UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________to_____________
Commission File Number 0-13299
DEAN WITTER CORNERSTONE FUND III
(Exact name of registrant as specified in its charter)
New York 13-3190919
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, 62 Fl., New York, NY 10048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 392-5454
(Former name, former address, and former fiscal year, if changed
since last report)
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
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 1999
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
September 30, 1999 (Unaudited) and December 31, 1998.......2
Statements of Operations for the Quarters Ended
September 30, 1999 and 1998 (Unaudited)....................3
Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited)....................4
Statements of Changes in Partners' Capital for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited)..5
Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited)....................6
Notes to Financial Statements (Unaudited)...............7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 12-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ......................................20-32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 33
Item 2. Changes in Securities and Use of Proceeds........33-34
Item 6. Exhibits and Reports on Form 8-K................... 34
</TABLE>
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
September 30, December 31,
1999 1998
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 33,783,604 38,504,975
Net unrealized gain on open contracts984,033 2,102,810
Net option premiums (139,169) (50,047)
Total Trading Equity 34,628,468 40,557,738
Interest receivable (DWR) 112,952 120,465
Due from DWR 77,798 81,647
Total Assets 34,819,218 40,759,850
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 277,651 220,184
Accrued administrative expenses 162,942 104,780
Accrued management fees 115,137 135,067
Total Liabilities 555,730 460,031
Partners' Capital
Limited Partners (11,273.419 and
12,193.413 Units, respectively)33,836,968 39,835,572
General Partner (142.103 Units) 426,520 464,247
Total Partners' Capital 34,263,488 40,299,819
Total Liabilities and Partners' Capital 34,819,218 40,
759,850
NET ASSET VALUE PER UNIT 3,001.48 3,266.97
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
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<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended September 30,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized (140,237) 1,195,020
Net change in unrealized (1,169,348)
3,556,398
Total Trading Results (1,309,585) 4,751,418
Interest Income (DWR) 344,598
422,909
Total Revenues (964,987) 5,174,327
EXPENSES
Brokerage commissions (DWR) 556,565 543,426
Management fees 351,219 434,472
Transaction fees and costs 41,564 57,477
Administrative expenses 20,836 20,852
Total Expenses 970,184 1,056,227
NET INCOME (LOSS) (1,935,171) 4,118,100
NET INCOME (LOSS) ALLOCATION
Limited Partners (1,911,525) 3,997,158
General Partner (23,646) 120,942
NET INCOME (LOSS) PER UNIT
Limited Partners (166.41) 316.52
General Partner (166.41) 316.52
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Nine Months Ended September 30,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized (183,542) 5,018,082
Net change in unrealized (1,118,777)
3,103,163
Total Trading Results (1,302,319) 8,121,245
Interest Income (DWR) 1,024,396 1,280,723
Total Revenues (277,923) 9,401,968
EXPENSES
Brokerage commissions (DWR) 1,577,672 1,636,282
Management fees 1,110,193 1,270,563
Transaction fees and costs 144,499 168,130
Administrative expenses 58,162 53,026
Total Expenses 2,890,526 3,128,001
NET INCOME (LOSS) (3,168,449) 6,273,967
NET INCOME (LOSS) ALLOCATION
Limited Partners (3,130,722) 6,092,123
General Partner (37,727) 181,844
NET INCOME (LOSS) PER UNIT
Limited Partners (265.49) 475.91
General Partner (265.49) 475.91
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S> <C> <C>
<C> <C>
Partners' Capital,
December 31, 1997 13,734.437 $39,970,539
$1,143,835 $41,114,374
Offering of Units 5.184 15,998 -
15,998
Net Income - 6,092,123
181,844 6,273,967
Redemptions (897.394) (2,849,139)
- - (2,849,139)
Partners' Capital,
September 30, 1998 12,842.227 $43,229,521
$1,325,679 $44,555,200
Partners' Capital,
December 31, 1998 12,335.516 $39,835,572
$464,247 $40,299,819
Net Loss - (3,130,722)
(37,727) (3,168,449)
Redemptions (919.994) (2,867,882)
- - (2,867,882)
Partners' Capital,
September 30, 1999 11,415.522 $33,836,968
$426,520 $34,263,488
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Nine Months Ended September 30,
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) (3,168,449) 6
,273,967
Noncash item included in net income (loss):
Net change in unrealized 1,118,777 (
3,103,163)
(Increase) decrease in operating assets:
Net option premiums 89,122 (7,952)
Interest receivable (DWR) 7,513 6,538
Due from DWR 3,849 (2,139)
Increase (decrease) in operating liabilities:
Accrued administrative expenses 58,162
47,316
Accrued management fees (19,930)
11,041
Net cash provided by (used for) operating activities (1
,910,956) 3,225,608
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units - 15,998
Increase (decrease) in redemptions payable57,467 (
128,767)
Redemptions of units (2,867,882) (
2,849,139)
Net cash used for financing activities (2,810,415)
(2,961,908)
Net increase (decrease) in cash(4,721,371) 263,700
Balance at beginning of period 38,504,975
39,762,715
Balance at end of period 33,783,604
40,026,415
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The financial statements include, in the opinion of management,
all adjustments necessary for a fair presentation of the results
of operations and financial condition of Dean Witter Cornerstone
Fund III (the "Partnership"). The financial statements and
condensed notes herein should be read in conjunction with the
Partnership's December 31, 1998 Annual Report on Form 10-K.
