<PAGE> 1
HIGH INCOME ADVANTAGE TRUST III Two World Trade Center, New York, New York
10048
LETTER TO THE SHAREHOLDERS July 31, 1997
DEAR SHAREHOLDER:
During the six-month period ended July 31, 1997, the high-yield market,
benefiting from a healthy economy, improved credit quality and a relatively
favorable interest-rate environment, posted strong returns relative to other
sectors of the fixed-income market. This sector's overall vitality came despite
some market weakness in March and April following the Federal Reserve Board's
rate hike.
Continued strength in the economy has resulted in solid earnings improvements on
the part of many high-yield companies during the first two quarters of 1997, and
has provided the fuel for the sharp equity market advance experienced over the
past year. Many high-yield companies have taken advantage of higher equity
valuations to raise equity and strengthen their individual balance sheets. The
resulting credit quality improvement has helped keep the high-yield market's
performance strong relative to many of the other fixed-income markets.
PERFORMANCE AND PORTFOLIO STRATEGY
In this context, High Income Advantage Trust III produced a total return of
12.62 percent for the six-month period ended July 31, 1997, based on its closing
market price on the New York Stock Exchange (NYSE) that day of $7.50 per share.
Based on its net asset value (NAV) of $6.28 per share, the Trust's total return
for the same period was 7.69 percent. Over the past six months, the Trust
continued to distribute regular income dividends at a rate of $0.06 per share
per month. For the six months, the Trust's distributions totaled approximately
$0.36 per share. On July 31, 1997, the Trust's net assets exceeded $80 million.
As the economy has continued to expand over the past few years, the Trust has
tended to concentrate on B-rated issues. In a growing economy one can generally
find undervalued, upgrade candidates in this sector of the market that provide
attractive yields as well as appreciation potential. Thus, we continue to feel
that many of these issues are very attractive long-term investments. However,
given the lower market yields available today and the potential for a modest
Federal Reserve rate tightening
<PAGE> 2
HIGH INCOME ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS July 31, 1997, continued
down the road, we have taken some defensive steps for the portfolio. These
include increasing our allocation to the higher-quality end of the market
(BB-rated issues or higher). We feel that these holdings will better protect
shareholders during a potentially nervous market environment as well as provide
the liquidity and portfolio flexibility needed to take advantage of future
opportunities. In addition, the Trust has sold many of its heavy cyclical
positions and is now focused mainly on more-predictable, recession-resistant and
growth sectors of the economy. In some of these sectors, such as media and
telecommunications, we expect to see continued consolidation, which should bode
well for many of the Trust's individual holdings.
LOOKING AHEAD
The one- to two-year outlook for the high-yield market remains favorable, given
our expectations for continued economic growth. We caution, however, that during
this period the possibility exists for another round of investor nervousness as
investors react to potential Federal Reserve Board moves.
We would like to remind you that the Trustees have approved a procedure whereby
the Trust may, when appropriate, 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
RESULTS OF SPECIAL MEETING (unaudited)
* * *
On May 20, 1997, a special meeting of the Trust's shareholders was held for the
purpose of voting on three separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Michael Bozic
For................................................................ 10,908,110
Withheld........................................................... 185,591
Charles A. Fiumefreddo
For................................................................ 10,905,122
Withheld........................................................... 188,579
Wayne E. Hedien
For................................................................ 10,902,563
Withheld........................................................... 191,138
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Edwin J. Garn, John R. Haire, Dr. Manuel H. Johnson, Michael E. Nugent, Philip
