<PAGE> 1
HIGH INCOME ADVANTAGE TRUST III Two World Trade Center, New York, New York
10048
LETTER TO THE SHAREHOLDERS January 31, 1997
DEAR SHAREHOLDER:
For the fifth time in the last six years, the high-yield market posted strong
returns and outperformed most of the other fixed-income markets. With a
rebounding economy and strong corporate earnings, the market was able to offset
what was for most of the year a weak fixed-income environment.
A year ago, investors were anticipating a recession due to concern over a
then-weakening economy. U.S. Treasury yields were lower than today's levels,
while yields in the high-yield market were higher. As the year played out, we
saw the economy bounce back, corporate earnings hold up, the equity markets
reach all time highs and recession fears ease. The result was a somewhat
volatile U.S. Treasury market, while the high-yield market held up well given
the stronger-than-expected economy. Although yield spreads narrowed during the
year, many B-rated issues still provide an attractive yield advantage over U.S.
Treasuries (nearly 400 basis points) and trade at discounts to par.
PERFORMANCE AND PORTFOLIO STRATEGY
Against this backdrop, High Income Advantage Trust III produced a total return
of 16.03 percent for the twelve-month period ended January 31, 1997, based on
its closing market price on the New York Stock Exchange (NYSE) of $7.00 per
share. Based on its net asset value (NAV) on the last day of the period, the
Trust's total return for the same period was 7.33 percent. Over the past twelve
months, the Trust continued to distribute regular income dividends at a rate of
$0.06 per share per month. For the full fiscal year, the Trust's distributions
totaled $0.79 per share, including an extra income dividend of $0.07 per share
paid on December 20, 1996. On January 31, 1997, the Trust's net assets exceeded
$78.7 million.
As the economy continued to expand over the past few years, we have tended to
concentrate on B-rated issues. In a growing economy, one can find undervalued,
"upgrade" candidates in this sector of the market that
<PAGE> 2
HIGH INCOME ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS January 31, 1997, continued
provide attractive yields as well as appreciation potential. As such, we
continue to feel that many of these issues are very attractive long-term
investments. However, given a potentially slowing economy down the road, we have
begun to take some defensive steps in the portfolio. During the second half of
1996, we upgraded the portfolio by increasing our allocation to the
higher-quality end of the market (BB-rated issues or higher) from 10 percent to
20 percent. We also sold many of our heavy cyclical positions and are now
focused mainly on the more predictable recession-resistant growth sectors. In
certain of these sectors, such as media and telecommunications, we expect to see
continued consolidation, which should bode well for most industry participants.
LOOKING AHEAD
Overall, we continue our focus on discounted B-rated investments yielding 10
percent or higher. However, while we are not expecting a recession in 1997, we
have begun to take a more defensive approach in case of any further economic
slowing down the road.
We would like to remind you that the Trustees have approved a procedure whereby
the Trust, when appropriate, may repurchase shares in the open market or in
privately negotiated transactions at a price not above market value or net asset
value, whichever is lower at the time of purchase.
We thank you for your continued support of High Income Advantage Trust III and
look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 3
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS January 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (90.5%)
Aerospace (1.5%)
$ 1,250 Sabreliner Corp. (Series B).......... 12.50% 04/15/03 $ 1,218,750
------------
Automotive (5.0%)
750 APS, Inc............................. 11.875 01/15/06 796,875
1,650 Envirotest Systems, Inc.............. 9.125 03/15/01 1,559,250
1,500 Toyota Motor Credit Corp............. 15.00 09/26/97 1,587,420
------------
3,943,545
------------
Broadcast Media (3.4%)
750 Adams Outdoor Advertising L.P. ...... 10.75 03/15/06 802,500
1,000 Paxson Communications Corp........... 11.625 10/01/02 1,052,500
750 Spanish Broadcasting System, Inc. ... 7.50 06/15/02 787,500
------------
2,642,500
------------
Business Services (4.8%)
1,612 Anacomp, Inc. ....................... 13.00+ 06/04/02 1,676,610
2,000 Xerox Credit Corp. .................. 15.00 06/10/97 2,064,040
------------
3,740,650
------------
Cable & Telecommunications (15.8%)