1. Organization
Dean Witter Cornerstone Fund III is a limited partnership
organized to engage in the speculative trading of futures,
options and forward contracts on foreign currencies and other
commodity interests (collectively, "futures interests"). The
Partnership is one of the Dean Witter Cornerstone Funds,
comprised of Dean Witter Cornerstone Fund II, the Partnership,
and Dean Witter Cornerstone Fund IV. 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 managers to the Partnership
are Welton Investment Corporation ("Welton") and Sunrise Capital
Management Inc. ("Sunrise"), (collectively, the "Trading
Managers").
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Commencing with the September 30, 1999 monthly closing, the Net
Assets previously managed by Abraham Trading Co. were reallocated
to Welton Investment Corporation. Additionally, any net proceeds
or redemptions received via monthly exchanges into or out of
Cornerstone III will be allocated equally between Welton and
Sunrise.
2. Related Party Transactions
The Partnership's cash is on deposit with DWR and Carr in futures
interests trading accounts to meet margin requirements as needed.
DWR pays interest on these funds based on current 13-week U.S.
Treasury bill rates. The Partnership pays brokerage commissions
to DWR.
3. Financial Instruments
The Partnership trades futures, options and forward contracts on
foreign currencies and other commodity interests. Futures and
forwards represent contracts for delayed delivery of an
instrument at a specified date and price. 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.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999. The
Partnership elected to adopt the provisions of SFAS No. 133
beginning with the fiscal year that ended December 31, 1998.
SFAS No. 133 supersedes SFAS No. 119 and No. 105, which required
the disclosure of average aggregate fair values and
contract/notional values, respectively, of derivative financial
instruments for an entity which carries its assets at fair value.
The application of SFAS No. 133 does not have a significant
effect on the Partnership's financial statements.
The net unrealized gain on open contracts is reported as a
component of "Equity in futures interests trading accounts" on
the Statements of Financial Condition and totaled $984,033 and
$2,102,810 at September 30, 1999 and December 31, 1998,
respectively.
Of the $984,033 net unrealized gain on open contracts at
September 30, 1999, $671,559 related to exchange-traded futures
and futures-styled option contracts and $312,474 related to off-
exchange-traded forward currency contracts.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the $2,102,810 net unrealized gain on open contracts at
December 31, 1998, $2,250,314 related to exchange-traded futures
and futures-styled option contracts and $(147,504) related to off-
exchange-traded forward currency contracts.
Exchange-traded futures and futures-styled options contracts held
by the Partnership at September 30, 1999 and December 31, 1998
mature through March 2000 and June 1999, respectively. Off-
exchange traded forward currency contracts held by the
Partnership at September 30, 1999 and December 31, 1998 mature
through December 1999 and March 1999, respectively.
