<PAGE>
MUNICIPAL INCOME TRUST III Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS
February 29, 1996
DEAR SHAREHOLDER:
Progressive tightening of monetary policy by the Federal Reserve Board
through early 1995 slowed economic growth and caused bond prices to advance.
However, the pace of the rally moderated between September 1995 and February
1996, coinciding with the first half of Municipal Income Trust III's current
fiscal year. The trend toward lower long-term interest rates was aided by the
central bank's easing of short-term interest rates in three separate moves
between July 1995 and January 1996.
MUNICIPAL MARKET CONDITIONS
Long-term municipal bond yields as tracked by The Bond Buyer Revenue Bond
Index* moved from 6.26 percent in August 1995 to 5.86 percent at the end of
February. This 40 basis point decline in yield corresponded to a 4 percent
price increase for a callable bond with a 30-year maturity. Similarly, yields
on 1-year municipal notes moved from 3.92 percent to 3.30 percent. The yield
pickup for extending maturity from 1-to-30 years was 256 basis points in
February 1996.
Municipal market concern over the risk of flat tax legislation caused the
ratio of Revenue Bond Index yields to 30-year U.S. Treasury bond yields to
rise to 94 percent in August 1995. A rising ratio means that municipal bond
prices have lagged U.S. Treasury prices. As the prospect of flat tax passage
in 1996 faded, the yield ratio improved to 91 percent at the end of February.
Between 1987 and 1994, long-term municipal revenue yields averaged 89 percent
of U.S. Treasury yields.
Municipal underwriting activity increased by one-third over the past
six-months as a result of lower interest rates. Despite a resurgence in new
issue volume, the municipal market has continued to experience consolidation
with several major dealers withdrawing from the business.
- ------------
*The Bond Buyer Revenue Bond Index is an arithmetic average of the yields of
25 selected municipal revenue bonds with 30-year maturities. Credit ratings
of these bonds range from Aa1 to Baa1 by Moody's Investors Service, Inc., and
AA+ to A- by Standard & Poor's Corp.
<PAGE>
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 29, 1996, continued
TAX REFORM
Flat tax advocates have continued to generate publicity for their proposals
and have effected the municipal market since early 1995. Most of the
discussion on proposed tax-reform measures is based on theoretical concepts,
which contain broad assumptions and lack specific details. Basically, the
various plans raise questions about the fairness of changing from a
progressive tax structure. Low flat-tax rate plans call for the elimination
of deductions of mortgage interest, charitable contributions, property taxes,
and state and local income taxes. As politicians attempted to make tax reform
a major issue in the 1996 elections, media coverage expanded from the
financial page to the front page. One advantage of this publicity is
increased recognition of the impact of tax reform on different tax payers.
In addition to the market risk associated with the flat-tax proposals,
municipal credits would also be negatively affected. If mortgage interest and
property tax deductions were eliminated, municipalities would experience a
decline in their property tax base. The loss of state and local income tax
deductions would increase the relative economic disadvantage that high-tax
states already face. The flat tax may be considered an attempt to shift tax
accountability from the federal to local governments.
PERFORMANCE
The net asset value (NAV) of Municipal Income Trust III (TFC) rose from $9.91
to $10.04 per share during the six-month period ended February 29, 1996.
Based on the $0.13 per share NAV change plus reinvestment of tax-free
dividends totaling $0.29 per share and taxable capital gains distributions
totaling approximately $0.04 per share, the Fund's total NAV return was 4.83
percent.
Over the same period, the Fund's market price on the New York Stock Exchange
improved from $8.875 to $9.75 per share. Based on this market price change
and reinvestment of tax-free dividends and taxable distributions, the Fund's
total market return was 13.68 percent. The Fund began the period trading at a
ten percent discount to NAV and closed at a three percent discount.
Undistributed net investment income totaled $0.13 per share on February 29,
1996 versus $0.145 per share six months ago.
PORTFOLIO STRUCTURE
On February 29, 1996, the Fund's $64 million in net assets was diversified
among 13 long-term municipal sectors and 39 credits. The three largest
sectors -- mortgage -- single family, transportation and refunded bonds --
represented 37 percent of net assets. Average call protection was maintained
at eight years. The average maturity of the long-term portfolio increased
moderately from 18 to 20 years.
