<PAGE> 1
HIGH INCOME ADVANTAGE TRUST III Two World Trade Center, New York, New York
10048
LETTER TO THE SHAREHOLDERS July 31, 1998
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of High Income
Advantage Trust III for the six-month period ended July 31, 1998.
Six months ago optimism over continued economic growth in the United States,
along with a favorable interest-rate environment, combined to produce a solid
start to the period under review. However, more recently, concerns over the
foreign market crisis and its impact on the U.S. economy have begun to surface,
resulting in a 1998 mid-year market correction. Though corporate credit quality
remains strong, these concerns resulted in a "flight-to-quality" in the
financial markets, with investors favoring highly rated U.S. government
securities over more volatile asset classes, such as equities or high-yield
bonds. For the full six-month period, high-yield bond returns remained
competitive with other sectors of the fixed-income markets as higher income
levels helped to offset weaker prices.
PERFORMANCE
As discussed above, the high-yield market's mid-year correction, a direct result
of the foreign market crisis, did depress results somewhat during the period.
For the six-month period ended July 31, 1998, the Trust's market price on the
New York Stock Exchange (NYSE) moved from $7.375 per share to $7.0625 per share.
Based on this change in NYSE market price, and including dividend distributions
totaling $0.36 per share, the Trust produced a total return of 0.61 percent.
Over the same period, the Trust's net asset value (NAV) moved from $6.18 per
share to $6.03 per share. Based on this change in NAV, and including dividend
distributions, the Trust's total return for the period was 2.51 percent.
Over the past six months, the Trust continued to distribute regular income
dividends at a rate of $0.06 per share per month. On July 31, 1998, net assets
exceeded $77 million.
<PAGE> 2
HIGH INCOME ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS July 31, 1998, continued
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.
PORTFOLIO STRATEGY
We have maintained a relatively conservative posture over the past 12 months, in
light of the market's declining yield levels over the past few years and the
increasing potential for a correction. As a result, we have maintained a core
position in the shorter-term, higher-quality end of the high-yield market
(BB-rated issues or higher), which has held up well in this increasingly nervous
market environment. In addition, we continue to concentrate on sectors of the
economy that historically are more predictable, recession-resistant and growth
oriented, such as food and beverage, healthcare, telecommunications, media and
cable television. These groups are expected to outperform the riskier, more
cyclical areas of the economy over the next year, given the slowing of many of
the world's markets.
Consistent with our more cautious posture, we have continued to avoid foreign
emerging high-yield markets. This defensive approach is expected to provide
important portfolio flexibility as we work to take advantage of today's more
attractive market yields.
LOOKING AHEAD
Despite the current volatility, our one- to two-year outlook for the high-yield
market remains favorable, given our expectations for continued U.S. economic
growth and a favorable interest- rate environment. If domestic economic growth
continues and interest rates remain low, we would expect general investor
sentiment in the financial markets to improve, with the high-yield market
rebounding from today's depressed levels. Should this scenario materialize, and
investor confidence grows, high-yield performance is expected to be strong over
the next few years.
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
2
<PAGE> 3
HIGH INCOME ADVANTAGE TRUST III
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 23, 1998, an annual 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>
Wayne E. Hedien
For..................................................... 10,372,685
Withheld................................................ 139,910
Dr. Manuel H. Johnson
For..................................................... 10,372,831
Withheld................................................ 139,764
John L. Schroeder
For..................................................... 10,366,727
Withheld................................................ 145,868
</TABLE>
The following Trustees were not standing for reelection at this meeting: Michael
Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire, Michael E. Nugent
and Philip J. Purcell.
