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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the transition period ___________ to _________________.
Commission File Number 0-15442
DEAN WITTER CORNERSTONE FUND IV
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(Exact name of registrant as specified in its Limited Partnership Agreement)
NEW YORK 13-3393597
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, - 62nd Flr., New York, N.Y. 10048
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 392-5454
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(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
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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 as of a
specified date within 60 days prior to the date of filing: $111,252,019.14 at
January 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
DEAN WITTER CORNERSTONE FUND IV
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1998
Page No.
DOCUMENTS INCORPORATED BY REFERENCE............................................1
Part I.
Item 1. Business............................................................2-4
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
Item 6. Selected Financial Data...............................................9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................10-19
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................................19-29
Item 8. Financial Statements and Supplementary Data..........................30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................30
Part III.
Item 10. Directors and Executive Officers of the Registrant................31-35
Item 11. Executive Compensation...............................................35
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................................36
Item 13. Certain Relationships and Related Transactions.......................36
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................................37
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference as follows:
Documents Incorporated Part of Form 10-K
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Partnership's Prospectus dated I
August 28, 1996 together with
the supplement to the prospectus
dated October 14, 1998
Annual Report to the Dean Witter II, III and IV
Cornerstone Funds II, III, and
IV Limited Partners for the year
ended December 31, 1998
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PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter Cornerstone Fund IV (the
"Partnership") is a New York limited partnership organized to engage in the
speculative trading of futures contracts and forward contracts on foreign
currencies (collectively, "futures interests"). The Partnership is one of the
Dean Witter Cornerstone Funds, comprised of Dean Witter Cornerstone Fund II,
Dean Witter Cornerstone Fund III, and the Partnership. The Partnership's general
partner is Demeter Management Corporation ("Demeter"). The non-clearing
commodity broker is Dean Witter Reynolds Inc. ("DWR") and an unaffiliated
clearing commodity broker, Carr Futures Inc. ("Carr"), provides clearing and
execution services. Both Demeter and DWR are wholly-owned subsidiaries of Morgan
Stanley Dean Witter & Co. ("MSDW"). The trading advisors to the Partnership are
John W. Henry & Company, Inc. and Sunrise Capital Management, Inc.
(collectively, the "Trading Advisors").
The Partnership's Net Asset Value per Unit, as of December 31, 1998, was
$4,736.86, representing an increase of 6.79 percent from the net asset value of
$4,435.47 at December 31, 1997. For a more detailed description of the
Partnership's business, see subparagraph (c).
(b) Financial Information about Industry Segments. For financial
information reporting purposes the Partnership is deemed to engage in one
industry segment, the speculative trading of futures interests. The
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relevant financial information is presented in Items 6 and 8.
(c) Narrative Description of Business. The Partnership is in the business
of speculative trading of futures interests, pursuant to trading instructions
provided by the Trading Advisors. For a detailed description of the different
facets of the Partnership's business, see those portions of the Partnership's
prospectus, dated August 28, 1996 (the "Prospectus"), together with the
supplement to the Prospectus dated October 14, 1998 (the "Supplement")
incorporated by reference in this Form 10-K, set forth below.
Facets of Business
1. Summary 1. "Summary of the Prospectus" (Pages
1-9 of the Prospectus and Pages
S-18 - S-34 of the Supplement).
2. Commodity Markets 2. "The Commodities Markets" (Pages
80-84 of the Prospectus).
3. Partnership's Commodity Trading 3. "Investment Program, Use of
Arrangements and Policies Proceeds and Trading Policies"
(Pages 45-47 of the Prospectus) and
"The Trading Managers" (Pages 51-74
of the Prospectus and Pages S-18 -
S-29 of the Supplement).
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4. Management of the Partnership 4. "The Cornerstone Funds" (Pages
19-24 of the Prospectus and Pages
S-1 - S-4 of the Supplement). "The
General Partner" (Pages 77-79 of
the Prospectus and Pages S-29 -
S-31 of the Supplement). "The
Commodity Brokers" (Pages 79-80 of
the Prospectus and Pages S-31 -
S-32 of the Supplement). "The
Limited Partnership Agreements"
(Pages 86-90 of the Prospectus).
