<PAGE> 1
MUNICIPAL INCOME TRUST III Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS August 31, 1997
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Municipal
Income Trust III (TFC) for the fiscal year ended August 31, 1997.
Stimulated by a resurgence of consumer spending in the fourth quarter of 1996,
the economy grew at a rapid pace in the first quarter of 1997. This caused
interest rates to rise between December 1996 and April 1997. In March, the
Federal Reserve Board tightened monetary policy in a preemptive move against a
possible increase in the rate of inflation. Economic growth slowed in the second
quarter and the bond market rallied. By July, yields had declined to last
November's levels. In addition to more moderate economic growth, low inflation
and stable Fed policy, the bond rally was aided by the strengthened overseas
performance of the dollar and the waning Federal budget deficit. Market
sentiment turned cautious in August as the UPS/Teamsters strike renewed concerns
that tight labor markets might prompt another tightening move by the Fed.
<TABLE>
<CAPTION>
BOND YIELDS 1994-1997
- --------------------------------------------------------------------
Insured Municipal
Revenue Yields as
30-Year Insured a Percentage of
Municipal Revenue 30-Year U.S. U.S. Treasury Yields
Yields Treasury Yields Ratio
- --------------------------------------------------------------------
<S> <C> <C> <C>
Dec '93 5.40% 6.34% 85.17%
5.40 6.24 86.54
5.80 6.66 87.09
6.40 7.09 90.27
6.35 7.32 86.75
6.25 7.43 84.12
Jun '94 6.50 7.61 85.41
6.25 7.39 84.57
6.30 7.45 84.56
6.55 7.81 83.87
6.75 7.96 84.80
7.00 8.00 87.50
Dec '94 6.75 7.88 85.66
6.40 7.70 83.12
6.15 7.44 82.66
6.15 7.43 82.77
6.20 7.34 84.47
5.80 6.66 87.09
Jun '95 6.10 6.62 92.15
6.10 6.86 88.92
6.00 6.66 90.08
5.95 6.48 91.82
5.75 6.33 90.84
5.50 6.14 89.56
Dec '95 5.35 5.94 90.07
5.40 6.03 89.55
5.80 6.46 86.69
5.85 6.66 87.84
5.95 6.89 86.36
6.05 6.99 86.55
Jun '96 5.90 6.89 85.63
5.85 6.97 83.93
5.90 7.11 82.98
5.70 6.93 82.25
5.65 6.64 85.09
5.50 6.35 86.61
Dec '96 5.60 6.63 84.46
5.70 6.79 83.95
5.65 6.80 83.08
5.90 7.10 83.10
5.75 6.94 82.85
5.65 6.91 81.77
Jun '97 5.60 6.78 82.60
5.30 6.30 84.00
5.50 6.61 83.00
- --------------------------------------------------------------------
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1997, continued
MUNICIPAL MARKET CONDITIONS
Municipal yields followed the trend of Treasury yields with less volatility.
Long-term insured revenue index yields rose from 5.50 percent to 5.90 percent
between November 1996 and March 1997. The recent bond rally carried yields to a
low of 5.30 percent in July before ending August at 5.50 percent.
The ratio of 30-year insured revenue bond yields to 30-year US Treasury yields
declined from 87 percent at the end of November 1996 to 83 percent in August
1997. A declining ratio means that municipals have outperformed Treasuries and
have become relatively more expensive. This ratio has annually ranged from an
average low of 83 percent to an average high of 90 percent over the past four
years.
New-issue municipal volume was ahead 8 percent in the first eight months of
1997. Overall, estimated underwriting volume of $180 billion for the full year
is expected to exceed bond maturities and redemptions of $130 billion.
PERFORMANCE
The Fund's net asset value (NAV) increased from $9.75 to $9.87 per share during
the fiscal year ended August 31, 1997. Based on this NAV change plus
reinvestment of tax-free dividends and a taxable long-term capital gain
distribution, the Fund's total NAV return was 7.93 percent. TFC's market price
on the New York Stock Exchange decreased from $9.875 to $9.50 per share during
the twelve-month period. Based on this market price change and reinvestment of
dividends and distributions, the Fund's total market return was 2.57 percent.
TFC's market price closed at a 4 percent discount to NAV on August 31, 1997.
Dividends for the last three months of 1997 were declared in September.
Beginning with the October 1997 payment, the monthly dividend was reduced from
$0.0475 per share to $0.0425 per share to more closely reflect the Fund's
anticipated income. Over the past 12 months the level of undistributed net
investment income has declined from $0.112 to $0.066 per share.