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP (the successor
firm to Price Waterhouse LLP as of JULY 1, 1998) AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For..................................................... 10,258,491
Against................................................. 45,542
Abstain................................................. 208,562
</TABLE>
(3) ELIMINATION OF THE TRUST'S FUNDAMENTAL POLICY REGARDING INVESTMENTS IN
RESTRICTED SECURITIES:
<TABLE>
<S> <C>
For..................................................... 5,494,481
Against................................................. 887,220
Abstain................................................. 597,407
</TABLE>
3
<PAGE> 4
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (94.1%)
Aerospace (0.6%)
$ 500 Sabreliner Corp. (Series B) - 144A*... 11.00 % 06/15/08 $ 500,000
----------
Automotive (2.3%)
1,800 Toyota Motor Credit Corp. ............ 15.00 09/25/98 1,823,274
----------
Broadcast Media (1.8%)
500 Paxson Communications Corp. .......... 11.625 10/01/02 536,250
750 Spanish Broadcasting System, Inc. .... 12.50 06/15/02 855,000
----------
1,391,250
----------
Business Services (5.8%)
500 Anacomp, Inc. (Series B).............. 10.875 04/01/04 527,500
1,500 Comforce Operating Inc. .............. 12.00 12/01/07 1,612,500
500 Entex Information Services,
Inc. - 144A*.......................... 12.50 08/01/06 505,000
1,800 Xerox Credit Corp. ................... 15.00 10/07/98 1,828,746
----------
4,473,746
----------
Cable/Cellular (3.8%)
750 Australis Holdings Ltd. (Australia)
(b).................................. 15.00++ 11/01/02 75,000
1,000 Clearnet Communications Inc.
(Canada).............................. 14.75++ 12/15/05 870,000
491 Falcon Holdings Group L.P.
(Series B)........................... 11.00 09/15/03 524,148
500 Price Communications Cellular
Holdings.............................. 11.25+ 08/15/08 498,750
1,000 Price Communications Cellular Holdings
(Series B)........................... 13.50++ 08/01/07 711,250
500 Triton Communications LLC - 144A*..... 11.00++ 05/01/08 286,250
----------
2,965,398
----------
Computer Equipment (4.0%)
1,000 CHS Electronics, Inc. ................ 9.875 04/15/05 995,000
1,500 IBM Credit Corp. ..................... 15.00 02/02/99 1,568,265
500 Unisys Corp. (Series B)............... 12.00 04/15/03 568,125
----------
3,131,390
----------
Consumer Products (2.0%)
1,000 J.B. Williams Holdings, Inc. ......... 12.00 03/01/04 1,050,000
500 Samsonite Corp. - 144A*............... 10.75 06/15/08 490,000
----------
1,540,000
----------
Electrical & Alarm Systems (1.2%)
1,000 Mosler, Inc. ......................... 11.00 04/15/03 920,000
----------
Entertainment/Gaming & Lodging (11.4%)
1,800 Aladdin Gaming/Capital Corp. - 144A*
(Units)++............................ 13.50++ 03/01/10 828,000
500 Epic Resorts LLC - 144A*.............. 13.00 06/15/05 507,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,250 Fitzgeralds Gaming Corp. ............. 12.25 % 12/15/04 $1,112,500
1,500 Lady Luck Gaming Finance Corp. ....... 11.875 03/01/01 1,552,500
2,000 Motels of America, Inc. (Series B).... 12.00 04/15/04 1,950,000
530 Resort At Summerlin................... 13.00+ 12/15/07 548,334
750 Stuart Entertainment, Inc. (Series B). 12.50 11/15/04 525,000
1,800 Walt Disney Co. ...................... 15.00 12/14/98 1,864,386
----------
8,888,220
----------
Finance (4.3%)
1,450 General Electric Capital Corp. ....... 15.00 01/21/99 1,512,553
1,800 Household Finance Corp. .............. 15.00 09/25/98 1,822,626
----------
3,335,179
----------
Foods & Beverages (8.2%)
500 Envirodyne Industries, Inc. .......... 10.25 12/01/01 501,250
1,500 General Mills, Inc. .................. 15.00 01/29/99 1,569,300
2,250 PepsiCo, Inc. ........................ 15.00 08/06/98 2,250,585
500 Sparkling Spring Water (Canada)....... 11.50 11/15/07 520,000
3,525 Specialty Foods Acquisition Corp.
