with a B.A. degree in Finance.
Patti L. Behnke, age 37, is Vice President and
Chief Financial Officer of Demeter. Ms. Behnke joined
DWR in April 1991 as Assistant Vice President of
Financial Reporting and is currently a First Vice
President and Director of Financial Reporting and
Managed Futures Accounting in the Individual Asset
Management Group. Prior to joining DWR, Ms. Behnke
held positions of increasing responsibility at L.F.
Rothschild & Co. and Carteret Savings Bank. Ms. Behnke
began her career at Arthur Anderson & Co., where she
was employed in the audit division from 1982-1986. She
is a member of the AICPA and the New York State Society
of Certified Public Accountants.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive
officers. As a limited partnership, the business of
the Partnership is managed by Demeter which is
responsible for the administration of the
business affairs of the Partnership but receives no
compensation for such services.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial
Owners - As of December 31, 1997, there were no persons
known to be beneficial owners of more than 5 percent of
the Units of Limited Partnership Interest in the
Partnership.
(b) Security Ownership of Management - At
December 31, 1997, Demeter owned 217.400 Units of
General Partnership Interest in the Partnership,
representing a 2.66 percent interest in the
Partnership.
(c) Changes in Control - None
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of
"Notes to Financial Statements", in the accompanying
1997 Annual Report to Partners, incorporated by
reference in this Form 10-K. In its capacity as the
Partnership's retail commodity broker, DWR received
commodity brokerage commissions (paid and accrued by
the Partnership) of $1,383,112 for the year ended
December 31, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of
independent public accountants, all appearing in the
accompanying 1997 Annual Report to Partners, are
incorporated by reference in this Form 10-K:
- Report of Deloitte & Touche LLP,
independent auditors, for the years ended
December 31, 1997, 1996 and 1995.
- Statements of Financial Condition as of
December 31, 1997 and 1996.
- Statements of Operations, Changes in
Partners' Capital, and Cash Flows for the
years ended December 31, 1997, 1996 and 1995.
- Notes to Financial Statements.
With the exception of the aforementioned
information and the information incorporated in Items
7, 8, and 13, the 1997 Annual Report to Partners is not
deemed to be filed with this report.
2. Listing of Financial Statement Schedules
No financial statement schedules are required to
be filed with this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Partnership during the last quarter of the period
covered by this report.
(c) Exhibits
Refer to Exhibit Index on Page E-1.
SIGNATURES
Pursuant to the requirement of Sections 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEAN WITTER
CORNERSTONE FUND II
(Registrant)
BY: Demeter
Management Corporation,
General Partner
March 24, 1998 BY: /s/ Mark J. Hawley
Mark J. Hawley, Director
and
President
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Demeter Management Corporation.
BY: /s/ Mark J. Hawley March
24, 1998
Mark J. Hawley, Director and
President
/s/ Richard M. DeMartini March
24, 1998
Richard M. DeMartini, Director
and Chairman of the Board
/s/ Lawrence Volpe March
24, 1998
Lawrence Volpe, Director
/s/ Joseph G. Siniscalchi March
24, 1998
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March
24, 1998
Edward C. Oelsner III, Director
/s/ Robert E. Murray, March
24, 1998
Robert E. Murray, Director
/s/ Patti L. Behnke March
24, 1998
Patti L. Behnke, Chief Financial
Officer and Principal Accounting
Officer
EXHIBIT INDEX
ITEM
METHOD OF FILING
- -3. Limited Partnership Agreement of
the Partnership, dated as of
December 7, 1983, as amended as (1)
of May 11, 1984.
- -10. Management Agreement among the
Partnership, Demeter and JWH
dated November 15, 1983. (2)
- -10. Dean Witter Cornerstone Funds
Exchange Agreement, dated as of
May 31, 1984. (3)
- -10. Amended and restated Customer Agreement Between the
Partnership and DWR, dated as of September 1, 1996.
(4)
- -10. Management Agreement among the
Partnership, Demeter and Northfield
Trading L.P. dated as of April
16, 1997. (5)
- -13. December 31, 1997 Annual Report to Limited Partners.
(5)
(1) Incorporated by reference to Exhibit 3.01 of the
Partnership's Annual Report on Form
10-K for the fiscal year ended September 30, 1984 (File No.
0-13298).
(2)
Incorporated by reference to Exhibit 10.03 of the
Partnership's Annual Report
on Form 10-K for the fiscal year ended September 30, 1984
(File No. 0-13298).
(3)
Incorporated by reference to Exhibit 10.04 of the
Partnership's Annual Report
on Form 10-K for the fiscal year ended September 30, 1984
(File No. 0-13298).
(4)
Incorporated by reference to Exhibit 10.01(d) to Post-
Effective Amendment No.
23 to the Partnership's Registration Statement on Form S-1
(File No. 2-88587)
filed on August 26, 1996.
(5) Filed
herewith.
MANAGEMENT AGREEMENT
THIS AGREEMENT, made the 16th day of April,
1997 among DEAN WITTER CORNERSTONE FUND II, a New York
limited partnership (the "Partnership"), DEMETER
MANAGEMENT CORPORATION, a Delaware corporation (the
"General Partner"), and NORTHFIELD TRADING L.P., a
Delaware limited partnership (the "Trading Manager");
W I T N E S S E T H:
WHEREAS, the Partnership has been organized
to engage in speculative trading of commodities
(including foreign currencies, mortgage-backed
securities, money market instruments, and any other
securities or items which are now or may hereafter be
the subject of futures contract trading), commodity
futures contracts, commodity forward contracts, foreign
exchange commitments, commodity options, spot (cash)
commodities and currencies, and any rights pertaining
thereto (hereinafter referred to as "commodity
interests"); the Trading Manager has extensive
experience trading in commodity interests and is
willing to provide certain services and undertake
certain obligations as set forth herein;
WHEREAS, the Partnership is a member
partnership of the Dean Witter Cornerstone Funds (the
"Cornerstone Funds") by entering into an agreement
pursuant to which units of limited partnership interest
("Units") of such member partnerships will be sold to
investors in a common offering under the Securities Act
of 1933, as amended (the "Act"), pursuant to a
Registration Statement on Form S-1 (No. 2-88587) (as
amended from time to time, the "Registration
Statement") and the Prospectus, constituting a part
thereof (as amended and supplemented, the
"Prospectus"), and thereafter, pursuant to which such
Units can be exchanged by a limited partner of a member
partnership of the Cornerstone Funds at the end of any
month for Units of other member partnerships of the
Cornerstone Funds at 100% of the respective Net Asset
Value thereof;
WHEREAS, the Partnership desires the Trading
Manager to act as a trading manager for the Partnership
and to make investment decisions with respect to
commodity interests for its
allocated share of the Partnership's Net
Assets and the Trading Manager desires so to act; and
WHEREAS, the Partnership, the General
Partner, and the Trading Manager wish to enter into
this Management Agreement which, among other things,
set forth certain terms and conditions upon which the
Trading Manager will conduct a portion of the
Partnership's commodity interest trading;
NOW, THEREFORE, the parties hereto hereby
agree as follows:
1. Undertakings in Connection with the
Offering of Units
(a) The Trading Manager agrees with respect
to the continuing offering of Units: (i) to make all
disclosures regarding itself, its principals and
affiliates, its trading performance, its trading
systems, methods, and strategies (subject to the need
to preserve the secrecy of proprietary information
concerning such systems, methods, and strategies), any
client accounts over which it has direct or indirect
discretionary trading authority (other than the names
of such clients), and otherwise as the Partnership may
reasonably require (x) to be made in the Partnership's
Prospectus required by Sections 4.21 and 4.24 of the
regulations of the CFTC, including any amendments or
supplements thereto, or (y) to comply with any
applicable federal or state law or rule or regulation,
including those of the Securities and Exchange
Commission (the "SEC"), the CFTC, the National Futures
Association (the "NFA"), the National Association of
Securities Dealers, Inc. (the "NASD") or any other
regulatory body, exchange, or board; and (ii) otherwise
to cooperate with the Partnership and the General
Partner by providing information regarding the Trading
Manager in connection with the preparation and filing
of the Registration Statement and Prospectus, including
any amendments or supplements thereto, with the SEC,
CFTC, NFA, NASD, and with appropriate governmental
authorities as part of making application for
registration of the Units under the securities or Blue
Sky laws of such jurisdictions as the Partnership may
deem appropriate. As used herein, the term "principal"
shall have the same meaning as defined in Section
4.10(e)(1) of the CFTC Regulations and the term
"affiliate" shall mean an entity or individual
(including a stockholder, director,
officer, employee, or agent) or entity that
directly or indirectly controls, is controlled by, or
is under common control with, any other entity or
individual.
(b) If, while Units continue to be offered
and sold, the Trading Manager becomes aware of any
untrue or misleading statement or omission in the
Registration Statement or the Prospectus regarding the
Trading Manager, its principals or affiliates, their
trading performance, or their trading systems, methods,
or strategies, or of the occurrence of any event of
change in circumstances which would result in their
being any such untrue or misleading statement or
omission, the Trading Manager shall immediately notify
the General Partner in writing and shall cooperate with
it in the preparation of any necessary amendments or
supplements to the Registration Statement or the
Prospectus. Neither the Trading Manager nor any of its
principals or affiliates, or any partners, officers,
directors, employees, or agents thereof, shall use or
distribute the Registration Statement, Prospectus
(including any final, amended, or supplemented
prospectus), or selling literature or shall engage in
any selling activities whatsoever in connection with
the offering of Units.
