<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
Two World Trade Center
LETTER TO THE SHAREHOLDERS July 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The 6-month period ended July 31, 2000, proved to be an extremely difficult one
for high-yield bond investors, as the high-yield market remained mired in one of
its worst slumps in the past 20 years. Concern over a rapidly growing U.S.
economy and the threat of inflation prompted the Federal Reserve Board to
continue its policy of raising short-term interest rates. As a result of the
Fed's actions and the ensuing higher-interest-rate environment, the financial
markets became worried about a potential hard landing for the U.S. economy and
its effect on future corporate earnings. These fears resulted in an extremely
weak fixed-income market during 1999 and an increasingly volatile equity market
in the first half of 2000. As investors became more risk averse, we witnessed a
severe flight to quality in the fixed-income markets, with the high-yield sector
being hit exceptionally hard. Much as in the last major high-yield market
correction ten years ago, significant investor outflows have greatly exaggerated
the decline, creating an extremely oversold market.
Credit spreads within the fixed-income markets widened dramatically over the
past year and a half as investors came to favor higher-quality securities. As a
result of this flight to quality, the yield spread between high-yield bonds and
comparable U.S. government securities is now approaching its widest margin in
history. Spreads have also broadened between the different tiers within the
high-yield sector as investors have gravitated toward the highest-quality end of
the marketplace. As a result of this trend, lower-yielding, higher-quality
BB-rated bonds have held up significantly better than those in the
higher-yielding, lower-quality B-rated sector. Much as we saw in the high-yield
bear market of 1989 and 1990, investors' reactions have resulted in a sharp
decline in the prices of many high-yield bonds, driving market yields
substantially higher in the process so that yield spreads on many B-rated bonds
are approaching their highest levels on record.
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
PERFORMANCE
For the 6-month period ended July 31, 2000, Morgan Stanley Dean Witter High
Income Advantage Trust II produced a total return of -7.64 percent, based on a
change in net asset value (NAV) and reinvestment of distributions totaling $0.33
per share. For the same period, the Trust's total return was 19.11 percent,
based on a change in its market price on the New York Stock Exchange (NYSE) and
reinvestment of distributions.
PORTFOLIO STRATEGY
As discussed, the past year and a half has been one of the most difficult
periods for the high-yield market, particularly the B-rated sector, the market's
largest one. As a result of the substantial weakness in the high-yield market,
we have seen high-yield bond prices decline sharply and yields rise dramatically
over this period. Although the Trust's position in the more defensive,
higher-quality end of the market held up relatively well in the turbulent market
environment, its long-term core position in the B-rated sector was adversely
affected over the past year. With yields on many high-yield issues at or near
10-year highs and currently trading at significant discounts to their stated
maturity value, we currently view the high-yield sector as extremely
undervalued, although the timing of a recovery is still very uncertain at this
point. As the market outlook improves over time, we would expect to see investor
flows turn positive once again, creating strong demand for many of today's
depressed high-yield bonds. In light of our positive long-term outlook based on
historically low valuations, we are maintaining our focus on this sector of the
market, which we believe offers the Trust long-term total return potential.
From an industry perspective we view the telecommunications sector as a
potentially rewarding investment opportunity, given the worldwide movement
toward providing expanded global telecommunications services, including voice,
video and data services over a combination of hardline and wireless networks.
The powerful combination of exciting growth prospects for the industry over the
next few years, along with the likelihood of the formation of strategic
partnerships with other major players, provides a fundamental backdrop for
strong revenue growth, higher profitability and future significant credit
improvement. Included among the Trust's current holdings are a number of telecom
companies that over the past year have either announced important strategic
partnerships or have raised equity capital to fuel future growth and profits.
With the recent high-yield market weakness we have seen many of these telecom
bonds decline sharply in price as investor nervousness spreads to this large but
volatile sector of the market. Despite the recent sector weakness, we view the
longer-
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
term prospects of this important industry very positively and feel that at
today's currently depressed levels many of these bonds represent outstanding
investment opportunities.
LOOKING AHEAD
In light of today's substantially higher yields, near-record yield spreads over
U.S. government bonds and significantly discounted bond prices, we view the
high-yield market as a potentially rewarding long-term investment opportunity.
Assuming a soft landing in the economy with growth continuing into 2001, we
would expect the high-yield market to recover over time and bond prices to
rebound from their current extremely depressed levels, much as they did in the
early 1990s period following the last high-yield bear market. Although the
B-rated segment of the market has clearly not been a good investment performer
over the past 18 months, we remain confident that its attractive yield and
capital appreciation potential remain intact for long-term investors.