(Series B)........................... 13.00++ 08/15/05 1,498,125
----------
6,339,260
----------
Healthcare (3.1%)
500 Pediatric Services of America, Inc.
(Series A)........................... 10.00 04/15/08 395,000
750 Unilab Corp. ......................... 11.00 04/01/06 802,500
1,500 Unison Healthcare Corp. - 144A* (a)... 12.25 11/01/06 746,250
500 Vencor, Inc. - 144A*.................. 9.875 05/01/05 425,000
----------
2,368,750
----------
Manufacturing (4.5%)
1,000 Berry Plastics Corp. ................. 12.25 04/15/04 1,090,000
5,000 International Semi-Tech
Microelectronics, Inc. (Canada)...... 11.50++ 08/15/03 1,325,000
500 International Wire Group, Inc. ....... 11.75 06/01/05 548,750
500 Outsourcing Services Group,
Inc. - 144A*.......................... 10.875 03/01/06 520,000
----------
3,483,750
----------
Manufacturing -- Diversified (5.3%)
800 Interlake Corp. ...................... 12.125 03/01/02 825,000
750 J.B. Poindexter & Co., Inc. .......... 12.50 05/15/04 746,250
3,900 Jordan Industries, Inc. (Series B).... 11.75++ 04/01/09 2,574,000
----------
4,145,250
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Oil & Gas (2.7%)
$ 500 Texaco Capital, Inc. ................. 15.00 % 01/13/99 $ 520,425
1,500 Transamerican Refining Corp. - 144A*
(Units)++............................ 16.00 06/30/03 1,582,500
----------
2,102,925
----------
Publishing (0.7%)
500 American Media Operations, Inc. ...... 11.625 11/15/04 535,000
----------
Restaurants (7.1%)
12,001 American Restaurant Group Holdings,
Inc. - 144A*......................... 0.00 12/15/05 3,030,177
1,500 FRD Acquisition Corp. (Series B)...... 12.50 07/15/04 1,650,000
1,000 Planet Hollywood International,
Inc. ................................. 12.00 04/01/05 850,000
----------
5,530,177
----------
Retail (1.4%)
1,000 Kmart Corp. .......................... 13.50 01/01/09 1,064,500
----------
Retail -- Food Chains (2.5%)
500 Mrs. Fields Original.................. 10.125 12/01/04 495,000
750 Pueblo Xtra International, Inc. ...... 9.50 08/01/03 736,875
750 Pueblo Xtra International, Inc.
(Series C)............................ 9.50 08/01/03 736,875
----------
1,968,750
----------
Telecommunications (15.2%)