The Partnership is subject to the credit risk associated with
counterparty non-performance. The credit risk associated with
the instruments in which the Partnership is involved is limited
to the amounts reflected in the Partnership's Statements of
Financial Condition. DWR and Carr act as the futures commission
merchants or the counterparties with respect to most of the
Partnership's assets. Exchange-traded futures and futures-styled
options contracts are marked to market on a daily basis, with
variations in value settled on a daily basis. Each of DWR and
Carr, as a futures commission merchant for all of the
Partnership's exchange-traded futures and futures-styled options
contracts, are required, pursuant to regulations of the Commodity
Futures Trading Commission ("CFTC") to segregate from their own
assets, and for the sole benefit of their commodity customers,
all funds held by
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
them with respect to exchange-traded futures and futures-styled
options contracts, including an amount equal to the net
unrealized gain on all open futures and futures-styled options
contracts, which funds, in the aggregate, totaled $34,455,163 and
$40,755,289 at September 30, 1999 and December 31, 1998,
respectively.
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 Partnership is at risk to the ability of Carr, the
sole counterparty on all of such contracts, to perform. Carr's
parent, Credit Agricole Indosuez, has guaranteed to the
Partnership payment of the net liquidating value of the
transactions in the Partnership's account with Carr (including
foreign currency contracts).
<PAGE>
Item 2. 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 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 its futures interests and result in
restrictions on redemptions.
<PAGE>
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 of Limited Partnership Interest ("Unit(s)")
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
For the Quarter and Nine Months Ended September 30, 1999
For the quarter ended September 30, 1999, the Partnership
recorded total trading losses net of interest income of $964,987
and posted a decrease in Net Asset Value per Unit. The most
significant losses were recorded from trading S&P 500 Index
futures as domestic equity prices moved in a short-term volatile
pattern during late July and August due to inflationary concerns
in the U.S. Additional losses were experienced in this market
complex during July from long positions in Hang Seng Index
futures as Hong Kong equity prices moved lower due to rising
<PAGE>
China-Taiwan tensions and a decline in China's gross domestic
product. In global interest rate futures, losses were recorded
during August from short eurodollar positions as U.S. bond prices
moved temporarily higher during mid-month due to benign inflation
data. Smaller losses were incurred from short positions in the
Swiss franc and the euro as the value of these European
currencies reversed their previous downward trend versus the U.S.
dollar during July due to strong economic data out of Europe and
U.S. inflationary fears. The losses recorded in this market
complex were mitigated by gains recorded from long positions in
the Japanese yen as the value of the yen strengthened versus the
U.S. dollar during the quarter amid optimism regarding the
Japanese economy. A portion of the Partnership's overall losses
for the quarter was offset by gains recorded from long positions
in crude oil and its refined products, unleaded gas, heating oil
and gas oil. Oil prices increased during July, August and
September, due primarily to a perceived tightness in supply,
increasing demand and an announcement by OPEC officials stating
that they would maintain output cuts until April 2000. Total
expenses for the three months ended September 30, 1999 were
$970,184, resulting in a net loss of $1,935,171. The value of a
Unit decreased from $3,167.89 at June 30, 1999 to $3,001.48 at
September 30, 1999.
For the nine months ended September 30, 1999, the Partnership
recorded total trading losses net of interest income of $277,923
and posted a decrease in Net Asset Value per Unit. The most
<PAGE>
significant losses were incurred from short positions in Japanese
government bond futures as prices increased during January and
February. During January, Japanese government bond prices moved
higher in a "flight-to-quality" due to renewed concerns regarding
the Brazilian economy. Prices in this market continued to
increase during February amid growing speculation that a rise in
Japanese bond yields would result in Japanese investors replacing
international bonds with yen-denominated debt. In currencies,
losses were experienced from long British pound positions as the
value of the pound weakened versus the U.S. dollar during May due
to fear of an interest rate cut by the Bank of England. In
global stock index futures, losses were recorded during July from
long positions in Hang Seng Index futures as Hong Kong equity
prices moved lower due to rising China-Taiwan tensions and a
decline in China's gross domestic product. Smaller losses were
incurred in the metals markets during May from long positions in
most base metals as prices declined amid abundant supplies and
weak demand. A portion of these losses was offset by gains
recorded from long futures positions in crude oil and its refined
products as oil prices climbed during the first quarter on news
that both OPEC and non-OPEC countries had reached an agreement to
cut total output beginning April 1st. Oil prices received an
added boost during the second and third quarters due to declining
inventory levels and increasing demand. Total expenses for the
nine months ended September 30, 1999 were $2,890,526, resulting
in a net loss of $3,168,449. The value of a Unit decreased from
$3,266.97 at December 31, 1998 to $3,001.48 at September 30,
1999.
