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, 2000 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
June 30, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
June 30, 2000 (Unaudited) and December 31, 1999............2
Statements of Operations for the Quarters Ended
June 30, 2000 and 1999 (Unaudited).........................3
Statements of Operations for the Six Months Ended
June 30, 2000 and 1999 (Unaudited).........................4
Statements of Changes in Partners' Capital for the
Six Months Ended June 30, 2000 and 1999 (Unaudited)........5
Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited).........................6
Notes to Financial Statements (Unaudited)...............7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 13-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ......................................22-35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................36-37
Item 5. Other Information................................37-38
Item 6. Exhibits and Reports on Form 8-K.................38-39
</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,
2000 1999 $
$
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 27,724,650 32,268,788
Net unrealized gain (loss) on open contracts (Carr) (156,406)
1,425,611 Net unrealized loss
on open contracts (MSIL) (150,164)
-
Net unrealized loss on open contracts (MS & Co.) (45,797)
______-___
Total net unrealized gain (loss) on open contracts (352,367)
1,425,611
Net option premiums (128,125) 318,281
Total Trading Equity 27,244,158 34,012,680
Interest receivable (DWR) 107,667 116,065
Due from DWR
2,450 -
Total Assets 27,354,275 34,128,745
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 378,500 443,758
Accrued administrative expenses 139,780 138,661
Accrued management fees 90,414 112,924
Total Liabilities 608,694 695,343
Partners' Capital
Limited Partners (9,847.093 and
10,836.119 Units, respectively) 26,365,107 33,000,637
General Partner (142.103 Units) 380,474 432,765
Total Partners' Capital 26,745,581 33,433,402
Total Liabilities and Partners' Capital27,354,275 34,128,745
NET ASSET VALUE PER UNIT 2,677.45 3,045.43
<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,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized (1,906,624) 221,630
Net change in unrealized (1,033,828) 1,503,917
Total Trading Results (2,940,452) 1,725,547
Interest Income (DWR) 339,495 336,329
Total Revenues (2,600,957) 2,061,876
EXPENSES
Brokerage commissions (DWR) 395,208 526,252
Management fees 285,482 375,763
Transaction fees and costs 24,814 57,173
Administrative expenses 18,934 18,914
Total Expenses 724,438
978,102
NET INCOME (LOSS) (3,325,395) 1,083,774
NET INCOME (LOSS) ALLOCATION
Limited Partners (3,279,418) 1,070,901
General Partner (45,977) 12,873
NET INCOME (LOSS) PER UNIT
Limited Partners (323.55) 90.59
General Partner (323.55) 90.59
<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,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized (1,163,554) (43,305)
Net change in unrealized (1,777,978) 50,571
Total Trading Results (2,941,532) 7,266
Interest Income (DWR) 702,152 679,798
Total Revenues (2,239,380) 687,064
EXPENSES
Brokerage commissions (DWR) 873,542 1,021,107
Management fees 611,035 758,974
Transaction fees and costs 48,508 102,935
Administrative expenses 37,473 37,326
Total Expenses 1,570,558 1,920,342
NET LOSS (3,809,938) (1,233,278)
NET LOSS ALLOCATION
Limited Partners (3,757,647)(1,219,197)
General Partner (52,291) (14,081)
NET LOSS PER UNIT
Limited Partners (367.98) (99.08)
General Partner (367.98) (99.08)
<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, 2000 and 1999
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S>
<C> <C> <C>
<C>
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
Partners' Capital,
December 31, 1999 10,978.222$33,000,637$432,765$33,433,402
Net loss - (3,757,647) (52,291)(3,809,938
)
Redemptions (989.026)(2,877,883) ____-___(2,877,883
)
Partners' Capital,
June 30, 2000 9,989.196$26,365,107 $380,474$26,745,581
<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,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S>
<C> <C>
Net income (loss) (3,809,938)(1,233,278)
Noncash item included in net income (loss):
Net change in unrealized 1,777,978 (50,571)
(Increase) decrease in operating assets:
Net option premiums 446,406 129,175
Interest receivable (DWR) 8,398 6,341
Due from DWR (2,450) (106,497)
Increase (decrease) in operating liabilities:
Accrued administrative expenses 1,119 37,326
Accrued management fees (22,510) (10,272)
Net cash used for operating activities (1,600,997)
(1,227,776)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions payable (65,258)
258,680
Redemptions of Units (2,877,883) (2,106,947)
Net cash used for financing activities (2,943,141) (1
,848,267)
Net decrease in cash (4,544,138) (3,076,043)
Balance at beginning of period 32,268,788 38,504,975
Balance at end of period 27,724,650 35,428,932
<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, 1999 Annual Report on Form 10-K.
