<PAGE> 1
MUNICIPAL INCOME TRUST III Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS February 28, 1998
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Municipal
Income Trust III (TFC) for the period ended February 28, 1998.
Over the past six months the securities markets were impacted by the Asian
financial crisis and its effect on the U.S. economy. International currency
turmoil strengthened the value of the U.S. dollar and created a "flight to
quality" demand for U.S. Treasury securities. Municipal bonds followed the trend
of Treasuries with yields declining to a range last seen 20 years ago. Domestic
employment conditions strengthened as unemployment declined to its lowest level
since 1973. The bond market rally was also aided by prospects of a federal
budget surplus, the first in more than two decades. Inflation remained subdued
despite the economy's strength.
MUNICIPAL MARKET CONDITIONS
Long-term insured municipal index yields declined from 5.50 percent in August
1997 to 5.20 percent at the end of February 1998. As usually
BOND YIELDS 1994-1998
<TABLE>
<CAPTION>
30-Year Insured 30-Year U.S.
Municipal Yields Treasury Yields
---------------- ---------------
<S> <C> <C>
Dec '93 5.4% 6.34%
5.4 6.24
5.8 6.66
6.4 7.09
6.35 7.32
6.25 7.43
Jun '94 6.5 7.61
6.25 7.39
6.3 7.45
6.55 7.81
6.75 7.96
7 8
Dec '94 6.75 7.88
6.4 7.7
6.15 7.44
6.15 7.43
6.2 7.34
5.8 6.66
Jun '95 6.1 6.62
6.1 6.86
6 6.66
5.95 6.48
5.75 6.33
5.5 6.14
Dec '95 5.35 5.94
5.4 6.03
5.8 6.46
5.85 6.66
5.95 6.89
6.05 6.99
Jun '96 5.9 6.89
5.85 6.97
5.9 7.11
5.7 6.93
5.65 6.64
5.5 6.35
Dec '96 5.6 6.63
5.7 6.79
5.65 6.8
5.9 7.1
5.75 6.94
5.65 6.91
Jun '97 5.6 6.78
5.3 6.3
5.5 6.61
5.4 6.4
5.35 6.15
5.3 6.05
Dec '97 5.15 5.92
Jan '98 5.15 5.8
Feb. '98 5.2 5.92
</TABLE>
<TABLE>
<CAPTION>
Insured Municipal
Revenue Yields as
a Percentage of
U.S. Treasury Yields
--------------------
<S> <C>
Dec '93 85.17%
86.54
87.09
90.27
86.75
84.12
Jun '94 85.41
84.57
84.56
83.87
84.80
87.50
Dec '94 85.66
83.12
82.66
82.77
84.47
87.09
Jun '95 92.15
88.92
90.08
91.82
90.84
89.56
Dec '95 90.07
89.55
86.69
87.84
86.36
86.55
Jun '96 85.63
83.93
82.98
82.25
85.09
86.61
Dec '96 84.46
83.95
83.08
83.10
82.85
81.77
Jun '97 82.60
84.00
83.00
84.40
86.90
87.60
Dec '97 86.90
Jan '98 88.80
Feb '98 87.80
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1998, continued
happens when yields change rapidly, the municipal rally lagged the rally in
Treasuries. The ratio of municipal yields to Treasury yields improved from an
historically rich 83 percent in August to a more attractive 88 percent in
February. A rising yield ratio means that municipals have underperformed
Treasuries and have become relatively more attractive.
Total municipal volume increased 20 percent to $220 billion in 1997. Half of the
underwritings were enhanced by bond insurance. Much of this growth came from
refunding issues sold in the second half of the year as interest rates declined.
Overall, refundings represented one quarter of total new volume. So far in 1998,
the pace of refunding activity has increased and total volume has exceeded last
year's level.
PERFORMANCE
The Fund's net asset value (NAV) increased from $9.87 per share to $10.05 over
the past six months. Based on this NAV change plus reinvestment of tax-free
dividends and long-term capital gain distributions totaling $0.29 per share, the
Fund's total NAV return was 4.99 percent. The Fund's market price on the New
York Stock Exchange moved from $9.50 to $9.375 per share. Based on this market
price change and reinvestment of dividends and capital gains, the Fund's total
market return was 1.75 percent. On February 28, 1998, TFC's market price was
trading at a modest discount of 6.72 percent to its NAV.
Monthly dividends for the first quarter of 1998 were declared in December.