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 appreciate your ongoing 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, 2000, an annual meeting of the Trust's shareholders was held for the
purpose of voting on the following matter, the results of which were as follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Michael Bozic
For......................................................... 10,770,186
Withheld.................................................... 212,528
Charles A. Fiumefreddo
For......................................................... 10,772,470
Withheld.................................................... 210,244
</TABLE>
The following Trustees were not standing for reelection at this meeting: Wayne
E. Hedien, Edwin J. Garn, Dr. Manuel H. Johnson, Michael E. Nugent, Philip J.
Purcell and John L. Schroeder.
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (95.7%)
Aerospace (0.9%)
$ 500 Sabreliner Corp. - 144A*.............. 11.00 % 06/15/08 $ 413,750
-----------
Beverages - Non-Alcoholic (1.8%)
1,000 Sparkling Spring Water (Canada)....... 11.50 11/15/07 780,000
-----------
Books/Magazines (0.5%)
250 Perry-Judds, Inc. .................... 10.625 12/15/07 215,000
-----------
Broadcast/Media (0.6%)
300 Tri-State Outdoor Mediagroup, Inc. ... 11.00 05/15/08 270,000
-----------
Broadcasting (1.0%)
200 STC Broadcasting, Inc. ............... 11.00 03/15/07 198,000
250 XM Satellite Radio Inc. - 144A*
(Units)++............................ 14.00 03/15/10 233,750
-----------
431,750
-----------
Cable Television (0.7%)
3,750 Australis Holdings Property Ltd.
(Australia) (a)...................... 15.00++ 11/01/02 37,500
500 Knology Holdings, Inc. ............... 11.875++ 10/15/07 265,000
-----------
302,500
-----------
Casino/Gambling (5.6%)
2,800 Aladdin Gaming Capital Corp. (Series
B)................................... 13.50++ 03/01/10 1,680,000
1,500 Fitzgeralds Gaming Corp. (Series B)
(b).................................. 12.25 12/15/04 795,000
-----------
2,475,000
-----------
Cellular Telephone (1.2%)
300 Dobson/Sygnet Communications.......... 12.25 12/15/08 309,000
700 Dolphin Telecom PLC (United
Kingdom)............................. 14.00++ 05/15/09 231,000
-----------
540,000
-----------
Construction/Agricultural Equipment/
Trucks (1.6%)
750 J.B. Poindexter & Co., Inc. .......... 12.50 05/15/04 708,750
-----------
Consumer Electronics/Appliances (0.7%)
5,000 International Semi-Tech
Microelectronics, Inc. (Canada)
(a).................................. 11.50++ 08/15/03 50,000
250 Windmere-Durable Holdings, Inc. ...... 10.00 07/31/08 245,000
-----------
295,000
-----------
Consumer Specialties (1.9%)
1,000 Samsonite Corp. ...................... 10.75 06/15/08 827,500
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer/Business Services (3.4%)
$500 Anacomp, Inc. (Series B).............. 10.875% 04/01/04 $ 337,500
250 Anacomp, Inc. (Series D).............. 10.875 04/01/04 168,750
668 Comforce Corp. (Series B)............. 15.00+ 12/01/09 200,320
1,500 Comforce Operating, Inc. ............. 12.00 12/01/07 810,000
-----------
1,516,570
-----------
Containers/Packaging (4.6%)
1,000 Berry Plastics Corp. ................. 12.25 04/15/04 962,500
1,583 Envirodyne Industries, Inc. .......... 10.25 12/01/01 1,068,525
-----------
2,031,025
-----------
Diversified Electronic Products (0.8%)
500 High Voltage Engineering, Inc. ....... 10.75 08/15/04 345,000
-----------
Diversified Manufacturing (6.7%)
600 Eagle-Picher Industries, Inc. ........ 9.375 03/01/08 501,000
3,900 Jordan Industries, Inc. (Series B).... 11.75++ 04/01/09 2,496,000
-----------
2,997,000
-----------
E.D.P. Services (0.9%)
500 Globix Corp. ......................... 12.50 02/01/10 395,000
-----------
Electronic Distributors (0.0%)
1,000 CHS Electronics, Inc. (a)(b).......... 9.875 04/15/05 20,000
-----------
Environmental Services (1.1%)
