UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 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
September 30, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
September 30, 2000 (Unaudited) and December 31, 1999.......2
Statements of Operations for the Quarters Ended
September 30, 2000 and 1999 (Unaudited)....................3
Statements of Operations for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited)....................4
Statements of Changes in Partners' Capital for the
Nine Months Ended September 30, 2000 and 1999 (Unaudited)..5
Statements of Cash Flows for the Nine Months Ended
September 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.............. 13-21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ......................................22-34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................35
Item 5. Other Information...................................35
Item 6. Exhibits and Reports on Form 8-K.................35-36
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
September 30, December
31,
2000 1999 $
$
(Unaudited)
ASSETS
<S> <C> <C>
Equity in futures interests trading accounts:
Cash 26,584,379 32,268,788
Net unrealized loss on open contracts (MS & Co.)
(737,149) -
Net unrealized loss on open contracts (MSIL)
(145,466) -
Net unrealized gain on open contracts (Carr)
- 1,425,611
Total net unrealized gain (loss) on open contracts (882,615)
1,425,611
Net option premiums (96,564) 318,281
Total Trading Equity 25,605,200 34,012,680
Interest receivable (DWR) 108,322 116,065
Due from DWR
17,345 -
Total Assets 25,730,867 34,128,745
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 423,823 443,758
Accrued administrative expenses 156,464 138,661
Accrued management fees 84,965 112,924
Total Liabilities 665,252 695,343
Partners' Capital
Limited Partners (9,463.180 and
10,836.119 Units, respectively) 24,694,788 33,000,637
General Partner (142.103 Units) 370,827 432,765
Total Partners' Capital 25,065,615 33,433,402
Total Liabilities and Partners' Capital 25,730,867 34,12
8,745
NET ASSET VALUE PER UNIT 2,609.57 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 September 30,
2000 1999
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized
167,925 (140,237)
Net change in unrealized (530,248) (1,169,348)
Total Trading Results (362,323) (1,309,585)
Interest Income (DWR) 324,000 344,598
Total Revenues (38,323) (964,987)
EXPENSES
Brokerage commissions (DWR) 331,052 556,565
Management fees 261,428 351,219
Transaction fees and costs 17,711 41,564
Administrative expenses 16,684 20,836
Total Expenses 626,875
970,184
NET LOSS (665,198) (1,935,171)
NET LOSS ALLOCATION
Limited Partners (655,551) (1,911,525)
General Partner (9,647) (23,646)
NET LOSS PER UNIT
Limited Partners (67.88) (166.41)
General Partner (67.88) (166.41)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Nine Months Ended September 30,
2000 1999
$ $
REVENUES
<S> <C> <C>
Trading profit (loss):
Realized (995,629) (183,542)
Net change in unrealized (2,308,226) (1,118,777)
Total Trading Results (3,303,855)(1,302,319)
Interest Income (DWR) 1,026,152 1,024,396
Total Revenues (2,277,703) (277,923)
EXPENSES
Brokerage commissions (DWR) 1,204,594 1,577,672
Management fees 872,463 1,110,193
Transaction fees and costs 66,219 144,499
Administrative expenses 54,157 58,162
Total Expenses 2,197,433 2,890,526
NET LOSS (4,475,136) (3,168,449)
NET LOSS ALLOCATION
Limited Partners (4,413,198)(3,130,722)
General Partner (61,938) (37,727)
NET LOSS PER UNIT
Limited Partners (435.86) (265.49)
General Partner (435.86) (265.49)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Nine Months Ended September 30, 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 - (3,130,722) (37,727)
(3,168,449)
Redemptions (919.994) (2,867,882)
- (2,867,882)
Partners' Capital,
September 30, 1999 11,415.522 $33,836,968 $426,520 $34,263,488
Partners' Capital,
December 31, 1999 10,978.222$33,000,637$432,765$33,433,402
Net loss - (4,413,198)
(61,938) (4,475,136)
Redemptions
(1,372.939) (3,892,651) - (3,892,6
51)
Partners' Capital,
September 30, 2000 9,605.283 $24,694,788 $370,827
$25,065,615
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER CORNERSTONE FUND III
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Nine Months Ended September 30,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss (4,475,136)(3,168,449)
Noncash item included in net loss:
Net change in unrealized 2,308,226 1,118,777
(Increase) decrease in operating assets:
Net option premiums 414,845 89,122
Interest receivable (DWR) 7,743 7,513
Due from DWR (17,345) 3,849
Increase (decrease) in operating liabilities:
Accrued administrative expenses 17,803 58,162
Accrued management fees (27,959) (19,930)
Net cash used for operating activities (1,771,823)
(1,910,956)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions payable (19,935)
57,467
Redemptions of Units (3,892,651) (2,867,882)
Net cash used for financing activities (3,912,586) (2
,810,415)
Net decrease in cash (5,684,409) (4,721,371)
Balance at beginning of period 32,268,788 38,504,975
Balance at end of period 26,584,379 33,783,604
<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 unaudited financial statements contained herein 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. Demeter, DWR, MS & Co. and MSIL
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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,
2000, as amended by SFAS No. 137. The Partnership adopted the
provisions of SFAS No. 133 beginning with the fiscal year ended
December 31, 1998. SFAS No. 133 superceded SFAS Nos. 119 and
105, which required the disclosure of average aggregate fair
values and contract/notional values, respectively, of derivative
financial instruments for an entity that carries its assets at
fair value. SFAS No. 133 was further amended by SFAS No. 138,
which clarifies issues surrounding interest rate risk, foreign
currency denominations, normal purchases and sales and net
hedging. The application of SFAS No. 133, as amended by SFAS No.
