Item 1. BUSINESS (a) General Development of Business. Dean Witter Cornerstone Fund III (the "Partnership") is a New York limited partnership formed to engage in the speculative trading of commodity futures contracts and other commodity interests, including, but not limited to, forward contracts on foreign currencies. The Partnership's net asset value per unit, as of December 31, 1995, was $2,508.68, representing an increase of 27.50 percent from the net asset value per unit of $1,967.64 at December 31, 1994. (b) Financial Information about Industry Segments. The Partnership's business comprises only one segment for financial reporting purposes, speculative trading of commodity futures contracts and other commodity interests. The relevant financial information is presented in Items 6 and 8. (c) Narrative Description of Business. The Partnership is in the business of speculative trading in commodity futures contracts and other commodity interests, pursuant to trading instructions provided by independent trading advisors. For a detailed description of the different facets of the Partnership's business, see those portions of the Partnership's latest Prospectus, dated May 2, 1994 together with the supplement to Prospectus and Disclosure Document dated August 7, 1995 (the "Supplement"), filed as part of 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 3-12 of the Prospectus and Page 1 of the Sup- plement).
2. Commodity Markets 2. "The Commodities Markets" (Pages 164-172).
3. Partnership's Commodity 3. "Trading Policies" (Pages Trading Arrangements and 68-69) and "The Trading Policies Manager" (Pages 73-74, and 120-145 of the Prospectus and Pages 12-13 and Pages T-12-T-16 of the Supplement).
4. Management of the Part- 4. "The Cornerstone Funds" (Pages nership 30-61 of the Prospectus and Pages 1-3 of the Supplement). "The General Partner" Pages 160-162 of the Prospectus and Page 14 of the Supplement "The Commodity Broker" (Pages 162-164). "The Limited Partnership Agreements" (Pages 174-178).
5. Taxation of the Partnership's 5. "Federal Income Tax Aspects" Limited Partners and "State and Local Income Tax Aspects" (Pages 182-189).
(d) Financial Information About Foreign and Domestic Operations and Export Sales.
The Partnership has not engaged in any operations in foreign countries; however, the Partnership (through the commodity broker) enters into forward contract transactions where foreign banks are the contracting party and trades in commodity interest contracts on foreign exchanges.
Item 2.
Item 2. PROPERTIES The executive and administrative offices are located within the offices of Dean Witter Reynolds Inc. ("DWR"). The DWR offices utilized by the Partnership are located at Two World Trade Center, 62nd Floor, New York, NY 10048. Item 3.
Item 3. LEGAL PROCEEDINGS The General Partner, Demeter Management Corporation ("Demeter"), is not aware of any material pending legal proceedings to which the Partnership is a party or to which any of its assets are subject. Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II
Item 5.
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, 1995 was approximately 6,747. No distributions have been made by the Partnership since it commenced trading 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.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership's assets are deposited in separate commodity trading accounts with DWR, the commodity broker, and are used by the Partnership as margin to engage in commodity futures contract trading. DWR holds such assets in either designated depositories or in securities approved by the Commodity Futures Trading Commission ("CFTC") for investment of customer funds. The Partnership's assets held by DWR may be used as margin solely for the Partnership's trading. Since the Partnership's sole purpose is to trade in commodity futures contracts and other commodity interests, it is expected that the Partnership will continue to own such liquid assets for margin purposes. The Partnership's investment in commodity futures contracts and other commodity interests may be illiquid. If the price for a futures contract for a particular commodity has increased or decreased by an amount equal to the "daily limit", positions in the commodity can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Partnership from promptly liquidating its commodity futures positions. There is no limitation on daily price moves in trading forward contracts on foreign currency. 