J. Purcell and John L. Schroeder.
(2) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE TRUST AND DEAN
WITTER INTERCAPITAL INC., IN CONNECTION WITH THE PROPOSED MERGER WITH MORGAN
STANLEY GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<S> <C>
For................................................................ 10,576,307
Against............................................................ 132,731
Abstain............................................................ 384,663
</TABLE>
(3) RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE TRUST'S
INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For................................................................ 10,749,524
Against............................................................ 58,672
Abstain............................................................ 285,505
</TABLE>
<PAGE> 4
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (87.0%)
Aerospace (1.0%)
$ 750 Sabreliner Corp. (Series B)........... 12.50% 04/15/03 $ 785,625
-----------
Automotive (3.7%)
1,500 APS, Inc. ............................ 11.875 01/15/06 1,451,250
1,500 Toyota Motor Credit Corp. ............ 15.00 09/26/97 1,519,680
-----------
2,970,930
-----------
Broadcast Media (5.7%)
750 Adams Outdoor Advertising L.P. ....... 10.75 03/15/06 821,250
750 Australis Holdings Ltd. (Australia)... 15.00++ 11/01/02 607,500
400 Echostar DBS Corp. - 144A*............ 12.50 07/01/02 405,000
750 Echostar Satellite Broadcasting....... 13.125++ 03/15/04 549,375
1,000 Paxson Communications Corp. .......... 11.625 10/01/02 1,095,000
750 Spanish Broadcasting System, Inc. .... 12.50 06/15/02 847,500
500 TCI Satellite Entertainment,
Inc. - 144A*......................... 12.25++ 02/15/07 302,500
-----------
4,628,125
-----------
Business Services (2.0%)
1,500 Anacomp, Inc. - 144A*................. 10.875 04/01/04 1,575,000
-----------
Cable & Telecommunications (17.4%)
1,000 Adelphia Communications,
Inc. - 144A*......................... 9.875 03/01/07 1,012,500
700 American Communication Services,
Inc. - 144A*......................... 13.75 07/15/07 742,000
1,600 American Communications Services,
Inc. ................................ 12.75++ 04/01/06 952,000
750 Cablevision Systems Corp. ............ 9.875 04/01/23 793,125
750 Charter Communication South East L.P.
(Series B)........................... 11.25 03/15/06 821,250
750 Falcon Holdings Group L.P. (Series
B)................................... 11.00+ 09/15/03 779,759
750 FrontierVision Operating Partners,
L.P. ................................ 11.00 10/15/06 802,500
350 GST Equipment Funding Corp. - 144A*... 13.25 05/01/07 385,000
2,500 Hyperion Telecommunication, Inc.
(Series B)........................... 13.00++ 04/15/03 1,525,000
8,750 In-Flight Phone Corp. (Series B)
(a).................................. 14.00++ 05/15/02 831,250
800 IXC Communications, Inc. (Series B)... 12.50 10/01/05 904,000
750 NextLink Communications, LLC.......... 12.50 04/15/06 840,000
1,100 Paging Network, Inc. ................. 10.125 08/01/07 1,130,250
1,000 Peoples Telephone Co., Inc. .......... 12.25 07/15/02 1,042,500
750 Rifkin Acquisition Partners L.P. ..... 11.125 01/15/06 810,000
750 Shared Technology/Fairchild, Inc. .... 12.25++ 03/01/06 720,000
-----------
14,091,134
-----------
Consumer Products (2.2%)
1,000 J.B. Williams Holdings, Inc. ......... 12.00 03/01/04 1,050,000
750 Renaissance Cosmetics, Inc. .......... 11.75 02/15/04 761,250
-----------
1,811,250
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Containers (2.0%)
$ 750 Mail-Well Corp. ...................... 10.50% 02/15/04 $ 800,625
750 Packaging Resources, Inc. ............ 11.625 05/01/03 772,500
-----------
1,573,125
-----------
Electrical & Alarm Systems (1.8%)
1,750 Mosler, Inc. ......................... 11.00 04/15/03 1,487,500
-----------
Entertainment/Gaming & Lodging (10.9%)
750 AMF Group Inc. (Series B)............. 10.875 03/15/06 832,500
250 Fitzgeralds Gaming Corp. (Units)++.... 13.00 12/31/02 237,500
1,500 Lady Luck Gaming Finance Corp. ....... 11.875 03/01/01 1,488,750
2,750 Motels of America, Inc. (Series B).... 12.00 04/15/04 2,667,500
800 Players International, Inc. .......... 10.875 04/15/05 840,000
750 Plitt Theaters, Inc. (Canada)......... 10.875 06/15/04 795,000
800 Station Casinos, Inc. (Series B)...... 9.625 06/01/03 786,000
1,250 Stuart Entertainment, Inc. (Series
B)................................... 12.50 11/15/04 1,150,000
-----------
8,797,250
-----------
Financial (3.8%)
1,500 General Electric Capital Corp.**...... 13.50 01/20/98 1,553,415
1,500 Household Finance Corp.**............. 15.00 09/25/97 1,519,170
-----------
3,072,585
-----------
Foods & Beverages (8.7%)
750 Envirodyne Industries, Inc. .......... 10.25 12/01/01 753,750
750 General Mills, Inc. .................. 13.50 01/21/98 776,782
2,250 PepsiCo, Inc. (WI).................... 15.00 08/06/98 2,455,222
7,300 Specialty Foods Acquisition Corp.