1,098 Adelphia Communications Corp. (Series
B).................................. 9.50+ 02/15/04 974,380
800 American Communications Services,
Inc. ............................... 13.00++ 11/01/05 496,000
800 American Communications Services,
Inc. ............................... 12.75++ 04/01/06 464,000
2,000 AT&T Capital Corp. .................. 15.00 05/05/97 2,046,660
750 Cablevision Systems Corp. ........... 9.875 04/01/23 729,375
750 Charter Communication South East L.P.
(Series B).......................... 11.25 03/15/06 795,000
1,591 Falcon Holdings Group L.P. (Series
B).................................. 11.00+ 09/15/03 1,479,862
750 Frontiervision, Inc. ................ 11.00 10/15/06 778,125
1,500 Hyperion Telecommunication, Inc.
(Series B).......................... 13.00++ 04/15/03 870,000
7,600 In-Flight Phone Corp. (Series B)
(c)................................. 14.00++ 05/15/02 1,064,000
800 IXC Communications, Inc. (Series
B).................................. 12.50 10/01/05 896,000
1,000 Peoples Telephone Co., Inc. ......... 12.25 07/15/02 1,055,000
750 Rifkin Acquisition Partners L.P. .... 11.125 01/15/06 791,250
------------
12,439,652
------------
Computer Equipment (2.5%)
750 Unisys Corp. ........................ 15.00 07/01/97 781,875
1,000 Unisys Corp. (Conv.)................. 8.25 03/15/06 1,212,610
------------
1,994,485
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 4
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS January 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Products (1.3%)
$ 1,000 J.B. Williams Holdings, Inc. ........ 12.00% 03/01/04 $ 1,035,000
------------
Containers (2.0%)
750 Mail - Well Corp. ................... 10.50 02/15/04 768,750
750 Packaging Resources, Inc. ........... 11.625 05/01/03 795,000
------------
1,563,750
------------
Electrical & Alarm Systems (2.1%)
1,750 Mosler, Inc. ........................ 11.00 04/15/03 1,680,000
------------
Entertainment/Gaming & Lodging (9.6%)
750 AMF Group Inc. (Series B)............ 10.875 03/15/06 810,000
1,500 Lady Luck Gaming Finance Corp. ...... 11.875 03/01/01 1,481,250
2,500 Motels of America, Inc. (Series B)... 12.00 04/15/04 2,118,750
800 Players International, Inc. ......... 10.875 04/15/05 810,000
750 Plitt Theaters, Inc. (Canada)........ 10.875 06/15/04 762,188
800 Station Casinos, Inc. ............... 9.625 06/01/03 808,000
750 Stuart Entertainment, Inc. - 144A*... 12.50 11/15/04 767,813
------------
7,558,001
------------
Financial (4.1%)
1,500 General Electric Capital Corp. ...... 13.50 01/20/98 1,609,455
1,500 Household Finance Corp. ............. 15.00 09/25/97 1,587,330
------------
3,196,785
------------
Foods & Beverages (7.1%)
1,650 Envirodyne Industries, Inc. ......... 10.25 12/01/01 1,617,000
750 General Mills, Inc. ................. 13.50 01/21/98 804,885
8,000 Specialty Foods Acquisition Corp.