900 21st Century Telecom Group............ 12.25++ 02/15/08 501,750
1,500 Advanced Radio Telecommunications
Corp.................................. 14.00 02/15/07 1,597,498
500 Birch Telecom Inc. - 144A*
(Units)++............................. 14.00 06/15/08 500,000
500 Caprock Communications
Corp. - 144A*......................... 12.00 07/15/08 507,500
1,000 Cellnet Data Systems, Inc. ........... 14.00++ 10/01/07 540,000
500 e. Spire Communications, Inc. ........ 13.75 07/15/07 585,000
500 Facilicom International, Inc. (Series
B).................................... 10.50 01/15/08 505,000
1,820 Firstworld Communications,
Inc. - 144A* (Units)++............... 13.00++ 04/15/08 823,550
500 GST Equipment Funding Corp. .......... 13.25 05/01/07 580,000
500 Hyperion Telecommunication, Inc.
(Series B)........................... 12.25 09/01/04 546,250
8,750 In-Flight Phone Corp. (Series B)
(b)................................... 14.00++ 05/15/02 1,225,000
500 NextLink Communications, Inc. ........ 12.50 04/15/06 570,000
500 Optel, Inc. - 144A*................... 11.50 07/01/08 517,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000 Peoples Telephone Co., Inc. .......... 12.25 % 07/15/02 $1,090,000
1,000 USA Mobile Communications Holdings,
Inc. ................................ 14.00 11/01/04 1,105,000
750 Winstar Communications, Inc. ......... 14.00++ 10/15/05 622,500
----------
11,816,548
----------
Telecommunications -- Equipment (1.2%)
1,000 FWT, Inc. ............................ 9.875 11/15/07 925,000
----------
Textiles (0.9%)
1,505 U.S. Leather, Inc. (a)................ 10.25 07/31/03 669,725
----------
Transportation (0.6%)
500 Alpha Shipping PLC (United Kingdom)... 9.50 02/15/08 445,000
----------
Wireless Communication (3.5%)
500 Echostar DBS Corp. ................... 12.50 07/01/02 563,750
1,000 Globalstar LP/Capital Corp. .......... 11.375 02/15/04 930,000
1,800 TCI Satellite Entertainment, Inc. .... 12.25++ 02/15/07 1,210,500
----------
2,704,250
----------
TOTAL CORPORATE BONDS
(Identified Cost $78,635,207).............................. 73,067,342
----------
NUMBER OF
SHARES
- --------
COMMON STOCKS (c) (3.7%)
Entertainment/Gaming & Lodging (0.2%)
2,000 Motels of America, Inc. - 144A*............................ 110,000
----------
Foods & Beverages (0.1%)
90,000 Specialty Foods Acquisition Corp. - 144A*.................. 90,000
----------
Restaurants (0.0%)
4,750 American Restaurant Group Holdings, Inc. - 144A*........... --
----------
Retail (3.4%)
585,200 County Seat Stores Corp. (d)(e)............................ 2,658,027
----------
TOTAL COMMON STOCKS
(Identified Cost $3,614,519)............................... 2,858,027
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS (c) (0.2%)
Aerospace (0.2%)
2,500 Sabreliner Corp. - 144A*................................... $ 125,052
-----------
Cable/Cellular (0.0%)
750 Australis Holdings Ltd. - 144A* (Australia)................ --
-----------
Containers (0.0%)
2,000 Crown Packaging Holdings, Ltd. - 144A*..................... --
-----------
Entertainment/Gaming & Lodging (0.0%)
500 Epic Resorts LLC - 144A*................................... --
1,250 Fitzgeralds South Inc. - 144A*............................. --
500 Resort At Summerlin - 144A*................................ --
-----------
--
-----------
Retail (0.0%)
2,000 County Seat Holdings Co. .................................. --
-----------
TOTAL WARRANTS
(Identified Cost $212,077)................................. 125,052
-----------
TOTAL INVESTMENTS
(Identified Cost $82,461,803) (f).................. 98.0% 76,050,421
OTHER ASSETS IN EXCESS OF LIABILITIES............... 2.0 1,579,710
----- -----------
NET ASSETS......................................... 100.0% $77,630,131
===== ===========
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
++ Consists of one or more class of securities traded together as a unit;
bonds with attached warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future specified date.
(a) Non-income producing security; bond in default.
(b) Non-income producing security; issuer in bankruptcy.
(c) Non-income producing security.
(d) Acquired through exchange offer.
(e) Includes 209,956 shares which are due from the issuer pursuant to a
reorganization.
(f) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $2,518,994 and the
aggregate gross unrealized depreciation is $8,930,376, resulting in net
unrealized depreciation of $6,411,382.
