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 March 31, 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 II
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S>
<C> Statements of Financial Condition
March 31, 2000 (Unaudited) and December 31, 1999 2
Statements of Operations for the Quarters Ended
March 31, 2000 and 1999 (Unaudited) 3
Statements of Changes in Partners' Capital for the
Quarters Ended March 31, 2000 and 1999 (Unaudited) 4
Statements of Cash Flows for the Quarters Ended
March 31, 2000 and 1999 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19-31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32-33
Item 5. Other Information 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>
March 31, December 31,
2000 199
9
$ $
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 31,304,690 32,268,788
Net unrealized gain on open contracts681,461 1,425,611
Net option premiums (50,431) 318,281
Total Trading Equity 31,935,720 34,012,680
Interest receivable (DWR) 122,949 116,065
Total Assets 32,058,669 34,128,745
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 601,594 443,758
Accrued administrative expenses 126,414 138,661
Accrued management fees 106,087 112,924
Total Liabilities 834,095 695,343
Partners' Capital
Limited Partners (10,262.631 and
10,836.119 Units, respectively)30,798,123 33,000,637
General Partner (142.103 Units) 426,451 432,765
Total Partners' Capital 31,224,574 33,433,402
Total Liabilities and Partners' Capital32,058,669 34,128,745
NET ASSET VALUE PER UNIT 3,001.00 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 March 31,
2000 1999
$ $
<S> <C> <C>
REVENUES
Trading profit (loss):
Realized 743,070 (264,935) Net
change in unrealized (744,150) (1,453,346)
Net change in unrealized (744,150) (1,453,346)
Total Trading Results (1,080) (1,718,281)
Interest Income (DWR) 362,657 343,469
Total Revenues 361,577 (1,374,812)
EXPENSES
Brokerage commissions (DWR) 478,334 494,855
Management fees 325,553 383,211
Transaction fees and costs 23,694 45,762
Administrative expenses 18,539 18,412
Management fees 325,553 383,211
Transaction fees and costs 23,694 45,762
Administrative expenses 18,539 18,412
Total Expenses 846,120 942,240
NET LOSS (484,543) (2,317,052)
NET LOSS ALLOCATION:
Limited Partners (478,229) (2,290,098)
General Partner (6,314) (26,954)
NET LOSS PER UNIT:
Limited Partners (44.43) (189.67)
General Partner (44.43) (189.67)
<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 Quarters Ended March 31, 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 - (2,290,098)(26,954)(2,317,052)
Redemptions
(335.054) (1,053,804) - (1,053,804)
Partners' Capital,
March 31, 1999
12,000.462 $36,491,670 $437,293$36,928,963
Partners' Capital,
December 31, 1999
10,978.222 $33,000,637 $432,765 $33,433,402
Net Loss - (478,229) (6,314)(484,543)
Redemptions
(573.488) (1,724,285) - (1,724,285)
Partners' Capital,
March 31, 2000
10,404.734 $30,798,123 $426,451$31,224,574
<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 Quarters Ended March 31,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss (484,543) (2,317,052)
Noncash item included in net loss:
Net change in unrealized 744,150 1,453,346
(Increase) decrease in operating assets:
Net option premiums 368,712 24,328
Interest receivable (DWR) (6,884) 6,123
Due from DWR - 6,640
Increase (decrease) in operating liabilities:
Accrued management fees 13,490 (11,004)
Accrued administrative expenses (32,574) 18,412
Net cash provided by (used for) operating activities
602,351 (819,207)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in redemptions payable 157,836 69,654
Redemptions of Units (1,724,285) (1,053,804)
Net cash used for financing activities (1,566,449) (984,150)
Net decrease in cash (964,098) (1,803,357)
Balance at beginning of period 32,268,788 38,504,975
Balance at end of period 31,304,690 36,701,618
<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") 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. The trading
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and Carr in futures
interests trading accounts to meet margin requirements as needed.
DWR pays interest on these funds based on current 13-week U.S.
Treasury bill rates. The Partnership pays brokerage commissions
to DWR.