Undistributed net investment income totaled $0.061 per share on February 28,
1998 versus $0.066 per share six months ago.
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,
1998, the Fund purchased and retired 34,500 shares of common stock at a weighted
average market discount of 7.46 percent.
PORTFOLIO STRUCTURE
Since last August, the Fund has extended maturity and improved call protection.
At the end of February the portfolio's average maturity was 21 years. The
distribution of bond call dates (illustrated in the accompanying chart) produced
average call protection of 8 years. The Fund's net assets of $63 million were
diversified among 14 long-term sectors and 44 credits. Credit quality continued
to be upgraded with 65 percent of long-term holdings rated triple or double "A."
<PAGE> 3
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1998, continued
LARGEST SECTORS as of February 28, 1998
(% of Net Assets)
<TABLE>
<S> <C>
Mortgage 16%
Transportation 14%
Hospital 10%
Water & Sewer 10%
General Obligation 8%
Electric 8%
IDR/PCR* 7%
Nursing & Health 5%
Refunded 5%
All Others 17%
</TABLE>
* Industrial Development/Pollution Control Revenue
Portfolio Structure is subject to change.
CREDIT RATINGS as of February 28, 1998
(% of Total Long-Term Portfolio)
<TABLE>
<S> <C>
Aaa or AAA 59%
Aa or AA 6%
A or A 17%
Baa or BBB 9%
N/R 9%
</TABLE>
As rated by Moody's Investor Service, Inc.
or Standard & Poor's Corp.
Portfolio structure is subject to change.
CALL STRUCTURE as of February 28, 1998
(% of Total Long-Term Portfolio)
<TABLE>
<CAPTION>
Years Bonds Callable Percent Callable
<S> <C>
1998 5%
1999 6%
2000 12%
2001 1%
2002 3%
2003 2%
2004 7%
2005 24%
2006 5%
2007 15%
2008+ 20%
</TABLE>
WEIGHTED AVERAGE CALL PROTECTION: 8 YEARS
Portfolio structure is subject to change.
<PAGE> 4
MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1998, continued
LOOKING AHEAD
The economic fundamentals are in place for another year of solid, albeit less
spectacular, domestic growth in 1998. Events in the Far East have strengthened
the U.S. dollar and led to lower interest rates. The Asian financial crisis
seems likely to moderate U.S. economic growth and inflationary pressures. Under
these conditions the outlook for municipal bonds remains favorable.
We appreciate your continued support of Municipal Income Trust III and look
forward to serving 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, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (94.3%)
General Obligation (8.4%)
$ 1,050 Moulton-Niguel Water District, California, Refg 1993
(MBIA)..................................................... 5.00% 09/01/19 $1,026,984
1,000 Massachusetts, 1995 Ser B (AMBAC)........................... 5.50 07/01/14 1,046,720
1,000 New York City, New York, 1995 Ser D (MBIA).................. 6.20 02/01/07 1,124,600
1,000 New York State, Refg Ser 1995 B............................. 5.70 08/15/10 1,087,850
1,000 Washington, Ser 1995 A...................................... 5.80 09/01/08 1,073,250
------- ----------
5,050 5,359,404
------- ----------
Educational Facilities Revenue (1.5%)
900 New Jersey Economic Development Authority, Educational
------- Testing Service Ser 1995 A (MBIA).......................... 5.90 05/15/15 972,378
----------
Electric Revenue (8.2%)
1,000 Sacramento Municipal Utility District, California, Refg 1994
Ser I (MBIA)............................................... 5.75 01/01/15 1,065,460
3,000 Southern California Public Power Authority, Mead-Adelanto
1994 Ser A (AMBAC)......................................... 5.15 07/01/15 3,083,160
1,000 Intermountain Power Agency, Utah, Refg Ser 1997 B (MBIA).... 5.75 07/01/19 1,063,370
------- ----------
5,000 5,211,990
------- ----------
Hospital Revenue (9.6%)
2,000 Birmingham-Carraway Special Care Facilities Financing
Authority, Alabama, Carraway Methodist Health Ser 1995 A
(Connie Lee)**............................................. 5.875 08/15/15 2,131,440
2,000 Michigan Hospital Finance Authority, Detroit Medical Center
Ser 1997 A (AMBAC)......................................... 5.25 08/15/27 1,994,000
1,000 University of Missouri, Health System Ser 1996 A (AMBAC).... 5.50 11/01/16 1,036,710
1,000 Delaware County Authority, Pennsylvania, Catholic Health
East Ser 1998 A (AMBAC).................................... 4.875 11/15/26 947,460
------- ----------
6,000 6,109,610
------- ----------
Industrial Development/Pollution Control Revenue (6.8%)
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 1,085,740
2,005 Alliance Airport Authority, Texas, American Airlines Inc Ser
1990 (AMT)................................................. 7.50 12/01/29 2,185,490
1,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, Texas, American Airlines Inc Ser 1995......... 6.00 11/01/14 1,056,250