2. Duties of the Trading Manager
(a) The Trading Manager hereby agrees to act
as a Trading Manager for the Partnership and, as such,
shall have sole authority and responsibility for
directing the investment and reinvestment of its
allocable share of Net Assets of the Partnership
pursuant to its trading program on the terms and
conditions and in accordance with the prohibitions and
trading policies set forth in this Agreement, the
Partnership's Limited Partnership Agreement as from
time to time in effect (the "Limited Partnership
Agreement"), and the Prospectus; provided, however,
that the General Partner may override the instructions
of the Trading Manager to the extent necessary (i) to
comply with the trading policies of the Partnership as
described in the Prospectus and Limited Partnership
Agreement and with applicable speculative position
limits, (ii) to fund any distributions, redemptions, or
reapportionments among other trading managers to the
Partnership, (iii) to pay the Partnership's expenses,
(iv) to the extent the General Partner believes doing
so is necessary for the protection of the Partnership,
(v) to terminate the commodity interests
trading of the Partnership, or (vi) to comply
with any applicable law or regulation. The General
Partner agrees not to override any such instructions
for the reasons specified in clauses (ii) or (iii) of
the preceding sentence unless the Trading Manager fails
to comply with a request of the General Partner to make
the necessary amount of funds available to the
Partnership within five days of such request. The
Trading Manager shall not be liable for the
consequences of any decision by the General Partner to
override instructions of the Trading Manager, except to
the extent that the Trading Manager is in breach of
this Agreement. In performing services for the
Partnership, the Trading Manager may not materially
alter or change the program used by the Trading Manager
in investing and reinvesting its allocable share of the
Partnership's Net Assets in commodity interest
contracts as described in the Trading Manager's
Disclosure Document dated September 24, 1996 (a copy of
which has been received by the General Partner) without
the prior consent of the General Partner, it being
understood that changes in the commodity interest
contracts traded shall not be deemed a material
alteration of the Trading Manager's program.
(b) The Trading Manager shall:
(i) Exercise good faith and due care in
trading commodity interests for the account of the
Partnership in accordance with the prohibitions and
trading policies of the Partnership as described in the
Prospectus and Limited Partnership Agreement to the
Trading Manager and the trading systems, methods, and
strategies of the Trading Manager described in the
Prospectus, with such changes and additions to such
trading systems, methods or strategies as the Trading
Manager, from time to time, incorporates into its
trading approach for accounts the size of the
Partnership.
(ii) Subject to reasonable assurances of
confidentiality by the General Partners and the
Partnership, provide the General Partner, within 30
days of a request therefor by the General Partner, with
information comparing the performance of the
Partnership's account and the performance of all other
client accounts directed by the Trading Manager using
the trading systems used by the Trading Manager for the
Partnership over a specified period of time. In
providing such information, the Trading Manager may
take such steps as are necessary to assure the
confidentiality of the Trading Manager's
clients' identities. The Trading Manager shall, upon
the General Partner's request, consult with the General
Partner concerning any discrepancies between the
performance of such other accounts and the
Partnership's account. The Trading Manager shall
promptly inform the General Partner of any material
discrepancies of which the Trading Manager is aware.
The General Partner acknowledges that different trading
strategies or methods may be utilized for differing
sizes of accounts, accounts with different trading
policies, accounts experiencing differing inflows or
outflows of equity, accounts which commence trading at
different times, accounts with different fee
structures, accounts which have different portfolios or
different fiscal years and that such differences may
cause divergent trading results.
(iii) Upon request of the General
Partner and subject to reasonable assurances of
confidentiality by the General Partner and the
Partnership, provide the General Partner with all
material information concerning the Trading Manager
other than proprietary information (including, without
limitation, information relating to changes in control,
personnel, trading approach, or financial condition).
The General Partner acknowledges that all trading
instructions made by the Trading Manager will be held
in confidence by the General Partner, except to the
extent necessary to conduct the business of the
Partnership or as required by law.
(iv) Inform the General Partner when the
Trading Manager's open positions maintained by the
Trading Manager exceed the Trading Manager's applicable
speculative position limits.
(c) All purchases and sales of commodity
interests pursuant to this Agreement shall be for the
account and at the risk of the Partnership and not for
the account or at the risk of the Trading Manager or
any of its partners, directors, officers, employees, or
any other person, if any, who controls the Trading
Manager within the meaning of the Act. All brokerage
commissions arising from the trading by the Trading
Manager shall be for the account of the Partnership,
but shall only be charged against the assets of the
Partnership managed by the Trading Manager.
(d) Notwithstanding any provision of this
Agreement to the contrary, the Trading Manager shall
assume financial responsibility for any errors
committed or caused by it in transmitting orders for
the purchase or sale of commodity interests for the
Partnership's account, including payment to the
commodity broker of the floor brokerage commissions,
exchange and NFA fees, and other transaction charges
and give-up charges incurred by the commodity broker on
such trades but only for the amount of the commodity
broker's out-of-pocket costs in respect thereof. The
Trading Manager's errors shall include, but not be
limited to, inputting improper trading signals or
communicating incorrect orders to any commodity broker
for the Partnership. However, the Trading Manager
shall not be responsible for errors committed or caused
by any commodity broker for the Partnership. The
Trading Manager and any commodity broker for the
Partnership each shall have an affirmative obligation
to notify promptly the other party of its own errors,
and the Trading Manager shall use its best efforts to
identify and promptly notify the General Partner of any
order or trade which the Trading Manager reasonably
believes was not executed in accordance with its
instructions to any commodity broker for the
Partnership.
(e) Prior to the commencement of trading by
the Trading Manager on behalf of the Partnership, the
General Partner, on behalf of the Partnership, shall
deliver to the Trading Manager a trading authorization
in the form annexed hereto as Exhibit A appointing the
Trading Manager the Partnership's attorney-in-fact for
such purpose.
3. Designation of Additional Trading
Managers
The Trading Manager understands and agrees
that if the General Partner at any time deems it to be
in the best interests of the Partnership, the General
Partner may designate and retain an additional trading
manager or managers for the Partnership and may
apportion to such additional trading manager(s) the
management of such amounts of "Net Assets" (as defined
in Section 7(c) hereof) as the General Partner shall
determine in its absolute discretion. The replacement
of any trading manager for the Partnership by the
General Partner shall not require any approval of the
existing trading managers (including the Trading
Manager). The designation and retention of an
additional or replacement trading manager or managers
and the apportionment of Net Assets to
any such trading manager(s) pursuant to this
Section 3 shall neither terminate this Agreement nor
modify in any regard the respective rights and
obligations of the Partnership, the General Partner,
and the Trading Manager hereunder.
4. Trading Manager Independent
For all purposes of this Agreement, the
Trading Manager shall be deemed to be an independent
contractor and shall, unless otherwise expressly
provided herein or authorized, have no authority to act
for or represent the Partnership or General Partner in
any way or otherwise be deemed an agent of the
Partnership or General Partner. Nothing contained
herein shall be deemed to require the Partnership or
General Partner to take any action contrary to the
Limited Partnership Agreement, the Certificate of
Limited Partnership of the Partnership as from time to
time in effect (the "Certificate of Limited
Partnership"), or any applicable law or rule or
regulation of any regulatory body, exchange, or board.
Nothing herein contained shall constitute the Trading
Manager and any other trading manager or managers for
the Partnership, the General Partner, or other member
partnerships of the Cornerstone Funds or their trading
managers as members of any partnership, joint venture,
association, syndicate, or other entity, or be deemed
to confer on any of them any express, implied, or
apparent authority to incur any obligation or liability
on behalf of any other.
5. Apportionment of Funds to the Trading
Manager
Effective as of the close of business on
April , 1997 the General Partner will reallocate the
Partnership's Net Assets. The trading manager initially
will be allocated approximately 20% of the
partnership's Net Assets effective as of the date
hereof, although the exact amount of the allocation is
in the discretion of the General Partner. The general
partner agrees to apportion approximately 20% of the
proceeds from any exchanges (as defined in the
prospectus) to the trading manager, although the exact
amount of the allocation is in the discretion of the
General Partner. However, the General Partner may, in
its absolute discretion, reapportion the funds of the
Partnership among the trading managers for the
Partnership (including the Trading Manager) when (i)
an additional or replacement trading manager or
managers are designated for the Partnership by the
General Partner pursuant to Section 3 hereof;
(ii) a trading manager for the Partnership is
terminated; (iii) there is a 35% decline in the value
of the Managed Net Assets (as defined in Section 7(c)
hereof) of the Trading Manager or any other trading
manager for the Partnership during any twelve
consecutive month period (after adding back the amount
of distributions, redemptions, exchanges, or
reapportionments charged to such Managed Net Assets and
subtracting increases in such Managed Net Assets from
Units acquired by purchase or exchange or from
reapportionments among trading managers during the
relevant portion of such twelve consecutive month
period); (iv) a fiscal year or "incentive period" (as
defined in Section 7(a) hereof) of the Partnership
ends; or (v) speculative position limits are exceeded
or about to be exceeded in any one commodity by the
Trading Manager or any other trading manager for the
Partnership or any principal or affiliate thereof.
6. Commodity Broker
The Trading Manager shall place orders for
all transactions in commodity interests for the
Partnership's account through such commodity broker or
brokers as the General Partner shall direct. At the
present time, Dean Witter Reynolds Inc., a Delaware
corporation and an affiliate of the General Partner
("Dean Witter"), shall act as sole broker for the
Partnership. Accordingly, the Trading Manager is
hereby directed to place all orders for transactions in
commodity interests for the Partnership's account
through Dean Witter until the General Partner shall
give the Trading Manager other instructions. The
General Partner shall provide the Trading Manager with
copies of brokerage statements. Notwithstanding that
Dean Witter shall act as commodity broker for the
Partnership, the Trading Manager may execute trades
through floor brokers other than those employed by Dean
Witter, provided such floor brokers "give-up" or
transfer the positions to Dean Witter in accordance
with the provisions of, and at such rates as provided
in, the "Give Up Billing Procedures" set forth in
Exhibit C annexed hereto, or consistent with such other
terms and conditions as shall be approved in advance by
Dean Witter.