550 Allied Waste North America Inc.
(Series B)........................... 10.00 08/01/09 479,875
-----------
Food Chains (1.1%)
260 Eagle Food Centers, Inc. (a)(b)....... 8.625 04/15/00 135,200
750 Pueblo Xtra International, Inc.
(Series C)........................... 9.50 08/01/03 375,000
-----------
510,200
-----------
Food Distributors (1.7%)
500 Fleming Companies, Inc. (Series B).... 10.625 07/31/07 431,250
350 Volume Services America............... 11.25 03/01/09 320,250
-----------
751,500
-----------
Hotels/Resorts (1.3%)
500 Epic Resorts LLC (Series B)........... 13.00 06/15/05 175,000
600 Resort At Summerlin (Series B)........ 13.00 12/15/07 419,717
-----------
594,717
-----------
Industrial Specialties (2.3%)
300 Indesco International, Inc. .......... 9.75 04/15/08 114,000
500 International Wire Group, Inc. ....... 11.75 06/01/05 500,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$500 Outsourcing Services Group, Inc.
(Series B)........................... 10.875% 03/01/06 $ 400,000
-----------
1,014,000
-----------
Internet Services (0.9%)
500 Cybernet Internet Services Inc. ...... 14.00 07/01/09 210,000
250 PSINet, Inc. ......................... 10.50 12/01/06 202,500
-----------
412,500
-----------
Medical Specialties (2.1%)
900 Mediq/PRN Life Support Services,
Inc. (b)............................. 11.00 06/01/08 45,000
1,000 Universal Hospital Services, Inc.
(issued 02/25/98).................... 10.25 03/01/08 580,000
500 Universal Hospital Services, Inc.
(issued 01/26/99).................... 10.25 03/01/08 290,000
-----------
915,000
-----------
Medical/Nursing Services (2.3%)
1,500 Pediatric Services of America, Inc.
(Series A)........................... 10.00 04/15/08 1,027,500
-----------
Military/Gov't/Technical (0.5%)
300 Loral Space & Communications Ltd. .... 9.50 01/15/06 225,000
-----------
Movies/Entertainment (0.4%)
800 Regal Cinemas Inc. ................... 9.50 06/01/08 160,000
-----------
Office Equipment/Supplies (1.7%)
1,300 Mosler, Inc. ......................... 11.00 04/15/03 780,000
-----------
Oil Refining/Marketing (0.0%)
1,500 Transamerican Refining Corp. (Series
B) (a)(b)............................ 16.00 06/30/03 18,750
-----------
Other Telecommunications (11.9%)
1,000 Birch Telecom Inc. ................... 14.00 06/15/08 800,000
500 DTI Holdings, Inc. (Series B)......... 12.50++ 03/01/08 195,000
350 Esprit Telecom Group PLC (United
Kingdom)............................. 11.50 12/15/07 252,000
500 Esprit Telecom Group PLC (United
Kingdom)............................. 10.875 06/15/08 335,000
1,800 Firstworld Communications, Inc. ...... 13.00++ 04/15/08 558,000
300 Globenet Comm Group Ltd. (Bermuda).... 13.00 07/15/07 304,500
300 Pac-West Telecomm Inc. ............... 13.50 02/01/09 303,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Primus Telecommunication Group, Inc.
(Series B)........................... 9.875% 05/15/08 $ 275,000
200 Primus Telecommunications Group,
Inc. ................................ 12.75 10/15/09 122,000
250 Versatel Telecom International NV
(Netherlands)........................ 13.25 05/15/08 256,250
700 Viatel, Inc. ......................... 11.25 04/15/08 434,000
250 Viatel, Inc. (issued 03/19/99)........ 11.50 03/15/09 155,000
300 Viatel, Inc. (issued 12/08/99)........ 11.50 03/15/09 186,000
1,000 World Access, Inc. (c)................ 13.25 01/15/08 889,999
250 Worldwide Fiber Inc. (Canada)......... 12.00 08/01/09 232,500
-----------
5,298,249
-----------
Package Goods/Cosmetics (1.8%)
806 J.B. Williams Holdings, Inc. ......... 12.00 03/01/04 797,940
-----------
Printing/Forms (0.1%)
500 Premier Graphics Inc. (b)............. 11.50 12/01/05 35,000
-----------
Restaurants (5.8%)
6,251 American Restaurant Group Holdings,
Inc. - 144A* (c)..................... 0.00 12/15/05 1,781,450
1,500 FRD Acquisition Corp. (Series B)...... 12.50 07/15/04 555,000
300 Friendly Ice Cream Corp. ............. 10.50 12/01/07 249,750
-----------
2,586,200
-----------
Retail - Specialty (1.1%)
300 Pantry, Inc. ......................... 10.25 10/15/07 289,500
250 Petro Stopping Centers L.P. .......... 10.50 02/01/07 223,750
-----------
513,250
-----------
Specialty Foods/Candy (2.6%)
8,322 SFAC New Holdings Inc. (c)............ 13.00++ 06/15/09 1,165,057
-----------
Telecommunications (12.3%)
