<PAGE> 1
MUNICIPAL INCOME TRUST III Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS August 31, 1996
DEAR SHAREHOLDER:
Stronger economic growth and the potential threat of inflation shifted the tone
of the fixed-income markets from bullish to bearish in early 1996. This change
in market psychology was confirmed by a surprisingly large increase in payroll
employment reported in March. Other indicators of economic activity and rising
commodity prices added to market concerns. As a result, investors anticipated
that the Federal Reserve Board might reverse its series of reductions in the fed
funds rate had begun in 1995. The bond market reacted to these expectations by
pushing long-term yields higher. More than three-quarters of the rise in
interest rates between February and July can be attributed to market weakness on
the days that strong monthly employment figures were reported.
MUNICIPAL MARKET CONDITIONS
Between August 1995 and February 1996, 30-year insured revenue bond yields
declined 70 basis points from 6.00 percent to 5.30 percent. Yields subsequently
moved higher, reaching 6.15 percent in April and again in mid June. By August
1996, 30-year insured revenue bond yields stood at 5.80 percent, compared to
3.85 percent for 1-year municipal notes. The yield pickup for extending maturity
from 1 to 30 years was 195 basis points.
Diminished risk that flat-tax proposals would cause a radical change in the tax
code prompted tax-exempt bonds to outperform U.S. Treasury securities. The ratio
of insured revenue bond yields to 30-year U.S. Treasury yields, which stood at
90 percent a year ago, declined to 82 percent. A decline in this ratio indicates
that municipal bond prices were stronger than U.S. Treasury prices.
The municipal market also benefited from steady demand. In addition to regular
maturities and calls for redemption, it has been estimated that investors also
face the retirement of $66 billion of previously refunded debt in 1996. On the
supply side, aggregate new-issue volume increased
<PAGE> 2
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1996, continued
18 percent to $114 billion during the first eight months of the year. However,
underwritings were postponed and the pace of activity slowed as interest rates
rose.
PERFORMANCE
The net asset value (NAV) of Municipal Income Trust III (TFC) declined from
$9.91 to $9.75 per share during the fiscal year ended August 31, 1996. Based on
this NAV change, plus reinvestment of tax-free dividends of $0.59 per share and
taxable capital gain distributions of $0.04 per share, the Fund's total return
was 5.07 percent. Over the same period, TFC's market price on the New York Stock
Exchange increased from $8.875 to $9.875 per share. Based on this market price
change plus reinvestment of dividends and distributions, the Fund's total return
was 18.83 percent.
TFC's market price on the New York Stock Exchange was trading at a 1 percent
premium to NAV on August 31, 1996. Undistributed net investment income was
$0.11 per share versus $0.145 per share a year ago.
PORTFOLIO STRUCTURE
In response to the rising interest rate environment in 1996, portfolio sales
shifted from defensive, higher-coupon bonds with limited call protection to
more market-sensitive discount and current-coupon issues. The average maturity
and call protection of the long-term portfolio were 19 years and 7 years,
respectively. The portfolio has consistently maintained an
upper-investment-grade quality structure with 78 percent of its long-term
holdings rated single "A" or better. TFC's net assets of $62 million were
diversified among 12 long-term sectors and 39 credits.
CREDIT RATINGS as of August 31, 1996
(% of Total Long-Term Portfolio)
A or A 18%
Aa or AA 9%
Aaa or AAA 51%
Baa or BBB 14%
Not Rated 8%
As measured by Standard & Poor's Corp. or Moody's Investors
Service, Inc.
FIVE LARGEST SECTORS as of August 31, 1996
(% of Net Assets)
Mortgage 14%
General Obligation 10%
Refunded 10%
Transportation 10%
Water & Sewer 10%
Other 46%
Portfolio Structure is subject to change
<PAGE> 3
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1996, continued
LOOKING AHEAD
The balance between the supply of new issues and demand created by maturity
should remain positive for the municipal market. Long-term insured municipal
securities currently yield 82 percent of the yield on U.S. Treasury securities
and may be expected to move in tandem with the U.S. Treasury market. Although
municipal performance relative to Treasuries has improved, tax-exempts could
again be affected by market uncertainty if new tax-reduction proposals were to
gain momentum.