7. Fees
(a) For the services to be rendered to the
Partnership by the Trading Manager under this
Agreement, the Partnership shall pay the Trading
Manager the following fees:
(i) A monthly management fee, without regard
to whether the Partnership is profitable, equal to 1/3
of 1% of the "Managed Net Assets" (as defined in
Section 7(c)) as of the end of each calendar month (a
4% annual rate) commencing with the month in which the
Partnership begins to receive trading advice from the
Trading Manager pursuant to this Agreement, adding back
for purposes of determining such fee any incentive fees
accrued or payable on such Managed Net Assets as of
such date and without reduction for any distributions
or redemptions accrued or payable as of such date.
(ii) An annual incentive fee equal to the
portion of 15 percent of the "New Appreciation" (as
defined below), if any, in the value of the "Net
Assets" (as defined in Section 7(c)) as of the last day
of any "incentive period" (as defined below) as shall
be allocated to the Trading Manager in accordance with
the provisions set forth in Exhibit B annexed hereto.
An "incentive period" shall be the twelve
month period commencing on January 1 and ending on
December 31.
The term "Appreciation" shall mean (A) the
value of the Net Assets as of the last day of any
incentive period (reduced by management fees accrued or
payable for the account of the Partnership for such
incentive period, but before reduction for the current
annual incentive fee, if any, accrued or payable for
the account of the Partnership for such incentive
period), minus (B) the highest value of Net Assets as
of the last day of any preceding incentive period.
The term "New Appreciation" means
Appreciation increased by (A) distributions and
redemptions paid or payable on Units and (B) exchanges
of Units for units of another member partnership of the
Cornerstone Funds, and decreased by (C) contributions
to the Partnership arising from Units acquired upon an
exchange or from the continuing offering of Units and
(D) interest income earned for the account of the
Partnership, with each item of increase or decrease
determined from the date of such
highest value of Net Assets to the last day
of the incentive period as of which such incentive fee
calculation is made.
The aggregate dollar amount of all
distributions and redemptions paid or payable on Units
and all exchange of Units shall be divided by the then
number of trading managers for the Partnership
(including the Trading Manager) and an equal dollar
amount in respect of such distributions, redemptions,
or exchanges shall be charged to the Managed Net Assets
of each such trading manager unless the General Partner
shall select an alternative means of allocation and
shall so notify the trading managers. All incentive
fees accrued at the end of a month or paid at the end
of an incentive period shall be charged to the Managed
Net Assets of each trading manager for the Partnership
(including the Trading Manager) in the same manner and
to the same extent as such amounts would or will be
paid to each such trading manager as of the date of
accrual or payment.
It is understood that limited partners of the
Partnership may redeem or exchange Units other than at
the end of an incentive period and that accrued
incentive fees, if any, shall be a deduction from the
"Net Asset Value" (as defined in the Limited
Partnership Agreement) of such Units upon redemption or
exchange. The Partnership agrees that the incentive
fee accrued on any such Units shall be paid to the
Trading Manager in accordance with the terms of this
Agreement as if a month-end were the end of an
incentive period. Any amounts so paid to trading
managers for the Partnership (including the Trading
Manager) shall be deducted from any subsequent
incentive fee to be paid as of the end of an incentive
period which includes New Appreciation allocable to
such Units.
(b) If any payment shall have been made by
the Partnership to the Trading Manager on account of
New Appreciation in the value of the Net Assets and
thereafter the Net Assets shall decline in value or
fail to experience New Appreciation for any subsequent
incentive period, the Trading Manager shall be entitled
to retain such amounts previously paid by the
Partnership in respect of New Appreciation. No
subsequent payment based on New Appreciation as of the
end of an incentive period shall be made to the Trading
Manager, however, until the Partnership has again
experienced New Appreciation and the Trading Manager
has
contributed thereto and is entitled to an
allocation of such incentive fee.
If this Agreement is terminated on a date
other than the end of an incentive period, the
incentive fee described above shall be determined as if
such date were the end of an incentive period. If this
Agreement is terminated on a date other than the end of
a calendar month, the management fee described above
shall be determined as if such date were the end of a
month, but such fee shall be prorated based on the
ratio of the number of trading days in the month
through the date of termination to the total number of
trading days in the month. If during any month
(including the month in which the Partnership commences
trading operations) the Partnership does not conduct
business operations, or suspends trading, or, as a
result of an act or failure to act by the Trading
Manager, is otherwise unable to utilize the trading
advice of the Trading Manager on any of the trading
days of that period for any reason, the management fee
described above shall be prorated based on the ratio of
the number of trading days in the month on which the
Partnership engaged in trading operations to the total
number of trading days in the month. The management
fee payable to the Trading Manager for the month in
which the Partnership begins to receive trading advice
from the Trading Manager pursuant to this Agreement
shall be prorated based on the ratio of the number of
trading days in the month from the day the Partnership
begins to receive such trading advice to the total
number of trading days in the month.
Any management or incentive fees payable to
the Trading Manager pursuant to the foregoing
provisions shall be paid within ten and thirty days,
respectively, after the end of the applicable period.
(c) As used herein, the term "Net Assets"
shall mean the total assets of the Partnership,
including all cash and cash equivalents (valued at
cost), accrued interest, and the market value of all
open commodity positions and other assets of the
Partnership, less (i) one-half of the brokerage
commissions that would be payable with respect to the
closing of each of the Partnership's open commodity
positions and (ii) all other liabilities of the
Partnership, including incentive fees accrued or
payable, determined in accordance with the principles
specified in the Limited Partnership Agreement and,
where no principle is
specified, in accordance with generally
accepted accounting principles consistently applied
under the accrual basis of accounting.
As used herein, the term "Managed Net Assets"
shall mean the total assets of the Partnership
allocated to the management of a trading manager
(including the Trading Manager), including all cash and
cash equivalents (valued at cost), accrued interest,
and the market value of all open commodity positions
and other assets allocated to such trading manager,
less (i) one-half of the brokerage commissions that
would be payable with respect to the closing of each of
such trading manager's open commodity positions, (ii)
its proportionate share of incentive fees for the
Partnership accrued or payable pursuant to the
provisions of this Section, and (iii) all other
liabilities of the Partnership allocated to such
trading manager, including brokerage commissions
attributable to the trading manager and monthly
management fees of the trading manager, determined in
accordance with the principles specified in the Limited
Partnership Agreement and, where no principle is
specified, in accordance with generally accepted
accounting principles consistently applied under the
accrual basis of accounting.
(d) The Trading Manager shall not receive
any share of the brokerage commissions paid by the
Partnership to any commodity broker, whether in the
form of rebates or otherwise.
8. Term
This Agreement shall continue in effect for a
period of one year following the date of this
Agreement. Thereafter, this Agreement shall be renewed
automatically for additional one-year terms unless
either the Partnership or the Trading Manager, upon
written notice given not less than 60 days prior to the
original termination date or any extended termination
date, notifies the other party of its intention not to
renew. This Agreement shall terminate if the
Partnership terminates. The Partnership shall have the
right to terminate this Agreement at any time without
penalty upon 15 days' prior written notice to the
Trading Manager. In addition, this Agreement may be
terminated by the Partnership at any time without
penalty upon written notice to the Trading Manager upon
the occurrence of any of the following events: (i) the
Trading Manager becomes bankrupt or insolvent;
(ii) the Trading Manager is unable to use its
trading system or methods as in effect on the date of
this Agreement and as refined and modified in the
future with the written consent of the General Partner
for the benefit of the Partnership; (iii) the
registration, as a commodity trading advisor or
otherwise, of the Trading Manager with the CFTC or its
membership in the NFA is revoked, suspended,
terminated, or not renewed or limited, conditioned,
restricted or qualified in any respect; (iv) except as
permitted in Section 14 hereof, the Trading Manager
merges or consolidates with, or sells or otherwise
transfers its advisory business, or all or a
substantial portion of its assets, any portion of its
commodity trading systems or methods, or its goodwill
to, any individual or entity; (v) a decline in the Net
Asset Value of a Unit, without taking into account
distributions, if any, to less than 40% of the Net
Asset Value of a Unit on the date that the Partnership
commenced trading operations; (vi) a decline in the Net
Asset Value of a Unit during any fiscal year to less
than 50% of the Net Asset Value of a Unit as of the
beginning of such fiscal year of the Partnership; (vii)
a decline by 50% during any consecutive 12-month period
in the value of the Net Assets managed by the Trading
Manager (after adding back the amount of distributions,
redemptions, exchanges or reapportionments charged to
such Net Assets and subtracting increases in such Net
Assets from Units acquired by Exchange or from
reapportionments among Trading Managers during the
relevant portion of such twelve consecutive month
period); (viii) the Trading Manager violates any of the
Partnership's trading policies or any administrative
policy described in writing to the General Partner,
except with the prior written consent of the General
Partner; or (ix) the Trading Manager fails to perform
any of its obligations under this Agreement. The
indemnities set forth in Sections 9 and 10 hereof shall
survive any termination of this Agreement.
9. Standard of Liability and Indemnity
(a) Subject to Section 2 and Sections 10
through 14 hereof, the Trading Manager and its
partners, directors, officers, employees, agents, and
its or their respective successors and assigns shall
not be liable to the Partnership, the General Partner,
its stockholders, officers, directors, or employees, or
any of its or their respective successors or assigns,
except by reason of acts of, or omissions due to, bad
faith, misconduct, or
negligence, or for not having acted in good
faith in the reasonable belief that such acts or
omissions were in, or not opposed to, the best
interests of the Partnership, or by reason of a
material breach of this Agreement, or by reason of a
breach of a representation or warranty in this
Agreement.
