<PAGE> 1
MUNICIPAL INCOME TRUST III Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS February 28, 1997
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Municipal
Income Trust III (TFC) for the six-month period ended February 28, 1997.
Domestic economic growth moderated during the third quarter of 1996. Consumer
spending led a rebound of economic activity in the fourth quarter. Under these
conditions, fixed-income yields moved lower through November but rose between
December and February. Inflation remained under control despite full employment
and stronger growth. On March 25, 1997, the Federal Reserve Board raised the
federal-funds rate 25 basis points to 5.50 percent in a preemptive move against
a possible acceleration in the rate of inflation.
MUNICIPAL MARKET CONDITIONS
Long-term insured revenue municipal bond yields declined from 5.80 percent in
August to 5.50 percent in November 1996. At the end of February, insured
municipal yields stood at 5.55 percent, having lagged the trend of Treasuries
toward higher yields. Between August and November, the ratio of insured
municipal revenue bond yields to 30-year U.S. Treasury yields fell from 86
percent to 84 percent, and reached 82 percent by the end of February. A
declining ratio means that municipal bond prices outperformed U.S. Treasury
prices. The average annual range of this ratio over the past three years has
been 81 percent to 92 percent. New-issue municipal volume increased 14 percent
to $183 billion in 1996. Underwriting volume in 1997 is expected to exceed the
amount of issues that will either mature or be called for redemption.
PERFORMANCE
Municipal Income Trust III's net asset value (NAV) moved from $9.75 to $9.76 per
share during the six-month period ended February 28, 1997. Based on this NAV
change, plus reinvestment of tax-free dividends totaling $0.29 per share and a
taxable long-term capital gain distribution
<PAGE> 2
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1997, continued
of $0.025 per share, the Fund's total NAV return was 3.65 percent. TFC's market
price on the New York Stock Exchange declined from $9.75 to $9.125 per share.
Based on this market price move and reinvestment of tax-free dividends and the
taxable capital gain distribution, the Fund's total market return was -4.41
percent.
TFC's market price on the New York Stock Exchange stood at a seven percent
discount to NAV on February 28, 1997. Undistributed net investment income
totaled $0.09 per share on February 28, 1997, versus $0.11 per share six months
earlier. Beginning with the November 1996 dividend, the monthly rate was reduced
from $0.05 to $0.0475 per share to more closely reflect the Fund's anticipated
income as older, higher yielding investments are called for redemption. Net
assets exceeded $62 million.
PORTFOLIO STRUCTURE
The Fund's investments were diversified among 13 long-term sectors and 42
credits. Portfolio sales primarily focused on market sensitive issues. Sales of
discount and current-coupon issues exceeded sales of defensive, higher-coupon
bonds with shorter calls. New purchases included securities with 15 to 25 year
maturities rather than the 20 to 30 year maturities. Bonds with shorter
durations were favored. The Fund's average maturity was 19 years.
The portfolio's distribution of older, shorter-call issues and newer issues with
longer call dates provided an average of 7 years of call protection.
<TABLE>
<CAPTION>
FIVE LARGEST SECTORS AS OF FEBRUARY 28, 1997
(% OF NET ASSETS)
<S> <C>
Housing 18%
Refunded 12%
Transportation 11%
Water & Sewer 10%
General Obligation 10%
All Others 39%
</TABLE>
Portfolio structure is subject to change.
<TABLE>
<CAPTION>
CREDIT RATINGS AS OF FEBRUARY 28, 1997
(% OF TOTAL LONG-TERM PORTFOLIO)
<S> <C>
Aaa OR AAA 54%
Aa OR AA 9%
A OR A 17%
Baa OR BBB 13%
NOT RATED 7%
</TABLE>
AS MEASURED BY MOODY'S INVESTORS SERVICES, INC. OR STANDARD & POOR'S CORP.
* NOT RATED AT TIME OF PURCHASE; DEEMED BY INVESTMENT MANAGER TO BE COMPARABLE
TO INVESTMENT-GRADE SECURITIES.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
<PAGE> 3
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1997, continued
Bonds with shorter-than-average call protection had average book yields in
excess of 7 3/4 percent. The book yields of bonds with longer-than-average call
protection averaged 6 percent. The portfolio has consistently sought to upgrade
quality, with more than 61 percent of its long-term holdings rated double "A" or
better.