1. Organization
Dean Witter Cornerstone Fund III is a New York limited
partnership organized to engage primarily 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 general partner is Demeter Management Corporation
("Demeter"). The non-clearing commodity broker is Dean Witter
Reynolds Inc. ("DWR"). Morgan Stanley & Co., Inc. ("MS & Co.")
and Morgan Stanley & Co. International Limited ("MSIL") provide
clearing and execution services. Prior to May 2000, Carr Futures
Inc. provided clearing and execution services. Demeter, DWR, MS
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
& Co. and MSIL are wholly-owned subsidiaries of Morgan Stanley
Dean Witter & Co. The trading managers to the Partnership are
Welton Investment Corporation ("Welton") and Sunrise Capital
Management Inc. ("Sunrise"), (collectively, the "Trading
Managers").
2. Related Party Transactions
The Partnership's cash is on deposit with DWR, MS & Co., and MSIL
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 ("FASB")
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. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133," which defers the required
implementation of SFAS No. 133 until fiscal years beginning after
June 15, 2000. However, the Partnership had previously elected
to adopt the provisions of SFAS No. 133 beginning with the fiscal
year 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 (loss) on open contracts is reported as a
component of "Equity in futures interests trading accounts" on
the statements of financial condition and totaled $(352,367) and
$1,425,611 at June 30, 2000 and December 31, 1999, respectively.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the $352,367 net unrealized loss on open contracts at June 30,
2000, $117,581 related to exchange-traded futures and futures-
styled option contracts and $234,786 related to off-exchange-
traded forward currency contracts.
The entire $1,425,611 net unrealized gain on open contracts at
December 31, 1999 related to exchange-traded futures and futures-
styled option contracts.
Exchange-traded futures and futures-styled options contracts held
by the Partnership at June 30, 2000 and December 31, 1999 mature
through March 2001 and May 2000, respectively. Off-exchange-
traded forward currency contracts held by the Partnership at June
30, 2000 mature through September 2000.
The Partnership has 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.
The Partnership also has credit risk because DWR, MS & Co., and
MSIL act as the futures commission merchants or the
counterparties, with respect to most of the Partnership's assets.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. DWR, MS & Co., and MSIL each 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 (loss) on all open futures and futures-styled
options contracts, which funds, in the aggregate, totaled
$27,607,069 and $33,694,399 at June 30, 2000 and December 31,
1999, 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 (loss) 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 MS & Co., the sole counterparty on all of
such contracts, to perform. The Partnership has a netting
agreement with MS & Co. This agreement, which seeks to reduce
both the Partnership's and
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
MS & Co.'s exposure on off-exchange-traded forward currency
contracts, should materially decrease the Partnership's credit
risk in the event of MS & Co.'s bankruptcy or insolvency.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity - The Partnership deposits its assets with DWR as non-
clearing broker and MS & Co. and MSIL as clearing brokers in
separate futures trading accounts established for each Trading
Manager, which assets are used as margin to engage in trading.
The assets are held in either non-interest-bearing bank accounts
or in securities and instruments permitted by the CFTC for
investment of customer segregated or secured funds. The
Partnership's assets held by the commodity brokers may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in futures, forwards, and
options, it is expected that the Partnership will continue to own
such liquid assets for margin purposes.
The Partnership's investment in futures, forwards, and options
may, from time to time, be illiquid. Most U.S. futures exchanges
limit fluctuations in prices during a single day by regulations
referred to as "daily price fluctuations limits" or "daily
limits". Trades may not be executed at prices beyond the daily
limit. If the price for a particular futures or options contract
has increased or decreased by an amount equal to the daily limit,
positions in that futures or options contract can neither be
taken nor liquidated unless traders are willing to effect trades
at or within the limit. Futures prices have occasionally
moved the
<PAGE>
daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets and subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources - The Partnership does not have, or expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest ("Unit(s)") in the future will
affect the amount of funds available for investment in futures
interests in subsequent periods. It is not possible to estimate
the amount and therefore, the impact of future redemptions of
Units.
<PAGE>
Results of Operations
General. The Partnership's results depend on its Trading
Managers and the ability of the Trading Managers' trading
programs to take advantage of price movements or other profit
opportunities in the futures, forwards, and options markets.