5. Taxation of the Partnership's 5. "Material Federal Income Tax
Limited Partners Considerations" and "State and
Local Income Tax Aspects" (Pages
92-99 of the Prospectus and Page
S-34 of the Supplement).
(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.
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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"), MSDW (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 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
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Superior Court of the State of Delaware, New Castle County, against the Dean
Witter Parties and certain trading advisors on behalf of all purchasers of
interests in various limited partnership commodity pools, 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 New York Supreme Court
dismissed the New York action in November 1998, but granted plaintiffs leave to
file an amended complaint, which they did in early December 1998. The defendants
have filed a motion to dismiss the amended complaint with prejudice on February
1, 1999. 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
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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.
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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 ("Units") in the Partnership. The number of holders of
Units at December 31, 1998 was approximately 7,873. No distributions have been
made by the Partnership since it commenced operations on May 1, 1987. 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.
The offering for the Partnership originally commenced May 31, 1984.
Effective September 30, 1994, Dean Witter Cornerstone Fund II, Dean Witter
Cornerstone Fund III and the Partnership were closed to new investors. Units
have been sold since then solely by "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. Through
December 31, 1998, the Partnership has sold 100,631.385 Units and the
Cornerstone Funds have sold an aggregate of 235,419.742 Units, leaving
14,580.258 Units remaining available for sale as of January 1, 1999. The
aggregate price of Units sold through December 31, 1998 with respect to the
Partnership is $168,049,953.
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Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total Revenues 15,675,941 43,376,481 19,489,622 31,756,524 (8,045,411)
(including interest)
Net Income (Loss) 7,830,780 34,531,802 11,532,721 24,196,319 (18,909,651)
Net Income (Loss) 301.39 1,230.81 367.93 529.66 (383.89)
Per Unit (Limited
& General Partners)
Total Assets 117,323,711 121,378,550 97,292,310 105,362,851 112,210,624
Total Limited 113,967,408 115,575,973 93,448,822 101,854,654 108,418,306
Partners' Capital
Net Asset Value 4,736.86 4,435.47 3,204.66 2,836.73 2,307.07
Per Unit of Limited
Partnership Interest
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity - Assets of the Partnership are deposited with DWR as
non-clearing broker and Carr as clearing broker in separate futures interest
trading accounts. Such assets are held in either non-interest bearing bank
accounts 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 futures interests, it is expected that
the Partnership will continue to own such liquid assets for margin purposes.
The Partnership's investment in futures interests may, from time to time,
be illiquid. Most United States futures exchanges limit fluctuations in certain
futures interest prices during a single day by regulations referred to as "daily
price fluctuations limits" or "daily limits." Pursuant to such regulations,
during a single trading day no trades may be executed at prices beyond the daily
limit. If the price for a particular futures interest has increased or decreased
by an amount equal to the daily limit, positions in such futures interest can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Futures interests 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
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its futures interests and result in restrictions on redemptions. The Partnership
may be subject to additional liquidity risks because it trades exclusively in
world currencies, the markets for some of which are or may become illiquid at
times.
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 from promptly liquidating unfavorable positions,
subjecting it to substantial losses. Either of these market conditions could
result in restrictions on redemptions.
Capital Resources. The Partnership does not have, nor does it expect to
have, any capital assets. Future redemptions and exchanges of Units will affect
the amount of funds available for investment in futures interests in subsequent
periods. Since they are at the discretion of Limited Partners, it is not
possible to estimate the amount and therefore, the impact of future redemptions
and exchanges.
Results of Operations. As of December 31, 1998, the Partnership's total
capital was $115,241,099, a decrease of $3,168,645 from the Partnership's total
capital of $118,409,744 at December 31, 1997. For the year ended December 31,
1998, the Partnership generated net income of $7,830,780, total subscriptions
aggregated $269,706 and total redemptions aggregated $11,269,131.