<PAGE>
For the Quarter and Nine Months Ended September 30, 1998
For the quarter ended September 30, 1998, the Partnership
recorded total trading revenues including interest income of
$5,174,327 and posted an increase in Net Asset Value per Unit.
The most significant gains were recorded in the global interest
rate futures markets during August and September from long
positions in U.S. and European bond futures as prices in these
markets trended higher. Most global bond prices rallied higher
during the last two months of the quarter as investors continued
to flock to these perceived "safe havens" due to worldwide
economic uncertainty and the subsequent volatility. Additional
gains were recorded in this market complex as long Japanese bond
futures positions profited from the upward trend in prices. In
the agricultural markets, profits were recorded from short
positions in the livestock and corn futures as prices in these
markets decreased during July and August due to increasing
supplies and declining demand. A portion of these gains was
offset by losses recorded in global stock index futures from long
S&P 500 Index futures positions as domestic stock prices plunged
during late July and throughout August after reaching record
levels early in the quarter. Additional losses were recorded in
the metals markets during July from short positions in base
metals futures as prices moved higher early in the month. As a
result of this move higher, long positions in these markets were
established only to result in additional losses in late July as
prices regained their previous downward momentum. Smaller losses
were recorded in energy futures trading during September. Total
expenses for the three months ended September 30, 1998 were
<PAGE>
$1,056,227, resulting in net income of $4,118,100. The value of
a Unit increased from $3,152.91 at June 30, 1998 to $3,469.43 at
September 30, 1998.
For the nine months ended September 30, 1998, the Partnership
recorded total trading revenues including interest income of
$9,401,968 and posted an increase in Net Asset Value per Unit.
The most significant profits were recorded from long global bond
futures positions, particularly U.S. and German bond futures,
during the third quarter as a result of a strong upward trend in
prices during August and September. Most global bond prices were
pushed significantly higher during this period as investors
sought a "safe haven" in lieu of the worldwide economic
instability, particularly in emerging markets. Smaller profits
were recorded from long positions in Japanese bond futures as
prices in this market also trended higher. In global stock index
futures, profits were recorded from long U.S. and European stock
index futures positions as prices in these markets trended
consistently higher to record highs throughout the first six
months of the year before reversing sharply lower during late
July and early August. Additional gains were recorded in
livestock futures from short cattle and hog futures as prices
declined during the second and third quarters. Gains were
recorded in energies from short crude oil futures positions as
oil prices declined during January and February on news of easing
tensions in the Middle East, and again during May, June and July
on reports of increasing supplies. Smaller gains were recorded
from short positions in sugar futures as sugar prices trended
lower between January and April. A
<PAGE>
portion of these gains was offset by losses recorded in the
metals markets from short gold futures positions as gold prices
reversed higher during January and September. Smaller losses
were recorded from long silver futures during March as silver
prices reversed lower after trending steadily higher during
January and early February. In currencies, losses were recorded
from transactions involving the British pound, as its value moved
in a trendless pattern relative to the U.S. dollar during the
first nine months of the year. Total expenses for the nine
months ended September 30, 1998 were $3,128,001, resulting in net
income of $6,273,967. The value of a Unit increased from
$2,993.52 at December 31, 1997 to $3,469.43 at September 30,
1998.
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.
<PAGE>
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.
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 Managers - 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
Managers throughout 1999 in their Year 2000 compliance and, where
applicable, to test its external interface with Carr and the
Trading Managers.
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
<PAGE>
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.
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 Managers 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 3. 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
<PAGE>
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, 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
<PAGE>
market-sensitive instruments.
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 Managers 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
<PAGE>
VaR using a model based on historical simulation with a
confidence level of 99%. Historical 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 Managers in their daily risk management activities.
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
<PAGE>
by market category as of September 30, 1999. As of September 30,
1999, the Partnership's total capitalization was approximately
$34 million.