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 commodity interest positions held by the Partnership at the same time, and if the Trading Advisors were unable to offset commodity interest positions of the Partnership, the Partnership could lose all of its assets. The Partnership has established Trading Policies for liquidity and leverage which help control market risk. Both the Trading Advisors and Demeter monitor the Partnership's trading activities on a daily basis to ensure compliance with the Trading Policies. Demeter may (under terms of the Management Agreements) override the trading instructions of a Trading Advisor to the extent necessary to comply with the Partnership's Trading Policies. Credit Risk. In addition to market risk, the Partnership is subject to credit risk in that a counterparty may not be able to meet its obligations to the Partnership. The counterparty of the Partnership for futures contracts traded in the United States and most foreign exchanges on which the Partnership trades is the clearinghouse associated with such exchange. In general, clearinghouses are backed by the membership of the exchange and will act in the event of non-performance by one of its members or one of its members' customers, and as such, should significantly reduce this credit risk. In cases where the Partnership trades on exchanges where the clearinghouse is not backed by the membership or when the Partnership enters into off-exchange contracts with a counterparty, the sole recourse of the Partnership will be the
clearinghouse or the counterparty as the case may be. With respect to futures contracts, DWR, in its business as an international commodity broker, constantly monitors the credit-worthiness of the exchanges and clearing members of the foreign exchanges with which it does business for clients, including the Partnership. If DWR believes that there was a problem with the credit-worthiness of an exchange on which the Partnership deals, it would so advise Demeter. With respect to forward contract trading, the Partnership trades with only those counterparties which Demeter, together with DWR, have determined to be creditworthy. As set forth in the Partnership's Trading Policies, in determining credit- worthiness, Demeter and DWR consult with the Corporate Credit Department of DWR. Currently, the Partnership deals solely with DWR as its counterparty on forward contracts. While DWR and Demeter monitor credit- worthiness and risk involved in dealing on the various exchanges and with counterparties, there can be no assurance that an exchange or counterparty will be able to meet its obligations to the Partnership. Capital Resources. The Partnership does not have, nor does it expect to have, any capital assets. Redemptions of additional Units in the future will impact the amount of funds available for investments in commodity futures, forward contracts on foreign currencies and other commodity interests in subsequent periods. As redemptions are at the discretion of Limited Partners, it is not possible to estimate the amount and therefore, the impact of future redemptions. Results of Operations. As of December 31, 1995, the Partnership's total capital was $46,949,674, a decrease of $52,779 from the Partnership's total capital of $47,002,453 at December 31, 1994. For the year ended December 31, 1995, the Partnership generated net income of
$11,031,694, total subscriptions aggregated $49,000, and total redemptions aggregated $11,133,473. For the year ended December 31, 1995, the Partnership's total trading revenues including interest income were $16,882,940. The Partnership's total expenses for the year were $5,851,246 resulting in net income of $11,031,694. The value of an individual unit in the Partnership increased from $1,967.64 at December 31, 1994 to $2,508.68 at December 31, 1995. As of December 31, 1994, the Partnership's total capital was $47,002,453, a decrease of $9,154,240 from the Partnership's total capital of $56,156,693 at December 31, 1993. For the year ended December 31, 1994, the Partnership incurred a net loss of $5,680,495, total subscriptions aggregated $5,299,578, and total redemptions aggregated $8,773,323. For the year ended December 31, 1994, the Partnership's total trading revenues including interest income were $1,307,961. The Partnership's total expenses for the year were $6,988,456 resulting in a net loss of $5,680,495. The value of an individual unit in the Partnership decreased from $2,187.31 at December 31, 1993 to $1,967.64 at December 31, 1994. As of December 31, 1993, the Partnership's total capital was $56,156,693, a decrease of $4,143,394 from the Partnership's total capital of $60,300,087 at December 31, 1992. For the year ended December 31, 1993, the Partnership incurred a net loss of $2,829,361, total subscriptions aggregated $9,819,616, and total redemptions aggregated $11,133,649.