137, did not have a significant effect on the Partnership's
financial statements, nor will the application of the provisions
of SFAS No. 138 have a significant effect on the Partnership's
financial statements.
SFAS No. 133 defines a derivative as a financial instrument or
other contract that has all three of the following
characteristics:
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in market
factors;
3) Terms require or permit net settlement.
Generally derivatives include futures, forwards, swaps or option
contracts, or other financial instruments with similar
characteristics such as caps, floors and collars.
The net unrealized gains (losses) on open contracts are reported
as a component of "Equity in futures interests trading accounts"
on the statements of financial condition and totaled ($882,615)
and $1,425,611 at September 30, 2000 and December 31, 1999,
respectively.
Of the $882,615 net unrealized loss on open contracts at
September 30, 2000, $637,473 related to exchange-traded futures
and futures-styled option contracts and $245,142 related to off-
exchange-traded forward currency contracts.
The entire $1,425,611 net unrealized gain on open contracts at
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 September 30, 2000 and December 31, 1999
mature through September 2001 and May 2000, respectively. Off-
exchange-traded forward currency contracts held by the
Partnership at September 30, 2000 mature through December 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.
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,
<PAGE>
DEAN WITTER CORNERSTONE FUND III
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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
$25,946,906 and $33,694,399 at September 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 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.
- 14 -
<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 quarters and nine months ended September 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 Nine Months Ended September 30, 2000
For the quarter ended September 30, 2000, the Partnership
recorded total trading losses net of interest income of $38,323
and posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 2.8% were recorded in the
energy markets primarily during July from long crude oil futures
positions as oil prices decreased amid growing conviction that
Saudi Arabia would follow through with a boost in production.
During September, long
<PAGE>
crude oil futures positions resulted in losses as prices reversed
lower after President Clinton ordered the release of 30 million
barrels of oil in the U.S.'s emergency Strategic Petroleum
reserve over a period of a month. In the global interest rate
futures markets, losses of approximately 2.2% were recorded
primarily from long Australian interest rate futures positions
during September as prices declined following a pattern set by
U.S. Treasuries and as the Australian currency dipped to new
historic lows. In the global stock index futures markets, losses
of approximately 0.9% were experienced primarily during September
from long U.S. stock index futures positions as prices declined
on jitters in the technology sector and a worrisome spike in oil
prices. Smaller losses of approximately 0.9% were recorded in
the soft commodities markets primarily from trading coffee
futures as prices moved erratically during mid-July. A portion
of overall Partnership losses was offset by gains of
approximately 2.7% recorded in the currency markets primarily
from short euro and Swiss franc positions during August and
September as the value of these European currencies weakened
versus the U.S. dollar and other major currencies amid a cooling
economy in Europe and the European Central Bank's stance on
interest rates. Additional gains of approximately 0.6% were
recorded in the metals markets primarily during July from short
gold futures positions as prices fell after the Bank of England
announced the results of its gold auction, which had concluded at
a lower price than most dealers expected. Smaller gains were
recorded in the agricultural markets primarily
<PAGE>
from short wheat futures positions during July as prices declined
on favorable U.S. crop weather forecasts. Total expenses for the
three months ended September 30, 2000 were $626,875, resulting in
a net loss of $665,198. The value of a Unit decreased from
$2,677.45 at June 30, 2000 to $2,609.57 at September 30, 2000.