Primary Market September 30, 1999
Risk Category Value at Risk
Equity (0.10)%
Interest Rate (0.74)
Currency (0.87)
Commodity (1.11)
Aggregate Value at Risk (1.73)%
Aggregate value at risk represents the aggregate VaR of the
Partnership's open positions and not the sum of the VaR of the
individual categories listed above. Aggregate VaR will be lower
as it takes into account correlation among different positions
and categories.
The table above represents the VaR of the Partnership's open
positions at September 30, 1999 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.
<PAGE>
The table below supplements the quarter-end VaR by presenting the
Partnership's high, low and average VaR as a percentage of total
Net Assets for the four quarterly reporting periods from October 1,
1998 through September 30, 1999.
Primary Market Risk Category High Low Average
Equity (2.24)% (0.10)% (0.94)%
Interest Rate (1.32) (0.43) (0.90)
Currency (1.95) (0.72) (1.23)
Commodity (1.11) (0.73) (0.91)
Aggregate Value at Risk (3.63)% (1.61)% (2.24)%
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 require-
ments, 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
<PAGE>
the 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 September 30, 1999 and for the end of the four
quarterly reporting periods from October 1, 1998 through September
30, 1999. 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 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 risk they may represent, are immaterial. The
Partnership also maintains a substantial portion (approximately
91%) of its available assets in cash at DWR. A decline in short-
term interest
<PAGE>
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 Demeter and the Trading Managers
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. 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
<PAGE>
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 September 30, 1999, by market sector. It may
be anticipated however, that these market exposures will vary
materially over time.
Currency. The primary market exposure in the Partnership at
September 30, 1999 was in the currency sector. The Partnership's
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes as well as political and general economic conditions
influence these fluctuations. The Partnership trades in a large
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. For the third
quarter of 1999, the Partnership's major exposures were in the
euro currency crosses and outright U.S. dollar positions.
(Outright positions consist of the U.S. dollar vs. other
currencies. These other currencies include the major and minor
currencies). Demeter does not anticipate that the risk profile
of the Partnership's currency sector will change significantly in
the future. The currency trading VaR figure includes foreign
margin amounts converted into U.S. dollars with an incremental
adjustment to reflect the exchange rate risk inherent to the
<PAGE>
dollar-based Partnership in expressing VaR in a functional
currency other than dollars.
Interest Rate. The second largest market exposure this
quarter was in the interest rate complex. Exposure was spread
across the U.S., German, Japanese, Spanish and Australian
interest rate sectors. Interest rate movements directly affect
the price of the sovereign bond futures positions held by the
Partnership and indirectly affect the value of its stock index
and currency positions. Interest rate movements in one country
as well as relative interest rate movements between countries
materially impact the Partnership's profitability. The
Partnership's primary interest rate exposure is generally to
interest rate fluctuations in the United States and the other G-7
countries. However, the Partnership also takes futures positions
in the government debt of smaller nations - e.g. Australia, New
Zealand and Spain. Demeter anticipates that G-7 and Australian
interest rates will remain the primary interest rate exposure of
the Partnership for the foreseeable future. The changes in
interest rates, which have the most effect on the Partnership,
are changes in long-term, as opposed to short-term, rates. Most
of the speculative futures positions held by the Partnership are
in medium-to-long term instruments. Consequently, even a
material change in short-term rates would have little effect on
the Partnership, were the medium-to-long term rates to remain
steady.
Equity. The primary equity exposure is to equity price risk
in the G-7 countries. The stock index futures traded by the
<PAGE>
Partnership are by law limited to futures on broadly-based
indices. As of September 30, 1999, the Partnership's primary
exposures were in the NASDAQ (U.S.) and CAC 40 (France) stock
indices. The Partnership is primarily exposed to the risk of
adverse price trends or static markets in the U.S. and European
indices. (Static markets would not cause major market changes
but would make it difficult for the Partnership to avoid being
"whipsawed" into numerous small losses).
Commodity.
Energy. On September 30, 1999, the Partnership's energy
exposure was shared by futures contracts in the crude and heating
oil, and unleaded gas markets. Price movements in these markets
result from political developments in the Middle East, weather
patterns, and other economic fundamentals. As oil prices have
increased about 100% this year, and, given that the agreement by
OPEC to cut production is approaching expiration in March 2000,
it is possible that volatility will remain on the high end.
Significant profits and losses have been and are expected to
continue to be experienced in this market.
