<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME Two World Trade Center
ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS January 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
Nineteen ninety-eight was unquestionably a difficult year for the high-yield
bond market, primarily because of a dramatic "flight-to-quality" in the second
half of the year. In response to concerns about sharply declining overseas
markets, investors sought the relative safety of U.S. government securities over
riskier investments, such as equities and high-yield bonds. While equities
rebounded during the fourth quarter, at year-end the high-yield market remained
near its lows as investors continued to be very risk averse, apparently awaiting
further evidence of continued economic growth in 1999.
Reviewing the year, after a rather quiet first half, serious concerns began to
emerge over the rapidly escalating foreign market crisis, raising questions as
to the extent of the impact on both the U.S. economy and corporate earnings.
This resulted in a sharp correction in the high-yield bond market during the
second half, causing high-yield bond prices to decline as much as 15 percent in
many cases and driving yields from their first-half range of 9 percent to the 12
percent area. The high-yield market itself witnessed a flight-to-quality as
well, with the middle tier of the market (B-rated issues) significantly
underperforming the upper tier (BB-rated issues), again attributable to
investors' severe risk aversion. As a result, high-yield market yields began
1999 near their highest level in relation to Treasuries in nearly 10 years.
PERFORMANCE
During the fiscal year ended January 31, 1999, Morgan Stanley Dean Witter High
Income Advantage Trust III produced a total return of -9.79 percent, based on a
change in net asset value (NAV) and reinvestment of distributions. Based on a
change in the Trust's market price on the New York Stock Exchange (NYSE) and
reinvestment of distributions, the Trust's total return for the fiscal year was
- -10.59 percent.
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS January 31, 1999, continued
Over the past twelve months, the Trust continued to distribute regular monthly
income dividends at a rate of $0.06 per share. For the fiscal year ended January
31, 1999, the Trust's distributions totaled $0.72 per share. On January 31,
1999, the Trust had net assets in excess of $64 million.
PORTFOLIO STRATEGY
During the fiscal year, the Trust maintained a substantial position in the more
defensive, higher-quality end of the fixed-income market, which held up well in
an extremely volatile environment. Despite these defensive holdings, however,
the Trust's more significant, long-term core position in the B-rated sector of
the market was sharply affected by the market's second half correction, as
described above.
In an effort to minimize the risk of an economic slowdown, we continue to
concentrate on sectors that have historically proven to be more predictable,
recession resistant and growth oriented, such as cellular communications, foods
and beverages, telecommunications, media and cable television. We believe that
these industry groups are poised to perform well over the next year, despite the
slowing of many of the world's markets. In addition, we expect to see continued
consolidation and merger activity within these industries, which should lead to
improved credit quality. We continue to focus primarily on domestic companies,
given the outlook for continued growth in the U.S. economy and are avoiding
emerging foreign high-yield markets because of the higher degree of uncertainty
associated with many of these markets.
LOOKING AHEAD
Despite the high-yield market's recent weakness, we consider today's
substantially higher, more attractive yields and significantly discounted bond
prices an investment opportunity, especially in view of the still relatively low
interest rate environment. Given a soft landing in the economy with growth
continuing into 1999, we expect the high-yield market to follow the lead of the
equity markets and rebound to more normal levels relative to U.S. Treasury
securities. Should this scenario materialize and high-yield bond prices recover,
the Trust would participate not only in today's exceptionally high income levels
but could potentially provide a degree of capital appreciation as well. Although
the B-rated segment of the market was not a good investment performer in 1998,
we are confident that its attractive yield and appreciation potential remains
intact for long-term high-yield investors.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS January 31, 1999, 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 lowest at the time of purchase.
We thank you for your continued support of Morgan Stanley Dean Witter 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
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE III
PORTFOLIO OF INVESTMENTS January 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (91.7%)
Aerospace (0.7%)
$ 500 Sabreliner Corp. - 144A*.............. 11.00% 06/15/08 $ 440,000
----------
Broadcast Media (2.1%)
500 Paxson Communications Corp. .......... 11.625 10/01/02 510,000
750 Spanish Broadcasting System, Inc. .... 12.50 06/15/02 836,250
----------
1,346,250
----------
Cable Television (0.2%)
3,750 Australis Holdings Property Ltd.
(Australia)(a)....................... 15.00++ 11/01/02 187,500
----------
Casinos/Gambling (3.6%)
2,800 Aladdin Gaming/Capital Corp.