PORTFOLIO STRUCTURE
The Fund's investments were diversified among 13 long-term sectors and 41
credits. Over the past twelve months $4 million par amount of bonds was
purchased and $2 million par amount was sold, each at average yields of 6
percent. Distributable income declined when $3 million par amount of bonds with
an average book yield of 7 1/2 percent was called for redemption.
<PAGE> 3
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1997, continued
LARGEST SECTORS as of August 31, 1997
(% of Net Assets)
<TABLE>
<S> <C>
Mortgage 18%
Refunded 13%
Transportation 10%
Water & Sewer 10%
General Obligation 10%
Electric 8%
IDR/PCR* 7%
Nursing & Health Related 7%
All Others 17%
</TABLE>
* Industrial Development/Pollution Control Revenue
Portfolio structure is subject to change.
CREDIT RATINGS as of August 31, 1997
(% of Total Long-Term Portfolio)
<TABLE>
<S> <C>
Aaa or AAA 54%
A or A 21%
Aa or AA 9%
Baa or BBB 9%
NR 7%
</TABLE>
As measured by Moody's Investors Service, Inc.
or Standard & Poor's Corp.
Portfolio structure is subject to change.
CALL STRUCTURE as of August 31, 1997
(% of Total Long-Term Portfolio)
Percent Callable
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
CALL PROTECTION 7.0 YEARS
Years Bonds Callable
<S> <C>
1997 1%
1998 5%
1999 6%
2000 15%
2001 8%
2002 3%
2003 3%
2004 10%
2005 23%
2006 5%
2007 9%
2008+ 12%
</TABLE>
<PAGE> 4
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1997, continued
The portfolio's average maturity was 19 years. The combination of older,
shorter-call issues and newer issues with longer call dates provided an average
of 7 years of call protection.
LOOKING AHEAD
Municipals have followed the trend of Treasuries throughout most of 1997. The
recent enactment of the Taxpayer Relief Act of 1997 did not impact municipals
directly. The long-term benefits of tax-exempt income have remained intact and
have fostered demand for municipal bonds.
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 twelve-month period ended August 31,
1997, the Fund purchased and retired 12,200 shares of common stock at a weighted
average market discount of 4.57 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> 5
MUNICIPAL INCOME TRUST III
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On May 20, 1997, an annual meeting of the Fund's shareholders was held for the
purpose of voting on three separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Edwin J. Garn
For................. 5,056,093
Withheld............ 75,614
John R. Haire
For................. 5,050,875
Withheld............ 80,832
Wayne E. Hedien
For................. 5,068,017
Withheld............ 63,690
Michael E. Nugent
For................. 5,064,334
Withheld............ 67,373
Philip J. Purcell
For................. 5,067,113
Withheld............ 64,594
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Dr. Manuel H. Johnson and John L.
Schroeder.
(2) APPROVAL OF A NEW INVESTMENT ADVISORY AGREEMENT BETWEEN THE FUND AND DEAN
WITTER INTERCAPITAL INC. IN CONNECTION WITH THE MERGER OF MORGAN STANLEY
GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<S> <C>
For................................................................ 4,970,097
Against............................................................ 56,081
Abstain............................................................ 113,934
</TABLE>
(3) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For................................................................ 5,042,526
Against............................................................ 7,740
Abstain............................................................ 89,846
</TABLE>
In addition, a 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 failed to obtain the necessary quorum of a majority of shares
outstanding and entitled to vote at the meeting. Although no quorum was
obtained, the following represents the total of the shares whose votes
returned to the Fund prior to the meeting.