(Series B).......................... 13.00++ 08/15/05 3,200,000
------------
5,621,885
------------
Healthcare (2.8%)
2,000 Unilab Corp. ........................ 11.00 04/01/06 1,380,000
750 Unison Healthcare Corp. - 144A*...... 12.25 11/01/06 800,625
------------
2,180,625
------------
Manufacturing (5.1%)
1,000 Berry Plastics Corp. ................ 12.25 04/15/04 1,110,000
750 Exide Electronics Group, Inc. (Series
B).................................. 11.50 03/15/06 806,250
1,000 International Wire Group, Inc. ...... 11.75 06/01/05 1,067,500
1,000 Uniroyal Technology Corp. ........... 11.75 06/01/03 1,007,500
------------
3,991,250
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS January 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Manufacturing - Diversified (6.9%)
$ 800 Foamex L.P. ......................... 11.875% 10/01/04 $ 866,000
800 Interlake Corp. ..................... 12.125 03/01/02 840,000
750 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 742,500
1,000 Jordan Industries, Inc. ............. 10.375 08/01/03 997,500
2,400 Jordan Industries, Inc. ............. 11.75++ 08/01/05 2,016,000
------------
5,462,000
------------
Oil & Gas (1.1%)
1,000 Empire Gas Corp. .................... 7.00 07/15/04 865,000
------------
Publishing (3.0%)
750 Affiliated Newspapers Investments,
Inc. ............................... 13.25++ 07/01/06 616,875
800 American Media Operations, Inc. ..... 11.625 11/15/04 854,000
875 United States Banknote Corp. ........ 10.375 06/01/02 866,250
------------
2,337,125
------------
Restaurants (6.0%)
4,570 American Restaurant Group Holdings,
Inc. ............................... 14.00++ 12/15/05 2,033,650
750 Carrols Corp. ....................... 11.50 08/15/03 791,250
2,050 Flagstar Corp. ...................... 11.25 11/01/04 850,750
1,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 1,050,000
------------
4,725,650
------------
Retail (1.8%)
4,400 County Seat Stores Co. (b)........... 12.00 10/01/02 1,452,000
------------
Retail - Food Chains (2.0%)
750 Jitney-Jungle Stores................. 12.00 03/01/06 798,750
800 Pathmark Stores, Inc. ............... 9.625 05/01/03 760,000
------------
1,558,750
------------
Textiles (2.6%)
750 Reeves Industries, Inc. ............. 11.00 07/15/02 716,250
1,505 U.S. Leather, Inc. .................. 10.25 07/31/03 1,324,400
------------
2,040,650
------------
TOTAL CORPORATE BONDS (Identified Cost $78,108,731)........... 71,248,053
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS January 31, 1997, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (a) (0.8%)
Entertainment/Gaming & Lodging (0.1%)
2,000 Motels of America, Inc. - 144A*........................... $ 80,000
------------
Foods & Beverages (0.1%)
90,000 Specialty Foods Acquisition Corp. - 144A*................. 90,000
------------
Manufacturing - Diversified (0.2%)
5,000 Thermadyne Holdings Corp. (d)............................. 128,750
------------
Publishing (0.4%)
3,500 Affiliated Newspapers Investments, Inc. (Class B)......... 343,000
------------
Restaurants (0.0%)
4,750 American Restaurant Group Holdings, Inc. - 144A*.......... 4,750
------------
TOTAL COMMON STOCKS
(Identified Cost $563,662)................................ 646,500
------------
PREFERRED STOCKS (2.4%)
Entertainment/Gaming & Lodging (2.4%)
80,000 Fitzgeralds Gaming Corp. (Units)++........................ 1,840,000
------------
Oil & Gas (0.0%)
373,201 TGX Corp. (Series A) (a)(d)............................... 3,732
------------
TOTAL PREFERRED STOCKS
(Identified Cost $4,718,250).............................. 1,843,732
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ---------
<C> <S> <C> <C>
WARRANTS (a) (0.1%)
Aerospace (0.0%)
2,500 Sabreliner Corp. - 144A*...................... 04/15/03 25,000
------------
Cable & Telecommunications (0.0%)
800 Hyperion Telecommunication, Inc. (Series
B) - 144A*................................... 04/01/01 24,055
5,500 In-Flight Phone Corp. - 144A*................. 08/31/02 --
------------
24,055
------------
Containers (0.0%)
2,000 Crown Packaging Holdings, Ltd. - 144A*........ 11/01/03 --
------------
Electronics (0.1%)
750 Exide Electronics Group, Inc. - 144A*......... 03/15/06 35,865
------------
Entertainment/Gaming & Lodging (0.0%)
1,250 Fitzgeralds South Inc. - 144A*................ 03/15/99 --
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS January 31, 1997, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Manufacturing (0.0%)
10,000 Uniroyal Technology Corp...................... 06/01/03 $ 10,000
------------
Oil & Gas (0.0%)
2,760 Empire Gas Corp............................... 07/15/04 13,800
------------
Retail (0.0%)
2,000 County Seat Holdings Co. ..................... 10/15/98 --
------------
TOTAL WARRANTS
(Identified Cost $544,393)................................. 108,720
------------
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- --------- ------------
SHORT-TERM INVESTMENT (4.2%)
REPURCHASE AGREEMENT
$ 3,268 The Bank of New York (dated 01/31/97;
proceeds $3,270,092; collateralized
by $4,775,730 U.S. Treasury Coupon
Strip 5.22% due 11/15/02 valued at
$3,334,035) (Identified Cost
$3,268,662)......................... 5.25% 02/03/97 3,268,662
------------
TOTAL INVESTMENTS
(Identified Cost $87,203,698) (e)...................... 98.0% 77,115,667
OTHER ASSETS IN EXCESS OF LIABILITIES................... 2.0 1,591,233
------ ------------
NET ASSETS............................................ 100.0% $ 78,706,900
====== ============
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
++ Consists of one or more classes of securities traded together as a unit;
generally stocks with attached warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond that will pay interest at the rate shown at a
future specified date.