------- ----------
4,005 4,327,480
------- ----------
Mortgage Revenue - Multi-Family (1.7%)
1,000 Massachusetts Housing Finance Agency, Rental 1994 Ser A
(AMT) (AMBAC).............................................. 6.60 07/01/14 1,063,100
------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Mortgage Revenue - Single Family (14.6%)
$ 355 Colorado Housing Finance Authority, Ser A-2 (AMT)........... 8.25% 08/01/20 $ 366,158
155 Hawaii Housing Finance & Development Corporation, Purchase
Ser 1989 A (AMT)........................................... 7.80 07/01/29 160,809
1,180 Idaho Housing Agency, Ser 1988 D-2 (AMT).................... 8.25 01/01/20 1,269,397
2,029 Saint Tammany Public Trust Financing Authority, Louisiana,
Refg Ser 1990 B............................................ 7.25 07/25/11 2,197,065
920 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT)........ 6.40 11/15/23 958,162
Massachusetts Housing Finance Agency,
495 Residential Ser 1989 A (AMT)............................... 8.10 08/01/09 515,043
165 Residential Ser 1989 A (AMT)............................... 8.20 08/01/27 171,333
2,985 Ohio Housing Finance Agency, Residential GNMA Collateralized
1996 Ser B-2 (AMT)......................................... 6.10 09/01/28 3,138,996
Utah Housing Finance Agency,
175 Ser 1991 Issue A-2 (AMT)................................... 7.75 01/01/23 182,626
345 Ser 1991 Issue B-2 (AMT)................................... 7.75 01/01/23 362,764
------- ----------
8,804 9,322,353
------- ----------
Nursing & Health Related Facilities Revenue (4.9%)
955 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990................ 10.25 01/01/20 1,032,985
1,935 Lexington-Fayette Urban County Government, Kentucky,
AHF/Kentucky-Iowa Inc Ser 1990............................. 10.25 01/01/20 2,093,012
------- ----------
2,890 3,125,997
------- ----------
Public Facilities Revenue (2.1%)
1,000 Marion County Convention & Recreational Facilities
Authority, Indiana, Excise Tax Sub Ser 1997 A (MBIA)....... 0.00 06/01/17 365,110
1,000 Washington County/St George Interlocal Agency, Utah, Ser
1997 A (AMBAC)............................................. 5.125 12/01/22 986,800
------- ----------
2,000 1,351,910
------- ----------
Resource Recovery Revenue (4.0%)
2,500 Cambria County Industrial Development Authority,
------- Pennsylvania, Cambria Cogen Co Ser 1989 F-2 (AMT).......... 7.75 09/01/19 2,536,850
----------
Transportation Facilities Revenue (14.2%)
2,265 Southwestern Development Authority, Illinois, Tri-City
Regional Port District Ser 1989 A (AMT) (a)................ 7.90 07/01/14 2,424,456
2,000 Kentucky Turnpike Authority, Economic Development Road
Revitalization Refg Ser 1995 (AMBAC)**..................... 5.625 07/01/15 2,113,680
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA)... 6.125 11/15/25 2,173,760
2,000 Puerto Rico Highway & Transportation Authority, Ser A
(WI)....................................................... 4.75 07/01/38 1,839,180
500 Massachusetts Bay Transportation Authority, 1998 Ser A
(MBIA) (WI)................................................ 5.50 03/01/15 535,550
------- ----------
8,765 9,086,626
------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Water & Sewer Revenue (10.3%)
$ 1,000 Chicago, Illinois, Wastewater Ser 1994 (MBIA)............... 6.375% 01/01/24 $1,114,220
1,000 Massachusetts Water Resources Authority, 1993 Ser C......... 5.25 12/01/20 993,350
1,090 Erie County Water Authority, New York, 4th Resolution Refg
Ser 1992 (AMBAC)........................................... 0.00 12/01/17 265,197
1,300 Ohio Water Development Authority, Water Pollution Ser 1995
(MBIA)..................................................... 5.75 12/01/17 1,374,243
3,755 Pittsburgh Water & Sewer Authority, 1998 Ser B (FGIC)
(WI)....................................................... 0.00 09/01/26 852,160
2,000 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A
(MBIA)**................................................... 5.00 07/01/25 1,941,840
------- -----------
10,145 6,541,010
------- -----------
Other Revenue (3.2%)
1,000 Mashantucket (Western) Pequot Tribe, Connecticut, 1997 Ser B
(a)........................................................ 5.75 09/01/27 1,021,960
1,000 Pasadena, California, Refg & Cap 1992 COPs.................. 5.75 01/01/13 1,038,560
------- -----------
2,000 2,060,520
------- -----------
Refunded (4.8%)
2,000 Florence County Public Facilities Corporation, South
Carolina, Law Enforcement & Civic Center 1990 COPs
(AMBAC).................................................... 7.60 03/01/00++ 2,161,920
790 Illinois Health Facilities Authority, Glen Oaks Medical
Center Inc Refg 1990 Ser D (ETM)........................... 9.50 11/15/15 920,816
