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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from
________________to___________________
Commission File Number 33-47797
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
(Exact name of registrant as specified in its Limited Partnership
Agreement)
DELAWARE 13-3577501
(State or other jurisdiction of
(I.R.S. Employer
incorporation of organization)
Identification No.)
c/o Demeter Management Corporation
Two World Trade Center, New York, N.Y. - 62nd Flr.
10048 (Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code
(212) 392-5454
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class
on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment of this Form 10K. [X ]
State the aggregate market value of the Units of Limited
Partnership Interest held by non-affiliates of the registrant.
The aggregate market value shall be computed by reference to the
price at which units were sold, or the average bid and asked
prices of such units, as of a specified date within 60 days prior
to the date of filing: $69,221,301.73 at January 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
(See Page 1)
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
Page No.
DOCUMENTS INCORPORATED BY REFERENCE. . . . . . . . . . . . .
. . . . 1
Part I .
Item 1. Business. . . . . . . . . . . . . . . . . . . . .
. 2-5
Item 2. Properties. . . . . . . . . . . . . . . . . . . .
. . 5
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . .
. . 5-7
Item 4. Submission of Matters to a Vote of Security
Holders . . .7
Part II.
Item 5. Market for the Registrant's Partnership Units and
Related Security Holder Matters . . . . . . . . .
. . . .8
Item 6. Selected Financial Data . . . . . . . . . . . . .
. . . .9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . .
. 10-17
Item 8. Financial Statements and Supplementary Data. . . .
. . 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . .
. . 17
Part III.
Item10. Directors, Executive Officers, Promoters and
Control Persons of the Registrant . . . . . . . .
. 18-23
Item11. Executive Compensation . . . . . . . . . . . . . .
. . 23
Item12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . .
. 23
Item13. Certain Relationships and Related Transactions . .
. 23-24
Part IV.
Item14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . .
. . 25
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by
reference as follows:
Documents Incorporated Part
of Form 10-K
Partnership's Registration Statement
On Form S-1, File No. 33-34989
filed on May 21, 1990. I and IV
Partnership's Registration Statement
on Form S-1, File No. 33-47797
filed on May 11, 1992. I and IV
December 31, 1997 Annual Report
for the Dean Witter Diversified
II and IV
Futures Fund III L.P.
PART I
Item 1. BUSINESS
(a) General Development of Business. Dean Witter
Diversified Futures Fund III L.P. (the "Partnership") is a
Delaware limited partnership formed to engage in the
speculative trading of commodity futures contracts and other
commodity interests, including, but not limited to, forward
contracts on foreign currencies, options on futures
contracts and physical commodities.
Units of limited partnership interest in the
Partnership were registered pursuant to a Registration
Statement on Form S-1 (File No. 33-34989) which became
effective on July 12, 1990. The offering of units was
underwritten on a "best efforts" basis by Dean Witter
Reynolds Inc. ("DWR"). The Partnership's general partner is
Demeter Management Corporation ("Demeter"). DWR and Demeter
are wholly-owned subsidiaries of Morgan Stanley, Dean
Witter, Discover & Co. ("MSDWD"). The Partnership commenced
operations on November 1, 1990. Additional units of limited
partnership interest in the Partnership were registered
pursuant to Registration Statements on Form S-1 (File No. 33-
37189) which became effective on October 11, 1990, a
Registration Statement on Form S-1 (File No. 33-47797) which
became effective on June 30, 1992, and a Registration
Statement on Form S-1 (File No. 33-52446) which became
effective on September 30, 1992.
Through July 31, 1997, the sole commodity broker for
the Partnership's transactions was DWR. On July 31, 1997,
DWR closed the sale of its institutional futures business
and foreign currency trading operations to Carr Futures,
Inc. ("Carr"), a subsidiary of Credit Agricole Indosuez.
Following the sale, Carr became the clearing commodity
broker for the Partnership's futures and futures options
trades and the counterparty on the Partnership's foreign
currency trades. DWR serves as the non-clearing commodity
broker for the Partnership with Carr providing all clearing
services for the Partnership's transactions.
The Partnership's net asset value per unit, as of
December 31, 1997, was $1,692.08, representing an increase
of 12.29 percent from the net asset value per unit of
$1,506.89 at December 31, 1996. For a more detailed
description of the Partnership's business see subparagraph
(c).
(b) Financial Information about Industry Segments. The
Partnership's business comprises only one segment for
financial reporting purposes, speculative trading of
commodity futures contracts and other commodity interests.
The relevant financial information is presented in Items 6
and 8.
(c) Narrative Description of Business. The Partnership
is in the business of speculative trading in commodity
futures contracts and other commodity interests, pursuant to
trading instructions provided by Dean
Witter Futures & Currency Management Inc. ("DWFCM"), a
wholly-owned subsidiary of MSDWD and an affiliate of DWR,
and Demeter. For a detailed description of the different
facets of the Partnership's business, see those portions of
the Partnership's Prospectus, dated June 30, 1992, filed as
part of the Registration Statement on Form S-1 (see
"Documents Incorporated by Reference" Page 1), set forth
below:
Facets of Business
1. Summary 1. "Summary of the
Prospectus"
(Pages 1-8).
2. Commodity Markets 2. "The Commodities
Markets"
(Pages 52-59).
3. Partnership's Commodity 3. "Trading Policies"
(Pages
Trading Arrangements and 48-49). "The Trading
Policies Manager" (Pages 37-
47).
4. Management of the Part- 4. "The Management
Agreement"
nership (Pages 50-52). "The
General Partner" (Pages 33-35)
and "The Commodity Broker"
(Pages 49-50). "The
Limited Partner- ship
Agreement" (Pages
61-65).
5. Taxation of the Partner- 5. "Federal Income Tax
ship's Limited Partners Aspects" and "State
and Local Income Tax
Aspects" (Pages 70-77).
(d) Financial Information About Foreign and Domestic
Operations and
Export Sales.
The Partnership has not engaged in any operations in
foreign
countries; however, the Partnership (through the commodity
brokers) enters into forward contract transactions where
foreign banks are the contracting party and trades in
futures interests on foreign exchanges.
Item 2. PROPERTIES
The executive and administrative offices are located
within the offices of DWR. The DWR offices utilized by the
Partnership are located at Two World Trade Center, 62nd
Floor, New York, NY 10048.