250 Caprock Communications Corp. ......... 11.50 05/01/09 182,500
300 Caprock Communications Corp.
(Series B)........................... 12.00 07/15/08 225,000
250 Covad Communications Group, Inc. ..... 12.50 02/15/09 190,000
300 Covad Communications Group, Inc.
(Series B)........................... 12.00 02/15/10 222,000
1,300 e. Spire Communications, Inc. ........ 13.75 07/15/07 845,000
500 Focal Communications Corp. (Series
B)................................... 12.125++ 02/15/08 337,500
300 GST Equipment Funding, Inc. (a)....... 13.25 05/01/07 157,500
250 Hyperion Telecommunication, Inc.
(Series B)........................... 12.25 09/01/04 245,000
450 Level 3 Communications, Inc. ......... 9.125 05/01/08 389,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 250 MGC Communications, Inc. - 144A*...... 13.00 % 04/01/10 $ 232,500
500 Nextlink Communications LLC........... 12.50 04/15/06 515,000
8,750 Normex Technologies Corp. (Series B)
(a)(b)............................... 14.00 05/15/02 700,000
900 Rhythms Netconnections, Inc. ......... 12.75 04/15/09 594,000
250 Startec Global Communications
Corp. ............................... 12.00 05/15/08 200,000
500 Talton Holdings, Inc. (Series B)...... 11.00 06/30/07 425,000
-----------
5,460,250
-----------
Wireless Communications (11.8%)
2,000 Advanced Radio Telecom Corp. ......... 14.00 02/15/07 1,759,999
500 AMSC Acquisition Co., Inc. (Series
B)................................... 12.25 04/01/08 372,500
200 Arch Escrow Corp. .................... 13.75 04/15/08 160,000
4,000 CellNet Data Systems, Inc. (a)........ 14.00++ 10/01/07 280,000
500 Globalstar LP/Capital Corp. .......... 10.75 11/01/04 135,000
600 Orbcomm Global LP/Capital Corp.
(Series B)........................... 14.00 08/15/04 210,000
1,000 Paging Network, Inc. (b).............. 10.125 08/01/07 400,000
1,500 Paging Network, Inc. (b).............. 10.00 10/15/08 600,000
1,000 USA Mobile Communications Holdings,
Inc. ................................ 14.00 11/01/04 860,000
500 Winstar Communications,
Inc. - 144A*......................... 12.75 04/15/10 465,000
-----------
5,242,499
-----------
TOTAL CORPORATE BONDS
(Cost $70,488,151)........................................ 42,551,332
-----------
<CAPTION>
NUMBER OF
SHARES
---------
<C> <S>
COMMON STOCKS (d)(0.6%)
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*............................ 500
-----------
Medical/Nursing Services (0.0%)
104,665 Raintree Healthcare Corp. (c).............................. 942
-----------
Other Telecommunications (0.5%)
6,667 Versatel Telecom International NV (ADR) Netherlands........ 213,344
3,142 World Access, Inc. (c)..................................... 28,278
-----------
241,622
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Restaurants (0.0%)
4,750 American Restaurant Group Holdings, Inc. - 144A*........... $ 1,188
-----------
Specialty Foods/Candy (0.1%)
453 SFAC New Holdings Inc. (c)................................. 113
90,000 Specialty Foods Acquisition Corp. - 144A*.................. 22,500
-----------
22,613
-----------
Telecommunication Equipment (0.0%)
41,066 FWT, Inc. (Class A) (c).................................... 411
-----------
Textiles (0.0%)
112,296 United States Leather, Inc. (c)............................ 1,123
-----------
TOTAL COMMON STOCKS
(Cost $6,404,795)......................................... 273,365
-----------
PREFERRED STOCKS (0.5%)
Oil Refining/Marketing (0.0%)
2,633 Transamerica Refining Corp. (Conv.) (Class B)*............. 26
1,448 Transamerica Refining Corp. (Conv.) (Class C)*............. 14
3,818 Transamerica Refining Corp. (Conv.) (Class D)*............. 38
7,899 Transamerica Refining Corp. (Conv.) (Class E)*............. 80
-----------
158
-----------
Telecommunication Equipment (0.5%)
410,666 FWT, Inc. (Series A) (c)................................... 205,333
-----------
TOTAL PREFERRED STOCKS
(Cost $1,647,295)......................................... 205,491
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
--------- ----------
<C> <S> <C> <C>
WARRANTS (d) (0.3%)
Aerospace (0.1%)
2,500 Sabreliner Corp. - 144A*....................... 04/15/03 25,000
-----------
Casino/Gambling (0.0%)
23,000 Aladdin Gaming Enterprises, Inc. - 144A*....... 03/01/10 230
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C>
Hotels/Resorts (0.0%)
500 Epic Resorts LLC - 144A*....................... 06/15/05 $ 5
500 Resort At Summerlin - 144A*.................... 12/15/07 5
-----------
10
-----------
Internet Services (0.0%)
500 Cybernet Internet Services Inc. - 144A*........ 07/01/09 5,000
-----------
Oil Refining/Marketing (0.0%)
1,500 Transamerican Refining Corp. - 144A*........... 06/30/03 2
-----------
Other Telecommunications (0.2%)
1,000 Birch Telecom Inc. - 144A*..................... 06/15/08 55,000
2,500 DTI Holdings Inc. - 144A*...................... 03/01/08 25
1,800 Firstworld Communications, Inc. - 144A*........ 04/15/08 36,000
-----------
91,025
-----------
Telecommunications (0.0%)
250 Startec Global Communications Corp. - 144A*.... 05/15/08 875
-----------
Wireless Communications (0.0%)
500 Motient Corp. - 144A*.......................... 04/01/08 20,000