<TABLE>
<CAPTION>
CALL STRUCTURE AS OF FEBRUARY 28, 1997
(% OF TOTAL LONG-TERM PORTFOLIO)
PERCENT CALLABLE
WEIGHTED AVERAGE CALL PROTECTION: 7 YEARS
<S> <C>
YEARS
BONDS PERCENT
CALLABLE CALLABLE
-------- --------
1997 2.1%
1998 4.2%
1999 6.3%
2000 15.1%
2001 8.3%
2002 3.3%
2003 3.1%
2004 9.1%
2005 23.9%
2006 4.6%
2007-2011 13.0%
2012+ 7.0%
</TABLE>
LOOKING AHEAD
The collapse of flat-tax proposals caused municipal bonds to improve relative to
U.S. Treasury securities. Tax-free yields are currently rich within their
average range to Treasury yields. If municipal yields were to rise significantly
in the future, the Fund would tend to sell its more defensive bonds with short
calls in order to extend maturity and increase call protection.
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 six-month period ended February 28,
1997, the Fund purchased and retired 4,300 shares of common stock at a weighted
average market discount of 6.13 percent.
<PAGE> 4
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1997, continued
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> 5
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1997 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (97.5%)
General Obligation (9.8%)
$ 1,050 Moulton-Niguel Water District, California, Refg Ser 1993 (MBIA).......... 5.00% 09/01/19 $ 948,822
1,500 Massachusetts, 1995 Ser B (AMBAC)........................................ 5.50 07/01/14 1,499,880
New York City, New York,
1,000 1995 Ser D (MBIA)....................................................... 6.20 02/01/07 1,078,330
500 1989 Ser C.............................................................. 6.50 08/15/08 501,075
1,000 New York State, Refg Ser 1995 B.......................................... 5.70 08/15/10 1,046,630
1,000 Washington, Ser 1995 A................................................... 5.80 09/01/08 1,044,220
- -------- ------------
6,050 6,118,957
- -------- ------------
Education Facilities Revenue (3.0%)
1,000 Massachusetts Health & Educational Facilities Authority, Boston College
Ser K................................................................... 5.25 06/01/18 947,220
900 New Jersey Economic Development Authority, Educational Testing Service
Ser 1995 A (MBIA)....................................................... 5.90 05/15/15 928,899
- -------- -----------
1,900 1,876,119
- -------- ------------
Electric Revenue (7.8%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I
(MBIA).................................................................. 5.75 01/01/15 1,010,960
3,000 Southern California Public Power Authority, Mead-Adelanto 1994 Ser A
(AMBAC)................................................................. 5.15 07/01/15 2,836,440
1,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA) (WI)............ 5.75 07/01/19 994,930
- -------- ------------
5,000 4,842,330
- -------- -----------
Hospital Revenue (6.4%)
2,000 Birmingham-Carraway Special Care Facilities Financing Authority, Alabama,
Carraway Methodist Health Ser 1995 A (Connie Lee)....................... 5.88 08/15/15 2,031,180
845 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc Refg
1990 Ser D.............................................................. 9.50 11/15/15 958,703
1,000 University of Missouri, Health System Ser 1996 A (AMBAC)................. 5.50 11/01/16 983,400
------------
- --------
3,845 3,973,283
- -------- ------------
Industrial Development/Pollution Control Revenue (6.7%)
1,000 New York State Energy Research & Development Authority, New York State
Electric & Gas Corp 1987 Ser A (AMT) (MBIA)............................. 6.15 07/01/26 1,018,280
2,005 Alliance Airport Authority, Texas, American Airlines Inc Ser 1990
(AMT)................................................................... 7.50 12/01/29 2,143,686
1,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
Texas, American Airlines Inc Ser 1995................................... 6.00 11/01/14 993,120
- -------- ------------
4,005 4,155,086
- -------- ------------
Mortgage Revenue - Multi-Family (1.7%)
1,000 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT) (AMBAC).... 6.60 07/01/14 1,043,780
- -------- ------------
Mortgage Revenue - Single Family (16.7%)
390 Colorado Housing Finance Authority, Ser A-2 (AMT)........................ 8.25 08/01/20 406,318
175 Hawaii Housing Finance & Development Corporation, Purchase Ser 1989 A
(AMT)................................................................... 7.80 07/01/29 182,773
1,370 Idaho Housing Agency, Ser 1988 D-2 (AMT)................................. 8.25 01/01/20 1,448,063
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1997 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,656 Saint Tammany Public Trust Financing Authority, Louisiana, Refg Ser 1990