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For the year ended December 31, 1998, the Partnership's total trading
revenues, including interest income, were $15,675,941. The Partnership's total
expenses for the year were $7,845,161, resulting in net income of $7,830,780.
The value of an individual unit in the Partnership increased from $4,435.47 at
December 31, 1997 to $4,736.86 at December 31, 1998.
As of December 31, 1997, the Partnership's total capital was $118,409,744,
an increase of $22,913,500 from the Partnership's total capital of $95,496,244,
at December 31, 1996. For the year ended December 31, 1997, the Partnership
generated net income of $34,531,802, total subscriptions aggregated $223,794 and
total redemptions aggregated $11,842,096.
For the year ended December 31, 1997, the Partnership's total trading
revenues, including interest income, were $43,376,481. The Partnership's total
expenses for the year were $8,844,679, resulting in net income of $34,531,802.
The value of an individual unit in the Partnership increased from $3,204.66 at
December 31, 1996 to $4,435.47 at December 31, 1997.
As of December 31, 1996, the Partnership's total capital was $95,496,244, a
decrease of $8,170,767 from the Partnership's total capital of $103,667,011 at
December 31, 1995. For the year ended
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December 31, 1996, the Partnership generated net income of $11,532,721, total
subscriptions aggregated $108,665 and total redemptions aggregated $19,812,153.
For the year ended December 31, 1996, the Partnership's total trading
revenues, including interest income, were $19,489,622. The Partnership's total
expenses for the year were $7,956,901, resulting in net income of $11,532,721.
The value of an individual unit in the Partnership increased from $2,836.73 at
December 31, 1995 to $3,204.66 at December 31, 1996.
The Partnership's overall performance record represents varied results of
trading in different futures interests markets. For a further description of
1998 trading results, refer to the letter to the Limited Partners in the
accompanying Annual Report to Limited Partners for the year ended December 31,
1998, incorporated by reference in this Form 10-K. The Partnership's gains and
losses are allocated among its partners for income tax purposes.
Credit Risk. In entering into futures 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
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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-traded contracts with a counterparty, the
sole recourse of the Partnership will be the clearinghouse, the exchange member
or the off-exchange-traded 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, MSDW or DWR.
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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 these credit risks of all prtnerships for which it
serves as general partner in several ways. First, it monitors the 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 the Partnership, as with all
its 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 the Partnership's
potential margin liability, exchange by exchange. Demeter is then able to
monitor the 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, the Partnership's trading policies limit the amount of its 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
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of the aims of the trading policies has been to reduce the credit exposure of
the Partnership to a single exchange and, historically, the Partnership's
exposure has typically amounted to only a small percentage of its total net
assets. On those relatively few occasions where the Partnership's credit
exposure may climb above that level, Demeter deals with the situation on a case
by case basis, carefully weighing whether the increased level of credit exposure
remains appropriate.
Third, Demeter has secured, with respect to Carr acting as the clearing
broker for the Partnership, a guarantee by Credit Agricole Indosuez, Carr's
parent, of the payment of the "net liquidating value" of the transactions
(futures and forward contracts) in the Partnership's account.
With respect to forward contract trading, the Partnership trades with only
those counterparties which Demeter, together with DWR, have determined to be
creditworthy. At the date of this filing, the Partnership deals only with Carr
as its 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 Annual Report to Limited Partners for the year ended December 31,
1998, incorporated by reference in this Form 10-K.
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Year 2000 Problem - Commodity pools, like financial and business
organizations and individuals around the world, depend on the smooth functioning
of computer systems. Many computer systems in use today cannot recognize the
computer code for the year 2000, but revert to 1900 or some other date. This is
commonly known as the "Year 2000 Problem". The Partnership could be adversely
affected if computer systems used by it or any third party with whom it has a
material relationship do not properly process and calculate date-related
information and data concerning dates on or after January 1, 2000. Such a
failure could adversely affect the handling or determination of futures trades
and prices and other services.