(b) The Partnership and the General Partner
shall indemnify, defend, and hold harmless the Trading
Manager, its partners, directors, officers, employees,
and its or their respective successors and assigns from
and against all liabilities (including in connection
with the defense or settlement of claims) incurred in
the performance of the services required by this
Agreement, provided that a court of competent
jurisdiction upon entry of final judgment shall find
(or, if no final judgment is entered, an opinion is
rendered to the Partnership by independent legal
counsel) to the effect that such liability was not the
result of bad faith, misconduct, or negligence on the
part of the indemnified person, or that the conduct by
the indemnified person was done in the good faith
belief that it was in, or not opposed to, the best
interests of the Partnership.`
(c) The Trading Manager shall indemnify,
defend, and hold harmless the Partnership, the General
Partner, its stockholders, officers, directors, and
employees, or any of its or their respective successors
or assigns, from and against all liabilities incurred
as a result of the activities of the Trading Manager,
its partners, directors, officers, employees, agents,
or its or their respective successors and assigns,
provided that such liability arises out of, or is based
upon, conduct by the Trading Manager or any of its
partners, directors, officers, employees, agents, or
its or their respective successors or assigns which is
found by a court of competent jurisdiction upon entry
of final judgment (or, if no final judgment is entered,
by an opinion rendered to the Partnership by
independent legal counsel) to be the result of bad
faith, misconduct, or negligence, or conduct not done
in the good faith belief that it was in, or not opposed
to, the best interests of the Partnership.
(d) The indemnities provided in this Section
9 by the Partnership and the General Partner to the
Trading Manager and its partners, directors, officers,
employees, and its or their respective successors and
assigns shall be inapplicable in the event of any
liability arising out of, or based upon, any
misrepresentation or material breach of any
warranty, covenant, or agreement of the Trading Manager
contained in this Agreement to the extent caused by
such event. Likewise, the indemnities provided in this
Section 9 by the Trading Manager to the Partnership,
the General Partner, its stockholders, officers,
directors, and employees, and any of its or their
respective successors and assigns shall be inapplicable
in the event of (i) any liability arising out of, or
based upon, any misrepresentation or material breach of
any warranty, covenant, or agreement of the Partnership
or the General Partner contained in this Agreement to
the extent caused by such event or (ii) any event
unrelated to the Trading Manager which occurred prior
to the date of this Agreement.
(e) The indemnifying party's right to
control the defense of any demand, claim, lawsuit or
action for which indemnity is to be sought under this
Section 9 and the requirements relating to notice form
the indemnified party shall be the same as in Section
10(c) below.
10. Indemnification in Connection with the
Registration Statement and the
Prospectus
(a) The Partnership and the General Partner
shall indemnify, defend, and hold harmless the Trading
Manager from and against any losses, claims, damages,
or liabilities, joint or several, to which the Trading
Manager may become subject, under the Act or otherwise,
insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of, or are
based upon, any untrue or misleading statement or
alleged untrue or misleading statement of any material
fact contained in the Registration Statement, the
Prospectus, or any amendment or supplement thereto, or
any related preliminary prospectus, or arise out of, or
are based upon, the omission or the alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements therein (in
the case of the Prospectus, in light of the
circumstances under which they were made) not
misleading; provided, however, that the Partnership and
the General Partner shall not be liable in any such
case to the extent that any such loss, claim, damage,
or liability arises out of, or is based upon, any
untrue or misleading statement or omission or alleged
untrue or misleading statement or omission made in any
of such documents in reliance upon, and in conformity
with, information furnished to the
Partnership or the General Partner or any of their
agents by or on behalf of the Trading Manager or its
agents. The Partnership and the General Partner also
shall reimburse any legal or other expenses, including
reasonable attorneys' fees, reasonably incurred by the
Trading Manager in connection with investigating or
defending any loss, claim, damage, liability, or action
covered by this indemnity agreement. The indemnity
agreement in this subsection (a) shall be in addition
to any liability which the Partnership and the General
Partner may otherwise have and shall extend, upon the
same terms and conditions, to each officer, director,
and employee of the Trading Manager and to each person,
if any, who controls the Trading Manager within the
meaning of the Act.
(b) The Trading Manager shall indemnify,
defend, and hold harmless the Partnership, the General
Partner, any member partnership of the Cornerstone
Funds, and any other trading manager for the
Partnership or for a member partnership of the
Cornerstone Funds from and against any losses, claims,
damages, or liabilities, joint or several, to which any
indemnified person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out
of, or are based upon, any untrue or misleading
statement or alleged untrue or misleading statement of
any material fact contained in the Registration
Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary
prospectus, or arise out of, or are based upon, the
omission or the alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statement therein (in the case of
the Prospectus, in light of the circumstances under
which they were made) not misleading, provided that any
such loss, claim, damage, or liability arises out of,
or is based upon, an untrue or misleading statement or
omission or alleged untrue or misleading statement or
omission made in any of such documents in reliance
upon, and in conformity with, information furnished to
the Partnership or the General Partner or any of their
agents by or on behalf of the Trading Manager or its
agents. The Trading Manager also shall reimburse any
legal or other expenses, including reasonable
attorneys' fees, reasonably incurred by any indemnified
person in connection with investigating or defending
any loss, claim, damage, liability, or action covered
by this indemnity agreement. The indemnity agreement
in this subsection (b) shall be in addition to any
liability which the Trading Manager may
otherwise have and shall extend, upon the same terms
and conditions, to each partner, officer, director, and
employee of any indemnified person and to each person,
if any, who controls any indemnified person within the
meaning of the Act.
(c) Promptly after receipt by an indemnified
party under this Section of notice of the commencement
of any action, the indemnified party shall notify the
indemnifying party of the commencement thereof if a
claim in respect thereof is to be made against the
indemnifying party under this Section; but the omission
so to notify the indemnifying party shall not relieve
the indemnifying party from any liability which the
indemnifying party may have to any indemnified party
under this Section (except where such omission shall
have materially prejudiced the indemnifying party) or
otherwise than under this Section. In case any action
is brought against any indemnified party, and the
indemnified party notifies the indemnifying party of
the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent
that the indemnifying party may wish, jointly with any
other indemnifying party similarly notified, to assume
the defense thereof, with legal counsel satisfactory to
the indemnified party, and after notice from the
indemnifying party to the indemnified party of the
indemnifying party's election so to assume the defense
thereof, the indemnifying party shall not be liable to
the indemnified party under this Section for any legal
or other expenses subsequently incurred by the
indemnified party in connection with the defense
thereof other than reasonable costs of investigation.
Notwithstanding any other provision of this Section, if
in any claim as to which indemnify is or may be
available any indemnified party reasonably determines
that its interests are or may be adverse, in whole or
in part, to the interests of the indemnifying party or
that there may be legal defenses available to the
indemnified party which are conflicting with the
defenses available to the indemnifying party, the
indemnified party may retain its own legal counsel in
connection with such claim, in which case the
indemnified part shall be responsible for any legal or
any other expenses, including reasonable attorneys'
fees, incurred by or on behalf of it in connection with
investigating or defending such claim.
11. Right to Advise Others and Uniformity of
Acts and Practices
(a) The Trading Manager is engaged in the
business of advising investors as to the purchase and
sale of commodity interests. During the term of this
Agreement, subject to Section 11(c) hereof, the Trading
Manager and its principals and affiliates may or will
be advising other investors (including their officers,
directors, and employees and their families, their
principals and affiliates, and partners, officers,
directors, and employees of such principals and
affiliates and their families) and trading for their
accounts. However, under no circumstances shall the
Trading Manager or any of its principals or affiliates
by any act or omission knowingly or deliberately favor
any account advised or managed by the Trading Manager
or any of its principals or affiliates over the account
of the Partnership in any way or manner (other than by
charging different management and/or incentive fees) or
employ a trading system, method, or strategy on behalf
of any other account advised or managed by the Trading
Manager or any of its principals or affiliates which is
materially different from the trading system, method or
strategy employed by the Trading Manager on behalf of
the Partnership's account unless: (i) the Trading
Manager has first offered to employ such other system,
method, or strategy on behalf of the Partnership's
account and the General Partner has expressly declined
such offer in writing, or (ii) the above-mentioned
trading system, method, or strategy is only offered to
a specific client (for whom the trading system, method,
or strategy was customized) and is not offered to
clients in the Trading Manager's Disclosure Document.
The General Partner agrees to respond promptly to such
requests. The Trading Manager and its principals and
affiliates agree to treat the Partnership in a
fiduciary capacity to the extent recognized by
applicable law, but, subject to that standard and
Section 11(c) hereof, the Trading Manager and its
principals and affiliates shall be free to advise and
manage accounts for other investors and shall be free
to trade on the basis of the same trading system or
other methods or strategies employed by the Trading
Manager for the account of the Partnership, or trading
systems, methods, or strategies which are entirely
independent of, or materially different from (if the
General Partner has expressly declined such offer
pursuant to the preceding sentence), those employed for
the account of the Partnership, and shall be free to
compete for the same commodity interests as the
Partnership or to
take positions opposite to the Partnership,
where such actions do not knowingly or deliberately
favor any of such accounts over the account of the
Partnership. At the request of the General Partner,
the Trading Manager shall use its best efforts to make
available for inspection and copying by the General
Partner copies of the normal monthly, quarterly, and
annual (as the case may be) reports sent to
participants in commodity pools (without identifying
such participants) for which the Trading Manager or any
of its principals or affiliates acts as a commodity
trading advisor and similar information with respect to
any other accounts of theirs with respect to which such
reports are not required to be delivered. At the
request of the General Partner, the Trading Manager and
its principals and affiliates shall provide the General
Partner with a written explanation, acceptable to the
General Partner, of material differences in performance
between the Partnership's account and such other
accounts.