B....................................................................... 7.25% 07/25/11 $ 2,827,377
1,000 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)..................... 6.40 11/15/23 1,012,450
Massachusetts Housing Finance Agency,
495 Residential Ser 1989 A (AMT)............................................ 8.10 08/01/09 520,829
165 Residential Ser 1989 A (AMT)............................................ 8.20 08/01/27 169,889
3,000 Ohio Housing Finance Agency, Residential GNMA Collateralized 1996 Ser B-2
(AMT)................................................................... 6.10 09/01/28 3,012,660
Utah Housing Finance Agency,
320 Ser 1991 Issue A-2 (AMT)................................................ 7.75 01/01/23 333,632
495 Ser 1991 Issue B-2 (AMT)................................................ 7.75 01/01/23 517,513
- -------- ------------
10,066 10,431,504
- -------- ------------
Nursing & Health Related Facilities Revenue (6.5%)
Vista, California, Long-Term Care Foundation of America
2,028 Ser 1994 A COPs (a)(b).................................................. 8.50 01/01/20 1,013,882
243 Ser 1994 B COPs (a)(b).................................................. 0.00 01/01/20 2,430
965 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990............................. 10.25 01/01/20 1,009,467
1,960 Lexington-Fayette Urban County Government, Kentucky, AHF/Kentucky-Iowa
Inc Ser 1990............................................................ 10.25 01/01/20 2,031,070
- -------- ------------
5,196 4,056,849
- -------- ------------
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 2,575,575
------------
Transportation Facilities Revenue (10.6%)
2,325 Southwestern Development Authority, Illinois, Tri-City Regional Port
District Ser 1989 A (AMT) (a)........................................... 7.90 07/01/14 2,536,714
2,000 Kentucky Turnpike Authority, Economic Development Road Revitalization
Refg Ser 1995 (AMBAC)................................................... 5.625 07/01/15 2,014,640
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)................ 6.125 11/15/25 2,054,340
- -------- ------------
6,325 6,605,694
- -------- ------------
Water & Sewer Revenue (10.2%)
1,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)............................ 6.375 01/01/24 1,073,590
500 Massachusetts Water Pollution Abatement Trust, Pool Ser 2................ 5.70 02/01/12 511,850
1,500 Massachusetts Water Resources Authority, 1993 Ser C...................... 5.25 12/01/20 1,390,545
1,090 Erie County Water Authority, New York, 4th Resolution Refg Ser 1992
(AMBAC)................................................................. 0.00 12/01/17 246,852
1,300 Ohio Water Development Authority, Water Pollution Ser 1995 (MBIA)........ 5.75 12/01/17 1,311,908
2,000 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A (MBIA)........... 5.00 07/01/25 1,819,820
- -------- ------------
7,390 6,354,565
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1997 (unaudited) 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 $ 996,830
500 Illinois Development Finance Authority, Church Road Partnership #2 Ser
1989 (AMT).............................................................. 7.88 09/01/14 516,300
- -------- ------------
1,500 1,513,130
- -------- ------------
Refunded (11.6%)
2,750 Florence County Public Facilities Corporation, South Carolina, Law
Enforcement & Civic Center 1990 COPs (AMBAC)............................ 7.60 03/01/00++ 3,034,268
3,000 Washington Public Power Supply System, Nuclear Proj #2 Refg Ser 1990 C... 7.625 01/01/01++ 3,393,600
750 West Virginia School Building Authority, Cap Impr Ser 1991 A............. 6.75 07/01/01++ 826,935
- -------- ------------
6,500 7,254,803
- -------- ------------
61,277
- -------- TOTAL MUNICIPAL BONDS (Identified Cost $58,300,277)............................................. 60,801,675
------------
SHORT-TERM MUNICIPAL OBLIGATION (2.4%)
1,500 Missouri Health & Educational Facilities Authority, Washington University
- -------- Ser 1996 C (Demand 03/03/97) (Identified Cost $1,500,000)............... 3.40* 09/01/30 1,500,000
------------
TOTAL INVESTMENTS (Identified Cost $59,800,277) (c).................................... 99.9% 62,301,675
$62,777
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................................... 0.1 44,185
---- ------------
NET ASSETS.............................................................................. 100.0% $62,345,860
====== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
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 demand obligation.