Item 3. LEGAL PROCEEDINGS
On September 6, 10, and 20, 1996, and on March 13,
1997, similar purported class actions were filed in the
Superior Court of the State of California, County of Los
Angeles, on behalf of all purchasers of interest in limited
partnership commodity pools sold by DWR. Named defendants
include DWR, Demeter, DWFCM, MSDWD (all such parties
referred to hereafter as the "Dean Witter Parties"), the
Partnership, certain other limited partnership commodity
pools of which Demeter is the general partner, and certain
trading advisors to those pools. On June 16, 1997, the
plaintiffs in the above actions filed a consolidated amended
complaint, alleging, among other things, that the defendants
committed fraud, deceit, negligent misrepresentation,
various violations of the California Corporations Code,
intentional and negligent breach of fiduciary duty,
fraudulent and unfair business practices, unjust enrichment,
and conversion in the sale and operation of the various
limited partnerships commodity pools.
Similar purported class actions were also filed on
September 18 and 20, 1996, in the Supreme Court of the State
of New York, New York County, and on November 14, 1996 in
the Superior Court of the State of Delaware, New Castle
County, against the Dean Witter Parties and certain trading
advisors on behalf of all purchasers of interests in various
limited partnership commodity pools, including the Partnership
sold by DWR. A consolidated and amended complaint in the
action pending in the Supreme Court of the State of New York
was filed on August 13, 1997, alleging that the defendants
committed fraud, breach of fiduciary duty, and negligent
misrepresentation in the sale and operation of the various
limited partnership commodity pools. On December 16, 1997,
upon motion of the plaintiffs, the action pending in the
Superior Court of the State of Delaware was voluntarily
dismissed without prejudice. The complaints seek
unspecified amounts of compensatory and punitive damages and
other relief. It is possible that additional similar
actions may be filed and that, in the course of these
actions, other parties could be added as defendants. The
Dean Witter Parties believe that they and the Partnership
have strong defenses to, and they will vigorously contest,
the actions. Although the ultimate outcome of legal
proceedings cannot be predicted with certainty, it is the
opinion of management of the Dean Witter Parties that the
resolution of the actions will not have a
material adverse effect on the financial condition or the
results of operations of any of the Dean Witter Parties or
the Partnership.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND
RELATED
SECURITY HOLDER MATTERS
There is no established public trading market for the
Units of Limited Partnership Interest in the Partnership.
The number of holders of Units at December 31, 1997 was
approximately 5,802. No distributions have been made by the
Partnership since it commenced trading operations on
November 1, 1990. Demeter has sole discretion to decide
what distri-butions, if any, shall be made to investors in
the Partnership. No determination has yet been made as to
future distributions.
Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
1997 1996 1995 1994
1993
Total Revenues
(including interest) 16,870,923 4,036,681 10,909,439 19,353,083
31,035,876
Net Income (Loss) 8,729,367 (5,408,768) (3,937,613) 5,193,417
10,476,583
Net Income (Loss)
Per Unit (Limited
& General Partners) 185.19 (74.86) (66.26) 91.72
109.66
Total Assets 73,774,146 81,320,352 102,412,462 120,022,299
143,073,846
Total Limited
Partners' Capital 70,564,013 78,452,540 98,628,520 115,956,558
138,530,684
Net Asset Value Per
Unit of Limited
Partnership Interest 1,692.08 1,506.89 1,581.75 1,648.01
1,556.29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership's assets are on deposit in
separate commodity interest trading accounts with DWR and
Carr, the commodity brokers, and are used by the Partnership
as margin to engage in commodity futures, forward contracts
and other commodity interest trading. DWR and Carr hold
such assets in either designated depositories or in
securities approved by the Commodity Futures Trading
Commission ("CFTC") for investment of customer funds. The
Partnership's assets held by DWR and Carr may be used as
margin solely for the Partnership's trading. Since the
Partnership's sole purpose is to trade in commodity futures
contracts, and other commodity interests, it is expected
that the Partnership will continue to own such liquid assets
for margin purposes.
The Partnership's investment in commodity futures
contracts, forward contracts and other commodity interests
may be illiquid. If the price for a futures contract for a
particular commodity has increased or decreased by an amount
equal to the "daily limit", positions in the commodity can
neither be taken nor liquidated unless traders are willing
to effect trades at or within the limit. Commodity futures
prices have occasionally moved the daily limit for several
consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly
liquidating its commodity futures positions.
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.
Market Risk. The Partnership trades futures, options
and forward contracts in interest rates, stock indices,
commodities and currencies. In entering into these
contracts there exists a risk to the Partnership (market
risk) that such contracts may be significantly influenced by
market conditions, such as interest rate volatility,
resulting in such contracts being less valuable. If the
markets should move against all of the futures interest
positions held by the Partnership at the same time, and if
the Trading Advisor were unable to offset futures interest
positions of the Partnership, the Partnership could lose all
of its assets and the Limited Partners would realize a 100%
loss. The Partnership has established Trading Policies,
which include standards for liquidity and leverage which
help control market risk. Both the Trading Advisor and
Demeter monitor the Partnership's trading activities on a
daily basis to ensure compliance with the Trading Policies.
Demeter may
(under terms of the Management Agreement) override the
trading instructions of the Trading Advisor to the extent
necessary to comply with the Partnership's Trading Policies.
Credit Risk. In addition to market risk, in entering
into futures, options and forward contracts there is a
credit risk to the Partnership that the counterparty on a
contract will not be able to meet its obligations to the
Partnership. The ultimate counterparty of the Partnership
for futures contracts traded in the United States and most
foreign exchanges on which the Partnership trades is the
clearinghouse associated with such exchange. In general, a
clearinghouse is backed by the membership of the exchange
and will act in the event of non-performance by one of its
members or one of its member's customers, and, as such,
should significantly reduce this credit risk. For example,
a clearinghouse may cover a default by (i) drawing upon a
defaulting member's mandatory contributions and/or non-
defaulting members' contributions to a clearinghouse
guarantee fund, established lines or letters of credit with
banks, and/or the clearinghouse's surplus capital and other
available assets of the exchange and clearinghouse, or (ii)
assessing its members. In cases where the Partnership
trades on a foreign exchange where the clearinghouse is not
funded or guaranteed by the membership or where the exchange
is a "principals' market" in which performance is the
responsibility of the exchange member and not the
exchange or a clearinghouse, or when the Partnership enters
into off-exchange contracts with a counterparty, the sole
recourse of the Partnership will be the clearinghouse, the
exchange member or the off-exchange contract counterparty,
as the case may be.