MSDW began its planning for the Year 2000 Problem in 1995, and currently
has several hundred employees working on the matter. It has developed its own
Year 2000 compliance plan to deal with the problem and had the plan approved by
the company's executive management, Board of Directors and Information
Technology Department. Demeter is coordinating with MSDW to address the Year
2000 Problem with respect to Demeter's computer systems that affect the
Partnership. This includes hardware and software upgrades, systems consulting
and computer maintenance.
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Beyond the challenge facing internal computer systems, the systems failure
of any of the third parties with whom the Partnership has a material
relationship - the futures exchanges and clearing organizations through which it
trades, Carr, or the Trading Advisors - could result in a material financial
risk to the Partnership. All U.S. futures exchanges are subject to monitoring by
the CFTC of their Year 2000 preparedness and the major foreign futures exchanges
are also expected to be subject to market-wide testing of their Year 2000
compliance during 1999. Demeter intends to monitor the progress of Carr and the
Trading Advisors throughout 1999 in their Year 2000 compliance and, where
applicable, to test its external interface with Carr and the Trading Advisors.
A worst case scenario would be one in which trading of contracts on behalf
of the Partnership becomes impossible as a result of the Year 2000 Problem
encountered by any third parties. A less catastrophic but more likely scenario
would be one in which trading opportunities diminish as a result of technical
problems resulting in illiquidity and fewer opportunities to make profitable
trades. MSDW has begun developing various "contingency plans" in the event that
the systems of such third parties fail. Demeter intends to consult closely with
MSDW in implementing those plans. Despite the best efforts of both Demeter and
MSDW, however, it is possible that these steps will not be sufficient to avoid
any adverse impact to the Partnership.
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Risks Associated with the Euro - On January 1, 1999, eleven countries in
the European Union established fixed conversion rates on their existing
sovereign currencies and converted to a common single currency (the "euro").
During a three-year transition period, the sovereign currencies will continue to
exist but only as a fixed denomination of the euro. Conversion to the euro
prevents the Trading Advisors from trading in certain currencies and thereby
limits their ability to take advantage of potential market opportunities that
might otherwise have existed had separate currencies been available to trade.
This could adversely affect the performance results of the Partnership.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the speculative
trading of futures interests. The market sensitive instruments held by the
Partnership are acquired solely for speculative trading purposes and, as a
result, all or substantially all of the Partnership's assets are subject to the
risk of trading loss. Unlike an operating company, the risk of market sensitive
instruments is integral, not incidental, to the Partnership's primary business
activities.
The futures interests traded by the Partnership involve varying degrees of
related market risk. Such market risk is often dependent upon changes in the
level or volatility of interest rates, exchange rates,
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and/or market values of financial instruments and commodities. Fluctuations in
related market risk based upon the aforementioned factors result in frequent
changes in the fair value of the Partnership's open positions, and,
consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide variety of
factors, including the diversification effects among the Partnership's existing
open positions, the volatility present within the market(s) and the liquidity of
the market(s). At varying times, each of these factors may act to exacerbate or
mute the market risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative of its
future results. Any attempt at quantifying the Partnership's market risk must be
qualified by the inherent uncertainty of its speculative trading, which may
cause future losses and volatility (i.e. "risk of ruin") far in excess of the
Partnership's experience to date and/or any reasonable expectation premised upon
historical changes in the fair value of its market sensitive instruments.
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Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's market
risk exposures contain "forward-looking statements" within the meaning of the
safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor, except for statements of historical
fact.
The Partnership accounts for open positions on the basis of mark-to-market
accounting principles. As such, any loss in the fair value of the Partnership's
open positions is directly reflected in the Partnership's earnings, whether
realized or unrealized, and the Partnership's cash flow, as profits and losses
on open positions of exchange-traded futures interests are settled daily through
variation margin.