For the year ended December 31, 1993, the Partnership's total trading revenues including interest income were $4,632,967. The Partnership's total expenses for the year were $7,462,328 resulting in a net loss of $2,829,361. The value of an individual unit in the Partnership decreased from $2,297.22 at December 31, 1992 to $2,187.31 at December 31, 1993. The Partnership's overall performance record represents varied results of trading in different commodity markets. For a further description of results, refer to the letter to the Limited Partners in the accompanying 1995 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item appears in the attached 1995 Annual Report to Partners and is incorporated by reference in this Annual Report on Form 10-K. Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
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 Dean Witter, Discover & Co. ("DWD") and is an affiliate of DWR. DWD, DWR and Demeter may each be deemed to be "promoters" and/or a "parent" of the Partnership within the meaning of the federal securities laws. Dean Witter Reynolds Inc. DWR is a financial services company which provides to its individual, corporate and institutional clients services as a broker in securities and commodity interest contracts, a dealer in corporate, municipal and government securities, an investment banker, an investment adviser and an agent in the sale of life insurance and various other products and services. DWR is a member firm of the New York Stock Exchange, the American Stock Exchange, the Chicago Board Options Exchange, and other major securities exchanges, and is a clearing member of the Chicago Board of Trade, the Chicago Mercantile Exchange, the Commodity Exchange Inc., and other major commodities exchanges. DWR is registered with the CFTC as a futures commission merchant and is a member of the NFA in such capacity. DWR is currently servicing its clients through a network of 350 branch offices with approximately 8,500 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, 1995 are as follows: Richard M. DeMartini, age 43, is the Chairman of the Board and a Director of Demeter. Mr. DeMartini is also the Chairman of the Board and a Director of Dean Witter Futures & Currency Management Inc. ("DWFCM"), a registered commodity trading advisor. Mr. DeMartini has served as President and Chief Operating Officer of Dean Witter Capital, a division of DWR since January 1989. From January 1988 until January 1989, Mr. DeMartini served as President and Chief Operating Officer of the Consumer Banking Division of DWD, and from May 1985 until January 1988 was President and Chief Executive Officer of the Consumer Markets Division of DWD. Mr. DeMartini currently serves as a Director of DWD and DWR, and has served as an officer of DWR for the past five years. Mr. DeMartini has been with DWD and its affiliates for 18 years. While Mr. DeMartini has extensive experience in the securities industry, he has no experience in commodity interests trading. Mark J. Hawley, age 52, is President and a Director of Demeter. Mr. Hawley joined DWR in February 1989 as Senior Vice President and Director of DWR's Managed Futures and Precious Metals Department. Mr. Hawley also serves as President of DWFCM. From 1978 to 1989, Mr. Hawley was a member of the senior management team at Heinold Asset Management, Inc., a commodity pool operator, and was responsible for a variety of projects in public futures funds. From 1972 to 1978, Mr. Hawley was a Vice President in charge of institutional block trading for the Mid-West at Kuhn Loeb & Co. Lawrence Volpe, age 48, 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 he served as audit manager in the financial services division. Joseph G. Siniscalchi, age 50, is a Director of Demeter. Mr. Siniscalchi joined DWR in July 1984 as a First Vice President, Director of General Accounting. He is currently Senior Vice President and Controller of the Financial Markets Division of DWR. From February 1980 to July 1984, Mr. Siniscalchi was Director of Internal Audit at Lehman Brothers Kuhn Loeb, Inc. Laurence E. Mollner, age 54, is a Director of Demeter. Mr. Mollner joined DWR in May 1979 as Vice President and Director of Commercial Sales. He is currently Executive Vice President and Deputy Director of the Futures Markets Division of DWR. Edward C. Oelsner III, age 53, is a Director of Demeter. Mr. Oelsner joined DWR in March 1981 as a Managing Director in the Corporate Finance Department. He currently manages DWR's Retail Products Group within the Corporate Finance Department. While Mr. Oelsner has extensive experience in the securities industry, he has no experience in commodity interests trading. Robert E. Murray, age 35, is a Director of Demeter. Mr. Murray is currently a First Vice President of the DWR Managed Futures Division and is a Director and the Senior Administrative Officer of DWFCM. Mr. Murray graduated from Geneseo State University in May 1983 with a B.A. degree in Finance. Mr. Murray began at DWR in 1984 and is currently the Director of Product Development for the Managed Futures Division and is responsible
for the development and maintenance of the proprietary Fund Management System utilized by Demeter and DWFCM for organizing information and producing reports for monitoring investors' accounts. Patti L. Behnke, age 35, is Vice President and Chief Financial Officer of Demeter. Ms. Behnke joined DWR in 1991 as Assistant Vice President of Financial Reporting and is currently First Vice President and Director of Financial Reporting and Managed Futures Accounting in the Capital Markets division of DWR. From August 1988 to September 1990, Ms. Behnke was Assistant Controller of L.F. Rothschild & Co. and from September 1986 to August 1988, she was associated with Carteret Savings Bank as Assistant Vice President - Financial Analysis. From April 1982 to September 1986, Ms. Behnke was an auditor at Arthur Andersen & Co. Item 11.