<TABLE>
<CAPTION>
PERCENTAGE OF
VOTE NO. OF SHARES OUTSTANDING SHARES
- ------- ------------- ------------------
<S> <C> <C>
For 617,242 12.03%
Against 986,312 19.22%
Abstain 259,142 5.05%
</TABLE>
<PAGE> 6
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (96.3%)
General Obligation (9.9%)
$ 1,050 Moulton-Niguel Water District, California, Refg 1993 (MBIA).............. 5.00% 09/01/19 $ 984,743
1,500 Massachusetts, 1995 Ser B (AMBAC)........................................ 5.50 07/01/14 1,519,215
New York City, New York,
1,000 1995 Ser D (MBIA)........................................................ 6.20 02/01/07 1,095,540
500 1989 Ser C............................................................... 6.50 08/15/08 505,545
1,000 New York State, Refg Ser 1995 B.......................................... 5.70 08/15/10 1,064,440
1,000 Washington, Ser 1995 A................................................... 5.80 09/01/08 1,054,030
- -------- ------------
6,050 6,223,513
- -------- ------------
Educational Facilities Revenue (3.0%)
1,000 Massachusetts Health & Educational Facilities Authority, Boston College
Ser K................................................................... 5.25 06/01/18 970,400
900 New Jersey Economic Development Authority, Educational Testing Service
- -------- Ser 1995 A (MBIA)....................................................... 5.90 05/15/15 938,412
------------
1,900 1,908,812
- -------- ------------
Electric Revenue (7.9%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I
(MBIA).................................................................. 5.75 01/01/15 1,029,930
3,000 Southern California Public Power Authority, Mead-Adelanto 1994 Ser A
(AMBAC)................................................................. 5.15 07/01/15 2,931,360
1,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA)................. 5.75 07/01/19 1,020,580
- -------- ------------
5,000 4,981,870
- -------- ------------
Hospital Revenue (4.9%)
2,000 Birmingham-Carraway Special Care Facilities Financing Authority, Alabama,
Carraway Methodist Health Ser 1995 A (Connie Lee)....................... 5.875 08/15/15 2,058,420
1,000 University of Missouri, Health System Ser 1996 A (AMBAC)................. 5.50 11/01/16 1,000,740
- -------- ------------
3,000 3,059,160
- -------- ------------
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 1,041,080
2,005 Alliance Airport Authority, Texas, American Airlines Inc Ser 1990
(AMT)................................................................... 7.50 12/01/29 2,170,653
1,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
- -------- Texas, American Airlines Inc Ser 1995................................... 6.00 11/01/14 1,028,260
------------
4,005 4,239,993
- -------- ------------
Mortgage Revenue - Multi-Family (1.7%)
1,000 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT) (AMBAC).... 6.60 07/01/14 1,054,620
- -------- ------------
Mortgage Revenue - Single Family (15.9%)
370 Colorado Housing Finance Authority, Ser A-2 (AMT)........................ 8.25 08/01/20 383,919
165 Hawaii Housing Finance & Development Corporation, Purchase Ser 1989 A
(AMT)................................................................... 7.80 07/01/29 171,772
1,310 Idaho Housing Agency, Ser 1988 D-2 (AMT)................................. 8.25 01/01/20 1,389,530
2,370 Saint Tammany Public Trust Financing Authority, Louisiana, Refg Ser 1990
B....................................................................... 7.25 07/25/11 2,544,369
1,000 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)..................... 6.40 11/15/23 1,028,930
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Massachusetts Housing Finance Agency,
$ 495 Residential Ser 1989 A (AMT)............................................. 8.10% 08/01/09 $ 518,631
165 Residential Ser 1989 A (AMT)............................................. 8.20 08/01/27 172,075
3,000 Ohio Housing Finance Agency, Residential GNMA Collateralized 1996 Ser B-2
(AMT)................................................................... 6.10 09/01/28 3,062,160
Utah Housing Finance Agency,
275 Ser 1991 Issue A-2 (AMT)................................................. 7.75 01/01/23 286,869
435 Ser 1991 Issue B-2 (AMT)................................................. 7.75 01/01/23 454,962
- -------- -----------
9,585 10,013,217
- -------- -----------
Nursing & Health Related Facilities Revenue (6.9%)
Vista, California, Long-Term Care Foundation of America
2,028 Ser 1994 A COPs (a) (b).................................................. 8.50 01/01/20 1,257,213
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 1,016,270
1,960 Lexington-Fayette Urban County Government, Kentucky, AHF/Kentucky-Iowa
- -------- Inc Ser 1990............................................................ 10.25 01/01/20 2,054,982
-----------
5,196 4,330,895
- -------- -----------
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 2,563,275
-----------
Transportation Facilities Revenue (10.4%)
2,265 Southwestern Development Authority, Illinois, Tri-City Regional Port
District Ser 1989 A (AMT) (a)........................................... 7.90 07/01/14 2,449,801
2,000 Kentucky Turnpike Authority, Economic Development Road Revitalization
Refg Ser 1995 (AMBAC)................................................... 5.625 07/01/15 2,038,420
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)................ 6.125 11/15/25 2,079,040
- -------- -----------
6,265 6,567,261
- -------- -----------
Water & Sewer Revenue (9.5%)
1,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)............................ 6.375 01/01/24 1,087,770
1,500 Massachusetts Water Resources Authority, 1993 Ser C...................... 5.25 12/01/20 1,432,065
1,090 Erie County Water Authority, New York, 4th Resolution Refg Ser 1992
(AMBAC)................................................................. 0.00 12/01/17 255,878
1,300 Ohio Water Development Authority, Water Pollution Ser 1995 (MBIA)........ 5.75 12/01/17 1,341,990