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps to
support the market value of the Fund's shares. In addition, we would like to
remind you that the Trustees have approved a procedure whereby the Fund, when
appropriate, may purchase shares in the open market or in privately negotiated
transactions at a price not above market value or net asset value, whichever is
lower at the time of purchase. During the fiscal year, the Fund purchased and
retired 18,600 shares of common stock at a six percent market discount.
We appreciate your ongoing support of Municipal Income Trust III and look
forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 4
MUNICIPAL INCOME TRUST III
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 27, 1996, an annual meeting of the Fund's shareholders was held for the
purpose of voting on four separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Dr. Manuel H. Johnson
For................................................................. 4,993,010
Withheld............................................................ 88,884
John L. Schroeder
For................................................................. 4,991,511
Withheld............................................................ 90,383
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire, Paul
Kolton, Michael E. Nugent and Philip J. Purcell
(2) CONTINUANCE OF THE CURRENTLY EFFECTIVE INVESTMENT ADVISORY AGREEMENT WITH
DEAN WITTER INTERCAPITAL INC.:
<TABLE>
<S> <C>
For................................................................. 4,879,093
Against............................................................. 97,040
Abstain............................................................. 105,761
</TABLE>
(3) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For................................................................. 4,962,948
Against............................................................. 24,525
Abstain............................................................. 94,421
</TABLE>
(4) SHAREHOLDER PROPOSAL TO AMEND THE FUND'S DECLARATION OF TRUST TO REQUIRE
EACH TRUSTEE, WITHIN 30 DAYS OF ELECTION, TO BECOME A SHAREHOLDER OF THE
FUND:
<TABLE>
<S> <C>
For................................................................. 1,410,925
Against............................................................. 1,968,199
Abstain............................................................. 282,469
</TABLE>
<PAGE> 5
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (93.0%)
General Obligation (9.7%)
$ 1,050 Moulton-Niguel Water District, California, Refg 1993 (MBIA)............... 5.00 % 09/01/19 $ 925,869
1,500 Massachusetts, 1995 Ser B (AMBAC)......................................... 5.50 07/01/14 1,456,755
New York City, New York,
1,000 1995 Ser D (MBIA)........................................................ 6.20 02/01/07 1,077,940
500 1989 Ser C............................................................... 6.50 08/15/08 500,715
1,000 New York State, Refg Ser 1995 B........................................... 5.70 08/15/10 1,028,710
1,000 Washington, Ser 1994 A.................................................... 5.80 09/01/08 1,022,850
------- ---------
6,050 6,012,839
------- ---------
Educational Facilities Revenue (4.3%)
1,000 Massachusetts Health & Educational Facilities Authority, Boston College
Ser K.................................................................... 5.25 06/01/18 919,690
900 New Jersey Economic Development Authority, Educational Testing Service Ser
1995 A (MBIA)............................................................ 5.90 05/15/15 902,034
750 West Virginia School Building Authority, Cap Impr Ser 1991 A.............. 6.75 07/01/15 785,790
------- ---------
2,650 2,607,514
------- ---------
Electric Revenue (7.5%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I
(MBIA)................................................................... 5.75 01/01/15 983,240
3,000 Southern California Public Power Authority, Mead-Adelanto 1994 Ser A
(AMBAC).................................................................. 5.15 07/01/15 2,765,220
1,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA) (WI)............. 5.75 07/01/19 934,430
------- ---------
5,000 4,682,890
------- ---------
Hospital Revenue (4.8%)
2,000 Birmingham-Carraway Special Care Facilities Financing Authority, Alabama,
Carraway Methodist Health Ser 1995 A (Connie Lee)........................ 5.875 08/15/15 1,969,620
895 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc Refg
1990 Ser D............................................................... 9.50 11/15/15 1,017,096