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.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners - As of December 31, 1995 there were no persons as beneficial owners of more than 5 percent of the Units of Limited Partnership Interest in the Partnership. (b) Security Ownership of Management - At December 31, 1995, Demeter owned 382.103 Units of General Partnership Interest representing a 2.04 percent interest in the Partnership. (c) Changes in Control - None
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Refer to Note 2 - "Related Party Transactions" of "Notes to Financial Statements", in the accompanying 1995 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 $3,499,743 for the year ended December 31, 1995.
PART IV Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Listing of Financial Statements The following financial statements and reports of independent public accountants, all appearing in the accompanying 1995 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, 1995, 1994 and 1993.
- Statements of Financial Condition as of December 31, 1995 and 1994.
- Statements of Operations, Changes in Partners' Capital, and Cash Flows for the years ended December 31, 1995, 1994 and 1993.
- Notes to Financial Statements. With exception of the aforementioned information and the information incorporated in Items 7, 8, and 13, the 1995 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 and E-2.
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 III (Registrant)
BY: Demeter Management Corporation, General Partner
March 21, 1996 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 21, 1996 Mark J. Hawley, Director and President
/s/ Richard M. DeMartini March 21, 1996 Richard M. DeMartini, Director and Chairman of the Board
/s/ Lawrence Volpe March 21, 1996 Lawrence Volpe, Director
/s/ Laurence E. Mollner March 21, 1996 Laurence E. Mollner, Director
/s/ Joseph G. Siniscalchi March 21, 1996 Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 21, 1996 Edward C. Oelsner III, Director
/s/ Robert E. Murray March 21, 1996 Robert E. Murray, Director
/s/ Patti L. Behnke March 21, 1996 Patti L. Behnke, Chief Financial 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 Management Corporation and Sunrise Commodities Inc. dated as of November 15, 1983. (2)
- - 10. Management Agreement among the Partnership, Demeter Management Corporation and Computerized Commodity Advisory Inc. dated as of June 18, 1986. (3)
- - 10. Dean Witter Cornerstone Funds Exchange Agreement, dated as of May 31, 1984. (4)
- - 10. Customer Agreement Between the Partnership and Dean Witter Reynolds Inc., dated as of May 31, 1984. (5)
- - 13. December 31, 1995 Annual Report to Limited Partners. (6)
(1) Incorporated by reference to Exhibit 3.01 to Partnership's Annual Report on Form 10-K for the fiscal year ended September 30, 1984.
(2) Incorporated by reference to Exhibit 10.03 to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 30, 1984.
(3) Incorporated by reference to Exhibit 10.04 to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 30, 1986.
(4) Incorporated by reference to Exhibit 10.06 to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 30, 1984.
(5) Incorporated by reference to Exhibit 10.07 to the Partnership's Annual Report on Form 10-K for the fiscal year ended September 30, 1984.
(6) Filed herewith.
E-1
Cornerstone Funds
December 31, 1995 Annual Report
[LOGO] DEAN WITTER
DEAN WITTER Two World Trade Center 62nd Floor NEW YORK, NY 10048 TELEPHONE (212) 392-8899
CORNERSTONE FUNDS ANNUAL REPORT
Dear Limited Partner:
This marks the eleventh annual report for Cornerstone Funds II and III and the ninth for Cornerstone Fund IV. The Net Asset Value per Unit for the three Cornerstone Funds on December 31, 1995 was as follows:
Cornerstone Fund IV, the currency Fund, recorded net losses during January as a decline in the value of the U.S. dollar relative to most major world currencies resulted in losses. As January progressed, the advisors to the Fund reversed positions only to experience additional losses when the U.S. dollar strengthened sharply on January 31. Significant gains were recorded during February and March due to a trend higher in the value of the Japanese yen and most major European currencies relative to the U.S. dollar. As a result, trading gains were recorded from long positions in the Japanese yen, German mark, as well as the Swiss and French francs and Norwegian krone.
