<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
Two World Trade Center
LETTER TO SHAREHOLDERS July 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
The six-month period ended July 31, 1999 has been a difficult one for the
high-yield bond market. Calendar year 1999 began with the high yield market
still feeling the effects of the dramatic flight to quality that occurred during
the second half of 1998. In response to concerns about the rapidly escalating
foreign-market crisis and its potential effect on the U.S. economy, investors
sought the relative safety of U.S. government securities over more economically
sensitive investments such as equities and high-yield bonds. This action
resulted in a sharp correction in the high-yield bond market during the second
half of 1998. High-yield bond prices declined as much as 15 percent and yields
rose from approximately 9 percent to the 12-percent range. The high-yield market
also experienced its own flight to quality during late 1998, with the middle
tier of the market (B-rated issues) significantly underperforming the upper tier
(BB-rated issues), due to investors' severe risk aversion.
As we enter the second half of 1999, the high-yield market has yet to rebound
from its woes of late last year. Fears about the foreign-market crisis have now
been replaced by concerns over potential inflation and ongoing credit-tightening
actions by the Federal Reserve Board. These concerns drove interest rates
sharply higher during the first half of 1999, resulting in a very weak
fixed-income market environment. While the high-yield market held up better than
most other fixed-income markets during the first half of 1999, it clearly
remains quite weak, due to the depressed bond market environment that exists
today. As a result, as we enter the second half of 1999, high-yield market
yields are approaching their highest and most attractive levels since the early
1990s, providing an unusually high yield advantage over U.S. Treasuries.
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
LETTER TO SHAREHOLDERS July 31, 1999, continued
PERFORMANCE
For the six-month period ended July 31, 1999, Morgan Stanley Dean Witter High
Income Advantage Trust III declined 1.74 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 six-month period was 8.55
percent.
Over the past six months, the Trust continued to distribute regular monthly
income dividends, at a rate of $0.06 per share. For the six-month period ended
July 31, 1999, the Trust's distributions totaled $0.36 per share. On July 31,
1999, the Trust had net assets in excess of $59 million.
PORTFOLIO STRATEGY
During the fiscal year, the Trust maintained a position in the more defensive,
higher-quality end of the high-yield market, which held up well in the period's
recent 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 recent market correction, as bond prices
declined sharply and yields rose dramatically. In terms of investment strategy,
we continue to concentrate on industry sectors that have historically proven to
be more predictable, recession resistant and/or growth oriented, such as cable
television, cellular communications, food and beverages, media, supermarkets and
telecommunications. We believe that these industry groups are poised to perform
well over the next year. We also expect to see continued consolidation and
merger activity within these industries, which should result in improved credit
quality for many of the industry's players. We continue to focus primarily on
domestic companies, given the favorable outlook for continued growth in the U.S.
economy, and are avoiding the emerging foreign high-yield markets at this time,
because of the higher degree of uncertainty and volatility associated with many
of these markets over the past few years.
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.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
LETTER TO SHAREHOLDERS July 31, 1999, continued
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is the President and Chief Operating Officer of Asset
Management for Morgan Stanley Dean Witter & Co. and President, Chief Executive
Officer and Director of Morgan Stanley Dean Witter Advisors Inc. He also serves
as Chairman, Chief Executive Officer and Director of Morgan Stanley Dean Witter
Distributors Inc. and Morgan Stanley Dean Witter Trust FSB.
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.
<TABLE>
<S> <C>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 22, 1999, an annual meeting of the Trust's shareholders was held for the
purpose of voting on two separate matters, the results of which were as follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Edwin J. Garn
For......................................................... 11,077,946
Withheld.................................................... 111,182
Michael E. Nugent
For......................................................... 11,082,019
Withheld.................................................... 107,109
Philip J. Purcell
For......................................................... 11,083,053
Withheld.................................................... 106,075
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Wayne E. Hedien, Dr. Manuel H. Johnson
and John L. Schroeder.
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................... 10,918,589
Against..................................................... 47,485
Abstain..................................................... 223,054
</TABLE>
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (95.6%)
Aerospace (0.6%)
$ 500 Sabreliner Corp. - 144A*............. 11.00 % 06/15/08 $ 380,000
-----------
Beverages - Non-Alcoholic (1.4%)
1,000 Sparkling Spring Water (Canada)...... 11.50 11/15/07 810,000
-----------
Broadcast Media (1.4%)
300 Tri-State Outdoor Media Group........ 11.00 05/15/08 302,250
500 Spanish Broadcasting System, Inc. ... 12.50 06/15/02 555,000
-----------
857,250
-----------
Cable Television (2.4%)
3,750 Australis Holdings Property Ltd.