For the nine months ended September 30, 2000, the Partnership
recorded total trading losses net of interest income of
$2,277,703 and posted a decrease in Net Asset Value per Unit.
The most significant losses of approximately 6.3% 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 had slowed and fading prospects of additional interest
rate hikes by the Federal Reserve. Additional losses of
approximately 5.8% were recorded in the global stock index
futures markets from long S&P 500 Index futures positions as
global equity prices declined during January amid fears of
interest rate hikes in the U.S. and Europe and profit-taking from
the previous year. Prices also declined during April due to an
unexpected jump in the Consumer Price Index, fears of inflation
and concerns regarding interest rate increases and during
September on jitters in the technology
<PAGE>
sector and a worrisome spike in oil prices. In the metals
markets, losses of approximately 2.1% were recorded primarily
from long aluminum futures positions as prices reversed lower
during February on technical factors. Short aluminum futures
positions resulted in additional 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 soft
commodities, losses of approximately 1.0% were recorded primarily
from trading coffee futures as prices moved erratically during
mid-July. Smaller losses of approximately 0.7% were recorded in
the agricultural markets primarily 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 of approximately
1.6% recorded in the energy markets primarily from long futures
positions in crude oil and its refined products as oil prices
powered to nine-year highs on concerns about futures output
levels amid dwindling stockpiles and increasing demand and frigid
weather in the Northeastern U.S. Additional gains of
approximately 1.2% were recorded in the currency markets
primarily from short euro and Swiss franc positions during August
and September as the value of these European currencies weakened
versus the U.S. dollar and other major currencies amid a cooling
economy in Europe and the European Central Bank's stance on
interest rates. Total expenses for the nine months ended
September 30, 2000 were $2,197,433,
<PAGE>
resulting in a net loss of $4,475,136. The value of a Unit
decreased from $3,045.43 at December 31, 1999 to $2,609.57 at
September 30, 2000.
For the Quarter and Nine Months Ended September 30, 1999
For the quarter ended September 30, 1999, the Partnership
recorded total trading losses net of interest income of $964,987
and posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 3.8% were recorded in the
global stock index futures markets primarily from trading S&P 500
Index futures as domestic equity prices moved in a short-term
volatile pattern during late July and August due to inflationary
concerns in the U.S. Additional losses were experienced in this
market complex during July from long positions in Hang Seng Index
futures as Hong Kong equity prices moved lower due to rising
China-Taiwan tensions and a decline in China's gross domestic
product. In global interest rate futures, losses of
approximately 2.0% were recorded primarily during August from
short eurodollar positions as U.S. bond prices moved temporarily
higher during mid-month due to benign inflation data. Smaller
losses of approximately 1.5% were incurred in the currency
markets primarily from short positions in the Swiss franc and the
euro as the value of these European currencies reversed their
previous downward trend versus the U.S. dollar during July due to
strong economic data out of Europe and U.S. inflationary fears.
The losses recorded in this market complex were mitigated by
<PAGE>
gains recorded from long positions in the Japanese yen as the
value of the yen strengthened versus the U.S. dollar during the
quarter amid optimism regarding the Japanese economy. A portion
of the Partnership's overall losses for the quarter was offset by
gains of approximately 4.0% recorded in the energy markets
primarily from long positions in crude oil and its refined
products, unleaded gas, heating oil and gas oil. Oil prices
increased during July, August and September, due primarily to a
perceived tightness in supply, increasing demand and an
announcement by OPEC officials stating that they would maintain
output cuts until April 2000. Total expenses for the three months
ended September 30, 1999 were $970,184, resulting in a net loss
of $1,935,171. The value of a Unit decreased from $3,167.89 at
June 30, 1999 to $3,001.48 at September 30, 1999.