------- -----------
2,790 3,082,736
------- -----------
61,849 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $55,946,796).................. 60,151,964
------- -----------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (2.2%)
1,000 Hapeville Development Authority, Georgia, Hapeville Hotel
Ser 1985 (Demand 3/02/98).................................. 3.65* 11/01/15 1,000,000
400 Platte County, Wyoming, Tri-State Generation & Transmission
Assn Inc Ser 1994 A (Demand 3/02/98)....................... 3.90* 07/01/14 400,000
------- -----------
1,400 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
------- (Identified Cost $1,400,000)................................................... 1,400,000
-----------
$63,249 TOTAL INVESTMENTS (Identified Cost $57,346,796) (b).................... 96.5% 61,551,964
=======
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................... 3.5 2,202,876
----- -----------
NET ASSETS.............................................................. 100.0% $63,754,840
===== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1998 (unaudited) continued
- ---------------------
<TABLE>
<S> <C>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Security purchased on a "when issued basis".
++ Prerefunded to call date shown.
* Current coupon of variable rate demand obligation.
** Some or all of these securities are segregated in connection
with the purchase of "when issued" securities.
(a) Resale is restricted to qualified institutional investors.
(b) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $4,231,075 and the aggregate gross
depreciation is $25,907, resulting in net unrealized
appreciation of $4,205,168.
</TABLE>
Bond Insurance:
- ---------------
<TABLE>
<S> <C>
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
February 28, 1998
<TABLE>
<S> <C>
Alabama... 3.3%
California... 9.7
Colorado... 0.6
Connecticut... 1.6
Delaware... 1.5
Georgia... 1.6
Hawaii... 0.3
Idaho... 2.0
Illinois... 7.0
Indiana... 0.6
Iowa... 4.9
Kentucky... 3.3
Louisiana... 3.4
Maine... 1.5
Massachusetts... 6.8
Michigan... 3.1
Missouri... 1.6
New Jersey... 1.5
New York... 5.6
Ohio... 7.1
Pennsylvania... 5.3
Puerto Rico... 2.9
South Carolina... 3.4
Texas... 8.5
Utah... 2.5
Virginia... 3.1
Washington... 3.2
Wyoming... 0.6
----
Total... 96.5%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $57,346,796).............................. $61,551,964
Cash........................................................ 1,057,105
Receivable for:
Investments sold........................................ 3,550,278
Interest................................................ 967,049
Prepaid expenses and other assets........................... 2,567
-----------
TOTAL ASSETS............................................ 67,128,963
-----------
LIABILITIES:
Payable for:
Investments purchased................................... 3,253,050
Investment advisory fee................................. 20,367
Administration fee...................................... 12,730
Shares of beneficial interest repurchased............... 9,468
Accrued expenses and other payables......................... 78,508
-----------
TOTAL LIABILITIES....................................... 3,374,123
-----------
NET ASSETS.............................................. $63,754,840
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $58,889,018
Net unrealized appreciation................................. 4,205,168
Accumulated undistributed net investment income............. 385,685
Accumulated undistributed net realized gain................. 274,969
-----------
NET ASSETS.............................................. $63,754,840
===========
NET ASSET VALUE PER SHARE,
6,344,486 shares outstanding
(unlimited shares authorized of $.01 par value)............ $10.05
===========
</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, 1998 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $1,906,694
----------
EXPENSES
Investment advisory fee..................................... 126,148
Administration fee.......................................... 78,842
Professional fees........................................... 38,500
Shareholder reports and notices............................. 15,883
Registration fees........................................... 8,290
Transfer agent fees and expenses............................ 5,532
Trustees' fees and expenses................................. 5,406
Custodian fees.............................................. 2,145
Other....................................................... 6,013
----------
TOTAL EXPENSES.......................................... 286,759
Less: expense offset........................................ (2,142)
----------