In April, Fund IV continued to record gains from the upward trend in the value of the Japanese yen relative to the U.S. dollar, as well as from transactions involving the Australian and New Zealand dollars. A reversal in the downward trend in the value of the U.S. dollar versus most major European currencies and the Japanese yen during May resulted in losses from transactions involving the German mark, French franc, Norwegian krone and
Japanese yen. In June, small losses were recorded from transactions involving the Japanese yen, British pound and French franc as the value of most major world currencies moved in a trendless range versus the U.S. dollar and one another. These losses were partially offset by gains from trading in the German mark and Australian dollar.
During July, Fund IV sustained losses as most foreign currencies, particularly the Australian and New Zealand dollars, as well as the German mark, continued to move in a trendless pattern relative to the U.S. dollar and one another. Trading gains were recorded during August as the Fund's previously established short positions in the Japanese yen profited from a sharp downward move in the value of the Japanese yen relative to the U.S. dollar. During September, the Fund recorded small net losses primarily as a result of a reversal in an upward move in the value of the U.S. dollar relative to most major European currencies, as well as the Japanese yen, on September 20 and 21. This sudden reversal resulted in losses from transactions involving the German mark, French franc and British pound. However, gains recorded from trading in the Japanese yen earlier in the month, offset a majority of Fund losses for the month.
Fund IV began the fourth quarter by recording net gains as the Fund's short yen positions profited from the continued decline of the Japanese yen relative to the U.S. dollar. Net losses were recorded during November due primarily to trendless movement in the value of world currencies, particularly the Australian dollar, German mark and French franc, relative to the U.S. dollar. Trading in the Japanese yen also resulted in losses as the previous downward trend in the value of the yen versus the U.S. dollar subsided during the month. During December, Fund IV recorded small net losses as the value of the British pound relative to the U.S. dollar moved sharply
higher late in the month. As a result, losses were recorded from the Fund's previously established short British pound positions. Trading gains from transactions involving the Japanese yen and German mark offset a majority of the losses experienced in the British pound.
Cornerstone Fund II, a diversified fund, recorded losses during January as a result of the aforementioned currency activity, as well as from trading in financial and agricultural futures. Fund II profited significantly during February and March as the value of most major world currencies relative to the U.S. dollar increased, resulting in profits for the Fund's long positions in major European currencies, as well as the Japanese yen. Additional gains were recorded from long positions in global bond futures positions as prices moved higher during this period as well as in crude oil futures trading.
In April, a continued upward trend in global financial futures prices resulted in gains for Fund II's previously established long stock index and bond futures positions. Additional gains were recorded for the Fund's long Japanese yen positions as the value of the yen continued to move higher versus the U.S. dollar. Small net losses were recorded during May as trading losses in traditional commodities, such as energy, agricultural and metals futures, as well as in currencies, more than offset gains recorded from long positions in global financial futures. During June, Fund II recorded small net losses as the previous upward trend in international interest rate futures prices pulled back during the month. These losses, coupled with smaller losses in the currency and agricultural futures markets, offset gains recorded in the energy and coffee futures markets.
During July, Fund II posted net losses as a result of trading in both U.S. and international bond futures. Additional Fund losses were recorded in the currency markets as the value of most major world
currencies moved in a narrow trading range relative to the U.S. dollar and one another. During August, losses were recorded in global bond futures, particularly in U.S. Treasury bond futures, as bond futures prices experienced a period of short-term volatile movement. These losses, coupled with losses recorded in soft commodities and silver futures, more than offset gains recorded from transactions involving the Japanese yen. Fund II also recorded losses in September due primarily to erratic price movement in global interest rate and stock index futures. Losses were also recorded in energy futures trading, as oil and gas prices reversed dramatically, and in metals futures trading, as both precious and base metals prices remained relatively trendless.
Small net losses were recorded during October as trendless price movement was commonplace in several of the markets traded by the Fund, including cotton, crude oil and overseas interest rate futures. However, trading profits were recorded from short Japanese yen positions, as well as from trading in the agricultural and metals markets. During November, profits were recorded as global bond futures prices increased during the month, resulting in gains in U.S., European and Japanese interest rate futures. Additional gains were recorded from short coffee futures positions as prices declined during the month. In December, Fund II was profitable primarily due to trading in the energy markets, as long positions in crude and heating oil profited from increasing oil prices, and in soft commodities, as gains were recorded as a result of trading in both sugar and coffee futures. Increasing soybean and corn prices during the month resulted in additional gains for the Fund's long soybean and corn futures positions.