(b) Subject to Section 11(c) hereof, the
Trading Manager and its principals and affiliates shall
not be restricted as to the number of nature of their
clients, except that: (i) they shall not accept
additional advisory clients or open additional
positions in commodity interests if to do so would
result in aggregate positions in any one commodity
exceeding the applicable speculative position limits of
the CFTC or any other regulatory body, exchange, or
board having jurisdiction; and (ii) if they at any time
become aware that the positions in commodity interests
of the Partnership, the Trading Manager, or any
principal or affiliate of the Trading Manager (either
alone or aggregated with the positions of any other
person) exceed or are about to exceed applicable
speculative position limits of the CFTC or any other
regulatory body, exchange, or board having
jurisdiction, they shall immediately notify the General
Partner of that fact and shall take such action,
consistent with their fiduciary responsibility to the
Partnership, their obligation not to favor any other
account over the Partnership's account, and their
obligations under this Agreement, as may be necessary
to prevent to the extent possible the significant
modification of positions taken or intended for the
Partnership.
(c) The Trading Manager represents and
agrees that so long as the Trading Manager acts as a
trading manager for the Partnership, neither the
Trading Manager nor any of its principals
or affiliates shall hold knowingly any
position or control any other account which would cause
the Partnership, the Trading Manager, or the principals
or affiliates of the Trading Manager to be in violation
of the Commodity Exchange Act (the "CEAct") or any
regulations promulgated thereunder, any applicable rule
or regulation of the CFTC or any other regulatory body,
exchange, or board. The Trading Manager further
represents and agrees that neither the Trading Manager
nor any of its principals or affiliates shall render
commodity trading advice to any other individual or
entity or otherwise engage in activity which shall
knowingly cause positions in commodity interests to be
attributed to the Trading Manager or any of its
principals or affiliates under the rules or regulations
of the CFTC or any other regulatory body, exchange, or
board so as to require the significant modification of
positions taken or intended for the account of the
Partnership. If applicable speculative position limits
are exceeded by the Trading Manager or any of its
principals or affiliates in the opinion of independent
legal counsel (who shall be other than counsel to the
Partnership), the CFTC, or any other regulatory body,
exchange, or board, the Trading Manager and its
principals and affiliates shall promptly liquidate
positions in all of their accounts, including the
Partnership's account, as to which positions are
attributed to the Trading Manager or any of its
principals or affiliates as nearly as possible in
proportion to their respective equities to the extent
necessary to comply with the applicable position limits
and shall deliver to the General Partner a written
explanation of the manner in which it or they complied
with this provision.
12. Additional Undertakings by the Trading
Manager
The Trading Manager warrants and agrees that
neither the Trading Manager nor any of its partners,
officers, directors, employees, principals, affiliates,
or any of the officers, directors, employees, or
stockholders of such principals or affiliates shall
knowingly use or distribute the Certificate of Limited
Partnership, any amendment thereto, or any list
excerpted or complied therefrom containing the names
and/or residence addresses of, and/or other
biographical information about, the limited partners of
the Partnership for the purpose of soliciting any such
person for a commodity pool or commodity trading
program similar in nature to the Partnership.
13. Aggregation
If it should prove necessary, in the
reasonable opinion of the legal counsel to the
Partnership with respect to commodity interests subject
to speculative position limits established by the CFTC,
an exchange, or any other commodity trading regulatory
agency or authority, for positions in commodity
interests taken by the Trading Manager for the account
of the Partnership to be aggregated, for purposes of
speculative position limits, with positions in
commodity interests taken by each of the other trading
managers for the account of the Partnership, or if an
order to that effect is made by the CFTC, such
exchange, or such other agency or authority, the
General Partner may require the Trading Manager and
each other trading manager affected thereby to utilize
only that portion of the speculative position limit in
each commodity interest as the General Partner shall
determine from time to time in its sole discretion.
14. Merger or Transfer of Assets of Trading
Manager
The Trading Manager may merge or consolidate
with, or sell or otherwise transfer its advisory
business, or all or a substantial portion of its assets
or its goodwill to, any entity that directly or
indirectly is controlled by, controls, or is under
common control with, the Trading Manager, provided that
such entity expressly assumes all obligations of the
Trading Manager under this Agreement and agrees to
continue to operate the business of the Trading
Manager, substantially as such business is being
conducted on the date hereof, as a separate and
distinct division of such entity. The Trading Manager
agrees to provide written notice to the General Partner
at least 30 days before the effective date of any such
merger, consolidation, sale, or transfer, whether
permitted under this Section or otherwise.
15. Complete Agreement
This Agreement constitutes the entire
agreement among the parties with respect to the matters
referred to herein, and no other agreement, verbal or
otherwise, shall be binding as among the parties unless
it is in writing and signed by the party against whom
enforcement is sought.
16. Assignment
This Agreement may not be assigned by any
party hereto without the prior written consent of the
other parties hereto, except that the Partnership and
General Partner may assign this Agreement to any entity
that directly or indirectly controls, is controlled by,
or is under common control with, them, and the Trading
Manager may assign this Agreement to a successor entity
expressly permitted under Section 17 hereof.
17. Amendment; Waiver
This Agreement may not be amended except by a
written instrument signed by the parties hereto. No
waiver of any provision of this Agreement shall be
implied from any course of dealing between or among the
parties hereto or from any failure by any party hereto
to assert its rights hereunder on any occasion or
series of occasions.
18. Severability
The invalidity or unenforceability of any
provision of this Agreement or any covenant herein
contained shall not affect the validity or
enforceability of any other provision or covenant
hereof or herein contained, and any such invalid
provision or covenant shall be deemed to be severable.
19. Notices
All notices required or desired to be
delivered under this Agreement shall be in writing and
shall be effective when delivered personally on the day
delivered or, when given by registered or certified
mail, postage prepaid, return receipt requested, on the
second business day following the day on which it is so
mailed, addressed as follows (or to such other address
as the party entitled to notice shall hereafter
designate in accordance with the terms hereof):
if to the Partnership or the General Partner:
c/o Demeter Management Corporation
2 World Trade Center, 62nd Floor
New York, New York 10048
Attn: Mr. Mark J. Hawley, President
and with copies to:
Dean Witter Reynolds Inc.
130 Liberty Street
New York, New York 10006
Attn: C. Robert Paul, III, Esq.
and
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attn: Edwin L. Lyon, Esq.
if to the Trading Manager:
Northfield Trading L.P.
3333 S. Wadsworth Boulevard, Suite D-318
Lakewood, Colorado 80227
Attn: Douglas Bry
and with a copy to:
David Novick, Esq.
Katten Muchin & Zavis
525 W. Monroe, #1600
Chicago, IL 60606
20. Survival
The provisions of this Agreement shall
survive the termination of this Agreement with respect
to any matter arising while this Agreement was in
effect, provided that the restriction in Section 11(c)
hereof shall not survive the termination of this
Agreement.
21. Governing Law
This Agreement shall be governed by, and
construed in accordance with, the law of the State of
New York (excluding the law thereof which requires the
application of or reference to the law of any other
jurisdiction).
22. Consent to Jurisdiction
The parties hereto agree that any action or
proceeding arising directly, indirectly, or otherwise
in connection with, out of, related to, or from this
Agreement, any breach hereof, or any transaction
covered hereby, shall be resolved, whether by
arbitration or otherwise, within the County, City, and
State of New York. Accordingly, the parties consent
and submit to the jurisdiction of the federal and state
courts and any applicable arbitral body located within
the County, City, and State of New York. The parties
further agree that any such action or proceeding
brought by either party to enforce any right, assert
any claim, or obtain any relief whatsoever in
connection with this Agreement shall be brought by such
party exclusively in the federal or state courts, or if
appropriate before an arbitral body, located within the
County, City, and State of New York.
23. Counterparts
This Agreement may be executed in
counterparts, each of which shall be deemed an original
but all of which together shall constitute one and the
same instrument.
24. Headings
Headings to sections herein are for the
convenience of the parties only and are not intended to
be a part of or to affect the meaning or interpretation
of this Agreement.
IN WITNESS WHEREOF, this Agreement has been
executed for and on behalf of the undersigned as of the
day and year first above written.
DEAN WITTER CORNERSTONE FUND II
By: Demeter Management Corporation,
General Partner
By: /s/ Mark J. Hawley_______
Mark J. Hawley, President
DEMETER MANAGEMENT CORPORATION
By: /s/ Mark J. Hawley _______
Mark J. Hawley, President
NORTHFIELD TRADING L.P.
By: /s/Douglas Bry____________
Name: Douglas Bry
Title: President
EXHIBIT A
TRADING AUTHORIZATION
Northfield Trading L.P.
3333 S. Wadsworth Boulevard, Suite D-318
Lakewood, Colorado 80227
Dear Sirs:
Dean Witter Cornerstone Fund II, a New York
limited partnership (the "Partnership"), does hereby
make, constitute, and appoint Northfield Trading L.P.
(the "Trading Manager") as the Partnership's agent and
attorney-in-fact to purchase and sell commodity
interests to be cleared through Dean Witter Reynolds
Inc., as commodity broker, as described in and in
accordance with the terms of the Management Agreement
dated as of April , 1997 among the Partnership,
Demeter Management Corporation and the Trading Manager,
until further notice to the Trading Manager.
This authorization shall terminate and be
null, void, and of no further effect simultaneously
with the termination of the said Management Agreement.