There can be no assurance that a clearinghouse,
exchange or other exchange member will meet its obligations
to the Partnership, and the Partnership is not indemnified
against a default by such parties from Demeter or MSDWD or
DWR. Further, the law is unclear as to whether a commodity
broker has any obligation to protect its customers from loss
in the event of an exchange, clearinghouse or other exchange
member default on trades effected for the broker's
customers; any such obligation on the part of the broker
appears even less clear where the default occurs in a non-US
jurisdiction.
Demeter deals with the credit risks in all
partnerships for which it serves as General Partner in
several ways. First, it monitors each partnership's credit
exposure to each exchange on a daily basis, calculating not
only the amount of margin required for it but also the
amount of its unrealized gains at each exchange, if any. The
Commodity Brokers inform each partnership, as with all their
customers, of its net margin requirements for all its
existing open positions, but do not break that net figure
down, exchange by exchange. Demeter, however, has installed
a system which permits it to monitor each partnership's
potential margin liability, exchange by exchange. Demeter
is then able to monitor the individual partnership's
potential net credit exposure to each exchange by adding the
unrealized trading gains on that exchange, if any, to the
partnership's margin liability thereon.
Second, as discussed earlier, each partnership's
trading policies limit the amount of partnership Net Assets
that can be committed at any given time to futures contracts
and require, in addition, a certain minimum amount of
diversification in the partnership's trading, usually over
several different products. One of the aims of such trading
policies has been to reduce the credit exposure of any
partnership to any single exchange and, historically, such
partnership exposure has typically amounted to only a small
percentage of its total Net Assets. On those relatively few
occasions where a partnership's credit exposure has climbed
above that level, Demeter has dealt with the situations on a
case by case basis, carefully weighing whether the increased
level of credit exposure remained appropriate. Demeter
expects to continue to deal with such situations in a
similar manner in the future.
Third, Demeter has secured, with respect to Carr acting
as the clearing broker for the partnerships, a guarantee by
Credit Agricole Indosuez, Carr's parent, of the payment of
the "net liquidating value" of the transactions (futures,
options and forward contracts) in each
partnership's account. As of December 31, 1997, Credit
Agricole Indosuez' total capital was over $3.25 billion and
it is currently rated AA2 by Moody's.
With respect to forward contract trading, the
partnerships trade with only those counterparties which
Demeter, together with DWR, have determined to be
creditworthy. At the date of this filing, the partnerships
deal only with Carr as their counterparty on forward
contracts. The guarantee by Carr's parent, discussed above,
covers these forward contracts.
See "Financial Instruments" under Notes to Financial
Statements in the Partnership's 1997 Annual Report to
Partners, incorporated by reference in this Form 10-K.
Capital Resources. The Partnership does not have, nor
does it expect to have, any capital assets. Redemptions of
additional Units of Limited Partnership Interest in the
future will affect the amount of funds available for
investments in subsequent periods. As redemptions are at
the discretion of Limited Partners, it is not possible to
estimate the amount and therefore, the impact of future
redemptions.
Results of Operations. As of December 1997, the
Partnership's total capital was $72,259,628, a decrease of
$7,702,955 from the Partnership's total capital of
$79,962,583 at December 31, 1996. For the
year ended December 31, 1997, the Partnership generated net
income of $8,729,367 and total redemptions aggregated
$16,432,322.
For the year ended December 31, 1997, the Partnership's
total trading revenues including interest income were
$16,870,923. The Partnership's total expenses for the year
were $8,141,556, resulting in net income of $8,729,367. The
value of an individual unit in the Partnership increased
from $1,506.89 at December 31, 1996 to $1,692.08 at December
31, 1997.
As of December 31, 1996, the Partnership's total
capital was $79,962,583, a decrease of $20,250,999 from the
Partnership's total capital of $100,213,582 at December 31,
1995. For the year ended December 31, 1996, the Partnership
incurred a net loss of $5,408,768 and total redemptions
aggregated $14,842,231.
For the year ended December 31, 1996, the Partnership's
total trading revenues including interest income were
$4,036,681. The Partnership's total expenses for the year
were $9,445,449, resulting in a net loss of $5,408,768. The
value of an individual unit in the Partnership decreased
from $1,581.75 at December 31, 1995 to $1,506.89 at December
31, 1996.
As of December 31, 1995, the Partnership's total
capital was $100,213,582, a decrease of $17,394,433 from the
Partnership's total
capital of $117,608,015 at December 31, 1994. For the year
ended December 31, 1995, the Partnership incurred a net loss
of $3,937,613 and total redemptions aggregated $13,456,820.
For the year ended December 31, 1995, the Partnership's
total trading revenues including interest income were
$10,909,439. The Partnership's total expenses for the year
were $14,847,052, resulting in a net loss of $3,937,613.
The value of an individual unit in the Partnership decreased
from $1,648.01 at December 31, 1994 to $1,581.75 at December
31, 1995.
The Partnership's overall performance record represents
varied results of trading in different commodity markets.
For a further description of trading results, refer to the
letter to the Limited Partners in the accompanying 1997
Annual Report to Partners, incorporated by reference in this
Form 10-K. The Partnership's gains and losses are allocated
among its Limited Partners for income tax purposes.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item appears in the
attached 1997 Annual Report to Partners and is incorporated
by reference in this Annual Report on Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS OF THE REGISTRANT
General Partner
Demeter, a Delaware corporation, was formed on August
18, 1977 to act as a commodity pool operator and is
registered with the CFTC as a commodity pool operator and
currently is a member of the National Futures Association
("NFA") in such capacity. Demeter is wholly-owned by MSDWD
and is an affiliate of DWR and DWFCM. DWD, DWR and Demeter
may each be deemed to be "promoters" and/or a "parent" of
the Partnership within the meaning of the federal securities
laws.