Cornerstone Fund III, also a diversified fund, experienced losses during January due to trading in the currency, financial and agricultural markets. During February and March, significant gains were recorded as a
result of trading in the currency markets as the value of the U.S. dollar moved lower versus most world currencies. Strong gains were also recorded from long positions in global bond futures, as prices in these markets increased during this two month period.
Trading in global financial futures was profitable during April and May as both U.S. and international interest rate futures prices continued to trend higher. Additional gains were recorded in stock index futures, specifically from trading Nikkei and S&P 500 Index futures. Small net gains were recorded during June as trading in base metals, energy and soft commodities futures more than offset trading losses recorded in international interest rate futures, currencies and livestock futures.
During July, trading losses were recorded in financial futures as global interest rate futures prices retreated from their previous upward trend. Additional losses were recorded in Japanese stock index futures as a sharp reversal in Japanese stock prices resulted in losses for the Fund's previously established short Nikkei Index futures positions. In August, gains were recorded from short positions in the Japanese yen, as the value of the yen moved lower relative to the U.S. dollar, and from long positions in Nikkei Index and corn futures as prices in both of these markets moved higher. In September, net gains were recorded as long positions in Japanese, European and Australian interest rate futures profited from increasing global bond prices. Smaller gains in agricultural futures and soft commodities contributed to the Fund's gains for the month.
Net losses were recorded during October due to losses in soft commodities trading as cotton and coffee prices moved in a trendless pattern, as well as from trading in currencies and global financial futures. During November, profits were recorded primarily from long positions in global interest rate
and S&P 500 Index futures, as prices moved higher. Smaller gains were recorded in soft commodities and energy futures trading. Fund III ended 1995 with strong gains during December as a result of trading in energy futures as long gas and oil positions profited from a dramatic price move higher. Agricultural futures trading resulted in additional gains as long positions in corn, soybean meal and soybean futures also benefited from rising prices.
Overall, each of the Cornerstone Funds was able to record significant profits during the calendar year of 1995. Cornerstone Funds II and III recorded profits primarily due to price trends in the global financial futures and currency markets. Cornerstone Fund IV profited as it was able to capitalize on currency trends in the first half of the year. Since their inception in 1985, Cornerstone Fund II has increased by 190.3% (a compound annualized return of 10.2%) and Cornerstone Fund III has increased by 157.3% (a compound annualized return of 9.0%). Cornerstone Fund IV, since its inception in 1987, has increased by 185.8% (a compound annualized return of 12.9%).
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.
Sincerely,
/s/ Mark J. Hawley 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, 1995 and 1994 and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Dean Witter Cornerstone Fund II, Dean Witter Cornerstone Fund III and Dean Witter Cornerstone Fund IV as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP February 21, 1996 New York, New York
DEAN WITTER CORNERSTONE FUND II STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND III STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND IV STATEMENTS OF FINANCIAL CONDITION
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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, 1995, 1994 AND 1993
DEAN WITTER CORNERSTONE FUNDS
STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND II STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND III STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
DEAN WITTER CORNERSTONE FUND IV STATEMENTS OF CASH FLOWS
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 (the "General Partner"). The commodity broker is Dean Witter Reynolds Inc. ("DWR"). Both DWR and the General Partner are wholly-owned subsidiaries of Dean Witter, Discover & Co.
The General Partner is required to maintain a 1% minimum interest in the equity of each Partnership and income (losses) are shared by the General and Limited Partners based upon their proportional ownership interests.
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements.
REVENUE RECOGNITION--Commodity futures contracts and forward contracts on foreign currencies are open commitments until settlement date. They are valued at market and the resulting unrealized gains and losses are reflected in income. Monthly, DWR pays each Partnership interest income based upon 80% of its average daily Net Assets at a rate equal to the average yield on 13-Week U.S. Treasury Bills issued during such month. For purposes of such interest payments in Dean Witter Cornerstone Fund IV, Net Assets do not include monies due the Partnership on forward contracts and other commodity interests, but not actually received.