-----------
TOTAL WARRANTS
(Cost $244,674)............................................ 142,142
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
--------- ------- ---------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT
$ 124 The Bank of New York
(dated 07/31/00; proceeds $123,577)
(e)(Cost $123,555)..................... 6.50% 08/01/00 123,555
-----------
TOTAL INVESTMENTS
(Cost $78,908,470) (f)............................ 97.4% 43,295,885
OTHER ASSETS IN EXCESS OF LIABILITIES............. 2.6 1,155,760
----- -----------
NET ASSETS........................................ 100.0% $44,451,645
===== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
PORTFOLIO OF INVESTMENTS July 31, 2000 (unaudited) continued
---------------------
<TABLE>
<C> <S>
ADR American Depository Receipt.
* Resale is restricted to qualified institutional investors.
++ Consists of one or more class of securities traded together
as a unit; stocks or 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 securities.
(e) Collateralized by $124,250 U.S. Treasury Note 5.875% due
02/15/04 valued at $126,026.
(f) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $661,370 and the
aggregate gross unrealized depreciation is $36,273,955,
resulting in net unrealized depreciation of $35,612,585.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2000 (unaudited)
ASSETS:
Investments in securities, at value
(cost $78,908,470)......................................... $43,295,885
Interest receivable......................................... 1,214,505
Prepaid expenses and other assets........................... 14,563
-----------
TOTAL ASSETS............................................ 44,524,953
-----------
LIABILITIES:
Investment management fee payable........................... 29,014
Accrued expenses and other payables......................... 44,294
-----------
TOTAL LIABILITIES....................................... 73,308
-----------
NET ASSETS.............................................. $44,451,645
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $111,277,286
Net unrealized depreciation................................. (35,612,585)
Accumulated undistributed net investment income............. 254,832
Accumulated net realized loss............................... (31,467,888)
-----------
NET ASSETS.............................................. $44,451,645
===========
NET ASSET VALUE PER SHARE,
12,837,779 shares outstanding
(unlimited shares authorized of $.01 par value)............ $3.46
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
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, 2000 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 4,227,335
-----------
EXPENSES
Investment management fee................................... 182,647
Professional fees........................................... 34,255
Transfer agent fees and expenses............................ 18,647
Shareholder reports and notices............................. 15,074
Registration fees........................................... 12,436
Trustees' fees and expenses................................. 6,040
Custodian fees.............................................. 2,034
Other....................................................... 6,496
-----------
TOTAL EXPENSES.......................................... 277,629
-----------
NET INVESTMENT INCOME................................... 3,949,706
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 252,683
Net change in unrealized depreciation....................... (7,383,712)
-----------
NET LOSS................................................ (7,131,029)
-----------
NET DECREASE................................................ $(3,181,323)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 15
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
2000 JANUARY 31, 2000
---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 3,949,706 $ 8,555,182
Net realized gain (loss).............................. 252,683 (1,211,052)
Net change in unrealized depreciation................. (7,383,712) (11,007,329)
----------- ------------
NET DECREASE...................................... (3,181,323) (3,663,199)
Dividends to shareholders from net investment
income............................................... (4,236,418) (9,012,471)
Decrease from transactions in shares of beneficial
interest............................................. -- (151,345)
----------- ------------
NET DECREASE...................................... (7,417,741) (12,827,015)
NET ASSETS:
Beginning of period................................... 51,869,386 64,696,401
----------- ------------
END OF PERIOD
(Including undistributed net investment income of
$254,832 and $541,544, respectively).............. $44,451,645 $ 51,869,386
=========== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (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 or American Stock Exchange, NASDAQ, or other exchange is valued at its
latest sale price, 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; (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.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (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.
