UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to__________________
Commission File No. 0-19116
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3577501
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 DIVERSIFIED FUTURES FUND III L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2000
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Statements of Financial Condition
June 30, 2000 (Unaudited) and December 31, 1999.......2
Statements of Operations for the Quarters Ended
June 30, 2000 and 1999 (Unaudited)....................3
Statements of Operations for the Six Months
Ended June 30, 2000 and 1999 (Unaudited)..............4
Statements of Changes in Partners' Capital for the
Six Months ended June 30, 2000 and 1999 (Unaudited)...5
Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)....................6
Notes to Financial Statements (Unaudited)..........7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..13-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk....................................23-36
Part II. OTHER INFORMATION
Item 1. Legal Proceedings..............................37-38
Item 5. Other Information.................................39
Item 6. Exhibits and Reports on Form 8-K...............39-40
<PAGE>
</TABLE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
June 30, December 31,
2000 1999 $
$
(Unaudited)
ASSETS
<S>
<C> <C>
Equity in futures interests trading accounts:
Cash 47,484,736 47,778,818
Net unrealized gain on open contracts (Carr)234,5901,959,828
Net unrealized loss on open contracts (MSIL)
(194,971) -
Net unrealized loss on open contracts (MS & Co.)
(1,055,906) _____-___
Total net unrealized gain (loss) on open contracts(1,016,287)
1,959,828
Total Trading Equity 46,468,449 49,738,646
Interest receivable (DWR) 177,686 178,458
Total Assets 46,646,135 49,917,104
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Redemptions payable 798,743 1,195,090
Accrued management fees (DWFCM) 117,114 125,214
Administrative expenses payable 103,765 69,232
Total Liabilities 1,019,622 1,389,536
Partners' Capital
Limited Partners (26,643.350 and
30,005.528 Units, respectively) 44,923,257 47,862,260
General Partner (417.091 Units) 703,256 665,308
Total Partners' Capital 45,626,513 48,527,568
Total Liabilities and Partners' Capital46,646,135 49,917,104
NET ASSET VALUE PER UNIT 1,686.10 1,595.11
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Quarters Ended June 30,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized 6,836,356 160,980
Net change in unrealized (5,405,017) 527,958
Total Trading Results 1,431,339 688,938
Interest Income (DWR) 543,175 505,843
Total Revenues 1,974,514 1,194,781
EXPENSES
Brokerage commissions (DWR) 634,008 967,660
Management fees (DWFCM) 357,621 437,199
Transaction fees and costs 39,716 68,853
Administrative expenses 25,000 21,000
Total Expenses 1,056,345 1,494,712
NET INCOME (LOSS) 918,169 (299,931)
NET INCOME (LOSS) ALLOCATION
Limited Partners 904,752 (295,685)
General Partner 13,417 (4,246)
NET INCOME (LOSS) PER UNIT
Limited Partners 32.17 (10.18)
General Partner 32.17 (10.18)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
2000 1999
$ $
REVENUES
<S>
<C> <C>
Trading profit (loss):
Realized 6,837,439 (3,504,965)
Net change in unrealized (2,976,115) 700,035
Total Trading Results 3,861,324 (2,804,930)
Interest Income (DWR) 1,062,711 1,046,080
Total Revenues 4,924,035 (1,758,850)
EXPENSES
Brokerage commissions (DWR) 1,437,905 1,882,346
Management fees (DWFCM) 719,956 897,940
Transaction fees and costs 100,445 141,569
Administrative expenses 49,000 35,000
Total Expenses 2,307,306 2,956,855
NET INCOME (LOSS) 2,616,729 (4,715,705)
NET INCOME (LOSS) ALLOCATION
Limited Partners 2,578,781 (4,660,360)
General Partner 37,948 (55,345)
NET INCOME (LOSS) PER UNIT
Limited Partners 90.99 (132.69)
General Partner 90.99 (132.69)
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
<S>
<C> <C> <C>
<C>
Partners' Capital,
December 31, 1998 36,385.865 $64,144,919 $743,819 $64,888,738
Net Loss - (4,660,360) (55,345) (
4,715,705)
Redemptions (2,915.983) (4,925,741)
- (4,925,741)
Partners' Capital,
June 30, 1999 33,469.882 $54,558,818 $688,474 $55,247,292
Partners' Capital,
December 31, 1999 30,422.619$47,862,260$665,308$48,527,568
Net Income - 2,578,781 37,948 2,616,729
Redemptions (3,362.178)(5,517,784)_____-___ (5,517,
784)
Partners' Capital,
June 30, 2000 27,060.441 $44,923,257
$703,256 $45,626,513
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
<TABLE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Six Months Ended June 30,
2000 1999
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
<S>
<C> <C>
Net income (loss) 2,616,729 (
4,715,705)
Noncash item included in net income (loss):
Net change in unrealized 2,976,115
(700,035)
Decrease in operating assets:
Interest receivable (DWR) 772 25,766
Increase (decrease) in operating liabilities:
Accrued management fees (DWFCM) (8,100) (23,653)
Administrative expenses payable 34,533
15,642
Net cash provided by (used for) operating activities 5,620,049
(5,397,985)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in redemptions payable(396,347) 173,148
Redemptions of Units (5,517,784)
(4,925,741)
Net cash used for financing activities(5,914,131)
(4,752,593)
Net decrease in cash (294,082) (
10,150,578)
Balance at beginning of period 47,778,818
63,721,724
Balance at end of period 47,484,736
53,571,146
<FN>
The accompanying notes are an integral part
of these financial statements.