The Partnership's risk exposure in the various market sectors traded by the
Trading Advisors is estimated below in terms of Value at Risk ("VaR"). The VaR
model employed by the Partnership incorporates numerous variables that could
impact the fair value of the Partnership's trading portfolio. The Partnership
estimates VaR using a model based on historical simulation with a confidence
level of 99%. Historical
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simulation involves constructing a distribution of hypothetical daily changes in
trading portfolio value. The VaR model generally takes into account linear
exposures to price and interest rate risk. Market risks that are incorporated in
the VaR model include equity and commodity prices, interest rates, foreign
exchange rates, as well as correlation that exists among these variables. The
hypothetical changes in portfolio value are based on daily observed percentage
changes in key market indices or other market factors ("market risk factors") to
which the portfolio is sensitive. In the case of the Partnership's VaR, the
historical observation period is approximately four years. The Partnership's
one-day 99% VaR corresponds to the negative change in portfolio value that,
based on observed market risk factor moves, would have been exceeded once in 100
trading days.
VaR models such as the Partnership's are continually evolving as trading
portfolios become more diverse and modeling techniques and systems capabilities
improve. It must also be noted that the VaR model is used to quantify market
risk for historic reporting purposes only and is not utilized by either Demeter
or the Trading Advisors in their daily risk management activities.
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The Partnership's Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the Partnership's
open positions as a percentage of total net assets by market category as of
December 31, 1998. As of December 31, 1998, the Partnership's total
capitalization was approximately $115 million.
Primary Market December 31, 1998
Risk Category Value at Risk
-------------- -----------------
Currency (.79)
Aggregate Value at Risk (.79)%
The table above represents the VaR of the Partnership's open positions at
December 31, 1998 only and is not necessarily representative of either the
historic or future risk of an investment in the Partnership. As the
Partnership's sole business is the speculative trading of primarily futures
interests, the composition of its portfolio of open positions can change
significantly over any given time period or even within a single trading day.
Such changes in open positions could materially impact market risk as measured
by VaR either positively or negatively.
The table below supplements the year end VaR by presenting the
Partnership's high, low and average VaR as a percentage of total net
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assets for the four quarterly reporting periods from January 1, 1998 through
December 31, 1998.
Primary Market Risk Category High Low Average
---------------------------- ---- --- -------
Currency (2.04) (0.79) (1.58)
Aggregate Value at Risk (2.04)% (0.79)% (1.58)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership is
typically many times the applicable margin requirements, as such margin
requirements generally range between 2% and 15% of contract face value.
Additionally, due to the use of leverage, the face value of the market sector
instruments held by the Partnership is typically many times the total
capitalization of the Partnership. The financial magnitude of the Partnership's
open positions thus creates a "risk of ruin" not typically found in other
investment vehicles. Due to the relative size of the positions held, certain
market conditions may cause the Partnership to incur losses greatly in excess of
VaR within a short period of time. The foregoing VaR tables, as well as the past
performance of the Partnership, gives no indication of such "risk of ruin".
In addition, VaR risk measures should be interpreted in light of the
methodology's limitations, which include the following: past changes in market
risk factors will not always yield accurate predictions of the
- 24 -
distributions and correlations of future market movements; changes in portfolio
value in response to market movements may differ from the responses implicit in
a VaR model; published VaR results reflect past trading positions while future
risk depends on future positions; VaR using a one-day time horizon does not
fully capture the market risk of positions that cannot be liquidated or hedged
within one day; and the historical market risk factor data used for VaR
estimation may provide only limited insight into losses that could be incurred
under certain unusual market movements.
The foregoing VaR tables present the results of the Partnership's VaR for
each of the Partnership's market risk exposures and on an aggregate basis at
December 31, 1998 and for the end of quarter periods during calendar 1998. Since
VaR is based on historical data, VaR should not be viewed as predictive of the
Partnership's future financial performance or its ability to manage and monitor
risk and there can be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated below or that such
losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances
not needed for margin. However, such balances, as well as any market
- 26 -
risk they may represent, are immaterial. The Partnership also maintains a
substantial portion (approximately 98%) of its available assets in cash at DWR.