(a) Resale is restricted to qualified institutional investors.
(b) Non-income producing security; bond in default.
(c) The aggregate cost for federal income tax purposes approximates identified cost. The aggregate gross
unrealized appreciation is $3,123,505 and the aggregate gross unrealized depreciation is $622,107,
resulting in net unrealized appreciation of $2,501,398.
</TABLE>
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 February 28, 1997 (unaudited) continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
February 28, 1997
<TABLE>
<S> <C>
Alabama.................. 3.3%
California............... 10.9
Colorado................. 0.7
Hawaii................... 0.3
Idaho.................... 2.3
Illinois................. 8.2
Iowa..................... 1.6
Kentucky................. 6.5
Louisiana................ 4.5
Maine.................... 1.6
Massachusetts............ 9.8
Missouri................. 4.0
New Jersey............... 1.5
New York................. 6.2
Ohio..................... 6.9
Pennsylvania............. 4.1
South Carolina........... 4.9
Texas.................... 8.3
Utah..................... 3.0
Virginia................. 2.9
Washington............... 7.1
West Virginia............ 1.3
---
Total.................... 99.9%
===
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $59,800,277)......................................... $62,301,675
Cash................................................................... 58,790
Interest receivable.................................................... 1,002,692
Prepaid expenses and other assets...................................... 16,531
-----------
TOTAL ASSETS....................................................... 63,379,688
-----------
LIABILITIES:
Payable for:
Investments purchased.............................................. 950,000
Investment advisory fee............................................ 19,215
Administration fee................................................. 12,009
Accrued expenses....................................................... 52,604
-----------
TOTAL LIABILITIES.................................................. 1,033,828
-----------
NET ASSETS:
Paid-in-capital........................................................ 59,279,727
Net unrealized appreciation............................................ 2,501,398
Accumulated undistributed net investment income........................ 566,720
Accumulated net realized loss.......................................... (1,985)
-----------
NET ASSETS......................................................... $62,345,860
===========
NET ASSET VALUE PER SHARE
6,386,886 shares outstanding
(unlimited shares authorized of $.01 par value)....................... $9.76
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended February 28, 1997 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME......................................................... $1,979,732
----------
EXPENSES
Investment advisory fee................................................. 124,083
Administration fee...................................................... 77,552
Professional fees....................................................... 31,063
Shareholder reports and notices......................................... 11,589
Transfer agent fees and expenses........................................ 9,618
Registration fees....................................................... 8,261
Trustees' fees and expenses............................................. 7,609
Custodian fees.......................................................... 1,893
Other................................................................... 5,043
----------
TOTAL EXPENSES...................................................... 276,711
LESS: EXPENSE OFFSET................................................ (1,886)
----------
NET EXPENSES........................................................ 274,825
----------
NET INVESTMENT INCOME............................................... 1,704,907
----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain....................................................... 2,845
Net change in unrealized appreciation................................... 392,007
----------
NET GAIN............................................................ 394,852
----------
NET INCREASE............................................................ $2,099,759
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 1997 AUGUST 31, 1996
- -----------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 1,704,907 $ 3,563,024
Net realized gain.................................... 2,845 163,941
Net change in unrealized appreciation................ 392,007 (771,378)
----------- -----------
NET INCREASE..................................... 2,099,759 2,955,587
----------- -----------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income................................ (1,852,820) (3,777,142)
Net realized gain.................................... (158,725) (224,230)
----------- -----------
TOTAL............................................ (2,011,545) (4,001,372)
----------- -----------
Net decrease from transactions in shares of
beneficial interest................................. (39,479) (172,108)
----------- -----------
NET INCREASE (DECREASE).......................... 48,735 (1,217,893)
NET ASSETS:
Beginning of period.................................. 62,297,125 63,515,018
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$566,720 and $714,633, respectively)............. $62,345,860 $62,297,125
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1997 (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'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.