Metals. The Partnership's primary metals market exposure is
to fluctuations in the price of gold and silver. Although
certain Trading Managers will, from time to time, trade base
metals such as copper, aluminum, zinc, nickel and lead, the
principal market exposures of the Partnership have consistently
been in precious metals, gold and silver. A significant amount
of exposure was evident in the gold market as the price of gold
increased dramatically following bullish comments by the European
<PAGE> Central
Bank. Silver prices were also volatile over this period, and the
Trading Managers have taken substantial positions when perceived
market opportunities developed. Demeter anticipates that gold
and silver will remain the primary metals market exposure for the
Partnership.
Soft Commodities and Agriculturals. On September 30, 1999,
the Partnership had a reasonable amount of exposure in the
markets that comprise these sectors. Most of the exposure,
however, was in the coffee, corn and wheat markets. Supply and
demand inequalities, severe weather disruption and market
expectations affect price movements in these markets.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of September 30, 1999:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in British pounds, Japanese yen, euros,
Swiss francs, and Mexican pesos. The Partnership controls the
non-trading risk of these balances by regularly converting these
balances back into dollars upon liquidation of the respective
positions.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Trading Managers
attempt to manage the risk of the Partnership's open positions
<PAGE>
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
Managers, each of whose strategies focus on different market
sectors and trading approaches, and (ii), monitoring the
performance of the Trading Managers on a daily basis. In
addition, the Trading Managers 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
Managers 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 Managers.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in the Partnership's 1998 Form 10-K:
In the New York action, the motion to dismiss the amended
complaint with prejudice has been fully briefed and argued and
the Dean Witter Parties are awaiting the New York Supreme Court's
decision.
In the California action, on September 24, 1999, the Superior
Court in the State of California entered an order dismissing the
consolidated amended complaint without prejudice on consent.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Dean Witter Cornerstone Fund I ("Cornerstone I"), Dean Witter
Cornerstone Fund II ("Cornerstone II"), and the Partnership
collectively registered 250,000 Units pursuant to a Registration
Statement on Form S-1, which became effective on May 31, 1984 (the
"Registration Statement") (SEC File Numbers 2-88587; 88587-01;
88587-02). As contemplated in the Registration Statement, an
additional fund, Dean Witter Cornerstone Fund IV ("Cornerstone IV"
and, collectively with Cornerstone I, Cornerstone II and the
Partnership, the "Cornerstone Funds"), was registered pursuant to
Post-Effective Amendment No. 5 to the Registration Statement, which
became effective on February 6, 1987. The managing underwriter for
the Cornerstone Funds is DWR.
<PAGE>
The offering for Cornerstone III originally commenced on May 31,
1984 and currently continues with 74,405.186 Units sold through
October 1, 1999. The aggregate price of Units sold through October
1, 1999 was $137,132,762.
For the Cornerstone Funds in aggregate, 235,430.680 Units have been
sold through October 1, 1999, leaving 14,569.320 Units remaining
available for sale as of October 1, 1999.
Effective September 30, 1984, Cornerstone II, the Partnership and
Cornerstone IV were closed to new investors; Units have been sold
since then solely in "Exchanges" with existing investors, at 100%
of Net Asset Value per Unit. DWR has been paying all expenses in
connection with the offering of Units since September 30, 1994,
without reimbursement.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits - None.
B) Reports on Form 8-K. - None.
<PAGE>
SIGNATURE
Pursuant to the requirements 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)
November 12, 1999 By: /s/ Lewis A. Raibley, III
Lewis A. Raibley, III
Director and Chief Financial
Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Dean
Witter Cornerstone Fund III and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 33,783,604
<SECURITIES> 0
<RECEIVABLES> 190,750<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,819,218<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,819,218<F3>
<SALES> 0
<TOTAL-REVENUES> (277,923)<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,890,526
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,168,449)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,168,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,168,449)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include interest receivable of $112,952 and due from
DWR of $77,798.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $984,033 and net option
premiums of $(139,169).
<F3>Liabilities include redemptions payable of $277,651, accrued management
fees of $115,137 and accrued administrative expenses of $162,942.
<F4>Total revenues include realized trading revenue of $(183,542), net
change in unrealized of $(1,118,777) and interest income of $1,024,396.
</FN>
</TABLE>