</TABLE>
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
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 Diversified
Futures Fund III L.P. (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 Diversified Futures Fund III L.P. is a Delaware
limited partnership organized to engage primarily in the
speculative trading of commodity futures contracts and forward
contracts, physical commodities, and other commodity interests
(collectively, "futures interests").
The general partner for the Partnership is Demeter Management
Corporation ("Demeter"). The non-clearing commodity broker is
Dean Witter Reynolds Inc. ("DWR"). Morgan Stanley & Co., Inc.
("MS & Co.") and Morgan Stanley & Co. International Limited
("MSIL") provide clearing and execution services. Prior to May
2000, Carr Futures Inc. provided clearing and execution services.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The trading manager is Dean Witter Futures & Currency Management
Inc. ("DWFCM" or the "Trading Manager"). Demeter, DWR, DWFCM, MS
& Co. and MSIL are wholly-owned subsidiaries of Morgan Stanley
Dean Witter & Co.
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 bills. The Partnership pays brokerage
commissions to DWR. Management fees and incentive fees (if any)
incurred by the Partnership are paid to DWFCM.
3. Financial Instruments
The Partnership trades commodity futures contracts and forward
contracts, physical commodities, 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
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
influence the market value of these contracts, including interest
rate volatility.
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.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The net unrealized gain (loss) on open contracts are reported as
a component of "Equity in futures interests trading accounts" on
the
statements of financial condition and totaled $(1,016,287) and
$1,959,828 at June 30, 2000 and December 31, 1999, respectively.
Of the $1,016,287 net unrealized loss on open contracts at June
30, 2000, $3,873,178 related to exchange-traded futures contracts
and $(2,856,891) related to off-exchange-traded forward currency
contracts.
Of the $1,959,828 net unrealized gain on open contracts at
December 31, 1999, $1,781,996 related to exchange-traded futures
contracts and $177,832 related to off-exchange-traded forward
currency contracts.
Exchange-traded futures contracts held by the Partnership at June
30, 2000 and December 31, 1999 mature through December 2000 and
September 2000, respectively. Off-exchange-traded forward
currency contracts held by the Partnership at June 30, 2000 and
December 31, 1999 mature through September 2000 and March 2000,
respectively.
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership has credit risk associated with counterparty
nonperformance. 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 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 the
Partnership's exchange-traded futures 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 contracts, including
an amount equal to the net unrealized gain (loss) on all open
futures contracts, which funds, in the aggregate, totaled
$51,357,914 and $49,560,814 at June 30, 2000 and December 31,
1999, respectively. With respect to the Partnership's off-
exchange-traded forward currency contracts, there are no daily
settlements of variations in value
<PAGE>
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
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 the 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 and forwards,
it is expected that the Partnership will continue to own such
liquid assets for margin purposes.
The Partnership's investment in futures, and forwards 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 contract has
increased or decreased by an amount equal to the daily limit,
positions in that futures 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
daily limit for several consecutive
<PAGE>
days with little or no trading. These market conditions could
prevent the Partnership from promptly liquidating its futures
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, subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets.