3. Financial Instruments
The Partnership trades futures, options and forward contracts on
foreign currencies and other commodity interests. Futures and
forwards represent contracts for delayed delivery of an
instrument at a specified date and price. Risk arises from
changes in the value of these contracts and the potential
inability of counterparties to perform under the terms of the
contracts. There are numerous factors which may significantly
influence the market value of these contracts, including interest
rate volatility.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board ("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 on open contracts are reported as a
component of "Equity in futures interests trading accounts" on
the statements of financial condition and totaled $681,461 and
$1,425,611 at March 31, 2000 and December 31, 1999,
respectively.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Of the $681,461 net unrealized gain on open contracts at March
31, 2000, $647,585 related to exchange-traded futures and futures-
styled option contracts and $33,876 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 March 31, 2000 and December 31, 1999 mature
through March 2001 and May 2000, respectively. Off-exchange
traded forward currency contracts held by the Partnership at
March 31, 2000 mature through June 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 and Carr act as
the futures commission merchants or the counterparties, with
respect to most of the Partnership's assets. Exchange-
traded
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $31,952,275 and $33,694,399 at March 31, 2000
and December 31, 1998, respectively. With respect to the
Partnership's off-exchange-traded forward currency contracts,
there are no daily settlements of variations in value nor is
there any requirement that an amount equal to the net unrealized
gain on open forward contracts be segregated. With respect to
those off-exchange-traded forward currency contracts, the
Partnership is at risk to the ability of Carr, the sole
counterparty on all of such contracts, to perform. The
Partnership has a netting agreement with Carr. This agreement,
which seeks to reduce both the Partnership's and Carr's exposure
on off-exchange-traded forward currency contracts, should
materially decrease the Partnership's credit risk in the event
of Carr's bankruptcy or insolvency.
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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).
4. Subsequent Event
The current exchange privilege among the Cornerstone funds (a
"Series Exchange") will be terminated effective with the April
30,2000 monthly closing. Limited partners will retain the ability
to execute an exchange from a Cornerstone fund into other funds
outside the Cornerstone Series (a "Non-Series Exchange") subject
to certain restrictions set forth in the applicable limited
partnership agreements.
<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 Carr as clearing broker 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 and exchanges of
additional units of limited partnership interest ("Unit(s)") in
the future will affect the amount of funds available for
investments 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 three months ended March 31, 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 Ended March 31, 2000
For the quarter ended March 31, 2000, the Partnership recorded
trading revenues, including interest income, of $361,577 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 2.6% were recorded in the
global interest rate futures markets from long positions in
Japanese government bond futures as prices moved lower during
March on firmer than expected capital investment figures out of
Japan and fears that the Bank of Japan would scrap its zero-rate
<PAGE>
policy earlier than expected. Newly established short positions
experienced additional losses during the last week of the month
as Japanese bond prices rebounded. Additional losses of
approximately 1.3% were experienced in the global stock index
futures markets from long S&P 500 Index futures positions as
global equity prices reversed lower earlier in January amid fears
of interest rate hikes in the U.S. and Europe and profit-taking
from the previous year. Additional losses were recorded later in
the month from long positions in these markets as prices resumed
their decline after economic data raised fears that the Federal
Reserve would take action to slow the economy. In the metals
markets, losses of approximately 1.2% were incurred from long
aluminum futures positions as prices reversed lower during
February on technical factors. The Partnership also recorded
losses during March from long positions as base metals generally
lost ground amid the softening of oil prices. In the soft
commodities markets, losses of approximately 0.7% resulted during
March from long cotton futures positions as prices fell after
figures from the USDA indicated a fall in exports. Long coffee
futures positions also incurred losses in this sector during
January as prices declined on forecasts for a bumper crop in
Brazil during 2000. Smaller losses of approximately 0.6% 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
<PAGE>
overall Partnership losses was offset by gains recorded in the
currency markets of approximately 3.4% from short positions in
the European common currency as its value weakened to a lifetime
low versus the U.S. dollar during January on skepticism about
Europe's economic outlook. The euro finished the quarter lower
relative to the U.S. dollar due to expectations that interest
rates would be held steady by the European Central Bank,
resulting in additional gains for short positions. Additional
gains of approximately 1.4% were produced in the energy markets
from long crude oil futures positions as oil prices powered to
nine year highs earlier in the quarter on concerns about future
output levels amid dwindling stockpiles and increasing demand and
frigid weather in the Northeastern U.S. Total expenses for the
three months ended March 31, 2000 were $846,120, resulting in a
net loss of $484,543. The value of a Unit decreased from
$3,045.43 at December 31, 1999 to $3,001.00 at March 31, 2000.