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, 2000 aggregated
$4,358,625 and $6,516,792, respectively.
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (unaudited) continued
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At July 31, 2000, the Trust had transfer agent fees
and expenses payable of approximately $4,000.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, January 31, 1999................................... 12,876,779 $128,768 $120,947,519
Treasury shares purchased and retired (weighted average
discount 4.39%)*........................................... (39,000) (390) (150,955)
Reclassification due to permanent book/tax differences...... -- -- (9,647,656)
---------- -------- ------------
Balance, January 31, 2000 and July 31, 2000................. 12,837,779 $128,378 $111,148,908
========== ======== ============
</TABLE>
---------------------
* The Trustees have voted to retire the shares purchased.
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 25, 2000 $0.055 August 4, 2000 August 18, 2000
August 29, 2000 $0.055 September 8, 2000 September 22, 2000
</TABLE>
6. FEDERAL INCOME TAX STATUS
At January 31, 2000, the Trust had a net capital loss carryover of approximately
$30,596,000 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
---------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008
--------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$3,256 $10,665 $4,258 $3,007 $5,910 $1,633 $1,867
====== ======= ====== ====== ====== ====== ======
</TABLE>
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
NOTES TO FINANCIAL STATEMENTS July 31, 2000 (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 $7,000 during fiscal 2000.
At January 31, 2000, 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.
19
<PAGE> 20
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, 2000 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period.............. $ 4.04 $ 5.02 $ 6.18 $ 6.11 $ 6.39 $ 6.12
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income............................ 0.31 0.66 0.72 0.78 0.77 0.75
Net realized and unrealized gain (loss).......... (0.56) (0.94) (1.16) 0.05 (0.26) 0.24
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations.... (0.25) (0.28) (0.44) 0.83 0.51 0.99
------ ------ ------ ------ ------ ------
Less dividends from net investment income......... (0.33) (0.70) (0.72) (0.76) (0.79) (0.72)
------ ------ ------ ------ ------ ------
Net asset value, end of period.................... $ 3.46 $ 4.04 $ 5.02 $ 6.18 $ 6.11 $ 6.39
====== ====== ====== ====== ====== ======
Market value, end of period....................... $4.625 $4.188 $5.938 $7.375 $ 7.00 $ 6.75
====== ====== ====== ====== ====== ======
TOTAL RETURN+..................................... 19.11%(1) (19.47)% (10.59)% 16.86% 16.03% 15.31%
RATIOS TO AVERAGE NET ASSETS:
Expenses.......................................... 1.16%(2) 1.08% 1.05% 0.96% 0.98% 1.00%
Net investment income............................. 16.47%(2) 14.78% 12.61% 12.70% 12.13% 11.80%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........... $44,452 $51,869 $64,696 $79,572 $78,707 $82,277
Portfolio turnover rate........................... 9%(1) 40% 81% 113% 161% 78%
</TABLE>
---------------------
+ Total 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 return does not
reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE> 21
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST III
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Trust.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Trust for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Trust, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
21
<PAGE> 22
(This Page Intentionally Left Blank)
<PAGE> 23
(This Page Intentionally Left Blank)
<PAGE> 24
TRUSTEES
----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
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 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
----------------------------------
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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, 2000