(Australia) (a)..................... 15.00++ 11/01/02 93,750
500 Knology Holdings Inc. ............... 11.875++ 10/15/07 285,000
300 Optel Inc. .......................... 13.00 02/15/05 219,000
1,200 Optel, Inc. (Series B)............... 11.50 07/01/08 828,000
-----------
1,425,750
-----------
Casino/Gambling (3.3%)
2,800 Aladdin Gaming/Capital Corp. (Series
B).................................. 13.50++ 03/01/10 1,148,000
1,500 Fitzgeralds Gaming Corp. (Series B)
(b)................................. 12.25 12/15/04 825,000
-----------
1,973,000
-----------
Cellular Telephone (1.7%)
300 American Cellular Corp. ............. 10.50 05/15/08 307,500
300 Clearnet Communications, Inc.
(Canada)............................. 14.75++ 12/15/05 277,500
300 Dobson/Sygnet Communications......... 12.25 12/15/08 315,000
300 Dolphin Telecom PLC - 144A* (United
Kingdom)............................ 14.00++ 05/15/09 129,000
-----------
1,029,000
-----------
Construction/Agricultural Equipment/
Trucks (1.2%)
750 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 708,750
-----------
Consumer Business Services (6.8%)
500 Anacomp, Inc. (Series B)............. 10.875 04/01/04 517,500
800 CEX Holdings, Inc. (Series B)........ 9.625 06/01/08 810,000
578 Comforce Corp. (Series B)............ 15.00+ 12/01/09 508,475
1,500 Comforce Operating Inc. (Series B)... 12.00 12/01/07 1,275,000
1,400 Entex Information Services, Inc. .... 12.50 08/01/06 952,000
-----------
4,062,975
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Electronics/Appliances
(2.3%)
$ 5,000 International Semi-Tech
Microelectronics, Inc. (Canada)..... 11.50 %++ 08/15/03 $ 900,000
500 Windmere-Durable Holdings, Inc. ..... 10.00 07/31/08 482,500
-----------
1,382,500
-----------
Consumer Specialties (1.5%)
1,000 Samsonite Corp. ..................... 10.75 06/15/08 860,000
-----------
Contract Drilling (1.0%)
1,000 Northern Offshore ASA (Norway)....... 10.00 05/15/05 610,000
-----------
Containers/Packaging (4.4%)
1,000 Berry Plastics Corp. ................ 12.25 04/15/04 1,027,500
1,583 Envirodyne Industries, Inc. ......... 10.25 12/01/01 1,305,975
300 Impac Group Inc. (Series B).......... 10.125 03/15/08 282,000
-----------
2,615,475
-----------
Diversified Electronic Products
(0.8%)
500 High Voltage Engineering Co. ........ 10.50 08/15/04 462,500
-----------
Diversified Manufacturing (4.7%)
300 Eagle-Picher Industries, Inc. ....... 9.375 03/01/08 283,500
3,900 Jordan Industries, Inc. (Series B)... 11.75++ 04/01/09 2,535,000
-----------
2,818,500
-----------
Electronic Distributors (1.2%)
1,000 CHS Electronics, Inc. ............... 9.875 04/15/05 690,000
-----------
Food Chains (1.1%)
750 Pueblo Xtra International, Inc.
(Series C)........................... 9.50 08/01/03 675,000
-----------
Food Distributors (0.8%)
500 Fleming Companies, Inc. (Series B)... 10.625 07/31/07 461,250
-----------
Hotels/Resorts (2.8%)
500 Epic Resorts LLC (Series B).......... 13.00 06/15/05 440,000
1,200 Motels of America, Inc. (Series B)... 12.00 04/15/04 744,000
600 Resort At Summerlin (Series B)....... 13.00+ 12/15/07 515,652
-----------
1,699,652
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Industrial Specialties (2.0%)
$ 300 Indesco International Inc. .......... 9.75 % 04/15/08 $ 195,000
500 International Wire Group, Inc. ...... 11.75 06/01/05 520,000
500 Outsourcing Services Group, Inc.
(Series B).......................... 10.875 03/01/06 477,500
-----------
1,192,500
-----------
Media Conglomerates (3.2%)
1,800 Disney (Walt) & Co................... 13.50 03/10/00 1,889,730
-----------
Medical Specialties (2.2%)
600 Mediq/PRN Life Support Service
Inc. ................................ 11.00 06/01/08 474,000
500 Universal Hospital Services, Inc. ... 10.25 03/01/08 420,000
500 Universal Hospital Services, Inc. ... 10.25 03/01/08 440,000
-----------
1,334,000
-----------
Medical/Nursing Services (1.3%)
1,500 Pediatric Services of America, Inc.