For the Quarter Ended March 31, 1999
For the quarter ended March 31, 1999, the Partnership recorded
total trading losses, net of interest income, of $1,374,812 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 3.6% were recorded in the
global interest rate futures markets primarily 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
<PAGE>
concerns regarding the Brazilian economy. Prices in this market
continued to increase during February amid growing speculation
that a rise in Japanese bond yields would result in Japanese
investors replacing international bonds with yen-denominated
debt. In currencies, losses of approximately 2.3% were incurred
primarily from long Japanese yen positions as the value of the
yen, despite reaching a 27-month high in early January, reversed
sharply lower after the Bank of Japan intervened in an effort to
keep Japanese exports affordable. The yen continued to move
lower versus the dollar during late January and throughout
February on concerns regarding the Brazilian economy, strong
economic data out of the U.S. and following comments by key Tokyo
officials that Japanese policy makers were satisfied with a
weaker yen. In metals, losses of approximately 1.2% were
experienced during the first half of March primarily from short
aluminum futures positions as prices increased amid a possible
drawdown in warehouse stocks and reports of increased global
demand. Smaller losses of approximately 0.9% were recorded in
global stock index futures during mid-March primarily from long
futures positions in the Financial Times 100 Index as British
equity prices slipped following the Bank of England's Monetary
Policy Committee decision to keep rates unchanged. A portion of
the Partnership's overall losses for the quarter were offset by
gains of approximately 1.4% recorded in the energy markets
primarily from long futures positions in crude oil as oil prices
climbed on news that both OPEC and non-OPEC countries had reached
<PAGE>
an agreement to cut total output beginning April 1, 1999.
Smaller gains of approximately 1.3% were recorded in the
agricultural markets primarily from short futures positions in
soybean and soybean products as prices declined due to a healthy
South American crop, fears that Brazil will increase exports to
support its economy and a continued decline in world demand.
Total expenses for the three months ended March 31, 1999 were
$942,240, resulting in a net loss of $2,317,052. The value of a
Unit decreased from $3,266.97 at December 1998 to $3,077.30 at
March 31, 1999.
Risks Associated With the Euro. On January 1, 1999, eleven
countries in the European Union established fixed conversion
rates on their existing sovereign currencies and converted to a
common single currency (the euro). During a three-year
transition period, the sovereign currencies will continue to
exist but only as a fixed denomination of the euro. Conversion
to the euro prevents the Trading Managers from trading in those
sovereign 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.
<PAGE>
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 subject to the risk of trading loss.
Unlike an operating company, the risk of market-sensitive
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 related 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.
<PAGE>
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.
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.
<PAGE>
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.
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
<PAGE>
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
by primary market risk category as of March 31, 2000 and 1999. At
March 31, 2000 and 1999, the Partnership's total capitalization
was approximately $31 million and $37 million, respectively.
Primary Market March 31, 2000 March 31, 1999
Risk Category Value at Risk Value at Risk
Currency (1.25)% (0.47)%
Interest Rate (0.68) (0.76)
Equity (1.26) (1.02)
Commodity (0.55) (0.32)
Aggregate Value at Risk (2.31)% (1.38)%
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.
<PAGE>
The table above represents the VaR of the Partnership's open
positions at March 31, 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.
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 April 1,
1999 through March 31, 2000.
Primary Market Risk Category High Low Average
Currency (1.95)% (0.87)% (1.36)%
Interest Rate (1.11) (0.43) (0.74)
Equity (2.24) (0.10) (1.02)
Commodity (1.11) (0.55) (0.86)
Aggregate Value at Risk (3.63)% (1.73)% (2.41)%
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
<PAGE>
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
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
<PAGE>
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 March 31, 2000 and for the end of the four
quarterly reporting periods from April 1, 1999 through March 31,
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
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. The Partnership also
maintains a substantial portion (approximately 87%) 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.
<PAGE>
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. 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.