<PAGE> 13
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1997 (unaudited) continued
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 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 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 pays 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.
<PAGE> 14
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1997 (unaudited) continued
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 28, 1997 aggregated
$3,985,670 and $1,514,178 respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At February 28, 1997, the Fund had
transfer agent fees and expenses payable of approximately $7,000.
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, 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
Treasury shares purchased and retired (weighted average discount 6.13%)*.......... (4,300) (43) (39,436)
--------- -------- ------------
Balance, February 28, 1997........................................................ 6,386,886 $ 63,869 $ 59,215,858
========= ======== ============
</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>
February 25, 1997 $0.0475 March 7, 1997 March 21, 1997
March 25, 1997 $0.0475 April 4, 1997 April 18, 1997
</TABLE>
<PAGE> 15
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
MONTHS ENDED FOR THE YEAR ENDED AUGUST 31*
FEBRUARY 28, -----------------------------------
1997* 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 9.75 $ 9.91 $ 9.81
------ ------ ------
Net investment income........................................... 0.26 0.56 0.60
Net realized and unrealized gain (loss)......................... 0.06 (0.09) 0.11
------ ------ ------
Total from investment operations................................ 0.32 0.47 0.71
------ ------ ------
Less dividends and distributions from:
Net investment income........................................ (0.29) (0.59) (0.54)
Net realized gain............................................ (0.02) (0.04) (0.07)
------ ------ ------
Total dividends and distributions............................... (0.31) (0.63) (0.61)
------ ------ ------
Net asset value, end of period.................................. $ 9.76 $ 9.75 $ 9.91
====== ====== ======
Market value, end of period..................................... $9.125 $9.875 $8.875
====== ====== ======
TOTAL INVESTMENT RETURN+........................................ (4.41)%(1) 18.83% 5.71%
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................................ 0.89% (2)(3) 0.91% 0.94%
Net investment income........................................... 5.60% (2) 5.61% 6.24%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands......................... $62,346 $62,297 $63,515
Portfolio turnover rate......................................... 5% (1) 17% 22%
<CAPTION>
FOR THE YEAR ENDED AUGUST 31*
----------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $10.05 $ 9.80 $ 9.60
------ ------ ------
Net investment income........................................... 0.60 0.63 0.62
Net realized and unrealized gain (loss)......................... (0.25) 0.26 0.28
------ ------ ------
Total from investment operations................................ 0.35 0.89 0.90
------ ------ ------
Less dividends and distributions from:
Net investment income........................................ (0.56) (0.60) (0.64)
Net realized gain............................................ (0.03) (0.04) (0.06)
------ ------ ------
Total dividends and distributions............................... (0.59) (0.64) (0.70)
------ ------ ------
Net asset value, end of period.................................. $ 9.81 $10.05 $ 9.80
====== ====== ======
Market value, end of period..................................... $ 9.00 $10.25 $ 9.75
====== ====== ======
TOTAL INVESTMENT RETURN+........................................ (6.60)% 12.27% 8.73%
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................................ 0.93% 0.98% 1.00%
Net investment income........................................... 5.99% 6.37% 6.38%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands......................... $64,011 $66,651 $65,024
Portfolio turnover rate......................................... 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) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
<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
MUNICIPAL
Barry Fink INCOME
Vice President, Secretary and General Counsel TRUST III
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
The financial statements included herein have been
taken from the records of the Fund without Semiannual Report
examination by the independent accountants and February 28, 1997
accordingly they do not express an opinion thereon.