On July 21, 1997, MSDWD, the sole shareholder of
Demeter, appointed a new Board of Directors consisting of
Richard M. DeMartini, Mark J. Hawley, Lawrence Volpe, Joseph
G. Siniscalchi, Edward C. Oelsner III, and Robert E. Murray.
Dean Witter Reynolds Inc.
DWR is a financial services company which provides to
its individual, corporate and institutional clients services
as a broker in securities and commodity interest contracts,
a dealer in corporate, municipal and government securities,
an investment adviser and an agent in the sale of life
insurance and various other products and services. DWR is a
member firm of the New York Stock Exchange, the American
Stock
Exchange, the Chicago Board Options Exchange, and other
major securities exchanges.
DWR is registered with the CFTC as a futures commission
merchant and is a member of the NFA in such capacity. As of
December 31, 1997, DWR is servicing its clients through a
network of approximately 401 branch offices with
approximately 10,155 account executives servicing individual
and institutional client accounts.
Directors and Officers of the General Partner
The directors and officers of Demeter as of December
31, 1997 are as follows:
Richard M. DeMartini, age 45, is the Chairman of the
Board and a Director of Demeter. Mr. DeMartini is also
Chairman of the Board and a Director of DWFCM. Mr. DeMartini is
president and chief operating officer of MSDWD's Individual
Asset Management Group. He was named to this position in
May of 1997 and is responsible for Dean Witter InterCapital,
Van Kampen American Capital, insurance services, managed
futures, unit trust, investment consulting services, Dean
Witter Realty, and NOVUS Financial Corporation. Mr.
DeMartini is a member of the MSDWD management committee, a
director of the InterCapital funds, a trustee of the TCW/DW
funds and a trustee of the Van Kampen American Capital and
Morgan
Stanley retail funds. Mr. DeMartini has been with Dean
Witter his
entire career, joining the firm in 1975 as an account
executive. He served as a branch manager, regional director
and national sales
director, before being appointed president and chief
operating officer of the Dean Witter Consumer Markets. In
1988 he was named president and chief operating officer of
Sears' Consumer Banking Division and in January 1989 he
became president and chief operating officer of Dean Witter
Capital. Mr. DeMartini has served as chairman of the board
of the Nasdaq Stock Market, Inc. and vice chairman of the
board of the National Association of Securities Dealers,
Inc. A native of San Francisco, Mr. DeMartini holds a
bachelor's degree in marketing from San Diego State
University.
Mark J. Hawley, age 54, is President and a Director of
Demeter. Mr. Hawley is also President and a Director of
DWFCM. Mr. Hawley joined DWR in February 1989 as Senior
Vice President and is currently the Executive Vice President
and Director of DWR's Managed Futures Department. From 1978
to 1989, Mr. Hawley was a member of the senior management
team at Heinold Asset Management, Inc., a CPO, and was
responsible for a variety of projects in public futures
funds. From 1972 to 1978, Mr. Hawley was a Vice President
in charge of institutional block trading for the Mid-West at
Kuhn Loeb & Company.
Lawrence Volpe, age 50, is a Director of Demeter and
DWFCM. Mr. Volpe joined DWR as a Senior Vice President and
Controller in September 1983, and currently holds those
positions. From July 1979 to September 1983, he was
associated with E.F. Hutton & Company Inc. and prior to his
- 20 -
departure, held the positions of First Vice President and
Assistant Controller. From 1970 to July 1979, he was
associated with Arthur Anderson & Co. and prior to his
departure served as audit manager in the financial services
division.
Joseph G. Siniscalchi, age 52, is a Director of
Demeter. Mr. Siniscalchi joined DWR in July 1984 as a First
Vice President, Director of General Accounting and served as
a Senior Vice President and Controller for DWR's Securities
division through 1997. He is currently Executive Vice
President and Director of the Operations Division of DWR.
From February 1980 to July 1984, Mr. Siniscalchi was
Director of Internal Audit at Lehman Brothers Kuhn Loeb,
Inc.
Edward C. Oelsner, III, age 55, is a Director of
Demeter. Mr. Oelsner is currently an Executive Vice
President and head of the Product Development Group at Dean
Witter InterCapital Inc., an affiliate of DWR. Mr. Oelsner
joined DWR in 1981 as a Managing Director in DWR's
Investment Banking Department specializing in coverage of
regulated industries and, subsequently, served as head of
the DWR Retail Products
Group. Prior to joining DWR, Mr. Oelsner held positions at
The First Boston Corporation as a member of the Research and
Investment Banking Departments from 1967 to 1981. Mr.
Oelsner received his M.B.A. in
Finance from the Columbia University Graduate School of
Business in 1966 and an A.B. in Politics from Princeton
University in 1964.
Robert E. Murray, age 37, is a Director of Demeter.
Mr. Murray is also a Director of DWFCM. Mr. Murray is
currently a Senior Vice President of DWR's Managed Futures
Department and is the Senior Administrative Officer of
DWFCM. Mr. Murray began his career at DWR in 1984 and is
currently the Director of Product Development for the
Managed Futures Department. He is responsible for the
development and maintenance of the proprietary Fund
Management System utilized by DWFCM and Demeter in
organizing information and producing reports for monitoring
clients' accounts. Mr. Murray currently serves as a
Director of the Managed Funds Association. Mr. Murray
graduated from Geneseo State University in May 1983 with a
B.A. degree in Finance.
Patti L. Behnke, age 37, is Vice President and Chief
Financial Officer of Demeter. Ms. Behnke joined DWR in
April 1991 as Assistant Vice President of Financial
Reporting and is currently a First Vice President and
Director of Financial Reporting and Managed Futures
Accounting in the Individual Asset Management Group. Prior
to joining
DWR, Ms. Behnke held positions of increasing responsibility
at L.F. Rothschild & Co. and Carteret Savings Bank. Ms.
Behnke began her career
at Arthur Anderson & Co., where she was employed in the
audit division from 1982-1986. She is a member of the AICPA
and the New York State Society of Certified Public
Accountants.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive
officers. As a limited partnership, the business of the
Partnership is managed by Demeter which is responsible for
the administration of the business affairs of the
Partnership but receives no compensation for such services.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT (a) Security Ownership of Certain
Beneficial Owners - As of December 31, 1997 there were no
persons known to be beneficial owners of more than 5 percent
of the Units of Limited Partnership Interest in the
Partnership.