NET INCOME (LOSS) PER UNIT--Net income (loss) per Unit is computed using the weighted average number of units outstanding during the period.
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS-- The Partnerships' assets "Equity in Commodity futures trading accounts" consists of cash on deposit at DWR to be used as margin for trading and the net asset or liability related to unrealized gains or losses on open contracts. The asset or liability related to the unrealized gains or losses on forward contracts is presented as a net amount because each Partnership has a master netting agreement with DWR.
DEAN WITTER CORNERSTONE FUNDS NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
BROKERAGE COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS--Brokerage commissions for each Partnership are accrued at 80% of DWR's published non- member rates on a half-turn basis.
Through March 31, 1995, brokerage commissions were capped at 1% per month of the adjusted Net Assets allocated to each trading program employed by a Trading Advisor. Effective April 1, 1995, the cap was reduced to 3/4 of 1%.
Related transaction fees and costs are accrued on a half-turn basis.
OPERATING EXPENSES--Each Partnership has entered into an exchange agreement pursuant to which certain common administrative expenses (i.e., legal, auditing, accounting, filing fees and other related expenses) are shared by each of the Partnerships based upon the number of Units of each Partnership outstanding during the month in which such expenses are incurred. In addition, the Partnerships incur monthly management fees and may incur incentive fees. The General Partner bears all other operating expenses.
INCOME TAXES--No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of each Partnership's revenues and expenses for income tax purposes.
DISTRIBUTIONS--Distributions, other than on redemptions of Units, are made on a pro-rata basis at the sole discretion of the General Partner. No distributions have been made to date.
CONTINUING OFFERING--Through September 26, 1994, Units of each Partnership were offered at a price equal to 107.625% of the Net Asset Value per Unit as of the opening of business on the first day of the month, which price included a 5% selling commission and a 2.5% charge for expenses relating to the continuing offering of Units. These expenses were shared by the Partnerships. Any funds received by DWR as a result of the Continuing Offering Expense charges that were in excess of the Continuing Offering Expenses incurred, were contributed pro-rata to the Partnerships, as a contribution of capital to the Partnerships for which no Units were issued. On September 26, 1994, the Continuing Offering was discontinued.
REDEMPTIONS--After an initial 180-day period, Limited Partners may redeem some or all of their Units at 100% of the Net Asset Value per Unit as of the last day of any month upon fifteen days advance notice by redemption form to the General Partner.
DEAN WITTER CORNERSTONE FUNDS NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
If the proceeds of a redemption are reinvested in any of the Partnerships within 180 days, the General Partner will waive the selling commissions and continuous offering expense charges on the amount reinvested.
EXCHANGES--On the last day of the first month, which occurs more than 180 days after a person first becomes a Limited Partner in any of the Partnerships, and the end of each month thereafter, Limited Partners may transfer their investment among the Partnerships (subject to certain restrictions outlined in the Limited Partnership Agreement) without paying additional charges.
DISSOLUTION OF THE PARTNERSHIP--Each Partnership will terminate on September 30, 2025 regardless of its financial condition at such time, upon a decline in Net Assets to less than $250,000, a decline in the Net Asset Value per Unit to less than $250, or under certain other circumstances defined in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
Each Partnership pays brokerage commissions to DWR on trades executed on its behalf as described in Note 1. Each Partnership's cash is on deposit with DWR in commodity trading accounts to meet margin requirements as needed. DWR pays interest on these funds as described in Note 1.
3. TRADING ADVISORS
The General Partner, on behalf of each Partnership, retains certain commodity trading advisors to make all trading decisions for the Partnerships. The trading advisors for each Partnership as of December 31, 1995 were as follows:
Dean Witter Cornerstone Fund II Abacus Asset Management Inc. John W. Henry & Co., Inc.
Dean Witter Cornerstone Fund III CCA Capital Management, Inc. Sunrise Capital Management
Dean Witter Cornerstone Fund IV John W. Henry & Co., Inc. Sunrise Capital Management
Each trading advisor owns at least ten Units in its respective Partnership. Compensation to the trading
DEAN WITTER CORNERSTONE FUNDS NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
advisors by the Partnerships consists of a management fee and an incentive fee as follows:
MANAGEMENT FEE--The management fee is accrued at the rate of 1/3 of 1% per month of the Net Assets under management by each trading advisor at each month end.