(Series A).......................... 10.00 04/15/08 780,000
-----------
Military/Gov't/Technical (0.4%)
300 Loral Space & Communications Ltd. ... 9.50 01/15/06 265,500
-----------
Office Equipment & Supplies (1.4%)
1,000 Mosler, Inc. ........................ 11.00 04/15/03 845,000
-----------
Oil Refining/Marketing (0.7%)
1,500 Transamerican Refining Corp.
(Units)++ (a)(b).................... 16.00 06/30/03 405,000
-----------
Other Telecommunications (2.9%)
500 Cybernet Internet Services
International, Inc. - 144A*......... 14.00 07/01/09 502,500
300 Esprit Telecom Group PLC (United
Kingdom)............................ 10.875 06/15/08 309,000
300 Globenet Communications Group
Ltd. - 144A* (Bermuda).............. 13.00 07/15/07 301,500
300 Versatel Telecom BV (Netherlands)
(Units)++........................... 13.25 05/15/08 312,000
300 Worldwide Fiber Inc. - 144A*
(Canada)............................. 12.00 08/01/09 298,500
-----------
1,723,500
-----------
Packaged Goods/Cosmetics (1.7%)
1,000 J.B. Williams Holdings, Inc. ........ 12.00 03/01/04 1,000,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Printing/Forms (0.8%)
$ 500 Premier Graphics Inc. ............... 11.50 % 12/01/05 $ 460,000
-----------
Restaurants (7.2%)
6,251 American Restaurant Group Holdings,
Inc. - 144A* (c).................... 0.00 12/15/05 2,125,238
1,500 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 1,372,500
300 Friendly Ice Cream Corp. ............ 10.50 12/01/07 274,500
2,500 Planet Hollywood International, Inc.
(a)(b)............................... 12.00 04/01/05 525,000
-----------
4,297,238
-----------
Retail - Specialty (0.5%)
300 Pantry Inc. ......................... 10.25 10/15/07 304,500
-----------
Services To The Health Industry
(0.6%)
350 Unilab Corp. ........................ 11.00 04/01/06 383,250
-----------
Specialty Foods/Candy (1.6%)
4,525 Specialty Foods Acquisition Corp.
(Series B).......................... 13.00++ 08/15/05 950,250
-----------
Telecommunications (16.8%)
900 21st Century Telecom Group, Inc. .... 12.25++ 02/15/08 405,000
1,000 Birch Telecom Inc. (Units)++......... 14.00 06/15/08 1,010,000
300 Caprock Communications Corp. (Series
B).................................. 12.00 07/15/08 309,000
600 Covad Communications Group Inc. ..... 12.50 02/15/09 573,000
500 DTI Holdings Inc. (Series B)......... 12.50++ 03/01/08 200,000
1,000 e.spire Communications, Inc. ........ 13.75 07/15/07 890,000
1,000 Facilicom International, Inc. (Series
B)................................... 10.50 01/15/08 710,000
1,800 Firstworld Communications, Inc. ..... 13.00++ 04/15/08 1,016,999
500 Focal Communications Corp. (Series
B)................................... 12.125++ 02/15/08 292,500
300 GST Equipment Funding Corp. ......... 13.25 05/01/07 325,500
500 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 525,000
8,750 In-Flight Phone Corp. (Series B)