(Series B)............................ 13.50++ 03/01/10 784,000
1,500 Fitzgeralds Gaming Corp. ............. 12.25 12/15/04 780,000
500 Lady Luck Gaming Finance Corp. ....... 11.875 03/01/01 508,125
750 Stuart Entertainment, Inc.
(Series B)............................ 12.50 11/15/04 262,500
----------
2,334,625
----------
Cellular Telephone (4.6%)
300 American Cellular Corp. - 144A*....... 10.50 05/15/08 315,000
1,000 Clearnet Communications, Inc.
(Canada)............................. 14.75++ 12/15/05 875,000
300 Dobson/Sygnet Communications - 144A*.. 12.25 12/15/08 321,000
1,000 Price Communications Cellular
Holdings............................. 11.25+ 08/15/08 935,000
1,000 Triton Communications LLC............. 11.00++ 05/01/08 550,000
----------
2,996,000
----------
Computers (1.5%)
1,000 CHS Electronics, Inc. ................ 9.875 04/15/05 960,000
----------
Consumer/Business Services (5.9%)
500 Anacomp, Inc. (Series B).............. 10.875 04/01/04 520,000
800 CEX Holdings, Inc. (Series B)......... 9.625 06/01/08 732,000
538 Comforce Corp. (Series B)............. 15.00+ 12/01/09 542,875
1,500 Comforce Operating Inc. (Series B).... 12.00 12/01/07 1,500,000
800 Entex Information Services,
Inc. - 144A*......................... 12.50 08/01/06 520,000
----------
3,814,875
----------
Consumer Specialties (1.2%)
1,000 Samsonite Corp. ...................... 10.75 06/15/08 810,000
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE III
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Sundries (2.3%)
$ 1,000 J.B. Williams Holdings, Inc. ......... 12.00% 03/01/04 $1,036,250
500 Windmere-Durable Holdings, Inc. ...... 10.00 07/31/08 453,750
----------
1,490,000
----------
Containers/Packaging (2.4%)
1,000 Berry Plastics Corp. ................. 12.25 04/15/04 1,055,000
500 Premier Graphics, Inc. - 144A*........ 11.50 12/01/05 502,500
----------
1,557,500
----------
Diversified Manufacturing (6.1%)
300 Eagle-Picher Industries, Inc. ........ 9.375 03/01/08 288,000
500 High Voltage Engineering Co. ......... 10.50 08/15/04 480,000
750 J.B. Poindexter & Co., Inc. .......... 12.50 05/15/04 735,000
3,900 Jordan Industries, Inc. (Series B).... 11.75++ 04/01/09 2,457,000
----------
3,960,000
----------
Energy (2.6%)
500 Northern Offshore ASA - 144A*
(Norway)............................. 10.00 05/15/05 250,000
100 Transamerican Refining
Corp. - 144A*........................ 15.00+ 12/01/03 99,000
1,500 Transamerican Refining Corp. - 144A*
(Units)++............................ 16.00 06/30/03 1,320,000
----------
1,669,000
----------
Food Chains (1.1%)
750 Pueblo Xtra International, Inc.
(Series C)........................... 9.50 08/01/03 720,000
----------
Food Distributors (0.7%)
500 Fleming Companies, Inc. (Series B).... 10.625 07/31/07 462,500
----------
Foods & Beverages (6.2%)
1,583 Envirodyne Industries, Inc. .......... 10.25 12/01/01 1,266,400
1,000 PepsiCo, Inc. ........................ 15.00 08/06/99 1,052,610
1,000 Sparkling Spring Water (Canada)....... 11.50 11/15/07 860,000
4,525 Specialty Foods Acquisition Corp.
(Series B)........................... 13.00++ 08/15/05 814,500
----------
3,993,510
----------
Healthcare (6.1%)
600 Mediq/PRN Life Support Service
Inc. ................................ 11.00 06/01/08 576,000
1,500 Pediatric Services of America, Inc.