A decline in short-term interest rates will result in a decline in the
Partnership's cash management income. This cash flow risk is not considered
material.
Materiality, as used throughout this section, is based on an assessment of
reasonably possible market movements and the potential losses caused by such
movements, taking into account the leverage, optionality and multiplier features
of the Partnership's market sensitive instruments.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's market
risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Trading Advisors
for managing such exposures are subject to numerous uncertainties, contingencies
and risks, any one of which could cause the actual results of the Partnership's
risk controls to differ materially from the objectives of such strategies.
- 27 -
Government interventions, defaults and expropriations, illiquid markets,
the emergence of dominant fundamental factors, political upheavals, changes in
historical price relationships, an influx of new market participants, increased
regulation and many other factors could result in material losses as well as in
material changes to the risk exposures and the risk management strategies of the
Partnership. Investors must be prepared to lose all or substantially all of
their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership as
of December 31, 1998, by market sector. It may be anticipated, however, that
these market exposures will vary materially over time.
Currency. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The Partnership trades in a large number of
currencies, including cross-rates - i.e., positions between two currencies other
than the U.S. dollar. However, the Partnership's major exposures have typically
been in the dollar/yen, dollar/mark, dollar/Australian dollar and dollar/pound
positions. Demeter does not anticipate that the risk profile of the
Partnership's
- 28 -
currency sector will change significantly in the future, although it is
difficult at this point to predict the effect of the introduction of the Euro on
the Trading Advisors' currency trading strategies.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the Partnership as
of December 31, 1998:
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds, French francs and
euros. The Partnership controls the non-trading risk of these balances by
regularly converting these balances back into U.S. dollars at varying intervals,
depending upon such factors as size, volatility, etc.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Trading Advisors, severally,
attempt to manage the risk of the Partnership's open positions are essentially
the same in all market categories traded. Demeter attempts to manage the
Partnership's market exposure by (i) diversifying the Partnership's assets among
different Trading Advisors, each of whose strategies focus on different market
sectors and trading approaches, and
- 29 -
(ii), monitoring the performance of the Trading Advisors on a daily basis. In
addition, the Trading Advisors establish diversification guidelines, often set
in terms of the maximum margin to be committed to positions in any one market
sector or market sensitive instrument. One should be aware that certain Trading
Advisors treat their risk control policies as strict rules, whereas others treat
such policies as general guidelines.
Demeter monitors and controls the risk of the Partnership's non-trading
instrument, cash, which is the only Partnership investment directed by Demeter,
rather than the Trading Advisors.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item appears in the Annual Report to
Limited Partners for the year ended December 31, 1998 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.
- 30 -
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are no directors or executive officers of the Partnership. The
Partnership is managed by Demeter.
Directors and Officers of the General Partner
The directors and officers of Demeter are as follows:
Mark J. Hawley, age 55, is Chairman of the Board and a Director of Demeter.
Mr. Hawley is also Chairman of the Board and a Director of DWFCM. Mr. Hawley
previously served as President of Demeter throughout 1998. Mr. Hawley joined DWR
in February 1989 as Senior Vice President and is currently the Executive Vice
President and Director of DWR's Product Management for Individual Asset
Management. In this capacity, Mr. Hawley is responsible for directing the
activities of the firm's Managed Futures, Insurance, and Unit Investment Trust
Business. From 1978 to 1989, Mr. Hawley was a member of the senior management
team at Heinold Asset Management, Inc., a CPO, and was responsible for a variety
of projects in public futures funds. From 1972 to 1978, Mr. Hawley was a Vice
President in charge of institutional block trading for the Mid-West at Kuhn Loeb
& Company.
- 31 -
Joseph G. Siniscalchi, age 53, 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 56, 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 38, is President and a Director of Demeter. Mr.