(b) Security Ownership of Management - At December 31,
1997, Demeter owned 1,002.091 Units of General Partnership
Interest representing a 2.35 percent interest in the
Partnership.
(c) Changes in Control - None
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Refer to Note 2 - "Related Party Transactions" of
"Notes to Financial Statements", in the accompanying 1997
Annual Report to Partners, incorporated by reference in this
Form 10-K. In its capacity as the Partnership's retail
commodity broker, DWR received commodity brokerage
commissions (paid and accrued by the Partnership) of
$5,267,971 for the year ended December 31, 1997. In its
capacity as the Partnership's trading manager, DWFCM
received management fees of $2,314,199 for the year ended
December 31, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
The following financial statements and report of
independent public accountants, all appearing in the
accompanying 1997 Annual Report to Partners, are
incorporated by reference in this Form 10-K:
- Report of Deloitte & Touche LLP,
independent auditors, for the years ended
December 31, 1997, 1996 and 1995.
- Statements of Financial Condition as of
December 31, 1997 and 1996.
- Statements of Operations, Changes in
Partners' Capital, and Cash Flows for the
years ended December 31, 1997, 1996 and 1995.
- Notes to Financial Statements.
With the exception of the aforementioned information
and the information incorporated in Items 7, 8 and 13,
the 1997 Annual Report to Partners is not deemed to be
filed with this report.
2. Listing of Financial Statement Schedules
No financial statement schedules are required to
be filed with this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Partnership during the last quarter of the period
covered by this report.
(c) Exhibits
Refer to Exhibit Index on Page E-1.
SIGNATURES
Pursuant to the requirement of Sections 13 or 15(d) 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
March 24, 1998 BY: /s/ Mark J. Hawley
Mark J. Hawley, Director and
President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Demeter Management Corporation.
BY: /s/ Mark J. Hawley March 24,
1998
Mark J. Hawley, Director and
President
/s/ Richard M. DeMartini March 24,
1998
Richard M. DeMartini, Director
and Chairman of the Board
/s/ Lawrence Volpe March 24,
1998
Lawrence Volpe, Director
/s/ Joseph G. Siniscalchi March 24,
1998
Joseph G. Siniscalchi, Director
/s/ Edward C. Oelsner III March 24,
1998
Edward C. Oelsner III, Director
/s/ Robert E. Murray March 24,
1998
Robert E. Murray, Director
/s/ Patti L. Behnke March 24,
1998
Patti L. Behnke, Chief Financial
Officer and Principal Accounting
Officer
EXHIBIT INDEX
ITEM
METHOD OF FILING
-3. Limited Partnership Agreement of
the Partnership, dated as of
July 12, 1990. (1)
- -3. Form of
Amendment No. 1 to the
Limited Partnership Agreement
of the Partnership. (2)
- -10. Management
Agreement among the
Partnership, Demeter Management
Corporation and Dean Witter Futures (3)
& Currency Management Inc. dated
as of July 12, 1990.
- -10. Form of Amendment No. 1 to the
Management Agreement. (4)
- -10. Customer Agreement Between the
Partnership and Dean Witter
Reynolds, Inc., dated as of (5)
July 12, 1990.
- -10. Form of Amendment No. 1 to the
Customer Agreement. (6)
- -13. December 31, 1997 Annual Report to Limited Partners. (7)
(1)
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.
(2)
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.
(3)
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.
(4)
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.
(5)
Incorporated by reference to Exhibit 10.01 of the
Partnership's Registration Statement on Form S-1. File N0.
33-34989, filed on May 21, 1990.
(6)
Incorporated by reference to Exhibit 10.01(a) of the
Partnership's Registration Statement on Form S-1, File No.
33-47797, filed on May 11, 1992.
(7) Filed
herewith.
Diversified
Futures
Fund III
December 31, 1997
Annual Report
[LOGO OF DEAN WITTER APPEARS HERE]
DEAN WITTER
Two World Trade Center 62nd Floor
New York, NY 10048 Telephone (212) 392-8899
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
ANNUAL REPORT
1997
Dear Limited Partner:
This marks the eighth annual report for the Dean Witter Diversified Futures
Fund III L.P. (the "Fund"). The Fund began the year at a Net Asset Value of
$1,506.89 and finished 1997 at $1,692.08, reflecting a gain of 12.2%. The Fund
has increased by 69.2% since it began trading in November 1990 (a compound
annualized return of 7.6%).
Gains were recorded during January and February as a result of a strengthening
in the value of the U.S. dollar versus the Japanese yen and most major European
currencies. Additional gains were recorded during this two month period from
long coffee futures positions as prices increased over concerns regarding the
weather and labor conditions in South America. Smaller gains were recorded from
short positions in the energy markets as oil and gas prices moved lower.
Performance during March resulted in a portion of previous months' profits
being given back as many of the markets that produced gains in January and
February experienced trend reversals and choppy price movement. The most
significant losses were recorded in the currency markets as the value of most
European currencies reversed higher versus the U.S. dollar. Additional losses
were recorded in the financial futures and most domestic commodities markets as
prices in these markets moved in a choppy pattern.
Losses were experienced during April as the difficult trading environment that
began in March continued. The most significant losses were recorded in the
financial futures markets as domestic bond prices rallied
higher late in the month after showing signs of trending lower previously.
Small losses were recorded during May as profits in soft commodities and
financial futures were more than offset by losses in the energy and currency
markets. During June, losses were recorded from long copper futures positions
as prices moved lower late in the month. Smaller losses were recorded from
trading in soft commodities and energies. A portion of these losses was offset
by gains from long global interest rate and stock index futures positions as
prices in these markets moved higher.
During July, profits were recorded from long positions in global interest rate
futures as U.S., Australian, European and Japanese interest rate futures prices
trended higher. Additional gains were recorded from short European currency
positions as the U.S. dollar again strengthened relative to the German mark. A
sharp trend reversal in global interest rate futures prices during August
resulted in a giveback of a portion of July's profits. Additional losses were
recorded in the currency markets as the value of most European currencies
increased relative to the U.S. dollar after moving lower previously. A strong
upward move in international interest rate futures prices during September
resulted in gains for the Fund's long positions. Smaller gains were recorded
from long natural gas futures positions as prices in this market also
increased.