(a) Non-income producing security.
(b) Non-income producing security; issuer in default.
(c) Non-income producing security; issuer in bankruptcy.
(d) Acquired through exchange offer.
(e) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $3,595,825 and the
aggregate gross unrealized depreciation is $13,683,856, resulting in net
unrealized depreciation of $10,088,031.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1997
ASSETS:
Investments in securities, at value
(identified cost $87,203,698)........................................ $ 77,115,667
Receivable for:
Interest.......................................................... 1,708,258
Investments sold.................................................. 1,011,250
Prepaid expenses and other assets..................................... 5,815
------------
TOTAL ASSETS...................................................... 79,840,990
------------
LIABILITIES:
Payable for:
Investments purchased............................................. 1,000,000
Investment management fee......................................... 57,179
Accrued expenses and other payables................................... 76,911
------------
TOTAL LIABILITIES................................................. 1,134,090
------------
NET ASSETS:
Paid-in-capital....................................................... 121,076,287
Net unrealized depreciation........................................... (10,088,031)
Accumulated undistributed net investment income....................... 716,269
Accumulated net realized loss......................................... (32,997,625)
------------
NET ASSETS........................................................ $ 78,706,900
============
NET ASSET VALUE PER SHARE,
12,876,779 shares outstanding (unlimited shares authorized of $.01
par value)........................................................... $6.11
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended January 31, 1997
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $10,668,067
------------
EXPENSES
Investment management fee.............................................. 610,239
Professional fees...................................................... 50,459
Transfer agent fees and expenses....................................... 43,845
Shareholder reports and notices........................................ 31,776
Registration fees...................................................... 24,372
Custodian fees......................................................... 16,216
Trustees' fees and expenses............................................ 13,213
Other.................................................................. 6,571
------------
TOTAL EXPENSES..................................................... 796,691
------------
NET INVESTMENT INCOME.............................................. 9,871,376
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss...................................................... (5,170,842)
Net change in unrealized depreciation.................................. 1,902,122
------------
NET LOSS........................................................... (3,268,720)
------------
NET INCREASE........................................................... $ 6,602,656
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, JANUARY 31,
1997 1996
------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................... $ 9,871,376 $ 9,613,457
Net realized loss................................... (5,170,842) (2,246,851)
Net change in unrealized depreciation............... 1,902,122 5,416,939
----------- -----------
NET INCREASE.................................... 6,602,656 12,783,545
Dividends from net investment income................ (10,172,655) (9,271,281)
----------- -----------
NET INCREASE (DECREASE)......................... (3,569,999) 3,512,264
NET ASSETS:
Beginning of period................................. 82,276,899 78,764,635
----------- -----------
END OF PERIOD
(Including undistributed net investment income
of $716,269 and $1,017,548, respectively)....... $78,706,900 $82,276,899
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS January 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
High Income Advantage Trust III (the "Trust") is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company. The Trust's primary investment objective is to earn a high
level of current income and, as a secondary objective, capital appreciation, but
only when consistent with its primary objective. The Trust seeks to achieve its
objective by investing primarily in lower-rated fixed income securities. The
Trust was organized as a Massachusetts business trust on November 23, 1988 and
commenced operations on February 28, 1989.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where securities are traded on more than one exchange; the securities are
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Dean Witter InterCapital, Inc. (the "Investment Manager") that
sale or bid prices are not reflective of a security's market value, portfolio
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Trustees; (4)
certain of the Trust's portfolio securities may be valued by an outside pricing
service approved by the Trustees. The pricing service may utilize a matrix
system incorporating security quality, maturity and coupon as the evaluation
model parameters, and/or research and evaluations by its staff, including review
of broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation of the portfolio securities valued by such
pricing service; and (5) short-term debt securities having a maturity date of
more than sixty days at time of purchase are valued on a mark-to-market basis
until sixty days prior to maturity and thereafter at amortized cost based on
their value on the 61st day. Short-term debt securities having a maturity date
of sixty days or less at the time of purchase are valued at amortized cost.