<PAGE>
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 29, 1996, continued
Holdings rated AAA or AA remained at 60 percent of the long-term
portfolio. The Fund's current credit-quality ratings are illustrated
on the right.
MOODY'S OR STANDARD & POOR'S CREDIT RATING
AS OF FEBRUARY 29, 1996
(% of Total Long-Term Investments)
(The chart below represents information which appears as a graphic in the
printed report)
A pie chart reflecting the credit quality of the portfolio as rated by Moody's
or Standard & Poors Credit Ratings as of February 29, 1996.
<TABLE>
<CAPTION>
CREDIT RATING PERCENT
------------- -------
<S> <C>
Aaa or AAA 42%
Aa or AA 18%
A or A 18%
Baa or BBB 14%
Not Rated 8%
</TABLE>
LOOKING AHEAD
Tax-reduction proposals may continue to receive publicity. However, the
balance between the supply of new issues and demand created by maturities and
calls for redemption should continue to be positive for the municipal market.
Long-term municipal securities continued to yield 90 percent of U.S.
Treasuries and are likely to move in tandem with the Treasury market.
The Fund's procedures 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 six-month period ended
February 29, 1996, the Fund purchased and retired 5,600 shares of common
stock at a weighted average market discount of 10.2 percent.
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>
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 29, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ---------------------------------------------------------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (96.9%)
General Obligation (9.6%)
$1,050 Moulton-Niguel Water District, California, Refg 1993 (MBIA) .... 5.00 % 09/01/19 $ 969,496
1,500 Massachusetts, 1995 Ser B (AMBAC) .............................. 5.50 07/01/14 1,498,155
New York City, New York,
1,000 1995 Ser D (MBIA) ............................................. 6.20 02/01/07 1,114,280
500 1989 Ser C .................................................... 6.50 08/15/08 505,030
1,000 New York State, Refg Ser 1995 B ................................ 5.70 08/15/10 1,045,380
1,000 Washington, Ser 1994 A ......................................... 5.80 09/01/08 1,055,020
- ----------- -------------
6,050 6,187,361
- ----------- -------------
Educational Facilities Revenue (4.2%)
1,000 Massachusetts Health & Educational Facilities Authority, Boston
College Ser K ................................................ 5.25 06/01/18 963,080
900 New Jersey Economic Development Authority, Educational Testing
Service Ser 1995 A (MBIA) ..................................... 5.90 05/15/15 932,031
750 West Virginia School Building Authority, Cap Impr Ser 1991 A ... 6.75 07/01/15 802,222
- ----------- -------------
2,650 2,697,333
- ----------- -------------
Electric Revenue (7.7%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser
I (MBIA) ...................................................... 5.75 01/01/15 1,011,900
4,000 San Antonio, Texas, Electric & Gas Refg Ser 1994 C ............. 4.70 02/01/06 3,922,280
- ----------- -------------
5,000 4,934,180
- ----------- -------------
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 2,028,260
895 Illinois Health Facilities Authority, Glen Oaks Medical Center
Inc Refg 1990 Ser D .......................................... 9.50 11/15/15 1,050,435
- ----------- -------------
2,895 3,078,695
- ----------- -------------
Industrial Development/Pollution Control Revenue (8.1%)
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 2,075,920
2,005 Alliance Airport Authority, Texas, American Airlines Inc Ser
1990 (AMT) . .................................................. 7.50 12/01/29 2,167,365
1,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995 ............. 6.00 11/01/14 978,490
- ----------- -------------
5,005 5,221,775
- ----------- -------------
Mortgage Revenue - Multi-Family (1.6%)
1,000 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT)
(AMBAC) ....................................................... 6.60 07/01/14 1,052,710
- ----------- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 29, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ---------------------------------------------------------------- -------- ----------- -------------
<C> <S> <C> <C> <C>
Mortgage Revenue - Single Family (16.4%)
$ 2,000 Alaska Housing Finance Corporation, 1993 1st Ser ............... 5.90 % 12/01/33 $ 1,967,080
420 Colorado Housing Finance Authority, Ser A-2 (AMT) .............. 8.25 08/01/20 444,255
225 Hawaii Housing Finance & Development Corporation, Purchase Ser
1989 A (AMT) .................................................. 7.80 07/01/29 236,898
1,580 Idaho Housing Agency, Ser 1988 D-2 (AMT) ....................... 8.25 01/01/20 1,675,037