------- ---------
2,895 2,986,716
------- ---------
Industrial Development/Pollution Control Revenue (8.2%)
2,000 New York State Energy Research & Development Authority, New York State
Electric & Gas Corp 1987 Ser A (AMT) (MBIA).............................. 6.15 07/01/26 1,997,080
2,005 Alliance Airport Authority, Texas, American Airlines Inc Ser 1990 (AMT)... 7.50 12/01/29 2,120,207
1,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
Texas, American Airlines Inc Ser 1995.................................... 6.00 11/01/14 975,830
------- ---------
5,005 5,093,117
------- ---------
Mortgage Revenue - Multi-Family (1.6%)
1,000 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT) (AMBAC)..... 6.60 07/01/14 1,024,580
------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
<C> <S> <C> <C> <C>
Mortgage Revenue - Single Family (12.5%)
$ 410 Colorado Housing Finance Authority, Ser A-2 (AMT)......................... 8.25 % 08/01/20 $ 429,344
200 Hawaii Housing Finance & Development Corporation, Purchase
Ser 1989 A (AMT)......................................................... 7.80 07/01/29 208,498
1,440 Idaho Housing Agency, Ser 1988 D-2 (AMT).................................. 8.25 01/01/20 1,495,598
2,834 Saint Tammany Public Trust Financing Authority, Louisiana, Refg Ser 1990
B........................................................................ 7.25 07/25/11 2,972,319
1,000 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)...................... 6.40 11/15/23 1,001,240
Massachusetts Housing Finance Agency,
495 Residential Ser 1989 A (AMT).............................................. 8.10 08/01/09 521,497
165 Residential Ser 1989 A (AMT).............................................. 8.20 08/01/27 173,724
Utah Housing Finance Agency,
365 Ser 1991 Issue A-2 (AMT).................................................. 7.75 01/01/23 382,502
580 Ser 1991 Issue B-2 (AMT).................................................. 7.75 01/01/23 603,705
------- ---------
7,489 7,788,427
------- ---------
Nursing & Health Related Facilities Revenue (7.2%)
Vista, California, Long-Term Care Foundation of America
2,030 Ser 1994 A COPs (a)....................................................... 8.50 01/01/20 1,461,623
243 Ser 1994 B COPs (a)....................................................... 0.00 01/01/20 2,430
980 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990.............................. 10.25 01/01/20 1,014,280
1,980 Lexington-Fayette Urban County Government, Kentucky, AHF/Kentucky-Iowa Inc
Ser 1990................................................................. 10.25 01/01/20 2,028,926
------- ---------
5,233 4,507,259
------- ---------
Resource Recovery Revenue (4.2%)
2,500 Cambria County Industrial Development Authority, Pennsylvania, Cambria
------- Cogen Co Ser 1989 F-2 (AMT).............................................. 7.75 09/01/19 2,612,775
---------
Transportation Facilities Revenue (10.4%)
2,325 Southwestern Development Authority, Illinois, Tri-City Regional Port
District
Ser 1989 A (AMT) (a)..................................................... 7.90 07/01/14 2,539,481
2,000 Kentucky Turnpike Authority, Economic Development Road Revitalization
Refg Ser 1995 (AMBAC).................................................... 5.625 07/01/15 1,962,280
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)................. 6.125 11/15/25 1,987,660
------- ---------
6,325 6,489,421
------- ---------
Water & Sewer Revenue (9.9%)
1,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)............................. 6.375 01/01/24 1,044,930
500 Massachusetts Water Pollution Abatement Trust, Pool Ser 2................. 5.70 02/01/12 498,955
1,500 Massachusetts Water Resources Authority, 1993 Ser C....................... 5.25 12/01/20 1,353,525
1,090 Erie County Water Authority, New York, 4th Resolution Refg Ser 1992
(AMBAC).................................................................. 0.00 12/01/17 238,132
1,300 Ohio Water Development Authority, Water Pollution Ser 1995 (MBIA)......... 5.75 12/01/17 1,285,726
2,000 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A (MBIA)............ 5.00 07/01/25 1,771,940
------- ---------
7,390 6,193,208
------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Other Revenue (2.4%)
$ 1,000 Pasadena, California, Refg & Cap 1992 COPs................................ 5.75 % 01/01/13 $ 970,060
500 Illinois Development Finance Authority, Church Road Partnership #2 Ser
------- 1989 (AMT)............................................................... 7.875 09/01/14 520,480