Capital Resources. The Partnership does not have, or expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest ("Unit(s)") in the future will
affect the amount of funds available for investment in futures
interests in subsequent periods. It is not possible to estimate
the amount, and therefore, the impact of future redemptions of
Units.
<PAGE>
Results of Operations
General. The Partnership's results depend on its Trading Manager
and the ability of the Trading Manager's trading programs to take
advantage of price movements or other profit opportunities in the
futures and forwards markets. The following presents a summary
the Partnership's operations for the quarter and six months ended
June 30, 2000 and 1999, respectively, and a general discussion of
its trading activities during each period. It is important to
note, however, that the Trading Manager trades 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 Manager 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
Manager's trading activities on behalf of the Partnership as a
whole and how the Partnership has performed in the past.
For the Quarter and Six Months Ended June 30, 2000
For the quarter ended June 30, 2000, the Partnership recorded
total trading revenues, including interest income, of $1,974,514
and posted an increase in Net Asset Value per Unit. The most
significant gains of approximately 10.4% were recorded in the
energy markets primarily during May from long positions in
natural gas futures as prices continued their upward trend on
<PAGE>
fears that inventory levels would remain low and that U.S. demand
will outstrip production this summer, when inventories are
typically refilled for the winter. Additional gains were
recorded during May and June from long futures positions in crude
oil and its related products as the previous upward movement in
oil prices re-emerged amid rising concerns regarding supplies and
production levels. In the agricultural markets, gains of
approximately 1.2% were recorded primarily during June from short
corn futures positions as corn prices were pressured lower by a
damp weather forecast in the U.S. midwest. In soft commodities,
gains of approximately 0.4% were recorded primarily during June
from short coffee futures positions as prices decreased amid
continued pressure from bearish technical factors and large
warehouse supplies. These gains were partially offset by losses
of approximately 6.5% recorded throughout a majority of the
quarter primarily from long positions in U.S. interest rate
futures as prices declined on inflation fears provoked by
stronger-than-forecasted U.S. economic data. Losses were also
recorded throughout the majority of the quarter from short
positions in German bond futures as prices were pushed higher by
the rise in U.S. prices. In the global stock index futures
markets, losses of approximately 1.8% were incurred primarily
during April from long positions in S&P 500 Index futures as
fears of inflation negatively impacted domestic equity prices.
<PAGE>
In the currency markets, losses of approximately 1.2% were
experienced primarily during April and early May from long
positions in the Japanese yen as its value weakened relative to
the U.S. dollar amid fears of an additional Bank of Japan
intervention and as Japanese consumer confidence remained
sluggish. In the metals markets, losses of approximately 0.7%
were recorded primarily during June from short aluminum futures
positions as prices increased on consumer and speculative buying.
Total expenses for the three months ended June 30, 2000 were
$1,056,345, resulting in net income of $918,169. The value of a
Unit increased from $1,653.93 at March 31, 2000 to $1,686.10 at
June 30, 2000.
For the six months ended June 30, 2000, the Partnership recorded
total trading revenues, including interest income of $4,924,035
and posted an increase in Net Asst Value per Unit. The most
significant gains of approximately 15.5% were recorded in the
energy markets primarily during May from long positions in
natural gas futures as prices continued their upward trend on
fears that inventory levels would remain low and that U.S. demand
will outstrip production this summer, when inventories are
typically refilled for the winter. Additional gains were
recorded during February from long positions in crude oil futures
as prices increased due to a combination of cold weather,
<PAGE>
declining inventories and increasing demand. Oil prices also
increased during June in reaction to the dismissal by OPEC of a
price setting mechanism and a promise of a modest production
increase. In the currency markets, gains of approximately 1.2%
were recorded primarily during January from short positions in
the Swedish krona, the euro and the Swiss franc as the value of
these European currencies weakened relative to the U.S. dollar,
hurt by skepticism about Europe's economic outlook and lack of
support from European officials. During April, profits were
recorded from short positions in the euro as the value of the
European common currency dropped to record lows versus the U.S.
dollar and British pound. In the agricultural markets, gains of
approximately 1.0% were recorded primarily during June from short
corn futures positions as corn prices were pressured lower by a
damp weather forecast in the U.S. Midwest. These gains were
partially offset by losses of approximately 7.6% recorded
throughout a majority of the second quarter from long positions
in U.S. interest rate futures as prices declined on inflation
fears provoked by stronger-than-forecasted U.S. economic data.