Murray is also President and a Director of DWFCM. Effective as of the close of
business on December 31, 1998, Mr. Murray replaced Mr. Hawley as President of
Demeter. Mr. Murray is also a Senior Vice President of DWR's Managed Futures
Department and is the Senior
- 32 -
Administrative Officer of DWFCM. Mr. Murray began his career at DWR in 1984
and is currently the Director of the Managed Futures Department. In this
capacity, Mr. Murray is responsible for overseeing all aspects of the firm's
Managed Futures Department. Mr. Murray currently serves as a Director of the
Managed Funds Association, an industry association for investment
professionals in futures, hedge funds and other alternative investments. Mr.
Murray graduated from Geneseo State University in May 1983 with a B.A. degree
in Finance.
Lewis A. Raibley, III, age 36, is Vice President, Chief Financial Officer
and a Director of Demeter. Effective as of the close of business on December 31,
1998, Mr. Raibley was elected to Demeter's Board of Directors. Mr. Raibley is
currently Senior Vice President and Controller in the Individual Asset
Management Group of MSDW. From July 1997 to May 1998, Mr. Raibley served as
Senior Vice President and Director in the Internal Reporting Department of MSDW
and prior to that, from 1992 to 1997, he served as Senior Vice President and
Director in the Financial Reporting and Policy Division of Dean Witter Discover
& Co. He has been with MSDW and its affiliates since June 1986.
Mitchell M. Merin, age 45, became a Director of Demeter on March 17, 1999.
Mr. Merin was appointed the Chief Operating Officer of Asset Management for MSDW
in December 1998 and the President and Chief Executive Officer of Morgan Stanley
Dean Witter Advisors in February 1998. He has been an Executive Vice President
of DWR since 1990, during
- 33 -
which time he has been director of DWR's Taxable Fixed Income and Futures
divisions, managing director in Corporate Finance and corporate treasurer. Mr.
Merin received his Bachelor's degree from Trinity College in Connecticut and his
M.B.A. degree in finance and accounting from the Kellogg Graduate School of
Management of Northwestern University in 1977.
Richard A. Beech, age 47, became a Director of Demeter on March 17, 1999.
Mr. Beech has been associated with the futures industry for over 23 years. He
has been at DWR since August 1984 where he is presently Senior Vice President
and head of Branch Futures. Mr. Beech began his career at the Chicago Mercantile
Exchange, where he became the Chief Agricultural Economist doing market
analysis, marketing and compliance. Prior to joining DWR, Mr. Beech also had
worked at two investment banking firms in Operations, Research, Managed Futures
and Sales Management.
Ray Harris, age 42, became a Director of Demeter on March 17, 1999. Mr.
Harris is currently Senior Vice President, Planning and Administration for
Morgan Stanley Dean Witter Asset Management and has worked at DWR or its
affiliates since July 1982, serving in both financial and administrative
capacities. From August 1994 to January 1999, he worked in two separate DWR
affiliates, Discover Financial Services and Novus Financial Corp., culminating
as Senior Vice
- 34 -
President. Mr. Harris received his B.A. degree from Boston College and his
M.B.A. in finance from the University of Chicago.
Richard M. DeMartini, age 46, previously served as the Chairman of the
Board and as a Director of Demeter throughout 1998. Effective as of the close of
business on December 31, 1998, Mr. DeMartini resigned as the Chairman of the
Board and as a Director of Demeter due to changes in his responsibilities within
MSDW.
Lawrence Volpe, age 51, served as a Director to Demeter throughout 1998.
Effective as of the close of business on December 31, 1998, Mr. Volpe resigned
as a Director of Demeter.
Patti L. Behnke, age 38, served as Vice President and Chief Financial
Officer of Demeter through May 1998. Effective June 1, 1998, Ms. Behnke resigned
as Vice President and Chief Financial Officer of Demeter in order to take on new
responsibilities as Operations Officer - Controllers Division for MSDW, and was
replaced by Mr. Raibley.