The following presents a summary of the Partnership's operations
for the quarter and six months ended June 30, 2000 and 1999,
respectively, and a general discussion of its trading activities
during each period. It is important to note, however, that the
Trading Managers trade in various markets at different times and
that prior activity in a particular market does not mean that
such market will be actively traded by the Trading Managers or
will be profitable in the future. Consequently, the results of
operations of the Partnership are difficult to discuss other than
in the context of its Trading Managers' trading activities on
behalf of the Partnership as a whole and how the Partnership has
performed in the past.
For the Quarter and Six Months Ended June 30, 2000
For the quarter ended June 30, 2000, the Partnership recorded
total trading losses net of interest income of $2,600,957 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 4.6% were recorded in the
currency markets primarily from short positions in the Japanese
yen as the value of the yen strengthened versus the U.S. dollar
during May and early June amid positive economic data out of
<PAGE>
Japan and the perception that interest rates in the U.S. may have
topped out. Additional losses of approximately 4.1% were
experienced in the global stock index futures markets primarily
from long S&P 500 Index futures positions as domestic equity
prices declined sharply during April due to an unexpected jump in
the Consumer Price Index, fears of inflation and concerns
regarding interest rate increases. In the global interest rate
futures markets, losses of approximately 2.1% were incurred
primarily from long U.S. interest rate futures positions a prices
declined during April amid fears of higher interest rates.
During June, newly established short U.S. interest rate futures
positions incurred additional losses as prices moved higher amid
signs that U.S. economic growth has slowed and fading prospects
of additional interest rate hikes by the Federal Reserve. Losses
were also recorded in this market complex from long positions in
German bund futures as European bond prices moved lower due to
the weakness in U.S. bonds and the sharp decline in the euro
during April. In the metals markets, losses of approximately
1.5% were incurred primarily from short aluminum futures
positions during June as prices reversed sharply higher on
institutional buying and fears that U.S. capacity could be hit
further by power shortages. Losses were also experienced in the
agricultural markets of approximately 0.4% primarily from long
soybean futures positions as prices moved lower during April and
May due to heavy rain in the U.S. soy growing regions. A portion
<PAGE>
of overall Partnership losses was offset by gains recorded in the
energy markets of approximately 2.6% primarily from long natural
gas futures positions as prices moved to four-year highs during
May amid supply woes. Additional gains of approximately 0.4%
were recorded in the soft commodities markets from short coffee
futures positions as prices declined on technical factors during
April. Long sugar futures positions were also profitable as
prices trended to 22-month highs later in the quarter on reports
of lower plantings and speculation that the world's surplus could
shrink. Total expenses for the three months ended June 30, 2000
were $724,438, resulting in a net loss of $3,325,395. The value
of a Unit decreased from $3,001.00 at March 31, 2000 to $2,677.45
at June 30, 2000.
For the six months ended June 30, 2000, the Partnership recorded
total trading losses net of interest income of $2,239,380 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 5.0% were recorded in the
global stock index futures markets primarily from long S&P 500
Index futures positions as global equity prices reversed lower in
January amid fears of interest rate hikes in the U.S. and Europe
and profit-taking from the previous year. Additional losses were
incurred from long S&P 500 Index futures positions as domestic
equity prices declined sharply during April due to an unexpected
jump in the Consumer Price Index, fears of inflation and concerns
regarding interest rate increases. Additional losses of
<PAGE>
approximately 4.6% were recorded in the global interest rate
futures markets primarily from long U.S. interest rate futures
positions as prices declined during April amid fears of higher
interest rates. During June, newly established short U.S.
interest rate futures positions incurred losses as prices moved
higher amid signs that U.S. economic growth has slowed and fading
prospects of additional interest rate hikes by the Federal
Reserve. Losses were also recorded in this market complex from
long positions in German bund futures as European bond prices
moved lower due to the weakness in U.S. bonds and the sharp
decline in the euro during April. In the metals markets, losses
of approximately 2.5% resulted primarily from long aluminum
futures positions as prices reversed lower during February on
technical factors. Short aluminum futures positions resulted in
losses during June as prices reversed sharply higher on
institutional buying and fears that U.S. capacity could be hit
further by power shortages. In the currency markets, losses of
approximately 0.9% were incurred primarily from short Japanese
yen positions as the yen's value strengthened versus the U.S.