(Series A)........................... 10.00 04/15/08 1,065,000
500 Unilab Corp. ......................... 11.00 04/01/06 523,750
1,500 Unison Healthcare Corp. - 144A* (b)... 12.25 11/01/06 585,000
500 Universal Hospital Services, Inc. .... 10.25 03/01/08 445,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE III
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Universal Hospital Services,
Inc. - 144A*......................... 10.25% 03/01/08 $ 427,500
500 Vencor Operating, Inc. ............... 9.875 05/01/05 360,000
----------
3,982,250
----------
Hotels/Resorts (4.2%)
500 Epic Resorts LLC (Series B)........... 13.00 06/15/05 490,000
2,000 Motels of America, Inc. (Series B).... 12.00 04/15/04 1,670,000
563 Resort At Summerlin (Series B)........ 13.00+ 12/15/07 535,216
----------
2,695,216
----------
Industrial Specialties (2.5%)
5,000 International Semi-Tech
Microelectronics, Inc. (Canada)...... 11.50++ 08/15/03 625,000
500 International Wire Group, Inc. ....... 11.75 06/01/05 532,500
500 Outsourcing Services Group,
Inc. - 144A*......................... 10.875 03/01/06 480,000
----------
1,637,500
----------
Office Equipment/Supplies (1.4%)
1,000 Mosler, Inc. ......................... 11.00 04/15/03 880,000
----------
Other Telecommunications (1.6%)
500 Esprit Telecom Group PLC (United
Kingdom)............................. 10.875 06/15/08 520,000
500 Versatel Telecom BV - 144A*
(Netherlands) (Units)++.............. 13.25 05/15/08 517,500
----------
1,037,500
----------
Printing/Publishing (0.5%)
300 American Media Operations, Inc. ...... 11.625 11/15/04 315,000
----------
Restaurants (7.1%)
6,251 American Restaurant Group Holdings,
Inc. - 144A* (c)..................... 0.00 12/15/05 1,875,210
1,500 FRD Acquisition Corp. (Series B)...... 12.50 07/15/04 1,595,625
300 Friendly Ice Cream Corp. ............. 10.50 12/01/07 268,500
2,500 Planet Hollywood International,
Inc. ................................ 12.00 04/01/05 850,000
----------
4,589,335
----------
Telecommunications (15.7%)
900 21st Century Telecom Group............ 12.25++ 02/15/08 333,000
1,000 Birch Telecom Inc. - 144A*
(Units)++............................ 14.00 06/15/08 910,000
500 Caprock Communications Corp. (Series
B)................................... 12.00 07/15/08 497,500
1,000 e. Spire Communications, Inc. ........ 13.75 07/15/07 910,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE III
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,000 Facilicom International, Inc. (Series
B)................................... 10.50% 01/15/08 $ 805,000
2,820 Firstworld Communications, Inc. ...... 13.00++ 04/15/08 1,142,100
500 Focal Communications (Series B)....... 12.125++ 02/15/08 255,000
500 GST Equipment Funding Corp. .......... 13.25 05/01/07 517,500
500 GST Telecom/GST Network Funding -
144A*................................ 10.50++ 05/01/08 232,500
500 Hyperion Telecommunication, Inc.
(Series B)........................... 12.25 09/01/04 532,500
500 Hyperion Telecommunication, Inc.
(Series B)........................... 13.00++ 04/15/03 387,500
8,750 In-Flight Phone Corp. (Series B) (d).. 14.00 05/15/02 1,312,500
300 Level 3 Communications, Inc. ......... 9.125 05/01/08 298,500
500 NextLink Communications, Inc. ........ 12.50 04/15/06 543,750
500 Optel, Inc. (Series B)................ 11.50 07/01/08 495,000
500 Pac-West Telecomm Inc. - 144A*........ 13.50 02/01/09 501,250
500 Primus Telecommunications Group
(Series B)........................... 9.875 05/15/08 472,500
----------
10,146,100
----------
Telecommunications Equipment (1.4%)
2,200 FWT, Inc. ............................ 9.875 11/15/07 880,000
----------
Wireless Communications (10.0%)
2,000 Advanced Radio Telecommunications
Corp. ............................... 14.00 02/15/07 1,500,000
4,000 Cellnet Data Systems, Inc. ........... 14.00++ 10/01/07 1,240,000
1,000 Globalstar LP/Capital Corp. .......... 11.375 02/15/04 750,000
300 Paging Network, Inc. ................. 10.00 10/15/08 285,000
1,800 TCI Satellite Entertainment, Inc. .... 12.25++ 02/15/07 918,000
1,000 USA Mobile Communications Holdings,