(a)(b)............................... 14.00++ 05/15/02 962,500
300 Level 3 Communications, Inc. ........ 9.125 05/01/08 285,000
500 NextLink Communications, Inc. ....... 12.50 04/15/06 530,000
500 Pac-West Telecomm Inc. - 144A*....... 13.50 02/01/09 500,000
500 Primus Telecommunications Group, Inc.
(Series B).......................... 9.875 05/15/08 460,000
600 Rhythms NetConnection,
Inc. - 144A*......................... 12.75 04/15/09 552,000
500 Talton Holdings Inc. ................ 11.00 06/30/07 466,250
-----------
10,012,749
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Telecommunication Equipment (0.3%)
$ 2,200 FWT, Inc. (b)........................ 9.875% 11/15/07 $ 198,000
-----------
Wireless Communications (12.6%)
2,000 Advanced Radio Telecommunications
Corp. .............................. 14.00 02/15/07 1,800,000
500 AMSC Acquisition Co. Inc. (Series
B)................................... 12.25 04/01/08 390,000
200 Arch Escrow Corp. - 144A*............ 13.75 04/15/08 184,000
4,000 Cellnet Data Systems, Inc. .......... 14.00++ 10/01/07 1,720,000
1,000 Globalstar LP/Capital Corp. ......... 11.375 02/15/04 710,000
600 Orbcomm Global LP.................... 14.00 08/15/04 558,000
500 Paging Network, Inc. ................ 10.125 08/01/07 395,000
600 Paging Network, Inc. ................ 10.00 10/15/08 474,000
1,000 USA Mobile Communications Holdings,
Inc. ............................... 14.00 11/01/04 970,000
300 Winstar Equipment Corp. ............. 12.50 03/15/04 315,000
-----------
7,516,000
-----------
TOTAL CORPORATE BONDS
(Identified Cost $71,847,999)............................. 57,078,819
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
- --------
<C> <S> <C> <C> <C>
COMMON STOCKS (d) (0.6%)
Cellular Telephone (0.0%)
1 Price Communications Corp. ............................... --
-----------
Clothing/Shoe/Accessory Stores (0.0%)
551,830 County Seat Stores, Inc. (c).............................. 4,966
-----------
Hotels/Resorts (0.0%)
2,000 Motels of America, Inc. - 144A*........................... 2,000
-----------
Medical/Nursing Services (0.2%)
104,665 Raintree Healthcare Corp. (c)............................. 117,748
-----------
Restaurants (0.0%)
4,750 American Restaurant Group Holdings, Inc. - 144A*.......... --
-----------
Specialty Foods/Candy (0.1%)
90,000 Specialty Foods Acquisition Corp. - 144A*................. 45,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Textiles (0.3%)
112,296 U.S. Leather, Inc. (c).................................... $ 168,510
-----------
TOTAL COMMON STOCKS
(Identified Cost $6,332,834).............................. 338,224
-----------
PREFERRED STOCKS (0.0%)
Oil Refining/Marketing
1,448 Transcontinental Refining Corp.* (Conv.).................. 81
2,633 Transcontinental Refining Corp.* (Conv.).................. 158
3,818 Transcontinental Refining Corp.* (Conv.).................. 202
7,899 Transcontinental Refining Corp.* (Conv.).................. 498
-----------
TOTAL PREFERRED STOCKS
(Identified Cost $939).................................... 939
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- -------- ----------
<C> <S> <C> <C>
WARRANTS (d) (0.5%)
Aerospace (0.0%)
2,500 Sabreliner Corp. - 144A*...................... 04/15/03 12,500
-----------
Casino/Gambling (0.0%)
23,000 Aladdin Gaming/Capital Corp. - 144A*.......... 03/01/10 230
-----------
Hotels/Resorts (0.0%)
500 Epic Resorts LLC - 144A*...................... 06/15/05 --
500 Resort At Summerlin - 144A*................... 12/15/07 --
-----------
--
-----------
Oil Refining/Marketing (0.0%)
1,500 Transamerican Refining Corp. - 144A*.......... 06/30/03 --
-----------
Other Telecommunications (0.1%)
500 Versatel Telecom BV - 144A* (Netherlands)..... 05/15/08 82,500
-----------
Telecommunications (0.4%)
1,000 Birch Telecom Inc. - 144A*.................... 06/15/08 55,000
2,500 DTI Holdings Inc. - 144A*..................... 03/01/08 --
1,800 Firstworld Communications, Inc. - 144A*....... 04/15/08 117,050
-----------
172,050
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
Wireless Communications (0.0%)
500 American Mobile Satellite Corp. - 144A*....... 04/01/08 $ 25,000
-----------
TOTAL WARRANTS
(Identified Cost $67,808)................................. 292,280
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------- ---------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT
REPURCHASE AGREEMENT (1.0%)
$ 642 The Bank of New York
(dated 07/30/99; proceeds $642,453)
(e) (Identified Cost $642,275)........... 5.00% 08/02/99 642,275
----------
TOTAL INVESTMENTS
(Identified Cost $78,891,855) (f)................... 97.7% 58,352,537
OTHER ASSETS IN EXCESS OF LIABILITIES............... 2.3 1,355,223
----- ----------
NET ASSETS......................................... 100.0% $59,707,760
===== ==========
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
+ Payment-in-kind security.
++ Currently a zero coupon bond that will pay interest at the rate shown at a
future specified date.
++ Consists of one or more class of securities traded together as a unit;
generally stocks or bonds with attached warrants.
(a) Issuer in bankruptcy.
(b) Non-income producing security; bond in default.
(c) Acquired through exchange offer.
(d) Non-income producing securities.
(e) Collateralized by $556,118 U.S. Treasury Bill 10.75% due 05/15/03 valued at
$656,662.
(f) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $1,431,136 and the
aggregate gross unrealized depreciation is $21,970,454, resulting in net
unrealized depreciation of $20,539,318.