3,033 Saint Tammany Public Trust Financing Authority, Louisiana, Refg
Ser 1990 B .................................................... 7.25 07/25/11 3,238,579
1,000 Maine Housing Authority, Purchase Ser 1990 A-4 (AMT) ........... 6.40 11/15/23 1,007,810
Massachusetts Housing Finance Agency,
495 Residental Ser 1989 A (AMT) ................................... 8.10 08/01/09 528,279
165 Residental Ser 1989 A (AMT) ................................... 8.20 08/01/27 175,598
Utah Housing Finance Agency,
465 Ser 1991 Issue A-2 (AMT) ...................................... 7.75 01/01/23 493,514
720 Ser 1991 Issue B-2 (AMT) ...................................... 7.75 01/01/23 764,150
- ----------- -------------
10,103 10,531,200
- ----------- -------------
Nursing & Health Related Facilities Revenue (7.3%)
Vista, California, Long-Term Care Foundation of America
2,034 Ser 1994 A COPs (a) ........................................... 8.50 01/01/20 1,627,539
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 1,026,854
1,980 Lexington-Fayette Urban County Government, Kentucky,
AHF/Kentucky-Iowa Inc Ser 1990 ............................... 10.25 01/01/20 2,052,844
- ----------- -------------
5,237 4,709,667
- ----------- -------------
Resource Recovery Revenue (4.1%)
2,500 Cambria County Industrial Development Authority, Pennsylvania,
Cambria Cogen Co Ser 1989 F-2 (AMT) .......................... 7.75 09/01/19 2,648,550
- ----------- -------------
Transportation Facilities Revenue (10.5%)
2,380 Southwestern Development Authority, Illinois, Tri-City Regional
Port District Ser 1989 A (AMT) (a) ........................... 7.90 07/01/14 2,636,159
2,000 Kentucky Turnpike Authority, Economic Development Road
Revitalization Refg Ser 1995 (AMBAC) ......................... 5.625 07/01/15 2,010,660
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA) ...... 6.125 11/15/25 2,089,100
- ----------- -------------
6,380 6,735,919
- ----------- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 29, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ---------------------------------------------------------------- -------- ----------- -------------
<C> <S> <C> <C> <C>
Water & Sewer Revenue (9.9%)
$ 1,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA) .................. 6.375% 01/01/24 $ 1,063,910
500 Massachusetts Water Pollution Abatement Trust, Pool Ser 2 ...... 5.70 02/01/12 512,810
Massachusetts Water Resources Authority,
1,500 1993 Ser C .................................................... 5.25 12/01/20 1,410,900
2,000 1995 Ser B (MBIA) ............................................. 5.00 12/01/25 1,840,500
1,090 Erie County Water Authority, New York, 4th Resolution Refg Ser
1992 (AMBAC) ................................................. 0.00 12/01/17 227,647
1,300 Ohio Water Development Authority, Water Pollution Ser 1995
(MBIA) ........................................................ 5.75 12/01/17 1,318,161
- ----------- -------------
7,390 6,373,928
- ----------- -------------
Other Revenue (2.4%)
1,000 Pasadena, California, Refg & Cap 1992 COPs ..................... 5.75 01/01/13 993,520
500 Illinois Development Finance Authority, Church Road Partnership
#2 Ser 1989 (AMT) ............................................. 7.875 09/01/14 529,390
- ----------- -------------
1,500 1,522,910
- ----------- -------------
Refunded (10.3%)
2,750 Florence County Public Facilities Corporation, South Carolina,
Law Enforcement & Civic Center 1990 COPs (AMBAC) ............... 7.60 03/01/00 ++ 3,117,950
3,000 Washington Public Power Supply System, Nuclear Proj #2 Refg Ser
1990 C ........................................................ 7.625 01/01/01 ++ 3,484,470
- ----------- -------------
5,750 6,602,420
- ----------- -------------
61,460 TOTAL MUNICIPAL BONDS (Identified Cost $58,838,892) ............................... 62,296,648
- ----------- -------------
SHORT-TERM MUNICIPAL OBLIGATION (1.7%)
1,100 Massachusetts, Dedicated Income Tax Ser 1990 B (Demand 03/01/96)
(Identified Cost $1,100,000) ................................. 3.35* 12/01/97 1,100,000
- ----------- -------------
$62,560 TOTAL INVESTMENTS (Identified Cost $59,938,892) (b) ..................... 98.6% 63,396,648
===========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES .......................... 1.4 875,544
----------- -------------
NET ASSETS .............................................................. 100.0% $64,272,192
=========== =============
<FN>
- ------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
++ 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
$59,938,892; the aggregate gross unrealized appreciation is
$3,603,213 and the aggregate gross unrealized depreciation is
$145,457, resulting in net unrealized appreciation of $3,457,756.