Losses were also recorded throughout the majority of the second
quarter from short positions in German bund futures as prices
were pushed higher by the rise in U.S. prices. In the global
stock index futures markets, losses of approximately 3.2% were
incurred throughout a majority of the first quarter and during
<PAGE>
April from long positions in S&P 500 Index futures as domestic
stock prices declined due to volatility in the technology sector
and fears that the Federal Reserve will be forced to take
aggressive action to slow the economy. In the metals markets,
losses of approximately 2.0% were experienced primarily from long
positions in base metal futures as a previous upward price trend
reversed sharply lower during February in response to interest
rate hikes across the globe. During June, smaller losses were
recorded from short aluminum futures positions as prices
increased on consumer and speculative buying. Total expenses for
the six months ended June 30, 2000 were $2,307,306, resulting in
net income of $2,616,729. The value of Unit increased from
$1,595.11 at December 31, 1999 to $1,686.10 at June 30, 2000.
For the Quarter and Six Months Ended June 30, 1999
For the quarter ended June 30, 1999, the Partnership recorded
total trading revenues including interest income of $1,194,781
and, after expenses, posted a decrease in Net Asset Value per
Unit. The most significant net trading losses of approximately
3.9% were experienced in the metals markets primarily from long
positions in copper and aluminum futures as base metals prices
declined significantly during late May amid large supply, low
demand and the possibility of a production cut in the near future
being judged unlikely. During June, additional losses were
<PAGE>
incurred in this market complex from short copper futures
positions as prices moved higher due to a drop in warehouse
stocks. In the global stock index futures markets, losses of
approximately 0.8% were recorded during mid April and May from
long S&P 500 Index futures positions as domestic equity prices
dropped following stronger-than-expected Consumer Price Index
data and indications by the Federal Open Market Committee that
the U.S. Federal Reserve is shifting towards a tightening bias.
In the agricultural markets, losses of approximately 0.1% were
experienced primarily from long corn futures positions as prices
regressed in early April in reaction to reports by the USDA that
the expected corn surplus will be one of the biggest in years and
from declining demand in the Asian markets. These losses were
partially offset by gains of approximately 2.0% recorded in the
currency markets primarily during April and May from short
Swedish krona positions as its value weakened versus the U.S.
dollar on speculation as to when Sweden will join Europe's
Monetary Union and due to a decline in oil prices. In the global
interest rate futures markets, gains of approximately 1.1% were
recorded primarily from long Japanese government bonds as prices
rallied during April after the Japanese government proposed no
new economic spending plans and on comments by a Senior Finance
Ministry official that the supply-demand balance in the market
will deteriorate. In soft commodities, gains of approximately
<PAGE>
0.6% were recorded primarily from short cotton futures positions
as prices dropped in late June on reports of beneficial rainfalls
across the Southeastern U.S. In the energy markets, gains of
approximately 0.5% were recorded primarily during April from long
natural gas futures positions as prices climbed following reports
of an increase in storage stocks that was well-below market
expectations. Total expenses for the three months ended June 30,
1999 were $1,494,712, resulting in a net loss of $299,931. The
value of a Unit decreased from $1,660.84 at March 31, 1999 to
$1,650.66 at June 30, 1999.
For the six months ended June 30, 1999, the Partnership recorded
total trading losses net of interest income of $1,758,850 and
posted a decrease in Net Asset Value per Unit. The most
significant losses of approximately 4.4% were experienced in the
metals markets primarily from long positions in copper and zinc
futures as base metals prices declined significantly in late May
amid a large supply, low demand and the possibility of a
production cut in the near future being judged unlikely. During
June, additional losses were incurred in this market complex from
short copper futures positions as prices moved higher due to a
drop in warehouse stocks. In the global interest rate futures
markets, losses of approximately 3.3% were recorded throughout a
majority of the first quarter from short Japanese bond futures
<PAGE>
positions as prices increased amid growing speculation that the
Bank of Japan may underwrite Japanese government bonds. Fears
that a rise in Japanese bond yields would lead many Japanese
money managers to repatriate assets from foreign investments to
yen-denominated debt also pushed prices higher. Additional
losses were recorded during February and March from short German
government bond futures positions as prices increased on reports
that Germany's industrial production showed a sharp increase,
creating hopes that Europe's biggest economy could be
strengthening. In the currency markets, losses of approximately
2.3% were experienced throughout a majority of the first quarter
from long Australian dollar positions as its value dropped
significantly relative to the U.S. dollar on speculation
regarding potential currency devaluations in the Asian region.