<PAGE> 12
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS January 31, 1997, continued
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily except where collection is not expected.
C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Trust pays the Investment Manager a management fee, calculated weekly and
payable monthly, by applying the following annual rates to the Trust's weekly
net assets: 0.75% to the portion of weekly net assets not exceeding $250
million; 0.60% to the portion of weekly net assets exceeding $250 million but
not exceeding $500 million; 0.50% to the portion of weekly net assets exceeding
$500 million but not exceeding $750 million; 0.40% to the portion of weekly net
assets exceeding $750 million but not exceeding $1 billion; and 0.30% to the
portion of weekly net assets exceeding $1 billion.
Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Manager maintains certain of the Trust's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Trust who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Trust.
<PAGE> 13
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS January 31, 1997, continued
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended January 31, 1997 aggregated
$123,736,602 and $130,704,159, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At January 31, 1997, the Trust had transfer agent fees
and expenses payable of approximately $4,000.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, January 31, 1995, 1996 and 1997........................................ 12,876,779 $128,768 $120,947,519
========== ======== ============
</TABLE>
5. DIVIDENDS
The Trust declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------ --------- ----------------- ------------------
<S> <C> <C> <C>
January 28, 1997 $0.06 February 7, 1997 February 21, 1997
February 25, 1997 $0.06 March 7, 1997 March 21, 1997
</TABLE>
6. FEDERAL INCOME TAX STATUS
At January 31, 1997, the Trust had an approximate net capital loss carryover
which may be used to offset future capital gains to the extent provided by
regulations which will be available through January 31, of the following years:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
- ---------------------------------------------------------------
2000 2002 2003 2004 2005 TOTAL
- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
$9,648 $3,256 $10,665 $4,258 $3,007 $30,834
====== ====== ======= ====== ======
</TABLE>
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital losses of
approximately $2,135,000 during fiscal 1997.
At January 31, 1997, the Trust had temporary book/tax differences primarily
attributable to post-October losses.
<PAGE> 14
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 31
------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 6.39 $ 6.12 $ 7.57 $ 6.70 $ 6.83
------ ------ ------ ------ ------
Net investment income............................................ 0.77 0.75 0.75 0.81 0.91
Net realized and unrealized gain (loss).......................... (0.26) 0.24 (1.43) 0.91 (0.13)
------ ------ ------ ------ ------
Total from investment operations................................. 0.51 0.99 (0.68) 1.72 0.78
------ ------ ------ ------ ------
Less dividends from net investment income........................ (0.79) (0.72) (0.77) (0.85) (0.91)
------ ------ ------ ------ ------
Net asset value, end of period................................... $ 6.11 $ 6.39 $ 6.12 $ 7.57 $ 6.70
====== ====== ====== ====== ======
Market value, end of period...................................... $ 7.00 $ 6.75 $ 6.50 $ 7.75 $ 6.875
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+......................................... 16.03% 15.31% (6.30)% 26.21% 20.77%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................................... 0.98% 1.00% 1.02% 0.99% 1.06%
Net investment income............................................ 12.13% 11.80% 11.04% 11.40% 13.22%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......................... $78,707 $82,277 $78,765 $97,466 $86,305
Portfolio turnover rate.......................................... 161% 78% 82% 231% 118%
</TABLE>
- ---------------------
+ Total investment return is based upon the current market value on the last
day of each period reported. Dividends are assumed to be reinvested at the
prices obtained under the Trust's dividend reinvestment plan. Total
investment return does not reflect brokerage commissions.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 15
HIGH INCOME ADVANTAGE TRUST III
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF HIGH INCOME ADVANTAGE TRUST III
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of High Income Advantage Trust III
(the "Trust") at January 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at January
31, 1997 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
March 7, 1997
<PAGE> 16
TRUSTEES
- -------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- -------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
HIGH
Barry Fink INCOME
Vice President, Secretary and General Counsel ADVANTAGE
TRUST III
Peter M. Avelar
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- -------------------------------------------------
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- -------------------------------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- -------------------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
Annual Report
January 31, 1997