dollar during May amid positive economic data out of Japan and
during the first half of June on the perception that interest
rates in the U.S. may have topped out. Additional currency
losses resulted from long British pound positions as the pound's
value weakened versus the U.S. dollar on interest rate increases
by the European Central Bank and U.S. Federal Reserve. These
losses were
<PAGE>
partially offset by gains recorded from short euro positions as
its value weakened versus the U.S. dollar during January on
skepticism about Europe's economic outlook, followed by notable
weakness during March and April on the European Central Bank's
passive stance towards its currency. Smaller losses of
approximately 0.8% were recorded in the agricultural markets from
short corn futures positions as prices increased during January
after the USDA made a surprise cut to 1999-2000 ending stocks
amid concerns for dryness in Brazil and subsequent crop damage.
A portion of overall Partnership losses was offset by gains
recorded in the energy markets of approximately 3.8% primarily
from long crude oil futures positions as oil prices powered to
nine-year highs on concerns about future output levels amid
dwindling stockpiles and increasing demand and frigid weather in
the Northeastern U.S. Additional gains of approximately 0.4%
were recorded in the soft commodities markets primarily during
June from long positions in sugar futures as sugar prices trended
to 22-month highs due to strong demand and declining production
from Brazil. Total expenses for the six months ended June 30,
2000 were $1,570,558, resulting in a net loss of $3,809,938. The
value of a Unit decreased from $3,045.43 at December 31, 1999 to
$2,677.45 at June 30, 2000.
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
<PAGE>
and posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 1.6% were recorded in global
stock index futures primarily 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 gains of approximately 1.4%
were recorded in the global interest rate futures markets
primarily 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 of
approximately 0.4% were recorded primarily 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 recorded in metals of approximately
1.5% incurred primarily 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 of approximately 0.5%
were recorded in the energy markets primarily during June from
long positions in natural gas futures as prices moved lower due
to higher-than-expected storage levels. Total expenses for the
<PAGE>
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 of approximately 2.8%
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 that a rise in Japanese
bond yields would result in Japanese investors replacing
international bonds with yen-denominated debt. In metals, losses
of approximately 2.6% were incurred primarily 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 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
<PAGE>
of 1999 was offset by gains recorded in the agricultural markets
of approximately 1.1% primarily 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 of approximately 1.0% were recorded in the energy markets
primarily 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. The market-sensitive instruments
held by the Partnership are acquired for speculative trading
purposes only and, as a result, all or substantially all of the
Partnership's assets are at risk of trading loss. Unlike an
operating company, the risk of market-sensitive
<PAGE>
instruments is central, not incidental, to the Partnership's main
business activities.
The futures interests traded by the Partnership involve varying
degrees of market risk. Market risk is often dependent upon
changes in the level or volatility of interest rates, exchange
rates, and prices of financial instruments and commodities.
Fluctuations in market risk based upon these 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 among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
<PAGE>
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 using mark-to-market
accounting principles. Any loss in the market value of the
Partnership's open positions is directly reflected in the
Partnership's earnings, whether realized or unrealized, and cash
flow. Profits and losses on open positions of exchange-traded
futures interests are settled daily through variation margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Managers is estimated below in terms of Value at Risk
("VaR"). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership's
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
<PAGE>
The VaR model 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, and correlation among these variables.
The hypothetical changes in portfolio value are based on daily
percentage changes observed in key market indices or other market
factors ("market risk factors") to which the portfolio is
sensitive. The historical observation period of the Partnership's
VaR is approximately four years. The one-day 99% confidence
level of the Partnership's VaR corresponds to the negative change
in portfolio value that, based on observed market risk factors,
would have been exceeded once in 100 trading days.
VaR models, including the Partnership's, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically 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 tables indicate the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
<PAGE>
by primary market risk category as of June 30, 2000 and 1999. At
June 30, 2000 and 1999, the Partnership's total capitalization
was approximately $27 million and $37 million, respectively.
Primary Market June 30, 2000 June 30, 1999
Risk Category Value at Risk Value at Risk
Equity (0.34)% (2.24)%
Interest Rate (1.12) (1.11)
Currency (0.53) (1.95)
Commodity (1.65) (1.01)
Aggregate Value at Risk (1.94)% (3.63)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual Market 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, 2000 and 1999 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. Because the Partnership's only
business is the speculative trading of futures interests, the
composition of its trading portfolio can change significantly
over any given time period, or even within a single trading day.