A sharp trend reversal in international interest rate futures prices during
October resulted in a give-back of a portion of September's profits. Additional
losses were recorded as a result of short-term volatility in domestic bond and
stock index futures throughout a majority of the month. Trading gains recorded
in the currency and agricultural markets offset a small portion of the overall
losses for the month. During November and December, profits were recorded in
the currency markets from short Japanese yen positions as the value of the
yen decreased relative to the U.S. dollar and other world currencies amid
concerns of the stability of the Asian economy. Additional profits were
recorded from short gold futures positions as gold prices declined to their
lowest level in over twelve years.
1997 was a profitable year for the Fund as profits were recorded from sustained
price movements in the currency markets during January and February and then
again in November and December from short Japanese yen positions as the value
of the U.S. dollar increased versus the yen. Additional gains were also
recorded from long global interest rate futures positions during June and July.
Although many of the profitable periods with long price trends were followed by
trend reversals and short-term volatile price movement, Dean Witter Futures &
Currency Management, Inc.'s ("DWFCM's") intermediate to long-term trend-
following trading methodology was able to retain profits. Looking ahead, we
remain confident in DWFCM's time tested methodology and in its ability to
profit over long-term periods.
Should you have any questions concerning this report, please feel free to
contact Demeter Management Corporation at Two World Trade Center, 62nd Floor,
New York, NY 10048 or your Dean Witter Account Executive.
I hereby affirm, that to the best of my knowledge and belief, the information
contained in this report is accurate and complete. Past performance is not a
guarantee of future results.
Sincerely,
/s/ Mark J. Hawley
Mark J. Hawley
President
Demeter Management Corporation
General Partner
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
INDEPENDENT AUDITORS' REPORT
The Limited Partners and the General Partner:
We have audited the accompanying statements of financial condition of Dean
Witter Diversified Futures Fund III L.P. (the "Partnership") as of December 31,
1997 and 1996 and the related statements of operations, changes in partners'
capital, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dean Witter Diversified Futures Fund III
L.P. as of December 31, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 17, 1998
New York, New York
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1997 1996
---------- ----------
$ $
ASSETS
Equity in Commodity futures trading
accounts:
Cash 62,384,530 79,927,495
Net unrealized gain on open contracts 11,155,386 1,118,317
---------- ----------
Total Trading Equity 73,539,916 81,045,812
Interest receivable (DWR) 230,391 274,540
Due from DWR 3,839 --
---------- ----------
Total Assets 73,774,146 81,320,352
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Redemptions payable 1,237,455 938,829
Accrued management fee (DWFCM) 185,798 204,690
Administrative expenses payable 91,265 97,983
Accrued brokerage commissions (DWR) -- 100,576
Accrued transaction fees and costs -- 15,691
---------- ----------
Total Liabilities 1,514,518 1,357,769
---------- ----------
PARTNERS' CAPITAL
Limited Partners (41,702.594 and 52,062.498 Units,
respectively) 70,564,013 78,452,540
General Partner (1,002.091 Units) 1,695,615 1,510,043
---------- ----------
Total Partners' Capital 72,259,628 79,962,583
---------- ----------
Total Liabilities and Partners' Capital 73,774,146 81,320,352
========== ==========
NET ASSET VALUE PER UNIT 1,692.08 1,506.89
========== ==========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS
ENDED
DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
$ $ $
REVENUES
Trading Profit (Loss):
Realized 3,815,795 5,496,387 15,303,022
Net change in unrealized 10,037,069 (4,799,679) (9,312,580)
---------- ---------- ----------
Total Trading Results 13,852,864 696,708 5,990,442
Interest income (DWR) 3,018,059 3,339,973 4,918,997
---------- ---------- ----------
Total Revenues 16,870,923 4,036,681 10,909,439
---------- ---------- ----------
EXPENSES
Brokerage commissions (DWR) 5,267,971 6,272,319 9,754,458
Management fee (DWFCM) 2,314,199 2,579,203 3,412,913
Transaction fees and costs 443,386 509,927 929,298
Administrative expenses 116,000 84,000 26,000
Incentive fee (DWFCM) -- -- 724,383
---------- ---------- ----------
Total Expenses 8,141,556 9,445,449 14,847,052
---------- ---------- ----------
NET INCOME (LOSS) 8,729,367 (5,408,768) (3,937,613)
========== ========== ==========
NET INCOME (LOSS) ALLOCATION:
Limited Partners 8,543,795 (5,333,749) (3,871,218)
General Partner 185,572 (75,019) (66,395)
NET INCOME (LOSS) PER UNIT:
Limited Partners 185.19 (74.86) (66.26)
General Partner 185.19 (74.86) (66.26)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
----------- ----------- --------- -----------
$ $ $
Partners' Capital,
December 31, 1994 71,363.599 115,956,558 1,651,457 117,608,015
Net Loss -- (3,871,218) (66,395) (3,937,613)
Redemptions (8,007.638) (13,456,820) -- (13,456,820)
----------- ----------- --------- -----------
Partners' Capital,
December 31, 1995 63,355.961 98,628,520 1,585,062 100,213,582
Net Loss -- (5,333,749) (75,019) (5,408,768)
Redemptions (10,291.372) (14,842,231) -- (14,842,231)
----------- ----------- --------- -----------
Partners' Capital,
December 31, 1996 53,064.589 78,452,540 1,510,043 79,962,583
Net Income -- 8,543,795 185,572 8,729,367
Redemptions (10,359.904) (16,432,322) -- (16,432,322)
----------- ----------- --------- -----------
Partners' Capital,
December 31, 1997 42,704.685 70,564,013 1,695,615 72,259,628
=========== =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS
ENDED
DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
$ $ $
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) 8,729,367 (5,408,768) (3,937,613)
Noncash item included in
net income (loss):
Net change in unrealized (10,037,069) 4,799,679 9,312,580
(Increase) decrease in operating as-
sets:
Interest receivable (DWR) 44,149 83,024 100,529
Due from DWR (3,839) 160,019 (160,019)
Increase (decrease) in operating
liabilities:
Accrued management fee (DWFCM) (18,892) (52,990) (44,671)
Administrative expenses payable (6,718) (69,620) (11,237)
Accrued brokerage commissions (DWR) (100,576) (260,635) 40,759
Accrued transaction fees and costs (15,691) (19,483) 13,180
----------- ----------- -----------
Net cash provided by (used for) oper-
ating activities (1,409,269) (768,774) 5,313,508
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Increase (decrease) in redemptions
payable 298,626 (438,383) (213,435)
Redemptions of units (16,432,322) (14,842,231) (13,456,820)
----------- ----------- -----------
Net cash used for financing activities (16,133,696) (15,280,614) (13,670,255)
----------- ----------- -----------
Net decrease in cash (17,542,965) (16,049,388) (8,356,747)
Balance at beginning of period 79,927,495 95,976,883 104,333,630
----------- ----------- -----------
Balance at end of period 62,384,530 79,927,495 95,976,883
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Dean Witter Diversified Futures Fund III L.P. (the "Partnership")
is a limited partnership organized to engage in the speculative trading of
commodity futures contracts, commodity options contracts and forward contracts
on foreign currencies. The general partner for the Partnership is Demeter
Management Corporation ("Demeter"). Demeter is a wholly-owned subsidiary of
Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD").