Inc. ................................ 14.00 11/01/04 1,030,000
1,000 Winstar Communications, Inc. ......... 14.00++ 10/15/05 725,000
----------
6,448,000
----------
TOTAL CORPORATE BONDS
(Identified Cost $72,206,731).............................. 59,352,661
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE III
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMON STOCKS (e) (1.0%)
Foods & Beverages (0.1%)
90,000 Specialty Foods Acquisition Corp. - 144A*.................. $ 90,000
----------
Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. - 144A*............................ 2,048
----------
Restaurants (0.0%)
4,750 American Restaurant Group Holdings, Inc. - 144A*........... --
----------
Retail (0.6%)
517,647 County Seat Stores, Inc. (c)............................... 349,411
----------
Textiles (0.3%)
112,296 U.S. Leather, Inc. (c)..................................... 168,444
----------
TOTAL COMMON STOCKS
(Identified Cost $4,939,894)............................... 609,903
----------
PREFERRED STOCKS (e)(0.0%)
Energy (0.0%)
2,548 Transcontinental Refining Corp.* (Conv.)................... 153
4,000 Transcontinental Refining Corp.* (Conv.)................... 2,720
4,633 Transcontinental Refining Corp.* (Conv.)................... 278
6,718 Transcontinental Refining Corp.* (Conv.)................... 403
13,899 Transcontinental Refining Corp.* (Conv.)................... 834
----------
TOTAL PREFERRED STOCKS
(Identified Cost $4,384)................................... 4,388
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
- ---------
<C> <S> <C> <C>
WARRANTS (e) (0.0%)
Aerospace (0.0%)
2,500 Sabreliner Corp. - 144A*.................................. 25,000
----------
Casino/Gambling (0.0%)
23,000 Aladdin Gaming/Capital Corp. - 144A*...................... --
1,250 Fitzgeralds South Inc. - 144A*............................ --
----------
--
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE III
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS VALUE
- ------------------------------------------------------------------------------------
<C> <S> <C> <C>
Hotels/Resorts (0.0%)
500 Epic Resorts LLC - 144A*.................................. $ --
500 Resort At Summerlin - 144A*............................... --
----------
--
----------
Other Telecommunications (0.0%)
500 Versatel Telecom BV - 144A* (Netherlands)................. 5,281
----------
Telecommunications (0.0%)
2,820 Firstworld Communications, Inc. - 144A*................... --
----------
TOTAL WARRANTS
(Identified Cost $67,768)................................. 30,281
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------- ---------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (5.7%)
U.S. GOVERNMENT AGENCY (f) (5.4%)
$ 3,500 Federal Home Loan Banks
(Amortized Cost $3,500,000)........... 4.62% 02/01/99 3,500,000
-----------
REPURCHASE AGREEMENT (0.3%)
173 The Bank of New York (dated 01/29/99;
proceeds $172,607) (g)
(Identified Cost $172,540)........... 4.688 02/01/99 172,540
-----------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $3,672,540)............................... 3,672,540
-----------
TOTAL INVESTMENTS
(Identified Cost $80,891,317) (h)................... 98.4% 63,669,773
OTHER ASSETS IN EXCESS OF LIABILITIES................ 1.6 1,026,628
----- -----------
NET ASSETS......................................... 100.0% $64,696,401
===== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE III
PORTFOLIO OF INVESTMENTS January 31, 1999, continued
- ---------------------
<TABLE>
<C> <S>
* Resale is restricted to qualified institutional investors.
++ Consists of one or more classes 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) Issuer in bankruptcy.
(b) Non-income producing security; bond in default.
(c) Acquired through exchange offer.
(d) Non-income producing security; issuer in bankruptcy.
(e) Non-income producing securities.
(f) Security was purchased on a discount basis. The interest
rate shown has been adjusted to reflect a money market
equivalent yield.
(g) Collateralized by $163,859 U.S. Treasury Note 6.25% due
01/31/02 valued at $175,991.