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.
- 35 -
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - As of December 31,
1998 there were no persons known to be beneficial owners of more than 5 percent
of the Units.
(b) Security Ownership of Management - At December 31, 1998, Demeter owned
268.889 Units of General Partnership Interest representing a 1.11 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 Annual Report to Limited Partners for the year
ended December 31, 1998, 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 $2,170,551 for
the year ended December 31, 1998.
- 36 -
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 reports of independent
auditors, all appearing in the accompanying Annual Report to Limited
Partners for the year ended December 31, 1998 are incorporated by
reference in this Form 10-K:
- Report of Deloitte & Touche LLP, independent auditors, for the
years ended December 31, 1998, 1997 and 1996.
- Statements of Financial Condition as of December 31, 1998 and
1997.
- Statements of Operations, Changes in Partners' Capital, and Cash
Flows for the years ended December 31, 1998, 1997 and 1996.
- Notes to Financial Statements.
With the exception of the aforementioned information and the
information incorporated in Items 7, 8, and 13, the Annual Report to
Limited Partners for the year ended December 31, 1998 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.
- 37 -
SIGNATURES
Pursuant to the requirements 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 IV
(Registrant)
BY: Demeter Management Corporation,
General Partner
March 26, 1999 BY: /s/ Robert E. Murray
------------------------------------
Robert E. Murray, 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/ Robert E. Murray March 26, 1999
--------------------------------------
Robert E. Murray, Director and
President
/s/ Mark J. Hawley March 26, 1999
--------------------------------------
Mark J. Hawley, Director
and Chairman of the Board
/s/ Joseph G. Siniscalchi March 26, 1999
--------------------------------------
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 26, 1999
--------------------------------------
Edward C. Oelsner III, Director
/s/ Mitchell M. Merin March 26, 1999
--------------------------------------
Mitchell M. Merin, Director
/s/ Richard A. Beech March 26, 1999
--------------------------------------
Richard A. Beech, Director
/s/ Ray Harris March 26, 1999
--------------------------------------
Ray Harris, Director
/s/ Lewis A. Raibley, III March 26, 1999
--------------------------------------
Lewis A. Raibley, III, Director, Chief
Financial Officer and Principal
Accounting Officer
- 38 -
EXHIBIT INDEX
Item Method of Filing
- ---- ----------------
- -3.01 Limited Partnership Agreement of the Partnership, (1)
dated as of December 11, 1986.
- -10.01 Management Agreement among the Partnership, Demeter (2)
and John W. Henry and Co. Inc (former name of John
W. Henry & Company, Inc.) dated as of May 1, 1987.
- -10.02 Management Agreement among the Partnership, Demeter (3)
and Sunrise Commodities Inc. (former name of Sunrise
Capital Management Inc.) dated as of May 1, 1987
- -10.03 Dean Witter Cornerstone Funds Exchange Agreement, (4)
dated as of May 31, 1984.
- -10.04 Amended and Restated Customer Agreement, dated as of (5)
December 1, 1997, between the Partnership and Dean
Witter Reynolds Inc.
- -10.05 Customer Agreement, dated as of December 1, 1997, (5)
among the Partnership, Carr Futures, Inc., and Dean
Witter Reynolds Inc.
- -10.06 International Foreign Exchange Master Agreement, (5)
dated as of August 1, 1997, between the Partnership
and Carr Futures, Inc.
- -13.01 December 31, 1998 Annual Report to Limited Partners. (5)
(1) Incorporated by reference to Exhibit 3.01 to Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 (File
No. 0-15442).
(2) Incorporated by reference to Exhibit 10.01 to the Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 (File
No. 0-15442).
(3) Incorporated by reference to Exhibit 10.02 to the Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 (File
No. 0-15442).
(4) Incorporated by reference to Exhibit 10.04 to the Partnership's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987 (File
No. 0-15442).
(5) Filed herewith.
E-1