-----------
1,500 1,490,540
------- -----------
Refunded (10.3%)
2,750 Florence County Public Facilities Corporation, South Carolina, Law
Enforcement & Civic Center 1990 COPs (AMBAC)............................. 7.60 03/01/00++ 3,040,180
3,000 Washington Public Power Supply System, Nuclear Proj #2 Refg Ser 1990 C.... 7.625 01/01/01++ 3,386,880
------- -----------
5,750 6,427,060
------- -----------
58,787 TOTAL MUNICIPAL BONDS (Identified Cost $55,806,955)............................................... 57,916,346
------- -----------
SHORT-TERM MUNICIPAL OBLIGATIONS (4.0%)
1,000 Dade County Industrial Development Authority, Florida, Florida Power &
Light Co Ser 1993 (Demand 09/03/96)...................................... 3.85* 06/01/21 1,000,000
1,500 Missouri Health & Educational Facilities Authority, Washington University
Ser 1996 C (Demand 09/03/96)............................................. 3.85* 09/01/30 1,500,000
------- -----------
2,500 TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS (Identified Cost $2,500,000)............................... 2,500,000
-------
-----------
$61,287 TOTAL INVESTMENTS (Identified Cost $58,306,955) (b)...................................... 97.0% 60,416,346
=======
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................. 3.0 1,880,779
------ -----------
NET ASSETS................................................................................ 100.0% $62,297,125
====== ===========
</TABLE>
- ---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when issued basis.
++ Prerefunded to call date shown.
* Current coupon of variable rate security.
(a) Resale is restricted to qualified institutional investors.
(b) The aggregate cost for federal income tax purposes is identified
cost. The aggregate gross unrealized appreciation was $2,391,121
and the aggregate gross unrealized depreciation was $281,730,
resulting in net unrealized appreciation of $2,109,391.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1996, continued
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
August 31, 1996
<TABLE>
<S> <C>
Alabama.................. 3.2%
California............... 11.4
Colorado................. 0.7
Florida.................. 1.6
Hawaii................... 0.3
Idaho.................... 2.4
Illinois................. 8.2
Iowa..................... 1.6
Kentucky................. 6.4
Louisiana................ 4.8
Maine.................... 1.6
Massachusetts............ 9.5
Missouri................. 2.4
New Jersey............... 1.4
New York................. 7.8
Ohio..................... 2.1
Pennsylvania............. 4.2%
South Carolina........... 4.9
Texas.................... 8.2
Utah..................... 3.1
Virginia................. 2.8
Washington............... 7.1
West Virginia............ 1.3
----
Total.................... 97.0%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1996
ASSETS:
Investments in securities, at value
(identified cost $58,306,955)............ $60,416,346
Cash...................................... 46,385
Receivable for:
Investments sold...................... 1,949,016
Interest.............................. 921,358
Prepaid expenses and other assets......... 7,141
-----------
TOTAL ASSETS.......................... 63,340,246
-----------
LIABILITIES:
Payable for:
Investments purchased................. 950,000
Investment advisory fee............... 24,888
Administration fee.................... 15,555
Accrued expenses.......................... 52,678
-----------
TOTAL LIABILITIES..................... 1,043,121
-----------
NET ASSETS:
Paid-in-capital........................... 59,319,206
Net unrealized appreciation............... 2,109,391
Accumulated undistributed net investment
income................................... 714,633
Accumulated undistributed net realized
gain..................................... 153,895
-----------
NET ASSETS............................ $62,297,125
===========
NET ASSET VALUE PER SHARE
6,391,186 shares outstanding
(unlimited shares authorized of $.01 par
value)................................... $9.75
=====
STATEMENT OF OPERATIONS
For the year ended August 31, 1996
NET INVESTMENT INCOME:
INTEREST INCOME........................... $ 4,138,424
-----------
EXPENSES
Investment advisory fee................... 255,147
Administration fee........................ 159,467
Professional fees......................... 58,740
Transfer agent fees and expenses.......... 30,061
Shareholder reports and notices........... 25,440
Trustees' fees and expenses............... 19,743