Losses recorded from short British pound positions in March
offset profits recorded in February as its value strengthened
versus the U.S. dollar as the market scaled back the chances of a
British interest rate cut following an announcement of a budget
that was more generous than expected. In the global stock index
futures markets, losses of approximately 0.9% were experienced
primarily during February, mid April and May from long S&P 500
Index futures positions as domestic equity prices moved lower on
concerns that the Federal Reserve may raise interest rates in an
effort to control inflation, following stronger-than-expected
<PAGE>
Consumer Price Index data and on indications by the Federal Open
Market Committee that the U.S. Federal Reserve is shifting
towards a tightening bias. These losses were partially offset by
gains of approximately 2.7% recorded in the energy markets
primarily during March from long positions in crude and heating
oil futures as prices moved significantly higher on news that
both OPEC and non-OPEC countries had reached an agreement to cut
total output by approximately two million barrels a day beginning
April 1st. Total expenses for the six months ended June 30, 1999
were $2,956,855, resulting in a net loss of $4,715,705. The
value of a Unit decreased from $1,783.35 at December 31, 1998 to
$1,650.66 at June 30, 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Introduction
The Partnership is a commodity pool involved in the speculative
trading of futures interests. The market-sensitive instruments
held by the Partnership are acquired for speculative trading
purposes only and, as a result, all or substantially all of the
Partnership's assets are at risk of trading loss. Unlike an
operating company, the risk of market-sensitive instruments is
central, not incidental, to the Partnership's main business
activities.
<PAGE>
The futures interests traded by the Partnership involve varying
degrees of market risk. Market risk is often dependent upon
changes in the level or volatility of interest rates, exchange
rates, and prices of financial instruments and commodities.
Fluctuations in market risk based upon these factors result in
frequent changes in the fair value of the Partnership's open
positions, and, consequently, in its earnings and cash flow.
The Partnership's total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership's open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the market
risk associated with the Partnership.
The Partnership's past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership's market risk is limited by the uncertainty of its
speculative trading. The Partnership's speculative trading may
cause future losses and volatility (i.e. "risk of ruin") that far
exceed the Partnership's experiences to date or any reasonable
expectations based upon historical changes in market value.
<PAGE>
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the
Partnership's
market risk exposures contain "forward-looking statements" within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act
of 1995 (set forth in Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-
looking statements for purposes of the safe harbor, except for
statements of historical fact.
The Partnership accounts for open positions using mark-to-market
accounting principles. Any loss in the market value of the
Partnership's open positions is directly reflected in the
Partnership's earnings, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of exchange-
traded futures interests are settled daily through variation
margin.
The Partnership's risk exposure in the market sectors traded by
the Trading Manager 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
<PAGE>
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
historic reporting purposes only and is not utilized by either
<PAGE>
Demeter or the Trading Manager in their daily risk management
activities.
The Partnership's Value at Risk in Different Market Sectors
The following tables indicates the VaR associated with the
Partnership's open positions as a percentage of total Net Assets
by primary market risk category as of June 30, 2000 and 1999. As
of June 30, 2000 and 1999, the Partnership's total capitalization
was approximately $46 million and $55 million, respectively.
Primary Market June 30, 2000 June 30, 1999
Risk Category Value at Risk Value at Risk
Currency (1.44)% (1.97)%
Interest Rate (1.63) (1.92)
Commodity (1.83) (0.90)
Equity (0.05) (0.48)
Aggregate Value at Risk (2.70)% (3.16)%
Aggregate Value at Risk represents the aggregate VaR of all the
Partnership's open positions and not the sum of the VaR of the
individual Market Categories listed above. Aggregate VaR will be
lower as it takes into account correlation among different
positions and categories.
The table above represents the VaR of the Partnership's open
positions at June 30, 2000 and 1999 only and is not necessarily
<PAGE>
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 July 1,
1999 through June 30, 2000.