NET EXPENSES............................................ 284,617
----------
NET INVESTMENT INCOME................................... 1,622,077
----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 444,390
Net change in unrealized appreciation....................... 864,216
----------
NET GAIN................................................ 1,308,606
----------
NET INCREASE................................................ $2,930,683
==========
</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, 1998 AUGUST 31, 1997
- ------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 1,622,077 $ 3,375,896
Net realized gain.................................... 444,390 8,875
Net change in unrealized appreciation................ 864,216 1,231,561
----------- -----------
NET INCREASE..................................... 2,930,683 4,616,332
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income................................ (1,655,203) (3,671,718)
Net realized gain.................................... (173,466) (158,725)
----------- -----------
TOTAL............................................ (1,828,669) (3,830,443)
----------- -----------
Net decrease from transactions in shares of
beneficial interest................................. (317,160) (113,028)
----------- -----------
NET INCREASE..................................... 784,854 672,861
NET ASSETS:
Beginning of period.................................. 62,969,986 62,297,125
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$385,685 and $418,811, respectively)............. $63,754,840 $62,969,986
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1998 (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.
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> 13
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1998 (unaudited) 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> 14
MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1998 (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, 1998 aggregated
$8,440,147 and $10,240,085, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL
PAR VALUE PAID IN
OF EXCESS OF
SHARES SHARES PAR VALUE
--------- --------- -----------
<S> <C> <C> <C>
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
Treasury shares purchased and retired (weighted average
discount 7.46%)*........................................... (34,500) (345) (316,815)
--------- ------- -----------
Balance, February 28, 1998.................................. 6,344,486 $63,445 $58,825,573
========= ======= ===========
</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>
December 30, 1997 $0.0425 March 6, 1998 March 20, 1998
March 24, 1998 $0.0425 April 3, 1998 April 17, 1998
March 24, 1998 $0.0425 May 8, 1998 May 22, 1998
March 24, 1998 $0.0425 June 5, 1998 June 19, 1998
</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 FOR THE YEAR ENDED AUGUST 31*
MONTHS ENDED ----------------------------------------------------
FEBRUARY 28, 1998* 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............... $ 9.87 $ 9.75 $ 9.91 $ 9.81 $10.05 $ 9.80
------ ------ ------ ------ ------ ------
Net investment income.............................. 0.25 0.53 0.56 0.60 0.60 0.63
Net realized and unrealized gain (loss)............ 0.22 0.19 (0.09) 0.11 (0.25) 0.26
------ ------ ------ ------ ------ ------
Total from investment operations................... 0.47 0.72 0.47 0.71 0.35 0.89
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income........................... (0.26) (0.58) (0.59) (0.54) (0.56) (0.60)
Net realized gain............................... (0.03) (0.02) (0.04) (0.07) (0.03) (0.04)
------ ------ ------ ------ ------ ------
Total dividends and distributions.................. (0.29) (0.60) (0.63) (0.61) (0.59) (0.64)
------ ------ ------ ------ ------ ------
Net asset value, end of period..................... $10.05 $ 9.87 $ 9.75 $ 9.91 $ 9.81 $10.05
====== ====== ====== ====== ====== ======
Market value, end of period........................ $9.375 $ 9.50 $9.875 $8.875 $ 9.00 $10.25
====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+........................... 1.75%(1) 2.57% 18.83% 5.71% (6.60)% 12.27%
RATIOS TO AVERAGE NET ASSETS:
Expenses........................................... 0.91%(2)(3) 0.91% 0.91% 0.94% 0.93% 0.98%
Net investment income.............................. 5.14%(2) 5.41% 5.61% 6.24% 5.99% 6.37%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............ $63,755 $62,970 $62,297 $63,515 $64,011 $66,651
Portfolio turnover rate............................ 14%(1) 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.
(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
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
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 28, 1998