Any changes in open positions could positively or negatively
materially impact market risk as measured by VaR.
<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 July 1,
1999 through June 30, 2000.
Primary Market Risk Category High Low Average
Equity (2.24)% (0.34)% (1.08)%
Interest Rate (1.12) (0.43) (0.83)
Currency (1.95) (0.53) (1.27)
Commodity (1.65) (0.55) (1.00)
Aggregate Value at Risk (3.63)% (1.94)% (2.47)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by
the Partnership to typically be many times the total
capitalization of the Partnership. The value of the
Partnership's open positions thus creates a "risk of ruin" not
typically found in other investments. The relative size of the
positions held may cause the Partnership to incur losses greatly
in excess of VaR within a short period of time, given the effects
of the leverage employed and market volatility. The VaR tables
above, as well as the past performance of the Partnership, gives
<PAGE>
no indication of such "risk of ruin". In addition, VaR risk
measures should be viewed in light of the methodology's
limitations, which include the following:
past changes in market risk factors will not always result
in accurate predictions of the distributions and correlations of
future market movements;
changes in portfolio value in response to market movements
may differ from those of the VaR model;
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 VaR tables above 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, 2000 and for the end of the four
quarterly reporting periods from July 1, 1999 through June 30,
2000. 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 or monitor risk. There can
<PAGE>
be no assurance that the Partnership's actual losses on a
particular day will not exceed the VaR amounts indicated above 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. These balances and any market
risk they may represent are immaterial. At June 30, 2000 the
Partnership's cash balance at DWR was approximately 90% of its
total Net Asset Value. 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 any
associated and potential losses, 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 (A) those disclosures that are
statements of historical fact and (B) 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.
<PAGE>
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, 2000, 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 global stock index sector. The primary equity exposure is to
equity price risk in the G-7 countries. The G-7 countries
consist of France, U.S., Britain, Germany, Japan, Italy and
<PAGE>
Canada. The stock index futures traded by the Partnership are by
law limited to futures on broadly based indices. As of June 30,
2000, the Partnership's primary exposures were in the S&P 500
(U.S.), Hang Seng (China) and NASDAQ (U.S.) 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.
Interest Rate. The second largest market exposure at June 30,
2000 was in the interest rate complex. Exposure was spread
across U.S., German 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. 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
<PAGE>
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.
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 2000, 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 dollar-based Partnership in
expressing VaR in a functional currency other than dollars.
<PAGE>
Commodity.
Energy. On June 30, 2000, the Partnership's energy exposure was
shared primarily by futures contracts in the crude oil and
natural gas markets. Price movements in these markets result
from political developments in the Middle East, weather patterns,
and other economic fundamentals. It is possible that volatility
will remain high. Significant profits and losses, which have
been experienced in the past, are expected to continue to be
experienced in this market. Natural gas has exhibited volatility
in prices resulting from weather patterns and supply and demand
factors and may continue in this choppy pattern.
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 and copper, the principal market exposures of the
Partnership have consistently been in precious metals, gold and
silver. Exposure was evident in the gold market as gold prices
were volatile during the quarter. Silver prices have remained
volatile over this period, and the Trading Managers have, from
time to time, taken positions as market opportunities developed.
Demeter anticipates that gold and silver will remain the primary
metals market exposure for the Partnership.
<PAGE>
Soft Commodities and Agriculturals. On June 30, 2000, the
Partnership had exposure in the corn, wheat and sugar 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 June 30, 2000:
Foreign Currency Balances. The Partnership's primary foreign
currency balances at June 30, 2000 were in British pounds and
Japanese yen. 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 Partnership and the Trading Managers separately attempt to
manage the risk of the Partnership's open positions in
essentially the same manner in all market categories traded.