Very truly yours,
DEAN WITTER CORNERSTONE FUND II
By: Demeter Management Corporation,
General Partner
By:_________________________________
Mark J. Hawley
Dated: April , 1997
EXHIBIT B
The total Partnership incentive fee, F, in
any incentive period is the sum of the incentive fees
payable as a result of New Appreciation. The change in
New Appreciation each incentive period shall for
accounting purposes be apportioned each incentive
period among all of the trading managers for the
Partnership in accordance with their net contribution,
after allocations for expenses and fees as described
above, to the change in New Appreciation. Thus, if the
total change in New Appreciation during the incentive
period is X, then
X = A + B + C
where A, B, and C are the contributions of each of the
trading managers to the total change in New
Appreciation. The General Partner shall prepare,
update annually, and maintain running totals of A, B,
and C as indicators of the cumulative contributions of
each trading manager. Thus, the cumulative sum of the
value of A, TA, represents the total contribution of
trading manager A to New Appreciation since the
inception of trading on behalf of the Partnership by
such trading manager. Similarly, the values TB and TC
are the cumulative contributions of trading managers B
and C, respectively.
The General Partner shall maintain a record
of cumulative total Partnership incentive fees and
cumulative incentive fees paid to each trading manager.
The cumulative total Partnership incentive fee, TF,
shall equal the sum of all Partnership incentive fees
paid. The cumulative total of incentive fees paid to
trading manager A, PA, shall equal the sum of all prior
incentive fees received by that trading manager.
Similarly, the values PB and PC are the cumulative
total of incentive fees paid to trading managers B and
C, respectively. Since the incentive fees are
allocated among the Partnership's trading managers,
then
TF = PA + PB + PC
Consequently, the following three ratios are indicators
of cumulative incentive fee payments relative to
cumulative performance for each trading manager:
PA/TA PB/TB PC/TC
To the extent possible, the goal of the allocation
rules of the next paragraph is to equalize these
indicators for each trading manager, i.e., to make
cumulative individual incentive fee payments
proportional
to cumulative individual performance.
At the end of each incentive period, the
following rules shall be used to allocate the total
Partnership incentive fee, F, among each trading
manager:
1) A trading manager whose total
contribution is zero shall receive no
incentive fee. Thus, if at the end of
the incentive period, TB is zero,
trading manager B shall not receive a
portion of the fee, F.
2) The total Partnership fee, F, shall be
allocated among trading managers one
dollar at a time. Each successive
dollar will be given to the trading
manager with the lowest ratio of
cumulative payments to cumulative
performance. Thus, if PB/TB is less
than both PA/TA and PC/TC, then trading
manager B is given the next dollar. The
values of PA, PB, and PC and the ratios
PA/TA, PB/TB, and PC/TC are then
recalculated before allocating the next
dollar. Thus, the trading manager(s)
with the lowest ratio continues to
receive dollars until his ratio is
larger than one of the other trading
managers.
3) Each trading manager shall be entitled
to retain any incentive fees paid in any
prior incentive period.
Cornerstone
Funds
December 31, 1997
Annual Report
LOGO
DEAN WITTER
Two World Trade Center
62nd Floor
New York, NY 10048
Telephone (212) 392-8899
DEAN WITTER CORNERSTONE FUNDS
ANNUAL REPORT
1997
Dear Limited Partner:
This marks the thirteenth annual report for Cornerstone Funds II and III and
the eleventh for Cornerstone Fund IV. The Net Asset Value per Unit for each of
the three Cornerstone Funds on December 31, 1997 was as follows:
% CHANGE
FUNDS N.A.V. FOR YEAR
----- --------- --------
Cornerstone Fund II $3,724.92 18.0%
Cornerstone Fund III $2,993.52 10.2%
Cornerstone Fund IV $4,435.47 38.4%
CORNERSTONE FUND IV, the currency fund, recorded strong gains during January
from a significant rise 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 also recorded during March as the U.S. dollar continued to move
higher versus most Asian currencies. Smaller profits were recorded from short
positions in the Singapore dollar and Japanese yen. Fund IV also benefited from
a strengthening in the value of 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. Fund
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.
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. Fund 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 krone and German mark as the value of these
currencies increased versus the U.S. dollar.
Fund 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. Fund IV recorded strong
profits during November 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.
CORNERSTONE FUND II, a diversified fund, 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. Fund II
recorded gains during March 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. Fund 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 as prices in these markets
moved lower after trending higher previously. During September, Fund II
recorded losses from trendless price movement in coffee, sugar and cocoa
futures. Additional losses were experienced in the energy and agricultural
markets as prices in these markets also moved without consistent direction.
Smaller losses were experienced from transactions involving the Swiss franc,
British pound and Japanese yen.
Fund 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. Fund II recorded
significant gains during December 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.
CORNERSTONE FUND III, also a diversified Fund, 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. In February, Fund
III recorded significant gains 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 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 choppy price movement. 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.
Fund III recorded losses during April as trendless price movement 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. Fund III recorded gains in June 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 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 Fund III. Smaller
losses were experienced from long positions in Australian stock index futures
and silver futures. Fund 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 by Fund III 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.
Each of the three Cornerstone Funds recorded profits for the year primarily by
taking advantage of price trends in the currency markets during January and
February, as well as in the fourth quarter. Cornerstone Funds II and III also
profited from long global interest rate
futures positions during July as prices in these markets made a strong upward
move. These gains, coupled with smaller gains from trading gold futures as gold
prices declined late in the year, as well as the Trading Advisors' ability to
limit losses from trend reversals and choppy price movement in the middle of
the year, contributed to each of the Fund's success in 1997. Effective March 1,
1997, Abacus Trading Corporation ("Abacus") was removed as a Trading Advisor to
Cornerstone Fund II. All assets formally managed by Abacus were allocated to
Northfield Trading L.P. ("Northfield") during April. We believe Fund II has
benefited from this mix of advisors, and will continue to do so given the
opportunity for trending market conditions.
Since their inception in 1985, Cornerstone Funds II and III have increased by
282.0% (a compound annualized return of 10.8%), and 207.0% (a compound
annualized return of 9.0%) respectively. Since its inception in 1987,
Cornerstone Fund IV has increased by 354.9% (a compound annualized return of
15.1%).
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048, or your Dean Witter Account Executive.
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is not a
guarantee of future results.
Sincerely,
LOGO
Mark J. Hawley
President
Demeter Management Corporation
General Partner
DEAN WITTER CORNERSTONE FUNDS
INDEPENDENT AUDITORS' REPORT
The Limited Partners and the General Partner of
Dean Witter Cornerstone Fund II
Dean Witter Cornerstone Fund III
Dean Witter Cornerstone Fund IV:
We have audited the accompanying statements of financial condition of Dean
Witter Cornerstone Fund II, Dean Witter Cornerstone Fund III and Dean Witter
Cornerstone Fund IV (collectively, the "Partnerships") as of December 31, 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.