On May 31, 1997, Morgan Stanley Group Inc. was merged with and into Dean
Witter, Discover & Co. ("DWD"). At that time DWD changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co.
Through July 31, 1997, the sole commodity broker for the Partnership's
transactions was Dean Witter Reynolds Inc. ("DWR"), also a subsidiary of MSDWD.
On July 31, 1997, DWR closed the sale of its institutional futures business and
foreign currency trading operations to Carr Futures, Inc. ("Carr"), a
subsidiary of Credit Agricole Indosuez. Following the sale, Carr became the
clearing commodity broker for the Partnership's futures and futures options
trades and the counterparty on the Partnership's foreign currency trades. DWR
will continue to serve as the non-clearing commodity broker for the Partnership
with Carr providing all clearing services for the Partnership's transactions.
Demeter is required to maintain a 1% minimum interest in the equity of the
Partnership and income (losses) are shared by Demeter and the Limited Partners
based upon their proportional ownership interests.
BASIS OF ACCOUNTING--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
REVENUE RECOGNITION--Commodity futures contracts and other commodity interests
are open commitments until settlement date. They are valued at market and the
resulting unrealized gains and losses are reflected in income. Monthly, DWR
pays the Partnership interest income based upon 80% of the average daily Net
Assets for the month at a rate equal to the average yield on 13-Week U.S.
Treasury Bills issued during such month. For purposes of such interest
payments, Net Assets do not include monies due the Partnership on forward
contracts and other commodity interests, but not actually received.
NET INCOME (LOSS) PER UNIT--Net income (loss) per Unit is computed using the
weighted average number of units outstanding during the period.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
EQUITY IN COMMODITY FUTURES TRADING ACCOUNTS--The Partnership's asset "Equity
in Commodity futures trading accounts" consists of cash on deposit at DWR and
Carr to be used as margin for trading and the net asset or liability related to
unrealized gains or losses on open contracts. The asset or liability related to
the unrealized gains or losses on forward contracts is presented as a net
amount in each period due to master netting agreements.
BROKERAGE COMMISSIONS AND RELATED TRANSACTION FEES AND COSTS--The Partnership
accrues brokerage commissions on a half-turn basis at 80% of DWR's published
non-member rates. Transaction fees and costs are accrued on a half-turn basis.
Prior to September 1, 1996, brokerage commissions were capped at 3/4 of 1% per
month of the Partnership's Net Assets as defined in the Limited Partnership
Agreement.
As of September 1, 1996, brokerage commissions and transaction fees chargeable
to the Partnership have been capped at 13/20 of 1% per month of the
Partnership's month-end Net Assets (as defined in the Limited Partnership
Agreement).
OPERATING EXPENSES--The Partnership bears all operating expenses related to its
trading activities, to a maximum of 3/5 of 1% annually of the Partnership's
average month-end Net Assets. These include filing fees, clerical,
administrative, auditing, accounting, mailing, printing and other incidental
operating expenses as permitted by the Limited Partnership Agreement. In
addition, the Partnership incurs a monthly management fee and may incur an
incentive fee. Demeter bears all other operating expenses.
INCOME TAXES--No provision for income taxes has been made in the accompanying
financial statements, as partners are individually responsible for reporting
income or loss based upon their respective share of the Partnership's revenues
and expenses for income tax purposes.
DISTRIBUTIONS--Distributions, other than on redemptions of Units, are made on a
pro-rata basis at the sole discretion of Demeter. No distributions have been
made to date.
REDEMPTIONS--Limited Partners are able to redeem some or all of their Units at
100% of the Net Asset Value per Unit as of the end of any month upon five
business days advance notice by redemption form to Demeter.
DISSOLUTION OF THE PARTNERSHIP--The Partnership will terminate on December 31,
2025 or at an earlier date if certain conditions set forth in the Limited
Partnership Agreement occur.
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. RELATED PARTY TRANSACTIONS
Under its Customer Agreement with DWR, the Partnership pays brokerage
commissions to DWR as described in Note 1. The Partnership's cash is on deposit
with DWR and Carr in commodity trading accounts to meet margin requirements as
needed. DWR pays interest on these funds as described in Note 1.
Demeter, on behalf of the Partnership and itself, has entered into a Management
Agreement with DWFCM to make all trading decisions for the Partnership.
Compensation to DWFCM by the Partnership consists of a management fee and an
incentive fee as follows:
MANAGEMENT FEE--The management fee is accrued daily at the rate of 1/4 of 1%
per month of the Net Assets, as defined in the Management Agreement, at each
month-end.
INCENTIVE FEE--The Partnership will pay a quarterly incentive fee to DWFCM
equal to 15% of the "Trading Profits", as defined in the Management Agreement,
earned by the Partnership as of the end of each calendar quarter. Such
incentive fee is accrued in each month in which "Trading Profits" occur. In
those months in which "Trading Profits" are negative, previous accruals, if
any, during the incentive period will be reduced.