2,000 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A (MBIA)........... 5.00 07/01/25 1,866,260
- -------- -----------
6,890 5,983,963
- -------- -----------
Other Revenue (2.4%)
1,000 Pasadena, California, Refg & Cap 1992 COPs............................... 5.75 01/01/13 1,014,750
500 Illinois Development Finance Authority, Church Road Partnership #2 Ser
- -------- 1989 (AMT).............................................................. 7.875 09/01/14 511,120
-----------
1,500 1,525,870
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Refunded (13.0%)
$ 2,750 Florence County Public Facilities Corporation, South Carolina, Law
Enforcement & Civic Center 1990 COPs (AMBAC)............................ 7.60% 03/01/00++ $ 2,994,530
845 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc Refg
1990 Ser D (ETM)........................................................ 9.50 11/15/15 997,278
3,000 Washington Public Power Supply System, Nuclear Proj #2 Refg Ser 1990 C... 7.625 01/01/01++ 3,354,990
750 West Virginia School Building Authority, Cap Impr Ser 1991 A............. 6.75 07/01/01++ 824,550
- -------- ------------
7,345 8,171,348
- -------- ------------
60,236 TOTAL MUNICIPAL BONDS (Identified Cost $57,282,845)............................................. 60,623,797
- -------- ------------
SHORT-TERM MUNICIPAL OBLIGATIONS (2.1%)
1,000 Idaho Health Facilities Authority, St. Luke's Regional Medical Center Ser
1995 (Demand 09/02/97).................................................. 3.65* 05/01/22 1,000,000
300 Missouri Health & Educational Facilities Authority, Washington University
- -------- Ser 1996 C (Demand 09/02/97)............................................ 3.75* 09/01/30 300,000
------------
1,300 TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS (Identified Cost $1,300,000)............................. 1,300,000
- -------- ------------
$61,536 TOTAL INVESTMENTS (Identified Cost $58,582,845) (c).................................... 98.4%
======== 61,923,797
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................................... 1.6 1,046,189
----- ------------
NET ASSETS.............................................................................. 100.0% $62,969,986
===== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
++ 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 $3,706,183 and the aggregate gross unrealized depreciation is $365,231,
resulting in net unrealized appreciation of $3,340,952.
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> 9
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1997, continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
August 31, 1997
<TABLE>
<S> <C>
Alabama.................. 3.3%
California............... 11.5
Colorado................. 0.6
Hawaii................... 0.3
Idaho.................... 3.8
Illinois................. 8.0
Iowa..................... 1.6
Kentucky................. 6.5
Louisiana................ 4.0
Maine.................... 1.6
Massachusetts............ 9.0
Missouri................. 2.1
New Jersey............... 1.5
New York................. 6.3
Ohio..................... 7.0
Pennsylvania............. 4.1
South Carolina........... 4.7
Texas.................... 8.4
Utah..................... 2.8
Virginia................. 4.3
Washington............... 7.0
----
Total.................... 98.4%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1997
ASSETS:
Investments in securities, at value
(identified cost $58,582,845)......................................... $61,923,797
Cash................................................................... 97,460
Interest receivable.................................................... 1,048,574
Prepaid expenses and other assets...................................... 7,121
-----------
TOTAL ASSETS....................................................... 63,076,952
-----------
LIABILITIES:
Payable for:
Investment advisory fee............................................ 25,678
Administration fee................................................. 16,049
Accrued expenses and other payables.................................... 65,239
-----------
TOTAL LIABILITIES.................................................. 106,966
-----------
NET ASSETS......................................................... $62,969,986
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital........................................................ $59,206,178
Net unrealized appreciation............................................ 3,340,952
Accumulated undistributed net investment income........................ 418,811
Accumulated undistributed net realized gain............................ 4,045
-----------
NET ASSETS......................................................... $62,969,986
===========
NET ASSET VALUE PER SHARE,
6,378,986 shares outstanding
(unlimited shares authorized of $.01 par value)....................... $9.87
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended August 31, 1997
NET INVESTMENT INCOME:
INTEREST INCOME......................................................... $3,940,590
----------
EXPENSES
Investment advisory fee................................................. 250,068
Administration fee...................................................... 156,293
Professional fees....................................................... 66,463
Shareholder reports and notices......................................... 40,383
Registration fees....................................................... 16,690
Trustees' fees and expenses............................................. 11,149
Transfer agent fees and expenses........................................ 10,475
Custodian fees.......................................................... 3,488
Other................................................................... 13,162
----------
TOTAL EXPENSES...................................................... 568,171
Less: expense offset.................................................... (3,477)