<PAGE>
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 March 31, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency - The primary market exposure in the Partnership at
March 31, 2000 was in the currency sector. The Partnership's
currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. Interest rate
changes as well as political and general economic conditions
influence these fluctuations. The Partnership trades in a large
number of currencies, including cross-rates - i.e., positions
between two currencies other than the U.S. dollar. For the first
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
<PAGE>
dollar-based Partnership in expressing VaR in a functional
currency other than dollars.
Interest Rate - The second largest market exposure at March 31,
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,
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.
<PAGE>
Equity - The primary equity exposure at March 31, 2000 was to
equity price risk in the G-7 countries. The stock index futures
traded by the Partnership are by law limited to futures on
broadly based indices. As of March 31, 2000, the Partnership's
primary exposures were in the S&P 500 (U.S.), Hang Seng (China)
and DAX (Germany) stock indices. The Partnership is primarily
exposed to the risk of adverse price trends or static markets in
the U.S. and European indices. (Static markets would not cause
major market changes but would make it difficult for the
Partnership to avoid being "whipsawed" into numerous small
losses).
Commodity
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, nickel 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 they have perceived
market opportunities to develop. Demeter anticipates that gold
and silver will remain the primary metals market exposure for the
Partnership.
<PAGE>
Energy - On March 31, 2000, 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. It is possible that volatility will
remain high and that 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 is expected to continue in this choppy pattern.
Soft Commodities and Agriculturals - On March 31, 2000, the
Partnership had a reasonable amount of exposure in the markets
that comprise these sectors. Most of the exposure was in the
wheat, soybeans and cotton 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 March 31, 2000:
Foreign Currency Balances - The Partnership's primary foreign
currency balances are in Hong Kong dollars and euros. The
Partnership controls the non-trading risk of these balances by
<PAGE>
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
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
On March 3, 2000, the plaintiffs in the New York action filed an
appeal of the order dismissing the consolidated complaint.
(Please refer to Legal Proceedings previously disclosed in the
Partnership's Form 10-K for the year ended December 31, 1999 for
a more detailed discussion.)
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
April 1, 2000. The aggregate price of Units sold through April 1,
1999 was $137,132,762.
<PAGE>
For the Cornerstone Funds in aggregate, 235,435.933 Units have
been sold through April 1, 2000, leaving 14,564.067 Units
remaining available for sale as of April 1, 2000.
Effective September 30, 1994, 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.
Effective April 30, 2000, the current exchange privilege among
the Cornerstone funds (a "Series Exchange") will be terminated.
Limited partners will retain the ability to execute an exchange
from a Cornerstone fund into other funds outside the Cornerstone
Series (a "Non-Series Exchange") subject to certain restrictions
set forth in the applicable limited partnership agreements.
Item 5. OTHER INFORMATION
Effective January 31, 2000, Mark J. Hawley resigned as Chairman
of the Board and a Director of Demeter and Dean Witter Futures &
Currency Management Inc. ("DWFCM") and Robert E. Murray replaced
him as Chairman of the Board of Demeter and DWFCM.
Demeter has determined, commencing in May 2000, to transfer the
Partnership's futures and options clearing from Carr to Morgan
<PAGE>
Stanley & Co. Incorporated ("MS & Co."), an affiliate of Demeter,
while trades on the London Metal Exchange will be cleared by
Morgan Stanley & Co. International Limited ("MSIL"), also an
affiliate of Demeter. In addition, MS & Co. and MSIL, rather
than Carr, will act as the counterparty on all of the
Partnership's foreign currency forward trades. Dean Witter
Reynolds Inc. will continue to act as the non-clearing commodity
broker for the Partnership.
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)
May 12, 2000 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 31,304,690
<SECURITIES> 0
<RECEIVABLES> 122,949<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,058,669<F2>
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,058,669<F3>
<SALES> 0
<TOTAL-REVENUES> 361,577<F4>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 846,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (484,543)
<INCOME-TAX> 0
<INCOME-CONTINUING> (484,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (484,543)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Receivables include interest receivable of $122,949.
<F2>In addition to cash and receivables, total assets include net
unrealized gain on open contracts of $681,461 and net option
premiums of $(50,431).
<F3>Liabilities include redemptions payable of $601,594, accrued management
fees of $126,414 and accrued administrative expenses of $106,087.
<F4>Total revenues include realized trading revenue of $743,070, net
change in unrealized of $(744,150) and interest income of $362,657.
</FN>
</TABLE>