(Series B)........................... 13.00++ 08/15/05 3,029,500
-----------
7,015,254
-----------
Healthcare (3.3%)
1,000 Unilab Corp. ......................... 11.00 04/01/06 960,000
2,000 Unison Healthcare Corp. - 144A*....... 12.25 11/01/06 1,700,000
-----------
2,660,000
-----------
Manufacturing (5.0%)
1,000 Berry Plastics Corp. ................. 12.25 04/15/04 1,105,000
750 Exide Electronics Group, Inc. (Series
B)................................... 11.50 03/15/06 870,000
1,000 International Wire Group, Inc. ....... 11.75 06/01/05 1,095,000
1,000 Uniroyal Technology Corp. ............ 11.75 06/01/03 1,000,000
-----------
4,070,000
-----------
Manufacturing - Diversified (5.8%)
800 Foamex L.P. .......................... 11.875 10/01/04 860,000
800 Interlake Corp. ...................... 12.125 03/01/02 838,000
750 J.B. Poindexter & Co., Inc. .......... 12.50 05/15/04 785,625
3,900 Jordan Industries, Inc. - 144A*....... 11.75++ 04/01/09 2,203,500
-----------
4,687,125
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Publishing (2.2%)
$ 800 American Media Operations, Inc. ...... 11.625% 11/15/04 $ 880,000
875 United States Banknote Corp. ......... 10.375 06/01/02 901,250
-----------
1,781,250
-----------
Restaurants (5.2%)
4,570 American Restaurant Group Holdings,
Inc. ................................ 14.00++ 12/15/05 1,668,050
750 Boston Chicken, Inc. (Conv.).......... 4.50 02/01/04 550,313
750 Carrols Corp. ........................ 11.50 08/15/03 806,250
1,100 FRD Acquisition Corp. (Series B)...... 12.50 07/15/04 1,174,250
-----------
4,198,863
-----------
Retail (2.9%)
4,400 County Seat Stores Co. (b)............ 12.00 10/01/02 2,376,000
-----------
Retail - Food Chains (2.0%)
750 Jitney-Jungle Stores of America,
Inc. ................................ 12.00 03/01/06 862,500
800 Pathmark Stores, Inc. ................ 9.625 05/01/03 772,000
-----------
1,634,500
-----------
Textiles (1.4%)
1,505 U.S. Leather, Inc. ................... 10.25 07/31/03 1,128,750
-----------
TOTAL CORPORATE BONDS
(Identified Cost $74,127,238).................................. 70,344,266
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ---------
<C> <S> <C>
COMMON STOCKS (c) (0.8%)
Entertainment/Gaming & Lodging (0.0%)
2,000 Motels of America, Inc. - 144A*............................ 30,000
-----------
Foods & Beverages (0.1%)
90,000 Specialty Foods Acquisition Corp. - 144A*.................. 90,000
-----------
Manufacturing - Diversified (0.2%)
5,000 Thermadyne Holdings Corp. (d).............................. 153,750
-----------
Oil & Gas (0.5%)
186,600 Sheridan Energy, Inc. ..................................... 419,850
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------
<C> <S> <C>
Restaurants (0.0%)
4,750 American Restaurant Group Holdings, Inc. - 144A*........... $ 4,750
-----------
TOTAL COMMON STOCKS
(Identified Cost $3,200,517)............................... 698,350
-----------
PREFERRED STOCK (2.8%)
Entertainment/Gaming & Lodging
80,000 Fitzgeralds Gaming Corp. (Units)++
(Identified Cost $2,000,000)............................... 2,240,000
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ---------
<C> <S> <C> <C>
WARRANTS (c) (0.1%)
Aerospace (0.1%)
2,500 Sabreliner Corp. - 144A*...................... 04/15/03 25,060
------------
Broadcast Media (0.0%)
750 Australis Holdings Ltd. - 144A* (Australia)... 10/30/01 --
------------
Cable & Telecommunications (0.0%)
800 Hyperion Telecommunication, Inc. (Series B) -
144A*........................................ 04/01/01 24,000
------------
Containers (0.0%)
2,000 Crown Packaging Holdings, Ltd. - 144A*........ 11/01/03 --
------------
Entertainment/Gaming & Lodging (0.0%)
1,250 Fitzgeralds South Inc. - 144A*................ 03/15/99 --
------------
Manufacturing (0.0%)
10,000 Uniroyal Technology Corp. .................... 06/01/03 15,000
------------
Retail (0.0%)
2,000 County Seat Holdings Co. ..................... 10/15/98 --
------------
TOTAL WARRANTS
(Identified Cost $239,867)................................. 64,060
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (e) (10.6%)
U.S. GOVERNMENT AGENCIES
$ 8,550 Federal Home Loan
Mortgage Corp.
(Amortized Cost
$8,546,099)............ 5.38 - 5.75% 08/01/97 - 08/08/97 $ 8,546,099
-----------
TOTAL INVESTMENTS
(Identified Cost $88,113,721) (f)....................... 101.3% 81,892,775
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS......... (1.3) (1,065,091)
----- ----------
NET ASSETS.............................................. 100.0% $80,827,684
===== ===========
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