LOGO
February 17, 1998
New York, New York
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1997 1996
---------- ----------
$ $
ASSETS
Equity in Commodity futures trading
accounts:
Cash 29,293,294 28,509,266
Net unrealized gain on open contracts 2,003,679 1,316,434
---------- ----------
Total Trading Equity 31,296,973 29,825,700
Interest receivable (DWR) 106,167 97,815
Due from DWR 27,883 123,327
---------- ----------
Total Assets 31,431,023 30,046,842
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accrued incentive fees 618,270 316,750
Redemptions payable 199,022 442,706
Accrued management fees 104,350 99,352
Common administrative expenses payable 21,640 52,339
Accrued brokerage commissions (DWR) -- 83,967
Accrued transaction fees and costs -- 5,558
---------- ----------
Total Liabilities 943,282 1,000,672
---------- ----------
PARTNERS' CAPITAL
Limited Partners (7,967.401 and 8,987.942 Units,
respectively) 29,677,943 28,360,195
General Partner (217.400 Units) 809,798 685,975
---------- ----------
Total Partners' Capital 30,487,741 29,046,170
---------- ----------
Total Liabilities and Partners'
Capital 31,431,023 30,046,842
========== ==========
NET ASSET VALUE PER UNIT 3,724.92 3,155.36
========== ==========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
--------- ---------- ----------
$ $ $
REVENUES
Trading Profit (Loss):
Realized 6,363,803 7,321,679 11,081,716
Net change in unrealized 687,245 (2,051,673) (947,973)
--------- ---------- ----------
Total Trading Results 7,051,048 5,270,006 10,133,743
Interest income (DWR) 1,228,298 1,179,784 1,471,022
--------- ---------- ----------
Total Revenues 8,279,346 6,449,790 11,604,765
--------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 1,383,112 1,719,932 1,864,093
Management fees 1,159,248 1,167,223 1,307,872
Incentive fees 650,800 329,590 381,720
Transaction fees and costs 128,692 170,971 160,238
Common administrative expenses 41,330 14,612 8,183
--------- ---------- ----------
Total Expenses 3,363,182 3,402,328 3,722,106
--------- ---------- ----------
NET INCOME 4,916,164 3,047,462 7,882,659
========= ========== ==========
NET INCOME ALLOCATION:
Limited Partners 4,792,341 2,976,870 7,753,763
General Partner 123,823 70,592 128,896
NET INCOME PER UNIT:
Limited Partners 569.56 324.71 592.90
General Partner 569.56 324.71 592.90
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
1997 1996
---------- ----------
$ $
ASSETS
Equity in Commodity futures trading
accounts:
Cash 39,762,715 40,587,011
Net unrealized gain on open contracts 1,938,295 2,580,803
Net option premiums (158,765) (291,412)
---------- ----------
Total Trading Equity 41,542,245 42,876,402
Interest receivable (DWR) 145,100 138,367
Due from DWR 94,981 122,701
---------- ----------
Total Assets 41,782,326 43,137,470
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 429,759 680,730
Accrued management fees 138,480 142,387
Common administrative expenses payable 99,713 137,548
Accrued brokerage commissions (DWR) -- 129,098
Accrued transaction fees and costs -- 12,349
---------- ----------
Total Liabilities 667,952 1,102,112
---------- ----------
PARTNERS' CAPITAL
Limited Partners (13,352.334 and 15,097.603 Units,
respectively) 39,970,539 40,997,752
General Partner (382.103 Units) 1,143,835 1,037,606
---------- ----------
Total Partners' Capital 41,114,374 42,035,358
---------- ----------
Total Liabilities and Partners'
Capital 41,782,326 43,137,470
========== ==========
NET ASSET VALUE PER UNIT 2,993.52 2,715.51
========== ==========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
--------- ---------- ----------
$ $ $
REVENUES
Trading Profit (Loss):
Realized 7,439,669 8,925,181 14,260,042
Net change in unrealized (642,508) (2,997,491) 561,437
--------- ---------- ----------
Total Trading Results 6,797,161 5,927,690 14,821,479
Interest income (DWR) 1,786,271 1,657,400 2,061,461
--------- ---------- ----------
Total Revenues 8,583,432 7,585,090 16,882,940
--------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 2,294,914 2,772,496 3,499,743
Management fees 1,728,062 1,629,715 1,828,013
Transaction fees and costs 229,570 379,973 502,332
Common administrative expenses 69,344 24,702 21,158
--------- ---------- ----------
Total Expenses 4,321,890 4,806,886 5,851,246
--------- ---------- ----------
NET INCOME 4,261,542 2,778,204 11,031,694
========= ========== ==========
NET INCOME ALLOCATION:
Limited Partners 4,155,313 2,699,171 10,824,963
General Partner 106,229 79,033 206,731
NET INCOME PER UNIT:
Limited Partners 278.01 206.83 541.04
General Partner 278.01 206.83 541.04
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
1997 1996
----------- ----------
$ $
ASSETS
Equity in Commodity futures trading
accounts:
Cash 119,181,131 91,656,399
Net unrealized gain on open contracts 1,815,112 5,330,520
----------- ----------
Total Trading Equity 120,996,243 96,986,919
Interest receivable (DWR) 382,307 305,391
----------- ----------
Total Assets 121,378,550 97,292,310
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Incentive fees payable 1,594,371 --
Redemptions payable 899,127 1,269,513
Accrued management fees 403,011 322,552
Common administrative expenses payable 72,297 126,007
Accrued brokerage commissions (DWR) -- 74,340
Accrued transaction fees and costs -- 3,654
----------- ----------
Total Liabilities 2,968,806 1,796,066
----------- ----------
PARTNERS' CAPITAL
Limited Partners (26,057.228 and 29,160.287 Units,
respectively) 115,575,973 93,448,822
General Partner (638.889 Units) 2,833,771 2,047,422
----------- ----------
Total Partners' Capital 118,409,744 95,496,244
----------- ----------
Total Liabilities and Partners'
Capital 121,378,550 97,292,310
=========== ==========
NET ASSET VALUE PER UNIT 4,435.47 3,204.66
=========== ==========
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---------- ---------- ----------
$ $ $
REVENUES
Trading Profit (Loss):
Realized 42,691,318 10,304,825 27,041,974
Net change in unrealized (3,515,408) 5,260,377 (198,148)
---------- ---------- ----------
Total Trading Results 39,175,910 15,565,202 26,843,826
Interest income (DWR) 4,200,571 3,924,420 4,912,698
---------- ---------- ----------
Total Revenues 43,376,481 19,489,622 31,756,524
---------- ---------- ----------
EXPENSES
Management fees 4,287,974 3,904,737 4,575,372
Brokerage commissions (DWR) 2,656,715 3,781,486 2,776,225
Incentive fees 1,594,371 -- --
Transaction fees and costs 171,578 222,993 168,718
Common administrative expenses 134,041 47,685 39,890
---------- ---------- ----------
Total Expenses 8,844,679 7,956,901 7,560,205
---------- ---------- ----------
NET INCOME 34,531,802 11,532,721 24,196,319
========== ========== ==========
NET INCOME ALLOCATION:
Limited Partners 33,745,453 11,297,656 23,857,922
General Partner 786,349 235,065 338,397
NET INCOME PER UNIT:
Limited Partners 1,230.81 367.93 529.66
General Partner 1,230.81 367.93 529.66
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUNDS
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
----------- ----------- --------- -----------
$ $ $
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
========== =========== ========= ===========
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
========== =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUNDS
STATEMENT OF CHANGES IN PARTNERS' CAPITAL--(CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
----------- ----------- --------- -----------
$ $ $
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
=========== =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND II
STATEMENTS OF CASH FLOWS
FOR THE YEARS
ENDED
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 4,916,164 3,047,462 7,882,659
Noncash item included in net income:
Net change in unrealized (687,245) 2,051,673 947,973
(Increase) decrease in
operating assets:
Interest receivable (DWR) (8,352) 9,670 17,183
Due from DWR 95,444 (97,802) 24,860
Increase (decrease) in
operating liabilities:
Accrued incentive fees 301,520 9,183 307,567
Accrued management fees 4,998 (4,886) (1,622)
Common administrative expenses payable (30,699) (28,975) (29,854)
Accrued brokerage commissions (DWR) (83,967) (10,486) 13,185
Accrued transaction fees
and costs (5,558) (1,399) 1,237
---------- ---------- ----------
Net cash provided by operating activities 4,502,305 4,974,440 9,163,188
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units 314,932 155,468 178,837
Increase (decrease) in redemptions payable (243,684) 307,817 (251,210)
Redemptions of units (3,789,525) (4,985,648) (8,604,610)
---------- ---------- ----------
Net cash used for financing activities (3,718,277) (4,522,363) (8,676,983)
---------- ---------- ----------
Net increase in cash 784,028 452,077 486,205
Balance at beginning of period 28,509,266 28,057,189 27,570,984
---------- ---------- ----------
Balance at end of period 29,293,294 28,509,266 28,057,189
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CASH FLOWS
FOR THE YEARS
ENDED
DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ---------- -----------
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 4,261,542 2,778,204 11,031,694
Noncash item included in net income:
Net change in unrealized 642,508 2,997,491 (561,437)
(Increase) decrease in
operating assets:
Net option premiums (132,647) 291,412 --
Interest receivable (DWR) (6,733) 21,313 33,368
Due from DWR 27,720 1,755 89,133
Increase (decrease) in
operating liabilities:
Accrued management fees (3,907) (16,243) (265)
Common administrative expenses payable (37,835) (84,488) (44,369)
Accrued brokerage
commissions (DWR) (129,098) (37,030) (34,476)
Accrued transaction fees
and costs (12,349) (8,629) 7,239
---------- ---------- -----------
Net cash provided by operating activities 4,609,201 5,943,785 10,520,887
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units 5,000 8,388 49,000
Increase (decrease) in
redemptions payable (250,971) 41,381 (26,829)
Redemptions of units (5,187,526) (7,700,908) (11,133,473)
---------- ---------- -----------
Net cash used for financing activities (5,433,497) (7,651,139) (11,111,302)
---------- ---------- -----------
Net decrease in cash (824,296) (1,707,354) (590,415)
Balance at beginning of period 40,587,011 42,294,365 42,884,780
---------- ---------- -----------
Balance at end of period 39,762,715 40,587,011 42,294,365
========== ========== ===========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF CASH FLOWS
FOR THE YEARS
ENDED
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income 34,531,802 11,532,721 24,196,319
Noncash item included in net income:
Net change in unrealized 3,515,408 (5,260,377) 198,148
(Increase) decrease in operating
assets:
Interest receivable (DWR) (76,916) 59,356 69,406
Increase (decrease) in operating
liabilities:
Accrued incentive fee 1,594,371 -- --
Accrued management fees 80,459 (26,487) (22,567)
Common administrative expenses payable (53,710) (141,781) (89,342)
Accrued brokerage commissions (DWR) (74,340) 41,760 32,580
Accrued transaction fees
and costs (3,654) 2,025 1,629
----------- ----------- -----------
Net cash provided by operating
activities 39,513,420 6,207,217 24,386,173
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Offering of units 223,794 108,665 212,691
Increase (decrease) in redemptions
payable (370,386) 224,709 (544,818)
Redemptions of units (11,842,096) (19,812,153) (30,634,265)
----------- ----------- -----------
Net cash used for financing activities (11,988,688) (19,478,779) (30,966,392)
----------- ----------- -----------
Net increase (decrease) in cash 27,524,732 (13,271,562) (6,580,219)
Balance at beginning of period 91,656,399 104,927,961 111,508,180
----------- ----------- -----------
Balance at end of period 119,181,131 91,656,399 104,927,961
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Dean Witter Cornerstone Fund II, 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"). Demeter is a wholly-owned subsidiary of
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD").
On May 31, 1997, Morgan Stanley Group Inc. was merged with and into Dean
Witter, Discover & Co. ("DWD"). At the time DWD changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD").
Through July 31, 1997, the sole commodity broker for the Partnership's
transactions was Dean Witter Reynolds Inc. ("DWR"), also a subsidiary of MSDWD.
On July 31, 1997, DWR closed the sale of its institutional futures business and
foreign currency trading operations to Carr Futures Inc. ("Carr"), a subsidiary
of Credit Agricole Indosuez. Following the sale, Carr became the clearing
commodity broker for the Partnerships' futures and futures options trades and
the counterparty on the Partnerships' foreign currency trades. DWR serves as a
non-clearing commodity broker for the Partnerships' with Carr providing all
clearing services for the Partnerships' transactions.
