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 June 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
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<TABLE>
DEAN WITTER CORNERSTONE FUND III
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 1999
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
June 30, 1999 (Unaudited) and December 31, 1998............2
Statements of Operations for the Quarters Ended
June 30, 1999 and 1998 (Unaudited).........................3
Statements of Operations for the Six Months Ended
June 30, 1999 and 1998 (Unaudited).........................4
Statements of Changes in Partners' Capital for the
Six Months Ended June 30, 1999 and 1998 (Unaudited)........5
Statements of Cash Flows for the Six Months Ended
June 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>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
June 30, December 31,
1999 1998
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 35,428,932 38,504,975
Net unrealized gain on open contracts2,153,381 2,102,810
Net option premiums (179,222) (50,047)
Total Trading Equity 37,403,091 40,557,738
Due from DWR 188,144 81,647
Interest receivable (DWR) 114,124 120,465
Total Assets 37,705,359 40,759,850
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 478,864 220,184
Accrued administrative expenses 142,106 104,780
Accrued management fees 124,795 135,067
Total Liabilities 745,765 460,031
Partners' Capital
Limited Partners (11,524.846 and
12,193.413 Units, respectively)36,509,428 39,835,572
General Partner (142.103 Units) 450,166 464,247
Total Partners' Capital 36,959,594 40,299,819
Total Liabilities and Partners' Capital 37,705,359 40,
759,850
NET ASSET VALUE PER UNIT 3,167.89 3,266.97
<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 Quarters Ended June 30,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized 221,630 510,583
Net change in unrealized 1,503,917 (146,226)
Total Trading Results 1,725,547 364,357
Interest Income (DWR) 336,329
427,720
Total Revenues 2,061,876 792,077
EXPENSES
Brokerage commissions (DWR) 526,252 536,265
Management fees 375,763 417,353
Transaction fees and costs 57,173 54,388
Administrative expenses 18,914 18,632
Total Expenses 978,102 1,026,638
NET INCOME (LOSS) 1,083,774 (234,561)
NET INCOME (LOSS) ALLOCATION
Limited Partners 1,070,901 (228,145)
General Partner 12,873 (6,416)
NET INCOME (LOSS) PER UNIT
Limited Partners 90.59 (16.79)
General Partner 90.59 (16.79)
<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 Six Months Ended June 30,
1999 1998
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized (43,305) 3,823,062
Net change in unrealized 50,571
(453,235)
Total Trading Results 7,266 3,369,827
Interest Income (DWR) 679,798 857,814
Total Revenues 687,064 4,227,641
EXPENSES
Brokerage commissions (DWR) 1,021,107 1,092,856
Management fees 758,974 836,091
Transaction fees and costs 102,935 110,653
Administrative expenses 37,326 32,174
Total Expenses 1,920,342 2,071,774
NET INCOME (LOSS) (1,233,278) 2,155,867
NET INCOME (LOSS) ALLOCATION
Limited Partners (1,219,197) 2,094,965
General Partner (14,081) 60,902
NET INCOME (LOSS) PER UNIT
Limited Partners (99.08) 159.39
General Partner (99.08) 159.39
<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 Six Months Ended June 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 - 2,094,965
60,902 2,155,867
Redemptions (599.870) (1,857,782)
- - (1,857,782)
Partners' Capital,
June 30, 1998 13,139.751 $40,223,720
$1,204,737 $41,428,457
Partners' Capital,
December 31, 1998 12,335.516 $39,835,572
$464,247 $40,299,819
Net Loss - (1,219,197)
(14,081) (1,233,278)
Redemptions (668.567) (2,106,947)
- - (2,106,947)
Partners' Capital,
June 30, 1999 11,666.949 $36,509,428
$450,166 $36,959,594
<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 Six Months Ended June 30,
1999 1998
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) (1,233,278) 2
,155,867
Noncash item included in net income (loss):
Net change in unrealized (50,571) 453,235
(Increase) decrease in operating assets:
Net option premiums 129,175 276,105
Due from DWR (106,497) (71,447)
Interest receivable (DWR) 6,341 1,035
Increase (decrease) in operating liabilities:
Accrued administrative expenses 37,326
26,463
Accrued management fees (10,272)
1,023
Net cash provided by (used for) operating activities (1
,227,776) 2,842,281
CASH FLOWS FROM FINANCING ACTIVITIES
Offering of units - 15,998
Increase (decrease) in redemptions payable258,680 (7,286)
Redemptions of units (2,106,947) (
1,857,782)
Net cash used for financing activities (1,848,267)
(1,849,070)
Net increase (decrease) in cash (3,076,043) 993,211
Balance at beginning of period 38,504,975
39,762,715
Balance at end of period 35,428,932
40,755,926
<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 Abraham Trading Co., Welton Investment Corporation and
Sunrise Capital Management Inc., (collectively, the "Trading
Managers").
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $2,153,381 and
$2,102,810 at June 30, 1999 and December 31, 1998, respectively.
Of the $2,153,381 net unrealized gain on open contracts at June
30, 1999, $2,087,450 related to exchange-traded futures and
futures-styled option contracts and $65,931 related to off-
exchange-traded forward currency contracts.