** Some or all of these securities are segregated in connection with the
purchase of when issued securities.
++ Consists of one or more classes of securities traded together as a unit;
stocks or bonds 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.
(WI) Security purchased on a when issued basis.
(a) Non-income producing security; issuer in bankruptcy.
(b) Non-income producing security; issuer in default.
(c) Non-income producing security.
(d) Acquired through exchange offer.
(e) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(f) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $3,988,844 and the
aggregate gross unrealized depreciation is $10,209,790, resulting in net
unrealized depreciation of $6,220,946.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1997 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $88,113,721)........................................ $ 81,892,775
Cash.................................................................. 60,392
Interest receivable................................................... 1,543,619
Prepaid expenses and other assets..................................... 3,878
------------
TOTAL ASSETS...................................................... 83,500,664
------------
LIABILITIES:
Payable for:
Investments purchased............................................. 2,543,023
Investment management fee......................................... 55,992
Accrued expenses and other payables................................... 73,965
------------
TOTAL LIABILITIES................................................. 2,672,980
------------
NET ASSETS........................................................ $ 80,827,684
============
COMPOSITION OF NET ASSETS:
Paid-in-capital....................................................... $121,076,287
Net unrealized depreciation........................................... (6,220,946)
Accumulated undistributed net investment income....................... 943,382
Accumulated net realized loss......................................... (34,971,039)
------------
NET ASSETS........................................................ $ 80,827,684
============
NET ASSET VALUE PER SHARE,
12,876,779 shares outstanding
(unlimited shares authorized of $.01 par value)...................... $6.28
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended July 31, 1997 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $ 5,264,521
-----------
EXPENSES
Investment management fee.............................................. 292,918
Shareholder reports and notices........................................ 28,806
Professional fees...................................................... 28,516
Transfer agent fees and expenses....................................... 20,400
Registration fees...................................................... 12,159
Custodian fees......................................................... 6,821
Trustees' fees and expenses............................................ 6,481
Other.................................................................. 5,745
-----------
TOTAL EXPENSES..................................................... 401,846
-----------
NET INVESTMENT INCOME.............................................. 4,862,675
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss...................................................... (1,973,414)
Net change in unrealized depreciation.................................. 3,867,085
-----------
NET GAIN........................................................... 1,893,671
-----------
NET INCREASE........................................................... $ 6,756,346
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
JULY 31, ENDED
1997 JANUARY 31, 1997
- -------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 4,862,675 $ 9,871,376
Net realized loss..................................... (1,973,414) (5,170,842)
Net change in unrealized depreciation................. 3,867,085 1,902,122
----------- ------------
NET INCREASE...................................... 6,756,346 6,602,656
Dividends from net investment income.................. (4,635,562) (10,172,655)
----------- ------------
NET INCREASE (DECREASE)........................... 2,120,784 (3,569,999)
NET ASSETS:
Beginning of period................................... 78,706,900 82,276,899
----------- ------------
END OF PERIOD
(Including undistributed net investment income of
$943,382 and $716,269, respectively).............. $80,827,684 $ 78,706,900
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1997 (unaudited)
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.