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $82,461,803)........... $ 76,050,421
Receivable for:
Interest.............................. 1,742,576
Investments sold...................... 1,648,438
Prepaid expenses and other assets........ 37,877
------------
TOTAL ASSETS.......................... 79,479,312
------------
LIABILITIES:
Payable for:
Investments purchased................. 862,505
Investment management fee............. 56,041
Payable to bank.......................... 884,956
Accrued expenses and other payables...... 45,679
------------
TOTAL LIABILITIES..................... 1,849,181
------------
NET ASSETS............................ $ 77,630,131
============
COMPOSITION OF NET ASSETS:
Paid-in-capital.......................... $121,076,287
Net unrealized depreciation.............. (6,411,382)
Accumulated undistributed net investment
income.................................. 1,010,492
Accumulated net realized loss............ (38,045,266)
------------
NET ASSETS............................ $ 77,630,131
============
NET ASSET VALUE PER SHARE,
12,876,779 shares outstanding (unlimited
shares authorized of $.01 par value).... $6.03
============
STATEMENT OF OPERATIONS
For the six months ended July 31, 1998 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME.......................... $ 5,021,517
------------
EXPENSES
Investment management fee................ 292,638
Professional fees........................ 24,235
Registration fees........................ 20,842
Shareholder reports and notices.......... 16,345
Transfer agent fees and expenses......... 15,336
Trustees' fees and expenses.............. 6,992
Custodian fees........................... 6,431
Other.................................... 4,446
------------
TOTAL EXPENSES........................ 387,265
------------
NET INVESTMENT INCOME................. 4,634,252
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................ (37,720)
Net change in unrealized depreciation.... (1,903,274)
------------
NET LOSS.............................. (1,940,994)
------------
NET INCREASE............................. $ 2,693,258
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JULY 31, 1998 JANUARY 31, 1998
- --------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 4,634,252 $10,066,319
Net realized loss.................................... (37,720) (5,009,921)
Net change in unrealized depreciation................ (1,903,274) 5,579,923
----------- -----------
NET INCREASE..................................... 2,693,258 10,636,321
Dividends from net investment income................. (4,635,588) (9,770,760)
----------- -----------
NET INCREASE (DECREASE).......................... (1,942,330) 865,561
NET ASSETS:
Beginning of period.................................. 79,572,461 78,706,900
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$1,010,492 and $1,011,828, respectively)......... $77,630,131 $79,572,461
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (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 Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., 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.
11
<PAGE> 12
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) 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
12
<PAGE> 13
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) continued
Investment Manager also bears the cost of telephone services, heat, light, power
and other utilities provided to the Trust.
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, 1998 aggregated
$33,534,870 and $32,170,788, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At July 31, 1998, the Trust had transfer agent fees
and expenses payable of approximately $700.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, January 31, 1997, 1998 and July 31, 1998........... 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 28, 1998 $0.06 August 7, 1998 August 21, 1998
August 25, 1998 $0.06 September 4, 1998 September 18, 1998
</TABLE>
6. FEDERAL INCOME TAX STATUS
At January 31, 1998, the Trust had a net capital loss carryover of approximately
$36,744,000 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>
AMOUNT IN THOUSANDS
- ---------------------------------------------------------------------
2000 2002 2003 2004 2005 2006
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$9,648 $3,256 $10,665 $4,258 $3,007 $5,910
====== ====== ======= ====== ====== ======
</TABLE>
13
<PAGE> 14
HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited) continued
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 $130,000 during fiscal 1998.
At January 31, 1998, the Trust had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales.
14
<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 FOR THE YEAR ENDED JANUARY 31
MONTHS ENDED ----------------------------------------------------
JULY 31, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 6.18 $ 6.11 $ 6.39 $ 6.12 $ 7.57 $ 6.70
------- ------- ------- ------- ------- -------
Net investment income...................................... 0.36 0.78 0.77 0.75 0.75 0.81
Net realized and unrealized gain (loss).................... (0.15) 0.05 (0.26) 0.24 (1.43) 0.91
------- ------- ------- ------- ------- -------
Total from investment operations........................... 0.21 0.83 0.51 0.99 (0.68) 1.72
------- ------- ------- ------- ------- -------
Less dividends from net investment income.................. (0.36) (0.76) (0.79) (0.72) (0.77) (0.85)
------- ------- ------- ------- ------- -------
Net asset value, end of period............................. $ 6.03 $ 6.18 $ 6.11 $ 6.39 $ 6.12 $ 7.57
======= ======= ======= ======= ======= =======
Market value, end of period................................ $7.0625 $ 7.375 $ 7.00 $ 6.75 $ 6.50 $ 7.75
======= ======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN+................................... 0.61%(1) 16.86% 16.03% 15.31% (6.30)% 26.21%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................... 0.99%(2) 0.96% 0.98% 1.00% 1.02% 0.99%
Net investment income...................................... 11.88%(2) 12.70% 12.13% 11.80% 11.04% 11.40%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.................... $77,630 $79,572 $78,707 $82,277 $78,765 $97,466
Portfolio turnover rate.................................... 42%(1) 113% 161% 78% 82% 231%
</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
15
<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
- -----------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- -----------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- -----------------------------------------
Morgan Stanley Dean Witter Advisors 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, 1998