For the nine months ended September 30, 1999, the Partnership
recorded total trading losses net of interest income of $277,923
and posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 4.1% were incurred 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
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
<PAGE>
investors replacing international bonds with yen-denominated
debt. In currencies, losses of approximately 3.5% were
experienced primarily from long British pound positions as the
value of the pound weakened versus the U.S. dollar during May due
to fear of an interest rate cut by the Bank of England. In
global stock index futures, losses of approximately 3.0% were
recorded primarily during July from long positions in Hang Seng
Index futures as Hong Kong equity prices moved lower due to
rising China-Taiwan tensions and a decline in China's gross
domestic product. Smaller losses of approximately 2.8% were
incurred in the metals markets primarily during May from long
positions in most base metals as prices declined amid abundant
supplies and weak demand. A portion of these losses was offset
by gains of approximately 4.7% recorded primarily from long
futures positions in crude oil and its refined products as oil
prices climbed during the first quarter on news that both OPEC
and non-OPEC countries had reached an agreement to cut total
output beginning April 1st. Oil prices received an added boost
during the second and third quarters due to declining inventory
levels and increasing demand. Total expenses for the nine months
ended September 30, 1999 were $2,890,526, resulting in a net loss
of $3,168,449. The value of a Unit decreased from $3,266.97 at
December 31, 1998 to $3,001.48 at September 30, 1999.
<PAGE>
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 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.
<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 Partner-
ship'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 table indicates the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category as of September 30, 2000 and
1999. At September 30, 2000 and 1999, the Partnership's total
capitalization was approximately $25 million and $34 million,
respectively.
Primary Market September 30, 2000 September 30, 1999
Risk Category Value at Risk Value at Risk
Interest Rate (0.87)% (0.74)%
Currency (1.42) (0.87)
Equity (0.01) (0.10)
Commodity (1.56) (1.11)
Aggregate Value at Risk (2.30)% (1.73)%
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 September 30, 2000 and 1999 only and is not
<PAGE>
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 October
1, 1999 through September 30, 2000.
Primary Market Risk Category High Low Average
Interest Rate (1.12)% (0.05)% (0.68)%
Currency (1.42) (0.29) (0.87)
Equity (1.26) (0.01) (0.67)
Commodity (1.65) (0.30) (1.01)
Aggregate Value at Risk (2.31)% (1.19)% (1.93)%
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
<PAGE>
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, give
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.
<PAGE>
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 September 30, 2000 and for the end of the four
quarterly reporting periods from October 1, 1999 through
September 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 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 September 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 potential losses, taking into account the leverage,
optionality and multiplier features of the Partnership's market-
sensitive instruments.
<PAGE>
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. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership as of September 30, 2000, by market sector. It may
<PAGE>
be anticipated however, that these market exposures will vary
materially over time.
Interest Rate. Exposure was primarily 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. The G-7 countries consist of France, U.S., Britain,
Germany, Japan, Italy and Canada. 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 that have the most significant 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>
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. At September 30, 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 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.
Equity. The primary equity exposure is 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. At September 30, 2000, the Partnership's primary
exposure was in the S&P 500 (U.S.) stock index. The Partnership
is primarily exposed to the risk of adverse price trends or
<PAGE>
static markets in the U.S. indices. Static markets would not
cause major market changes but would make it difficult for the
Partnership to avoid being "whipsawed" into numerous small
losses.
Commodity
Energy. At September 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
copper, aluminum and zinc, 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
continued to be volatile during the quarter. Silver prices have
remained volatile over this period, and the Trading Managers
<PAGE>
have from time to time taken positions as they have perceived
market opportunities to develop.
Soft Commodities and Agriculturals. At September 30, 2000, the
Partnership had exposure in the markets that comprise these
sectors. Most of the exposure was in the wheat, corn 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 September 30, 2000:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in 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
<PAGE>
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
Please refer to Legal Proceedings previously disclosed in the
Partnership's Form 10-Q(s) for the quarters ended March 31, 2000
and June 30, 2000 and Form 10-K for the year ended December 31,
1999.
Item 5. OTHER INFORMATION
Commencing December 1, 2000, the management fee paid by the
Partnership to each Trading Manager will be reduced from a 4% to
a 3.5% annual rate.
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 of the
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 of 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 dated as of July
1, 1996 is incorporated by reference to Exhibit 10.02 of the
Partnership's Annual Report on From 10-K for the fiscal year
ended December 31, 1997 (File No. 0-13299).
<PAGE>
10.03 Dean Witter Cornerstone Funds Exchange Agreement,
dated as of May 31, 1984 is incorporated by reference to
Exhibit 10.06 of 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 of 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 of the Partnership's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 (File No. 0-
13299).
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 of 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 incorporated by reference to
Exhibit 10.07 of the Partnership's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000, (File NO. 0-
13299).
(B) Reports on form 8-K - None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dean Witter Cornerstone Fund III
(Registrant)
By: Demeter Management Corporation
(General Partner)
November 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.