Primary Market Risk Category High Low Average
Currency (1.97)% (1.44)% (1.76)%
Interest Rate (1.92) (0.86) (1.49)
Commodity (2.08) (0.90) (1.47)
Equity (1.28) (0.05) (0.64)
Aggregate Value at Risk (3.41)% (2.26)% (2.88)%
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
<PAGE>
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, 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
<PAGE>
the historical market risk factor data used for VaR
estimation may provide only limited insight into losses that
could be incurred under certain unusual market movements.
The VaR tables above present the results of the Partnership's VaR
for each of the Partnership's market risk exposures and on an
aggregate basis at June 30, 2000 and for the end of the four
quarterly reporting periods from July 1, 1999 through June 30,
2000. Since VaR is based on historical data, VaR should not be
viewed as predictive of the Partnership's future financial
performance or its ability to manage or monitor risk. There can be
no assurance that the Partnership's actual losses on a particular
day will not exceed the VaR amounts indicated above or that such
losses will not occur more than 1 in 100 trading days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. These balances and any market risk
they may represent are immaterial. At June 30, 2000 the
Partnership's cash balance at DWR was approximately 96% 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.
<PAGE>
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.
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 Manager
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
<PAGE>
result in material losses as well as in material changes to the
risk exposures and the risk management strategies of the
Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the
Partnership as of June 30, 2000, by market sector. It may be
anticipated however, that these market exposures will vary
materially over time.
Currency. The Partnership's currency exposure is to exchange
rate fluctuations, primarily fluctuations which disrupt the
historical pricing relationships between different currencies and
currency pairs. Interest rate changes as well as political and
general economic conditions influence these fluctuations. The
Partnership trades in a large number of currencies, including
cross-rates - i.e., positions between two currencies other than
the U.S. dollar. For the second quarter of 2000, the
Partnership's major exposures were in the euro currency crosses
and outright U.S. dollar positions. Outright positions consist
of the U.S. dollar vs. other currencies. These other currencies
include the major and minor currencies. Demeter does not
anticipate that the risk profile of the Partnership's currency
sector will change significantly in the future. The currency
<PAGE>
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.
Interest Rate. The second market exposure on June 30, 2000 was in
the interest rate complex. Exposure was spread across U.S.,
German and Japanese interest rate sectors. Interest rate
movements directly affect the price of the sovereign bond futures
positions held by the Partnership and indirectly affect the value
of its stock index and currency positions. Interest rate
movements in one country as well as relative interest rate
movements between countries materially impact the Partnership's
profitability. The Partnership's primary interest rate exposure
is generally to interest rate fluctuations in the United States
and the other G-7 countries. 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 which have the
most effect on the Partnership are changes in long-term, as
opposed to short-term, rates. Most of the speculative interest
<PAGE>
rate 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.
Commodity.
Energy. On June 30, 2000, the Partnership's energy exposure
was shared primarily by futures contracts in the crude oil and
natural gas markets. Price movements in these markets result
from political developments in the Middle East, weather patterns,
and other economic fundamentals. It is possible that volatility
will remain high 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 may continue in this choppy pattern.
Metals. The Partnership's primary metals market exposure for the
quarter ended June 30, 2000 was to fluctuations in the price of
aluminum and nickel.
Soft Commodities and Agriculturals. On June 30, 2000, the
Partnership had exposure in the corn, soybean, cotton and coffee
<PAGE>
markets. Supply and demand inequalities, severe weather
disruption and market expectations affect price movements in
these markets.
Equity. Exposure to stock indices on June 30, 2000 was limited
to a small position in the Nikkei stock index.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following was the only non-trading risk exposure of the
Partnership as of June 30, 2000:
Foreign Currency Balances. The Partnership's primary foreign
currency balances are in euros and Japanese yen. The Partnership
controls the non-trading risk of these balances by regularly
converting these balances back into dollars upon liquidation of
the respective position.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Manager, 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 market sectors and trading approaches, and
monitoring the performance of the Trading Manager daily. In
<PAGE>
addition, the Trading Manager establishes 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 Manager.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following supplements Legal Proceedings previously disclosed
in the Partnership's Form 10-Q for the quarter ended March 31,
2000 and Form 10-K for the year ended December 31, 1999:
On October 25, 1996, the Market Surveillance Committee (the
"Committee") of the National Association of Securities Dealers
("NASD") filed a formal complaint against MS & Co. and seven
current and former traders, alleging violations of certain NASD
rules relating to manipulative and deceptive practices, locked
and crossed markets, and failure to supervise. Hearings were
held in June and July 1997. On April 13, 1998 the Committee
ruled that MS & Co. and the seven traders had engaged in
manipulative and deceptive practices and improperly locked or
crossed markets, but not that MS & Co. had failed to supervise
its traders. The Committee levied a fine of $1,000,000 on MS &
Co., a fine of $100,000 and a 90-day suspension on one of its
former traders, and fines of $25,000 and 30-day suspensions on
each of the remaining current and former traders. On January 18,
2000 the National Adjudicatory Council, which heard the appeal,
issued a ruling which upheld the Committee's April 1998 decision,
however, the National Adjudicatory Council reduced the firm's
fine to $495,000, reversed all previously imposed suspensions
against the traders,
<PAGE>
reduced the fine for each of six traders to $2,500 and dismissed
all charges against the seventh trader.