Demeter is required to maintain a 1% minimum interest in the equity of each
Partnership and income (losses) are shared by the General and Limited Partners
based upon their proportional ownership interests.
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
REVENUE RECOGNITION--Commodity futures contracts and forward contracts on
foreign currencies are open commitments until settlement date. They are valued
at market and the resulting unrealized gains and losses are reflected in
income. Monthly, DWR pays each Partnership interest income based upon 80% of
its average daily Net Assets at a rate equal to the average yield on 13-Week
U.S. Treasury Bills issued during such month. For purposes of such interest
payments in Dean Witter Cornerstone Fund IV, Net
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Assets do not include monies due the Partnership on forward contracts and other
commodity interests, but not actually received.
NET INCOME (LOSS) PER UNIT--Net income (loss) per Unit is computed using the
weighted average number of units outstanding during the period.
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS-- Each Partnerships' assets
"Equity in Commodity futures trading accounts" consists of cash on deposit at
DWR and Carr to be used as margin for trading, the net asset or liability
related to unrealized gains or losses on open contracts and the net option
premiums paid and/or received. The asset or liability related to the unrealized
gains or losses on forward contracts is presented as a net amount in each
period due to master netting agreements with DWR.
BROKERAGE COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS--Brokerage
commissions for each Partnership are accrued at 80% of DWR's published non-
member rates on a half-turn basis. 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 each Partnership have been capped at 13/20 of 1% per month of the
Partnership's month end Net Assets (as defined in the Limited Partnership
Agreement) applied on a per trading system basis, allocated to each such
trading program.
OPERATING EXPENSES--Each Partnership has entered into an exchange agreement
pursuant to which certain common administrative expenses (i.e., legal,
auditing, accounting, filing fees and other related expenses) are shared by
each of the Partnerships based upon the number of Units of each Partnership
outstanding during the month in which such expenses are incurred. In addition,
the Partnerships incur monthly management fees and may incur incentive fees.
Demeter bears all other operating expenses.
INCOME TAXES--No provision for income taxes has been made in the accompanying
financial statements,
as partners are individually responsible for reporting income or loss based
upon their respective share of each Partnership's revenues and expenses for
income tax purposes.
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 the General Partner.
EXCHANGES--Limited Partners may transfer their investment among the
Partnerships (subject to certain restrictions outlined in the Limited
Partnership Agreement) without paying additional charges.
DISSOLUTION OF THE PARTNERSHIP--Each Partnership will terminate on September
30, 2025 regardless of its financial condition at such time, upon a decline in
Net Assets to less than $250,000, a decline in the Net Asset Value per Unit to
less than $250, or under certain other circumstances defined in each Limited
Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
Each Partnership pays brokerage commissions to DWR on trades executed on its
behalf as described in Note 1. Each Partnership's cash is on deposit with DWR
in commodity trading accounts to meet margin requirements as needed. DWR pays
interest on these funds as described in Note 1.
3. TRADING ADVISORS
Demeter, on behalf of each Partnership, retains certain commodity trading
advisors to make all trading decisions for the Partnerships. The trading
advisors for each Partnership as of December 31, 1997 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 Systems Corporation
Sunrise Capital Management, Inc.
Dean Witter Cornerstone Fund IV
John W. Henry & Company, Inc.
Sunrise Capital Management, Inc.
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Compensation to the trading advisors by the Partnerships consists of a
management fee and an incentive fee as follows:
MANAGEMENT FEE--The management fee is accrued at the rate of 1/3 of 1% per
month of the Net Assets
under management by each trading advisor at each month end.
INCENTIVE FEE--Each Partnership 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.
4. FINANCIAL INSTRUMENTS
The Partnerships trade futures and forward contracts in interest rates, stock
indices, commodities, currencies, petroleum and precious metals. Risk arises
from changes in the value of these contracts and the potential inability of
counterparties to perform under the terms of the contracts. There are numerous
factors which may significantly influence the market value of these contracts,
including interest rate volatility. At December 31, 1997 and 1996, open
contracts were:
CORNERSTONE II
---------------------
CONTRACT OR NOTIONAL AMOUNT
-----------------------------
1997 1996
---------- ----------
$ $
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase 30,057,000 18,287,000
Commitments to Sell 13,539,000 70,723,000
Commodity Futures:
Commitments to Purchase 6,148,000 6,346,000
Commitments to Sell 15,082,000 14,596,000
Foreign Futures:
Commitments to Purchase 25,543,000 57,075,000
Commitments to Sell 20,799,000 8,798,000
OFF-EXCHANGE-TRADED FORWARD
CURRENCY CONTRACTS
Commitments to Purchase 17,705,000 26,688,000
Commitments to Sell 46,518,000 18,334,000
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CORNERSTONE III
-----------------------
CONTRACT OR NOTIONAL AMOUNT
-------------------------------
1997 1996
----------- -----------
$ $
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase 50,242,000 118,163,000
Commitments to Sell 21,172,000 59,405,000
Options Written -- 18,613,000
Commodity Futures:
Commitments to Purchase 8,055,000 17,683,000
Commitments to Sell 31,622,000 22,811,000
Options Written -- 18,407,000
Foreign Futures:
Commitments to Purchase 50,870,000 62,344,000
Commitments to Sell 42,064,000 22,390,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CON-
TRACTS
Commitments to Purchase 27,863,000 420,000
Commitments to Sell 41,794,000 1,379,000
CORNERSTONE IV
-----------------------
CONTRACT OR NOTIONAL AMOUNT
-------------------------------
1997 1996
----------- -----------
$ $
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase -- 93,583,000
Commitments to Sell -- 118,029,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CON-
TRACTS
Commitments to Purchase 218,670,000 208,140,000
Commitments to Sell 427,237,000 205,227,000
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 unrealized gains on open contracts are reported as a component of "Equity
in Commodity futures trading accounts" on the Statements of Financial Condition
and totaled at December 31, 1997 and 1996, respectively, $2,003,679 and
$1,316,434 for Cornerstone II, $1,938,295 and $2,580,803 for Cornerstone III
and $1,815,112 and $5,330,520 for Cornerstone IV.
For Cornerstone II, 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.
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For Cornerstone III, 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 $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 nonperformance. The credit risk associated
with these instruments is limited to the amounts reflected in each
Partnerships' Statement of Financial Condition.
Exchange-traded contracts and off-exchange-traded forward currency contracts
held by the Partnerships at December 31, 1997 and 1996 mature as follows:
1997 1996
-------------- ------------
CORNERSTONE II
Exchange-Traded Contracts December 1998 June 1998
Off-Exchange-Traded Forward Currency Contracts March 1998 March 1997
CORNERSTONE III
Exchange-Traded Contracts June 1998 June 1997
Off-Exchange-Traded Forward Currency Contracts March 1998 January 1997
CORNERSTONE IV
Exchange-Traded Contracts September 1998 March 1997
Off-Exchange-Traded Forward Currency Contracts April 1998 March 1997
The Partnerships also have credit risk because either DWR or Carr act as the
futures commission merchant or the counterparty with respect to most of the
Partnerships' assets. Exchange-traded futures contracts are marked to market on
a daily basis, with variations in value settled on a daily basis. DWR and Carr,
as the futures commission merchants of all of each Partnership's exchange-
traded futures 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
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
customers, all funds held by them with respect to exchange-traded futures
contracts including an amount equal to the net unrealized gain on all open
futures contracts, which funds totaled at December 31, 1997 and 1996
respectively, $30,968,637 and $29,851,316 for Cornerstone II, $41,931,212 and
$43,176,300 for Cornerstone III, and $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 counterparty on all of such contracts, to perform. Carr's parent,
Credit Agricole Indosuez, has guaranteed Carr's obligations to the
Partnerships.
For the years ended December 31, 1997 and 1996 the average fair value of
financial instruments held for trading purposes was as follows:
CORNERSTONE II 1997
- -------------- ----------------------
ASSETS LIABILITIES
---------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 32,004,000 25,556,000
Commodity Futures 14,417,000 12,696,000
Foreign Futures 26,042,000 10,396,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 36,907,000 46,749,000
1996
----------------------
ASSETS LIABILITIES
---------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 48,469,000 47,433,000
Commodity Futures 24,459,000 22,228,000
Foreign Futures 43,821,000 14,875,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 38,522,000 44,536,000
CORNERSTONE III 1997
- --------------- ----------------------
ASSETS LIABILITIES
---------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 82,881,000 46,462,000
Options on Financial Futures 698,000 64,639,000
Commodity Futures 26,095,000 21,377,000
Options on Commodity Futures 1,117,000 4,712,000
Foreign Futures 44,764,000 26,219,000
Options on Foreign Futures 7,229,000 --
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 12,599,000 13,558,000
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1996
-----------------------
ASSETS LIABILITIES
----------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 105,128,000 74,480,000
Options on Financial Futures -- 10,138,000
Commodity Futures 44,276,000 18,531,000
Options on Commodity Futures -- 2,763,000
Foreign Futures 80,000,000 27,228,000
Options on Foreign Futures -- 584
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 233,000 354,000
CORNERSTONE IV 1997
- -------------- -----------------------
ASSETS LIABILITIES
----------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 34,008,000 57,577,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 299,407,000 414,754,000
1996
-----------------------
ASSETS LIABILITIES
----------- -----------
$ $
EXCHANGE-TRADED FINANCIAL FUTURES CONTRACTS 67,114,000 125,331,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS 334,452,000 334,461,000
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 & Currency Management Inc., MSDWD (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
DEAN WITTER CORNERSTONE FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
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.
DEAN WITTER REYNOLDS INC.
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