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1999 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $78,891,855).............................. $58,352,537
Interest receivable......................................... 1,583,866
Prepaid expenses and other assets........................... 3,466
-----------
TOTAL ASSETS............................................ 59,939,869
-----------
LIABILITIES:
Investments management fee payable.......................... 44,878
Payable to bank............................................. 120,000
Accrued expenses and other payables......................... 67,231
-----------
TOTAL LIABILITIES....................................... 232,109
-----------
NET ASSETS.............................................. $59,707,760
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $121,076,287
Net unrealized depreciation................................. (20,539,318)
Accumulated undistributed net investment income............. 416,215
Accumulated net realized loss............................... (41,245,424)
-----------
NET ASSETS.............................................. $59,707,760
===========
NET ASSET VALUE PER SHARE,
12,876,779 shares outstanding
(unlimited shares authorized of $.01 par value)............ $4.64
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended July 31, 1999 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 4,399,818
-----------
EXPENSES
Investment management fee................................... 230,318
Professional fees........................................... 28,750
Transfer agent fees and expenses............................ 24,839
Registration fees........................................... 24,234
Shareholder reports and notices............................. 18,055
Custodian fees.............................................. 7,214
Trustees' fees and expenses................................. 6,508
Other....................................................... 6,922
-----------
TOTAL EXPENSES.......................................... 346,840
-----------
NET INVESTMENT INCOME................................... 4,052,978
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (1,088,249)
Net change in unrealized depreciation....................... (3,317,774)
-----------
NET LOSS................................................ (4,406,023)
-----------
NET DECREASE................................................ $ (353,045)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER 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
1999 JANUARY 31, 1999
- ---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 4,052,978 $ 9,260,801
Net realized loss..................................... (1,088,249) (2,152,260)
Net change in unrealized depreciation................. (3,317,774) (12,713,436)
----------- ------------
NET DECREASE...................................... (353,045) (5,604,895)
Dividends from net investment income.................. (4,635,596) (9,271,165)
----------- ------------
NET DECREASE...................................... (4,988,641) (14,876,060)
NET ASSETS:
Beginning of period................................... 64,696,401 79,572,461
----------- ------------
END OF PERIOD
(Including undistributed net investment income of
$416,215 and $998,833, respectively).............. $59,707,760 $ 64,696,401
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter 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") 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.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited), continued
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, 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
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited), continued
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 six months ended July 31, 1999 aggregated
$13,155,790 and $12,793,595, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager and
Distributor, is the Trust's transfer agent. At July 31, 1999, the Trust had
transfer agent fees and expenses payable of approximately $7,800.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, January 31, 1998, 1999 and July 31, 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>
July 27, 1999 $0.06 August 8, 1999 August 20, 1999
August 24, 1999 $0.06 September 3, 1999 September 17, 1999
</TABLE>
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 1999 (unaudited), 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.
18
<PAGE> 19
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 SIX FOR THE YEAR ENDED JANUARY 31
MONTHS ENDED ----------------------------------------------------
JULY 31, 1999 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period....................... $ 5.02 $ 6.18 $ 6.11 $ 6.39 $ 6.12 $ 7.57
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income..................................... 0.34 0.72 0.78 0.77 0.75 0.75
Net realized and unrealized gain (loss)................... (0.36) (1.16) 0.05 (0.26) 0.24 (1.43)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations............. (0.02) (0.44) 0.83 0.51 0.99 (0.68)
------ ------ ------ ------ ------ ------
Less dividends from net investment income.................. (0.36) (0.72) (0.76) (0.79) (0.72) (0.77)
------ ------ ------ ------ ------ ------
Net asset value, end of period............................. $ 4.64 $ 5.02 $ 6.18 $ 6.11 $ 6.39 $ 6.12
====== ====== ====== ====== ====== ======
Market value, end of period................................ $6.063 $5.938 $7.375 $ 7.00 $ 6.75 $ 6.50
====== ====== ====== ====== ====== ======
TOTAL RETURN+.............................................. 8.55%(1) (10.59)% 16.86% 16.03% 15.31% (6.30)%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................... 1.13%(2) 1.05% 0.96% 0.98% 1.00% 1.02%
Net investment income...................................... 13.20%(2) 12.61% 12.70% 12.13% 11.80% 11.04%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.................... $59,708 $64,696 $79,572 $78,707 $82,277 $78,765
Portfolio turnover rate.................................... 21%(1) 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.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE> 20
TRUSTEES
- ----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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.
MORGAN STANLEY
DEAN WITTER
HIGH INCOME ADVANTAGE
TRUST III
Semiannual Report
July 31, 1999