(h) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $1,055,584 and the aggregate gross
unrealized depreciation is $18,277,128, resulting in net
unrealized depreciation of $17,221,544.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1999
ASSETS:
Investments in securities, at value
(identified cost $80,891,317).............................. $ 63,669,773
Receivable for:
Interest................................................ 1,399,378
Investments sold........................................ 492,408
Prepaid expenses and other assets........................... 3,089
------------
TOTAL ASSETS............................................ 65,564,648
------------
LIABILITIES:
Payable for:
Investments purchased................................... 758,250
Investment management fee............................... 41,088
Accrued expenses and other payables......................... 68,909
------------
TOTAL LIABILITIES....................................... 868,247
------------
NET ASSETS.............................................. $ 64,696,401
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $121,076,287
Net unrealized depreciation................................. (17,221,544)
Accumulated undistributed net investment income............. 998,833
Accumulated net realized loss............................... (40,157,175)
-----------
NET ASSETS.............................................. $ 64,696,401
============
NET ASSET VALUE PER SHARE,
12,876,779 shares outstanding (unlimited shares authorized
of $.01 par value)......................................... $5.02
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended January 31, 1999
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 10,033,361
------------
EXPENSES
Investment management fee................................... 550,779
Professional fees........................................... 51,031
Transfer agent fees and expenses............................ 49,106
Registration fees........................................... 48,000
Shareholder reports and notices............................. 32,968
Custodian fees.............................................. 13,973
Trustees' fees and expenses................................. 12,924
Other....................................................... 13,779
------------
TOTAL EXPENSES.......................................... 772,560
------------
NET INVESTMENT INCOME................................... 9,260,801
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (2,152,260)
Net change in unrealized depreciation....................... (12,713,436)
------------
NET LOSS................................................ (14,865,696)
------------
NET DECREASE................................................ $ (5,604,895)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER 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, 1999 JANUARY 31, 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 9,260,801 $10,066,319
Net realized loss..................................... (2,152,260) (5,009,921)
Net change in unrealized depreciation................. (12,713,436) 5,579,923
------------ -----------
NET INCREASE (DECREASE)........................... (5,604,895) 10,636,321
Dividends from net investment income.................. (9,271,165) (9,770,760)
------------ -----------
NET INCREASE (DECREASE)........................... (14,876,060) 865,561
NET ASSETS:
Beginning of period................................... 79,572,461 78,706,900
------------ -----------
END OF PERIOD
(Including undistributed net investment income of
$998,833 and $1,011,828, respectively)............ $ 64,696,401 $79,572,461
============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS January 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter High Income Advantage Trust III (the "Trust"),
formerly High Income Advantage Trust III, 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
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
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 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.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
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.
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, 1999 aggregated
$56,904,599 and $60,367,126, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Trust's transfer agent. At January 31, 1999, the Trust had
transfer agent fees and expenses payable of approximately $100.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR EXCESS OF
SHARES VALUE PAR VALUE
---------- -------- ------------
<S> <C> <C> <C>
Balance, January 31, 1997, 1998 and 1999.................... 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 26,
1999............ $0.06 February 5, 1999 February 19, 1999
February 23,
1999............ $0.06 March 5, 1999 March 19, 1999
</TABLE>
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS January 31, 1999, continued
6. FEDERAL INCOME TAX STATUS
At January 31, 1999, the Trust had a net capital loss carryover of approximately
$38,377,000 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 2007
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$9,648 $3,256 $10,665 $4,258 $3,007 $5,910 $1,633
====== ====== ======= ====== ====== ====== ======
</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 $663,000 during fiscal 1999.
At January 31, 1999, the Trust had temporary book/tax differences primarily
attributable to post-October losses, capital loss deferrals on wash sales and
interest on bonds in default.
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER 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
----------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 6.18 $ 6.11 $ 6.39 $ 6.12 $ 7.57
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income...................................... 0.72 0.78 0.77 0.75 0.75
Net realized and unrealized gain (loss).................... (1.16) 0.05 (0.26) 0.24 (1.43)
------ ------ ------ ------ ------
Total income (loss) from investment operations.............. (0.44) 0.83 0.51 0.99 (0.68)
------ ------ ------ ------ ------
Less dividends from net investment income................... (0.72) (0.76) (0.79) (0.72) (0.77)
------ ------ ------ ------ ------
Net asset value, end of period.............................. $ 5.02 $ 6.18 $ 6.11 $ 6.39 $ 6.12
====== ====== ====== ====== ======
Market value, end of period................................. $5.938 $7.375 $ 7.00 $ 6.75 $ 6.50
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
TOTAL RETURN+............................................... (10.59)% 16.86% 16.03% 15.31% (6.30)%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.05% 0.96% 0.98% 1.00% 1.02%
Net investment income....................................... 12.61% 12.70% 12.13% 11.80% 11.04%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $64,696 $79,572 $78,707 $82,277 $78,765
Portfolio turnover rate..................................... 81% 113% 161% 78% 82%
</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
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER 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 Morgan Stanley Dean Witter High
Income Advantage Trust III (the "Trust"), formerly High Income Advantage Trust
III, at January 31, 1999, 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, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
March 5, 1999
19
<PAGE> 20
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
MORGAN STANLEY
DEAN WITTER
HIGH INCOME
ADVANTAGE
TRUST III
Annual Report
January 31, 1999