Bond Insurance:
- --------------
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 29, 1996 (unaudited) continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
February 29, 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
Alabama ........ 3.2% Kentucky ....... 6.3% South Carolina.. 4.8%
Alaska ......... 3.1 Louisiana ...... 5.0 Texas .......... 14.2
California ..... 7.2 Maine .......... 1.6 Utah ........... 2.0
Colorado ....... 0.7 Massachusetts .. 14.1 Washington ..... 7.1
Hawaii ......... 0.4 New Jersey ..... 1.5 West Virginia .. 1.2
Idaho .......... 2.6 New York ....... 7.7 ------
Illinois ....... 8.2 Ohio ........... 2.0 Total 98.6%
Iowa ........... 1.6 Pennsylvania ... 4.1 ======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $59,938,892) .................. $63,396,648
Cash ............................................ 79,427
Interest receivable ............................. 885,395
Prepaid expenses and other assets ............... 15,944
-------------
TOTAL ASSETS .................................. 64,377,414
-------------
LIABILITIES:
Payable for:
Investment advisory fee ....................... 24,212
Administration fee ............................ 15,132
Accrued expenses and other payables ............. 65,878
-------------
TOTAL LIABILITIES ............................. 105,222
-------------
NET ASSETS:
Paid-in-capital ................................. 59,441,221
Net unrealized appreciation ..................... 3,457,756
Accumulated undistributed net investment income 846,061
Accumulated undistributed net realized gain .... 527,154
-------------
NET ASSETS .................................... $64,272,192
=============
NET ASSET VALUE PER SHARE,
6,404,186 shares outstanding
(unlimited shares authorized of $.01 par value) $10.04
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the Six Months Ended February 29, 1996 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ....................... $2,061,488
------------
EXPENSES
Investment advisory fee ............... 128,617
Administration fee .................... 80,386
Professional fees ..................... 24,181
Shareholder reports and notices ...... 15,622
Transfer agent fees and expenses ..... 13,785
Trustees' fees and expenses ........... 10,662
Registration fees ..................... 8,091
Custodian fees ........................ 1,987
Other ................................. 5,625
------------
TOTAL EXPENSES BEFORE EXPENSE OFFSET 288,956
LESS: EXPENSE OFFSET ................ (1,983)
------------
TOTAL EXPENSES AFTER EXPENSE OFFSET.. 286,973
------------
NET INVESTMENT INCOME ............... 1,774,515
------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ..................... 537,200
Net change in unrealized appreciation.. 576,987
------------
NET GAIN ............................ 1,114,187
------------
NET INCREASE .......................... $2,888,702
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 29, 1996 AUGUST 31, 1995
- ------------------------------------------------------ ----------------- ---------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................. $ 1,774,515 $ 3,882,502
Net realized gain ..................................... 537,200 214,184
Net change in unrealized appreciation ................. 576,987 322,955
----------------- ---------------
NET INCREASE ........................................ 2,888,702 4,419,641
----------------- ---------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income ................................. (1,857,205) (3,484,365)
Net realized gain ..................................... (224,230) (476,509)
----------------- ---------------
TOTAL ............................................... (2,081,435) (3,960,874)
----------------- ---------------
Net decrease from transactions in shares of beneficial
interest ............................................. (50,093) (955,047)
----------------- ---------------
TOTAL INCREASE (DECREASE) ........................... 757,174 (496,280)
NET ASSETS:
Beginning of period ................................... 63,515,018 64,011,298
----------------- ---------------
END OF PERIOD
(Including undistributed net investment income of
$846,061 and $928,751, respectively) ................ $64,272,192 $63,515,018
================= ===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 29, 1996 (unaudited)
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 was organized as a Massachusetts business trust
on June 26, 1989 and commenced operations on October 5, 1989.
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.