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
<PAGE> 13
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1997 (unaudited) continued
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> 14
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1997 (unaudited) 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 six months ended July 31, 1997 aggregated
$49,076,217 and $53,344,656, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At July 31, 1997, the Trust had transfer agent fees and
expenses payable of approximately $6,900.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, January 31, 1996, January 31, 1997 and July 31, 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>
July 29, 1997 $0.06 August 8, 1997 August 22, 1997
August 26, 1997 $0.06 September 5, 1997 September 19, 1997
</TABLE>
6. FEDERAL INCOME TAX STATUS
At January 31, 1997, the Trust had net capital loss carryover of approximately
$30,834,000 which may be used to offset future capital gains to the extent
provided by regulations which is available through January 31 of the following
years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
- ---------------------------------------------------
2000 2002 2003 2004 2005
- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C>
$9,648 $3,256 $10,665 $4,258 $3,007
====== ====== ======= ====== ======
</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> 15
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 SIX
MONTHS ENDED FOR THE YEAR ENDED JANUARY 31
JULY 31, -----------------------------
1997 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 6.11 $ 6.39 $ 6.12
-------- ---------- ----------
Net investment income............................................ 0.38 0.77 0.75
Net realized and unrealized gain (loss).......................... 0.15 (0.26) 0.24
-------- ---------- ----------
Total from investment operations................................. 0.53 0.51 0.99
-------- ---------- ----------
Less dividends from net investment income........................ (0.36) (0.79) (0.72)
-------- ---------- ----------
Net asset value, end of period................................... $ 6.28 $ 6.11 $ 6.39
======== ========== ==========
Market value, end of period...................................... $ 7.50 $ 7.00 $ 6.75
======== ========== ==========
TOTAL INVESTMENT RETURN+......................................... 12.62%(1) 16.03% 15.31%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................................... 1.02%(2) 0.98% 1.00%
Net investment income............................................ 12.38%(2) 12.13% 11.80%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......................... $80,828 $78,707 $82,277
Portfolio turnover rate.......................................... 65%(1) 161% 78%
<CAPTION>
FOR THE YEAR ENDED JANUARY 31
---------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 7.57 $ 6.70 $ 6.83
---------- ---------- ----------
Net investment income............................................ 0.75 0.81 0.91
Net realized and unrealized gain (loss).......................... (1.43) 0.91 (0.13)
---------- ---------- ----------
Total from investment operations................................. (0.68) 1.72 0.78
---------- ---------- ----------
Less dividends from net investment income........................ (0.77) (0.85) (0.91)
---------- ---------- ----------
Net asset value, end of period................................... $ 6.12 $ 7.57 $ 6.70
========== ========== ==========
Market value, end of period...................................... $ 6.50 $ 7.75 $ 6.875
========== ========== ==========
TOTAL INVESTMENT RETURN+......................................... (6.30)% 26.21% 20.77%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................................... 1.02% 0.99% 1.06%
Net investment income............................................ 11.04% 11.40% 13.22%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......................... $78,765 $97,466 $86,305
Portfolio turnover rate.......................................... 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.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 16
Trustees
- -----------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
Officers
- -----------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
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
The financial statements included herein have been taken from the records of
the Trust without examination by the independent accountants and accordingly
they do not express an opinion thereon.
High
Income
Advantage
Trust III
Semiannual Report
July 31, 1997