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 June 30, 1999 and December 31, 1998 mature
through June 2000 and June 1999, respectively. Off-exchange-
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
traded forward currency contracts held by the Partnership at June
30, 1999 and December 31, 1998 mature through September 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 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
$37,516,382 and $40,755,289 at June 30, 1999 and December 31,
1998, respectively.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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 Six Months Ended June 30, 1999
For the quarter ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $2,061,876
and posted an increase in Net Asset Value per Unit. The most
significant gains were recorded in global stock index futures
from long positions in S&P 500 Index futures as domestic equity
prices moved higher during April, following an interest rate cut
by the European Central Bank, and during late June after the
Federal Reserve said it was shifting to a neutral bias following
an increase in the Federal Funds rate on June 30. Additional
<PAGE>
gains were recorded during May and June from short positions in
U.S. interest rate futures as domestic bond prices declined in
anticipation of an interest rate increase by the Federal Reserve
late in the quarter. In the agricultural markets, profits were
recorded from short futures positions in soybeans and soybean oil
as prices in these markets fell during May and June due to
favorable planting forecasts and bearish supply-demand and
production data. These gains were partially offset by losses
incurred from long positions in most base metals as prices fell
significantly during late May amid large supply, low demand and
as the possibility of production cuts in the near future seemed
unlikely. Smaller losses were recorded in the energy markets
during June from long positions in natural gas futures as prices
moved lower due to higher-than-expected storage levels. Total
expenses for the three months ended June 30, 1999 were $978,102,
resulting in net income of $1,083,774. The value of a Unit
increased from $3,077.30 at March 31, 1999 to $3,167.89 at June
30, 1999.
For the six months ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $687,064 and,
after expenses, posted a decrease in Net Asset Value per Unit.
The most significant net trading losses were recorded 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
<PAGE>
that a rise in Japanese bond yields would result in Japanese
investors replacing international bonds with yen-denominated
debt. In metals, losses were incurred during May from long
positions in most base metals as prices declined amid abundant
supplies, weak demand and as the possibility of production cuts
in the near future seemed unlikely. Smaller losses 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, more than offset gains
from short positions in the Swiss franc and the European common
currency, the euro, as their values weakened versus the dollar
throughout the first half of the year. A portion of the overall
Partnership losses for the first six months of 1999 was offset by
gains recorded in the agricultural markets from short futures
positions in soybeans and soybean oil as prices declined during
January and February, and again during May and June, due to a
healthy South American crop, fears that Brazil will increase
exports to support its economy and a continued decline in world
demand. Additional gains were recorded from long futures
positions in crude oil 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 quarter as prices
reached a 19-month high due to declining inventory levels and
increasing demand. Total expenses for the six months ended June
30, 1999 were $1,920,342, resulting in a net loss of $1,233,278.
The value of a Unit decreased from $3,266.97 at December 31, 1998
to $3,167.89 at June 30, 1999.
<PAGE>
For the Quarter and Six Months Ended June 30, 1998
For the quarter ended June 30, 1998, the Partnership recorded
total trading revenues including interest income of $792,077 and,
after expenses, posted a decrease in Net Asset Value per Unit.
The most significant net trading losses were incurred in the
currency markets from short German mark positions as its value
reversed higher during April after showing signs of trending
lower previously. Additional currency losses were recorded
during April from long British pound positions as its value
weakened relative to other currencies. In other markets, losses
were recorded in financial futures during April and June
primarily from long Australian bond futures positions as prices
reversed lower after trending higher previously. These losses,
coupled with smaller losses incurred in British interest rate
futures trading, were partially offset by profits from long
global stock index futures positions as prices moved higher
throughout a majority of the quarter. In agricultural futures,
losses were experienced from short corn and soybean futures
positions as prices moved higher during the latter half of June.
A portion of the Partnership's overall losses for the month was
offset by gains in soft commodities from short sugar futures
positions as sugar prices moved lower during April. Additional
profits recorded during June from short positions in coffee
futures, as well as during May and June from short positions in
crude oil futures, helped to offset a portion of the losses for
the quarter. Total expenses for the three months ended June 30,
1998 were $1,026,638, resulting in a net loss of $234,561. The
<PAGE>
value of a Unit decreased from $3,169.70 at March 31, 1998 to
$3,152.91 at June 30, 1998.
For the six months ended June 30, 1998, the Partnership recorded
total trading revenues including interest income of $4,227,641 and
posted an increase in Net Asset Value per Unit. The most
significant profits were recorded from long U.S. and European stock
index futures positions as prices in these markets trended
consistently higher throughout the first six months of the year.
Additional profits were recorded from long European bond futures
positions as prices in these markets trended higher during the
first quarter. In energies, gains were recorded from short crude
oil futures positions as oil prices declined during January and
February, as tensions eased in the Middle East, and again during
May and June on reports of increasing supplies. Smaller gains were
recorded from short positions in sugar futures as sugar prices
trended lower between January and April. A portion of these gains
was offset by losses recorded in the metals markets from long
silver futures positions as silver prices reversed lower during
March after trending steadily higher during January and February
and from short gold futures positions as gold prices reversed
higher during January. Smaller losses were recorded in currencies
from transactions involving the British pound, as its value moved
in a trendless pattern throughout a majority of the first half of
the year, and from short German mark positions as its value moved
higher versus the U.S. dollar during April. Total expenses for the
six months ended June 30, 1998 were $2,071,774, resulting in net
income
<PAGE>
of $2,155,867. The value of a Unit increased from $2,993.52 at
December 31, 1997 to $3,152.91 at June 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.