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 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
<PAGE>
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 29, 1996 (unaudited) continued
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 with Dean Witter InterCapital
Inc. ("the Investment Adviser"), the Fund pays an advisory fee, calculated
weekly and payable monthly, by applying the following annual rates to the
Fund's weekly net assets: 0.40% to the portion of weekly net assets not
exceeding $250 million and 0.30% to the portion of 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 paid an administration fee, calculated
weekly and payable monthly, by applying the following annual rates to the
Fund's weekly net assets: 0.25% to the portion of weekly net assets not
exceeding $250 million; 0.20% to the portion of weekly net assets exceeding
$250 million but not exceeding $500 million; 0.167% to the portion of weekly
net assets exceeding $500 million but not exceeding $750 million; and 0.133%
to the portion of 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
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 six months ended February 29, 1996
aggregated $4,834,580 and $4,573,104, respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At February 29, 1996, the Fund
had transfer agent fees and expenses payable of approximately $5,200.
<PAGE>
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 29, 1996 (unaudited) continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL PAID
PAR VALUE IN EXCESS OF
SHARES OF SHARES PAR VALUE
----------- ----------- -------------
<S> <C> <C> <C>
Balance, August 31, 1993 ................................................ 6,632,086 $66,321 $61,369,111
Treasury shares purchased and retired (weighted average discount 7.82%)* (109,400) (1,094) (987,977)
----------- ----------- -------------
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 10.21%)* (5,600) (56) (50,037)
----------- ----------- -------------
Balance, February 29, 1996 .............................................. 6,404,186 $64,042 $59,377,179
=========== =========== =============
</TABLE>
- ------------
* The Trustees have voted to retire the shares purchased.
6. DIVIDENDS
The Fund has declared the following dividends from net investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
DECLARATION DATE PER SHARE DATE DATE
- ----------------- ----------- --------------- ----------------
<S> <C> <C> <C>
February 27, 1996 $0.05 March 8, 1996 March 22, 1996
March 26, 1996 $0.05 April 4, 1996 April 19, 1996
</TABLE>
<PAGE>
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 SIX FOR THE YEAR ENDED AUGUST 31*
MONTHS ENDED -----------------------------------------------------
FEBRUARY 29, 1996* 1996 1994 1993 1992 1991
- --------------------------------------- ------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period .................. $ 9.91 $ 9.81 $10.05 $ 9.80 $ 9.60 $ 9.32
------------------ --------- --------- --------- --------- ---------
Net investment income .................. 0.28 0.60 0.60 0.63 0.62 0.68
Net realized and unrealized gain (loss) 0.18 0.11 (0.25) 0.26 0.28 0.30
------------------ --------- --------- --------- --------- ---------
Total from investment operations ...... 0.46 0.71 0.35 0.89 0.90 0.98
------------------ --------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income ................. (0.29) (0.54) (0.56) (0.60) (0.64) (0.66)
Net realized gain ..................... (0.04) (0.07) (0.03) (0.04) (0.06) (0.04)
------------------ --------- --------- --------- --------- ---------
Total dividends and distributions ..... (0.33) (0.61) (0.59) (0.64) (0.70) (0.70)
------------------ --------- --------- --------- --------- ---------
Net asset value, end of period ......... $ 10.04 $ 9.91 $ 9.81 $10.05 $ 9.80 $ 9.60
================== ========= ========= ========= ========= =========
Market value, end of period ............ $ 9.75 $8.875 $ 9.00 $10.25 $ 9.75 $9.625
================== ========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN+ ............... 13.68%(1) 5.71% (6.60)% 12.27% 8.73% 20.38%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................... 0.90%(2)(3) 0.94% 0.93% 0.98% 1.00% 1.02%
Net investment income .................. 5.51%(2)(3) 6.24% 5.99% 6.37% 6.38% 7.20%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $64,272 $63,515 $64,011 $66,651 $65,024 $63,565
Portfolio turnover rate ................ 7%(1) 22% 23% 2% 8% 40%
<FN>
- ------------
* 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) Not annualized.
(2) Annualized.
(3) The above expense and net investment income ratios would have been
0.89% and 5.52%, respectively, which reflects 0.01% effect for custody
cash credits.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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<PAGE>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
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 ADVISER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
Municipal
Income
Trust III
Semiannual Report
February 29, 1996