Demeter attempts to manage market exposure by diversifying the
Partnership's assets among different Trading Managers, each of
whose strategies focus on different market sectors and trading
approaches, and monitoring the performance of the Trading
Managers daily. In addition, the Trading Managers establish
<PAGE>
diversification guidelines, often set in terms of the maximum
margin to be committed to positions in any one market sector or
market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership's non-
trading instrument, cash. Cash 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 Form 10-Q for the quarter ended March 31,
2000 and Form 10-K for the year ended December 31, 1999:
On October 25, 1996, the Market Surveillance Committee (the
"Committee") of the National Association of Securities Dealers
("NASD") filed a formal complaint against MS & Co. and seven
current and former traders, alleging violations of certain NASD
rules relating to manipulative and deceptive practices, locked
and crossed markets, and failure to supervise. Hearings were
held in June and July 1997. On April 13, 1998 the Committee
ruled that MS & Co. and the seven traders had engaged in
manipulative and deceptive practices and improperly locked or
crossed markets, but not that MS & Co. had failed to supervise
its traders. The Committee levied a fine of $1,000,000 on MS &
Co., a fine of $100,000 and a 90-day suspension on one of its
former traders, and fines of $25,000 and 30-day suspensions on
each of the remaining current and former traders. On January 18,
2000 the National Adjudicatory Council, which heard the appeal,
issued a ruling which upheld the Committee's April 1998 decision,
however, the National Adjudicatory Council reduced the firm's
fine to $495,000, reversed all previously imposed suspensions
against the traders,
<PAGE>
reduced the fine for each of six traders to $2,500 and dismissed
all charges against the seventh trader.
On January 11, 1999, the Securities and Exchange Commission
brought an action against 28 NASDAQ market makers, including MS &
Co., and 51 individuals, including one current and one former
trader employed by MS & Co., for certain conduct during 1994.
The core of the charges against MS & Co. concerns improper or
undisclosed coordination of price quotes with other broker-
dealers and related reporting, recordkeeping and supervisory
deficiencies in violation of Sections 15(b)(4)(E), 15(c)(1) and
(2) and 17(a) of the Securities Exchange Act and Rules 15c1-2,
15c2-7 and 17a-3 promulgated thereunder. Without admitting or
denying the charges, MS & Co. consented to the entry of a cease
and desist order and to the payment of a civil penalty of
$350,000, disgorgement of $4,170 and to submit certain of its
procedures to an independent consultant for review. In addition,
one current and one former trader employed by MS & Co. accepted
suspensions of less than two months each and were fined $25,000
and $30,000 respectively.
Item 5. OTHER INFORMATION
Effective July 1, 2000, Lewis A. Raibley, III resigned as Chief
Financial Officer and a Director of Demeter and Dean Witter
Futures Currency Management Inc. Effective July 10, 2000,
Raymond
<PAGE>
E. Koch replaced Lewis A. Raibley, III as Chief Financial Officer
of Demeter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.01 Limited Partnership Agreement of the Partnership,
dated as of December 7,
1983, as amended as of May 11, 1984 is incorporated
by reference to Exhibit 3.01 to Partnership's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1984 (File No. 0- 13299).
10.01 Management
Agreement among the Partnership, Demeter and Sunrise Capital Management
Inc. formerly Sunrise Commodities Inc. dated as of November 15, 1983 is
incorporated by reference to Exhibit 10.03 to the Partnership's
Annual Report on Form 10-K for the fiscal year ended September 30,
1984 (File No. 0- 13299).
10.02 Management Agreement among the Partnership, Demeter and Welton
Investment Systems Corporation d
ated as of July 1, 1996 is incorporated by reference
to Exhibit 10.02 to the Partnership's Annual Report
on From 10-K for the fiscal year ended December 31,
1997 (File No. 0-13299).
10.04 Dean Witter
Cornerstone Funds Exchange Agreement, dated as of May 31, 1984 is
incorporated by reference to Exhibit 10.06 to the Partnership's Annual
Report on Form 10-K for the fiscal year ended September 30, 1984 (File
No. 0-13299).
10.05 Amended and
Restated Customer Agreement, dated as of December 1, 1997, between
the Partnership and Dean Witter Reynolds Inc. is incorporated by
reference to Exhibit 10.05 to the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 (File No. 0-13299).
10.06 Customer Agreement, dated as of December 1, 1997,
among the
Partnership, Carr Futures, Inc. and Dean Witter
Reynolds Inc. is incorporated by reference to
Exhibit 10.06 to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998
(File No. 0-13299).
<PAGE>
10.07 International Foreign Exchange Master Agreement, dated as
of August 1, 1997, between the Partnership and Carr
Futures, Inc. is incorporated by reference to Exhibit
10.07 to the Partnership's Annual Report on Form 10-K
for the fiscal year
ended December 31, 1998 (File No. 0-13299).
10.08 Customer Agreement, dated as of May 1, 2000 between
Morgan Stanley & Co. Incorporated, the Partnership
and Dean Witter Reynolds Inc. is filed herewith.
(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 14, 2000 By:/s/Raymond E. Koch _____
Raymond E. Koch
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.