Registration fees......................... 16,540
Custodian fees............................ 4,004
Other..................................... 10,247
-----------
TOTAL EXPENSES BEFORE EXPENSE
OFFSET................................ 579,389
LESS: EXPENSE OFFSET.................. (3,989)
-----------
TOTAL EXPENSES AFTER EXPENSE
OFFSET................................ 575,400
-----------
NET INVESTMENT INCOME................. 3,563,024
-----------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain......................... 163,941
Net change in unrealized appreciation..... (771,378)
-----------
NET LOSS.............................. (607,437)
-----------
NET INCREASE.............................. $ 2,955,587
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................... $ 3,563,024 $ 3,882,502
Net realized gain................................... 163,941 214,184
Net change in unrealized appreciation............... (771,378) 322,955
----------- -----------
NET INCREASE.................................... 2,955,587 4,419,641
----------- -----------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income............................... (3,777,142) (3,484,365)
Net realized gain................................... (224,230) (476,509)
----------- -----------
TOTAL........................................... (4,001,372) (3,960,874)
----------- -----------
Net decrease from transactions in shares of
beneficial
interest........................................... (172,108) (955,047)
----------- -----------
TOTAL DECREASE.................................. (1,217,893) (496,280)
NET ASSETS:
Beginning of period................................. 63,515,018 64,011,298
----------- -----------
END OF PERIOD
(Including undistributed net investment income
of $714,633 and $928,751, respectively)......... $62,297,125 $63,515,018
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1996
1. ORGANIZATION AND ACCOUNTING POLICIES
Municipal Income Trust III (the "Fund") is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company. The Fund's investment objective is to provide current income
which is exempt from federal income tax. The Fund was organized as a
Massachusetts business trust on June 26, 1989 and commenced operations on
October 5, 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 -- Portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service has
informed the Fund that in valuing portfolio securities, it uses both a
computerized matrix of tax-exempt securities and evaluations by its staff, in
each case based on information concerning market transactions and quotations
from dealers which reflect the bid side of the market each day. The portfolio
securities are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized 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 Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment
<PAGE> 12
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1996, continued
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 ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement, the Fund pays Dean Witter
InterCapital Inc. ("the Investment Adviser") an advisory fee, calculated weekly
and payable monthly, by applying the following annual rates to the Fund's
average weekly net assets: 0.40% to the portion of average weekly net assets not
exceeding $250 million and 0.30% to the portion of average weekly net assets
exceeding $250 million.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Adviser pays the salaries of all personnel,
including officers of the Fund, who are employees of the Investment Adviser.
3. ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement with Dean Witter Services Company Inc.
(the "Administrator"), the Fund pays an administration fee, calculated weekly
and payable monthly, by applying the following annual rates to the Fund's
average weekly net assets: 0.25% to the portion of average weekly net assets not
exceeding $250 million; 0.20% to the portion of average weekly net assets
exceeding $250 million but not exceeding $500 million; 0.167% to the portion of
average weekly net assets exceeding $500 million but not exceeding $750 million;
and 0.133% to the portion of average weekly net assets exceeding $750 million.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Fund'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
<PAGE> 13
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1996, continued
Fund who are employees of the Administrator. The Administrator also bears the
cost of telephone services, heat, light, power and other utilities provided to
the Fund.