----------
NET EXPENSES........................................................ 564,694
----------
NET INVESTMENT INCOME............................................... 3,375,896
----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain....................................................... 8,875
Net change in unrealized appreciation................................... 1,231,561
----------
NET GAIN............................................................ 1,240,436
----------
NET INCREASE............................................................ $4,616,332
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
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, 1997 AUGUST 31, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 3,375,896 $ 3,563,024
Net realized gain...................................... 8,875 163,941
Net change in unrealized appreciation.................. 1,231,561 (771,378)
----------- -----------
NET INCREASE....................................... 4,616,332 2,955,587
----------- -----------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income.................................. (3,671,718) (3,777,142)
Net realized gain...................................... (158,725) (224,230)
----------- -----------
TOTAL.............................................. (3,830,443) (4,001,372)
----------- -----------
Net decrease from transactions in shares of beneficial
interest.............................................. (113,028) (172,108)
----------- -----------
NET INCREASE (DECREASE)............................ 672,861 (1,217,893)
NET ASSETS:
Beginning of period.................................... 62,297,125 63,515,018
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$418,811 and $714,633, respectively)............... $62,969,986 $62,297,125
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 13
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1997
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> 14
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1997, 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 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> 15
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1997, 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 year ended August 31, 1997 aggregated $3,985,670
and $2,557,595 respectively.
Dean Witter Trust FSB, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent. At August 31, 1997, the Fund had transfer agent
fees and expenses payable of approximately $500.
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 4.57%)*.......... (12,200) (122) (112,906)
--------- ------- -----------
Balance, August 31, 1997.......................................................... 6,378,986 $63,790 $59,142,388
========= ======= ===========
</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>
July 1, 1997 $0.0475 September 5, 1997 September 19, 1997
September 23, 1997 $0.0425 October 3, 1997 October 17, 1997
September 23, 1997 $0.0425 November 7, 1997 November 21, 1997
September 23, 1997 $0.0425 December 5, 1997 December 19, 1997
</TABLE>
<PAGE> 16
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*
-------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 9.75 $ 9.91 $ 9.81 $ 10.05 $ 9.80
------- ------- ------- ------- -------
Net investment income................................................. 0.53 0.56 0.60 0.60 0.63
Net realized and unrealized gain (loss)............................... 0.19 (0.09) 0.11 (0.25) 0.26
------- ------- ------- ------- -------
Total from investment operations...................................... 0.72 0.47 0.71 0.35 0.89
------- ------- ------- ------- -------
Less dividends and distributions from:
Net investment income.............................................. (0.58) (0.59) (0.54) (0.56) (0.60)
Net realized gain.................................................. (0.02) (0.04) (0.07) (0.03) (0.04)
------- ------- ------- ------- -------
Total dividends and distributions..................................... (0.60) (0.63) (0.61) (0.59) (0.64)
------- ------- ------- ------- -------
Net asset value, end of period........................................ $ 9.87 $ 9.75 $ 9.91 $ 9.81 $ 10.05
======= ======= ======= ======= =======
Market value, end of period........................................... $ 9.50 $ 9.875 $ 8.875 $ 9.00 $ 10.25
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN+.............................................. 2.57% 18.83% 5.71% (6.60)% 12.27%
RATIOS TO AVERAGE NET ASSETS:
Expenses.............................................................. 0.91% 0.91% 0.94% 0.93% 0.98%
Net investment income................................................. 5.41% 5.61% 6.24% 5.99% 6.37%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............................... $62,970 $62,297 $63,515 $64,011 $66,651
Portfolio turnover rate............................................... 4% 17% 22% 23% 2%
</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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 17
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
" Fund") at August 31, 1997, 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 Fund'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, 1997 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 10, 1997
1997 FEDERAL TAX NOTICE (unaudited)
During the year ended August 31, 1997, the Fund paid to the
shareholders $0.58 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, 1997, the
Fund paid to shareholders $0.02 per share from long-term
capital gains.
<PAGE> 18
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<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
- -----------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- -----------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- -----------------------------------------------------
Dean Witter Trust FSB
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
MUNICIPAL
INCOME
TRUST III
Annual Report
August 31, 1997