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
<PAGE>
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
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
<PAGE>
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
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
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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
by market category as of June 30, 1999. As of June 30, 1999, the
Partnership's total capitalization was approximately $37 million.
Primary Market June 30, 1999
Risk Category Value at Risk
Equity (2.24)%
Interest Rate (1.11)
Currency (1.95)
Commodity (1.01)
Aggregate Value at Risk (3.63)%
<PAGE>
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 June 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.
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 July 1,
1998 through June 30, 1999.
Primary Market Risk Category High Low Average
Equity (2.24)% (0.08)% (0.93)%
Interest Rate (1.74) (0.43) (1.15)
Currency (1.95) (0.72) (1.28)
Commodity (1.01) (0.68) (0.80)
Aggregate Value at Risk (3.63)% (1.61)% (2.36)%
<PAGE>
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 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.
<PAGE>
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 June 30, 1999 and for the end of the four
quarterly reporting periods from July 1, 1998 through June 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
85%) 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
<PAGE>
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 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 June 30, 1999, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Equity. The primary market exposure in the Partnership is in
the stock index sector. The primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by
<PAGE>
the Partnership are by law limited to futures on broadly based
indices. As of June 30, 1999, the Partnership's primary exposures
were in the S&P 500 (U.S.), NASDAQ (U.S.) and Nikkei (Japan) stock
indices. The Partnership is primarily exposed to the risk of
adverse price trends or static markets in the U.S., European and
Japanese 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).
Interest Rate. The second largest market exposure this
quarter is in the interest rate complex. Exposure was spread
across the U.S., German, Australian, Spanish, and Japanese 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 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
<PAGE>
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.
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. 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 second 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 Value at Risk figure includes foreign margin amounts
converted into U.S. dollars with an incremental adjustment to
reflect the exchange rate risk inherent to the dollar-based
Partnership in expressing Value at Risk in a functional currency
other than dollars.
Commodity.
Soft Commodities and Agriculturals. On June 30, 1999, the
Partnership had a reasonable amount of exposure in the markets
that comprise these sectors. Most of the exposure, however, was
<PAGE>
in the corn, coffee and soybean markets. Supply and demand
inequalities, severe weather disruption and market expectations
affect price movements in these markets.
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 aluminum, copper, nickel and lead, the principal
market exposures of the Partnership have consistently been in
precious metals, gold and silver. The Trading Managers' gold
trading has been increasingly limited due to the long-lasting and
mainly non-volatile decline in the price of gold over the last 10-
15 years. However, silver prices have remained volatile over
this period, and the Trading Managers have, from time to time,
taken substantial positions as they have perceived market
opportunities to develop. Demeter anticipates that gold and
silver will remain the primary metals market exposure for the
Partnership.
Energy. On June 30, 1999, the Partnership's energy exposure
was shared by futures contracts in the oil and natural 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 broken out of low
price ranges achieved in 1998, it is possible that volatility
will increase as well. Significant profits and losses have been
and are expected to continue to be experienced in this market.
Natural gas, also a primary energy market exposure, has exhibited
<PAGE> more volatility than the oil
markets on an intra-day and daily basis and is expected to
continue in this choppy pattern.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of June 30, 1999:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in Swiss francs, euros, British pounds,
Japanese yen 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
position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Trading Managers,
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 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
<PAGE>
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:
With respect to the plaintiff's consolidated action in
California, on July 1, 1999, the Superior Court of the State of
California, ruling from the bench, denied the plaintiffs' motion
to have their lawsuit certified as a class action, stating, among
other things, that plaintiffs' lawsuit did not present common
questions of fact.
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.
The offering for Cornerstone III originally commenced on May 31,
1984 and currently continues with 74,405.186 Units sold through
July
<PAGE>
1, 1999. The aggregate price of Units sold through July 1, 1999 was
$137,132,762.
For the Cornerstone Funds in aggregate, 235,430.680 Units have been
sold through July 1, 1999, leaving 14,569.320 Units remaining
available for sale as of July 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)
August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 35,428,932
<SECURITIES> 0
<RECEIVABLES> 302,268<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,705,359<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,705,359<F3>
<SALES> 0
<TOTAL-REVENUES> 687,064<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,920,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,233,278)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,233,278)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,233,278)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include interest receivable of $114,124 and due from
DWR of $188,144.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $2,153,381 and net option
premiums of $(179,222).
<F3>Liabilities include redemptions payable of $478,864, accrued management
fees of $124,795 and accrued administrative expenses of $142,106.
<F4>Total revenues include realized trading revenue of $(43,305), net
change in unrealized of $50,571 and interest income of $679,798.
</FN>
</TABLE>