On January 11, 1999, the Securities and Exchange Commission
brought an action against 28 NASDAQ market makers, including MS &
Co., and 51 individuals, including one current and one former
trader employed by MS & Co., for certain conduct during 1994.
The core of the charges against MS & Co. concerns improper or
undisclosed coordination of price quotes with other broker-
dealers and related reporting, recordkeeping and supervisory
deficiencies in violation of Sections 15(b)(4)(E), 15(c)(1) and
(2) and 17(a) of the Securities Exchange Act and Rules 15c1-2,
15c2-7 and 17a-3 promulgated thereunder. Without admitting or
denying the charges, MS & Co. consented to the entry of a cease
and desist order and to the payment of a civil penalty of
$350,000, disgorgement of $4,170 and to submit certain of its
procedures to an independent consultant for review. In addition,
one current and one former trader employed by MS & Co. accepted
suspensions of less than two months each and were fined $25,000
and $30,000 respectively.
<PAGE>
Item 5. OTHER INFORMATION
Effective July 1, 2000, Lewis A. Raibley, III resigned as Chief
Financial Officer and a Director of Demeter and DWFCM. Effective
July 10, 2000, Raymond E. Koch replaced Lewis A. Raibley, III as
Chief Financial Officer of Demeter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits.
3.01 Limited Partnership Agreement of the Partnership, dated as
of July 12, 1990 is incorporated by reference to Exhibit 3.01 and
Exhibit 3.02 of the Partnership's Registration Statement on Form
S-1, File No. 33-34989, filed on May 21, 1990.
3.02 Form of Amendment No. 1 to the Limited Partnership
Agreement of the Partnership is incorporated by reference
to Exhibit 3.01(a) of the Partnership's Registration
Statement on Form S-1, File No. 33-47797, filed on May 11, 1992.
10.01 Management Agreement among the Partnership, Demeter
Management Corporation and Dean Witter Futures &
Currency Management Inc. dated as of July 12, 1990 is
incorporated by reference to Exhibit 10.02 of the
Partnership's Registration Statement on Form S-1, file
No. 33-34989, filed on May 21, 1990.
10.02 Form of Amendment No. 1 to the Management Agreement
is incorporated by reference to Exhibit 10.02 (a) of
the Partnership's Registration Statement on Form S-1,
file no. 33-47797, filed on May 11, 1992.
10.03 Amended and Restated Customer Agreement dated as of
December 1, 1997, between the Partnership and Dean Witter
Reynolds Inc. incorporated by reference to Exhibit 10.03 of the
Partnership's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, File No. 0-19116.
<PAGE>
10.04 Customer Agreement dated as of December 1, 1997,
between the Partnership, Carr Futures, Inc., and Dean Witter
Reynolds Inc. is incorporated by reference to Exhibit 10.04 of
the Partnership's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, File No. 19116.
10.05 International foreign Exchange Master Agreement dated
as of August 1, 1997, between the Partnership and Carr Futures,
Inc. is incorporated by reference to Exhibit 10.05 of the
Partnership's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, File No. 19116.
10.06 Customer Agreement, dated as of May 1, 2000 between
Morgan Stanley & Co. Incorporated, the Partnership
and Dean Witter Reynolds Inc. is filed herewith.
B) Reports on Form 8-K. - None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dean Witter Diversified Futures
Fund III L.P. (Registrant)
By: Demeter Management Corporation
(General Partner)
August 14, 2000 By:/s/Raymond E. Koch __________
Raymond E. Koch
Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