3. FINANCIAL INSTRUMENTS
The Partnership trades futures and forward contracts in interest rates, stock
indices, commodities, currencies, petroleum and precious metals. 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. At December 31, 1997 and 1996, open contracts were:
CONTRACT OR NOTIONAL AMOUNT
---------------------------
1997 1996
------------- -------------
$ $
EXCHANGE-TRADED CONTRACTS
Financial Futures:
Commitments to Purchase 21,796,000 --
Commodity Futures:
Commitments to Purchase 2,964,000 13,206,000
Commitments to Sell 44,840,000 40,027,000
Foreign Futures:
Commitments to Purchase 143,405,000 43,199,000
Commitments to Sell 32,821,000 80,268,000
OFF-EXCHANGE-TRADED FORWARD CURRENCY CONTRACTS
Commitments to Purchase 144,840,000 220,399,000
Commitments to Sell 277,442,000 284,187,000
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A portion of the amounts indicated as off-balance-sheet risk in forward
currency contracts is due to offsetting forward commitments to purchase and to
sell the same currency on the same date in the future. These commitments are
economically offsetting, but are not offset in the forward market until the
settlement date.
The unrealized gains on open contracts are reported as a component of "Equity
in Commodity futures trading accounts" on the Statements of Financial Condition
and totaled $11,155,386 and $1,118,317 at December 31, 1997 and 1996,
respectively.
Of the $11,155,386 net unrealized gain on open contracts at December 31, 1997,
$4,510,208 related to exchange-traded futures contracts and $6,645,178 related
to off-exchange-traded forward currency contracts.
Of the $1,118,317 net unrealized gain on open contracts at December 31, 1996,
$2,867,245 related to exchange-traded futures contracts and $(1,748,928)
related to off-exchange-traded forward currency contracts.
Exchange-traded futures contracts held by the Partnership at December 31, 1997
and 1996 mature through June 1998 and June 1997, respectively. Off-exchange-
traded forward currency contracts held by the Partnership at December 31, 1997
and 1996 mature through April 1998 and February 1997, respectively. The
contract amounts in the above table represent the Partnership's extent of
involvement in the particular class of financial instrument, but not the credit
risk associated with counterparty nonperformance. The credit risk associated
with these instruments is limited to the amounts reflected in the Partnership's
Statements of Financial Condition.
The Partnership also has credit risk because either DWR or Carr acts as the
futures commission merchant or the sole counterparty, 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
and Carr, as the futures commission merchants for the Partnership's exchange
traded-futures contracts, are required pursuant to regulations of the Commodity
Futures Trading Commission 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 on all open futures contracts, which funds totaled $66,894,738
and $82,794,740 at December 31, 1997 and 1996, respectively. With respect to
the Partnership's off-exchange-traded forward currency contracts, there are
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
no daily settlements of variations in value nor is there any requirement that
an amount equal to the net unrealized gain on open forward contracts be
segregated. With respect to those off-exchange-traded forward currency
contracts, the Partnership is at risk to the ability of Carr, the sole
counterparty on all of such contracts, to perform. Carr's parent, Credit
Agricole Indosuez has guaranteed Carr's obligations to the Partnership.
For the years ended December 31, 1997 and 1996, the average fair value of
financial instruments held for trading purposes was as follows:
1997
-----------------------
ASSETS LIABILITIES
----------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 21,847,000 73,460,000
Commodity Futures 29,351,000 34,585,000
Foreign Futures 89,567,000 52,168,000
OFF-EXCHANGE-TRADED
FORWARD CURRENCY CONTRACTS 164,466,000 219,214,000
1996
-----------------------
ASSETS LIABILITIES
----------- -----------
$ $
EXCHANGE-TRADED CONTRACTS:
Financial Futures 105,297,000 55,515,000
Commodity Futures 48,290,000 34,261,000
Foreign Futures 150,041,000 54,933,000
OFF-EXCHANGE-TRADED
FORWARD CURRENCY CONTRACTS 254,647,000 280,645,000
4. LEGAL MATTERS
On September 6, 10, and 20, 1996, and on March 13, 1997, similar purported
class actions were filed in the Superior Court of the State of California,
County of Los Angeles, on behalf of all purchasers of interests in limited
partnership commodity pools sold by DWR. Named defendants include DWR, DWFCM,
Demeter, MSDWD (all such parties referred to hereafter as the "Dean Witter
Parties"), the Partnership, certain other limited partnership commodity pools
of which Demeter is the general partner, and certain trading advisors to those
pools. On June 16, 1997, the plaintiffs in the above actions filed a
consolidated amended complaint, alleging, among other things, that the
defendants committed fraud, deceit, negligent misrepresentation, various
violations of the California Corporations Code, intentional and negligent
breach of fiduciary duty, fraudulent and unfair business practices, unjust
enrichment, and conversion in the sale and operation of the various limited
partnerships commodity pools. Similar purported class actions were also filed
on
DEAN WITTER DIVERSIFIED FUTURES FUND III L.P.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
September 18 and 20, 1996, in the Supreme Court of the State of New York, New
York County, and on November 14, 1996 in the Superior Court of the State of
Delaware, New Castle County, against the Dean Witter Parties and certain
trading advisors on behalf of all purchasers of interests in various limited
partnership commodity pools, including the Partnership, sold by DWR. A
consolidated and amended complaint in the action pending in the Supreme Court
of the State of New York was filed on August 13, 1997, alleging that the
defendants committed fraud, breach of fiduciary duty, and negligent
misrepresentation in the sale and operation of the various limited partnership
commodity pools. On December 16, 1997, upon motion of the plaintiffs, the
action pending in the Superior Court of the State of Delaware was voluntarily
dismissed without prejudice. The complaints seek unspecified amounts of
compensatory and punitive damages and other relief. It is possible that
additional similar actions may be filed and that, in the course of these
actions, other parties could be added as defendants. The Dean Witter Parties
believe that they and the Partnership have strong defenses to, and they will
vigorously contest, the actions. Although the ultimate outcome of legal
proceedings cannot be predicted with certainty, it is the opinion of management
of the Dean Witter Parties that the resolution of the actions will not have a
material adverse effect on the financial condition or the results of operations
of any of the Dean Witter Parties or the Partnership.
DEAN WITTER REYNOLDS INC.
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