4. 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 August 31, 1996 aggregated
$10,334,765 and $12,750,104, respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At August 31, 1996, the Fund had
transfer agent fees and expenses payable of approximately $5,000.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
--------- ---------- ------------
<S> <C> <C> <C>
Balance, August 31, 1994.......................................................... 6,522,686 $ 65,227 $ 60,381,134
Treasury shares purchased and retired (weighted average discount 10.71%)*......... (112,900) (1,129) (953,918)
--------- -------- ------------
Balance, August 31, 1995.......................................................... 6,409,786 64,098 59,427,216
Treasury shares purchased and retired (weighted average discount 5.98%)*.......... (18,600) (186) (171,922)
--------- -------- ------------
Balance, August 31, 1996.......................................................... 6,391,186 $ 63,912 $ 59,255,294
========= ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. DIVIDENDS
The Fund declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------- --------- ------------------ -------------------
<S> <C> <C> <C>
August 27, 1996 $0.05 September 6, 1996 September 20, 1996
September 24, 1996 $0.05 October 4, 1996 October 18, 1996
</TABLE>
<PAGE> 14
MUNICIPAL INCOME 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 AUGUST 31*
-------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 9.91 $ 9.81 $10.05 $ 9.80 $9.60
----- ----- ----- ----- ----
Net investment income................................................. 0.56 0.60 0.60 0.63 0.62
Net realized and unrealized gain (loss)............................... (0.09) 0.11 (0.25) 0.26 0.28
----- ----- ----- ----- ----
Total from investment operations...................................... 0.47 0.71 0.35 0.89 0.90
----- ----- ----- ----- ----
Less dividends and distributions from:
Net investment income.............................................. (0.59) (0.54) (0.56) (0.60) (0.64)
Net realized gain.................................................. (0.04) (0.07) (0.03) (0.04) (0.06)
----- ----- ----- ----- ----
Total dividends and distributions..................................... (0.63) (0.61) (0.59) (0.64) (0.70)
----- ----- ----- ----- ----
Net asset value, end of period........................................ $ 9.75 $ 9.91 $ 9.81 $10.05 $9.80
====== ====== ====== ====== =====
Market value, end of period........................................... $9.875 $8.875 $ 9.00 $10.25 $9.75
====== ====== ====== ====== =====
TOTAL INVESTMENT RETURN+.............................................. 18.83% 5.71% (6.60)% 12.27% 8.73%
RATIOS TO AVERAGE NET ASSETS:
Total expenses before expense offset.................................. 0.91%(1) 0.94% 0.93% 0.98% 1.00%
Net investment income................................................. 5.61% 6.24% 5.99% 6.37% 6.38%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $62,297 $63,515 $64,011 $66,651 $65,024
Portfolio turnover rate............................................... 17% 22% 23% 2% 8%
</TABLE>
- ---------------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total investment return is based upon the current market value on the last
day of each period reported. Dividends and distributions are assumed to be
reinvested at prices obtained under the Fund's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions.
(1) The above expense ratio was 0.91% after expense offset.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 15
MUNICIPAL INCOME TRUST III
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MUNICIPAL INCOME 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 Municipal Income Trust III (the
"Trust") at August 31, 1996, 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 August
31, 1996 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 11, 1996
--------------------------------------------------------------------
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended August 31, 1996, the Fund paid to the
shareholders $0.59 per share from net investment income. All
of the Fund's dividends from net investment income were exempt
interest dividends, excludable from gross income for Federal
income tax purposes. For the year ended August 31, 1996, the
Fund paid to shareholders $0.04 per share from long-term
capital gains.
<PAGE> 16
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
MUNICIPAL
INCOME
TRUST III
SEMIANNUAL REPORT
AUGUST 31, 1996