INCENTIVE FEE--Each Partnership will pay an annual incentive fee equal to 15% of the "New Appreciation" in Net Assets as of the end of each annual incentive period ending December 31, except for Dean Witter Cornerstone Fund IV, which will pay incentive fees at the end of each annual incentive period ending May 31. Such incentive fee is accrued in each month in which "New Appreciation" occurs. In those months in which "New Appreciation" is negative, previous accruals, if any, during the incentive period will be reduced. In those instances in which a Limited Partner redeems an investment, the incentive fee (if earned through a redemption date) is to be paid on those redemptions to the trading advisor in the month of such redemption.
4. FINANCIAL INSTRUMENTS
The Partnerships trade futures and forward contracts in interest rates, stock indices, commodities, currencies, petroleum and precious metals. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the market value of these contracts, including interest rate volatility. At December 31, 1995 and 1994, open contracts were:
DEAN WITTER CORNERSTONE FUNDS NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A portion of the amounts indicated as off-balance-sheet risk in forward foreign currency contracts is due to offsetting forward commitments to purchase and to sell the same currency on the same date in the future. These commitments are economically offsetting, but are not offset in the forward market until the settlement date.
The unrealized gains on open contracts are reported as a component of "Equity in Commodity futures trading accounts" on the Statements of Financial Condition and totaled at December 31, 1995 and 1994, respectively, $3,368,107 and $4,316,080 for Cornerstone II, $5,578,294 and $5,016,857 for Cornerstone III and $70,143 and $268,291 for Cornerstone IV.
For Cornerstone II, of the $3,368,107 net unrealized gain on open contracts at December 31, 1995, $3,448,812 related to exchange-traded futures contracts and ($80,705) related to off-exchange-traded forward currency contracts. Of the $4,316,080 net unrealized gain on open contracts at December 31, 1994, $4,296,011 related to exchange-traded futures contracts and $20,069 related to off-exchange-traded forward currency contracts.
DEAN WITTER CORNERSTONE FUNDS NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For Cornerstone III, net unrealized gain on open contracts at December 31, 1995 related entirely to exchange traded futures. Of the $5,016,857 net unrealized gain on open contracts at December 31, 1994, $5,788,691 related to exchange- traded futures contracts and ($771,834) related to off-exchange-traded forward currency contracts.
For Cornerstone IV, of the $70,143 net unrealized gain on open contracts at December 31, 1995, $534,487 related to exchange-traded futures contracts and $(464,344) related to off-exchange-traded forward currency contracts. The net unrealized gain on open contracts at December 31, 1994, related entirely to off-exchange-traded forward currency contracts.
The contract amounts in the above table represent the Partnership's extent of involvement in the particular class of financial instrument, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments is limited to the amounts reflected in the Partnerships' Statements of Financial Condition.
Exchange-traded contracts and off-exchange-traded forward currency contracts held by the Partnerships at December 1995 and 1994 mature as follows:
The Partnerships also have credit risk because the sole counterparty, with respect to most of the Partnerships' assets, is DWR. Exchange-traded futures contracts are marked to market on a daily basis, with variations in value settled on a daily basis. DWR, as the futures commission merchant of all of the Partnership's exchange-traded futures contracts, is required pursuant to regulations of the Commodity Futures Trading Commission to segregate from its own assets, and for the sole benefit of its commodity customers, all funds held by DWR with respect to exchange-traded futures contracts including an amount equal to the net
DEAN WITTER CORNERSTONE FUNDS NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
unrealized gain on all open futures contracts which funds totaled at December 31, 1995 and 1994 respectively, $31,506,001 and $31,866,995 for Cornerstone II, $47,872,659 and $48,673,471 for Cornerstone III, $105,462,448 and $111,508,180 for Cornerstone IV. With respect to the Partnership's off-exchange-traded forward currency contracts, there are no daily settlements of variations in value nor is there any requirement that an amount equal to the net unrealized gain on open forward contracts be segregated. With respect to those off- exchange-traded forward currency contracts, the Partnerships are at risk to the ability of DWR, the counterparty on all of such contracts, to perform.
For the year ended December 31, 1995 the average fair value of financial instruments held for trading purposes was as follows:
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