<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III Two World Trade Center
LETTER TO THE SHAREHOLDERS August 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
In the wake of 1998's international economic difficulties, the financial
markets have benefited from global healing. The turmoil included the Asian
financial crisis, the Russian debt default and the orchestrated rescue of a
major hedge fund. This precipitated a flight to quality and U.S. Treasury
securities bond yields fell to 30-year lows. The major catalyst for the return
to stability was the liquidity provided by the Federal Reserve Board's
75-basis-point reduction in the federal-funds rate during the fourth quarter of
1998.
The U.S. economy, led by consumer demand, has continued to experience robust
growth this year. Moving into 1999, higher materials prices and wage increases
caused the fixed-income markets to focus on the possibility that the central
bank would begin to take back some of the liquidity provided during last year's
crises. By the end of August, long-term interest rates were again at levels
last seen in the spring of 1998. During the summer the Federal Reserve changed
monetary policy and, in two separate moves, raised the federal-funds rate 50
basis points to 5.25 percent.
MUNICIPAL MARKET CONDITIONS
Last year's "flight-to-quality" rally primarily benefited U.S. Treasuries. As
global turmoil subsided and interest rates began to rise, Treasury yields
increased more than municipal yields. Long-term insured municipal index yields
have risen 70 basis points, from 5.05 percent to 5.75 percent, during the first
eight months of 1999. Over the same period, Treasury yields rose nearly 100
basis points to 6.05 percent.
The ratio of long-term municipal yields to Treasury yields declined from 99
percent at the end of 1998 to 94 percent by the end of August. The ratio is a
measure of relative performance that compares long-term insured municipal index
yields to benchmark 30-year Treasury yields. A declining ratio means municipals
have outperformed Treasuries. Over the past five years the annual high ratio
has averaged 93 percent and the annual low ratio 84 percent of Treasuries.
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1999, continued
Municipal performance was also aided by a slowdown in the pace of
underwritings. New-issue volume declined 22 percent in the first eight months
of 1999. Refunding activity, the most interest-rate-sensitive component of
supply, was down 51 percent.
30-YEAR BOND YIELDS 1994-1999
[BAR CHART OMITTED]
DATE AAA INS TSY %RELATIONSHIP
---- ------- --- -------------
12/31/93 5.40% 6.34% 85.17%
01/31/94 5.40 6.24 86.54%
02/28/94 5.80 6.66 87.09%
03/31/94 6.40 7.09 90.27%
04/29/94 6.35 7.32 86.75%
05/31/94 6.25 7.43 84.12%
06/30/94 6.50 7.61 85.41%
07/29/94 6.25 7.39 84.57%
08/31/94 6.30 7.45 84.56%
09/30/94 6.55 7.81 83.87%
10/31/94 6.75 7.96 84.80%
11/30/94 7.00 8.00 87.50%
12/30/94 6.75 7.88 85.66%
01/31/95 6.40 7.70 83.12%
02/28/95 6.15 7.44 82.66%
03/31/95 6.15 7.43 82.77%
04/28/95 6.20 7.34 84.47%
05/31/95 5.80 6.66 87.09%
06/30/95 6.10 6.62 92.15%
07/31/95 6.10 6.86 88.92%
08/31/95 6.00 6.66 90.09%
09/29/95 5.95 6.48 91.82%
10/31/95 5.75 6.33 90.84%
11/30/95 5.50 6.14 89.58%
12/29/95 5.35 5.94 90.07%
01/31/96 5.40 6.03 89.55%
02/29/96 5.60 6.46 86.69%
03/29/96 5.85 6.66 87.84%
04/30/96 5.95 6.89 86.36%
05/31/96 6.05 6.99 86.55%
06/28/96 5.90 6.89 85.63%
07/31/96 5.85 6.97 83.93%
08/30/96 5.90 7.11 82.98%
09/30/96 5.70 6.93 82.25%
10/31/96 5.65 6.64 85.09%
11/29/96 5.50 6.35 86.61%
12/31/96 5.60 6.63 84.46%
01/31/97 5.70 6.79 83.95%
02/28/97 5.65 6.80 83.09%
03/31/97 5.90 7.10 83.10%
04/30/97 5.75 6.94 82.85%
05/30/97 5.65 6.91 81.77%
06/30/97 5.60 6.78 82.60%
07/30/97 5.30 6.30 84.13%
08/31/97 5.50 6.61 83.21%
09/30/97 5.40 6.40 84.38%
10/31/97 5.35 6.15 86.99%
11/30/97 5.30 6.05 87.60%
12/31/97 5.15 5.92 86.99%
01/31/98 5.15 5.80 88.79%
02/28/98 5.20 5.92 87.84%
03/31/98 5.25 5.93 88.53%
04/30/98 5.35 5.95 89.92%
05/29/98 5.20 5.80 89.66%
06/30/98 5.20 5.65 92.04%
07/31/98 5.18 5.71 90.72%
08/31/98 5.03 5.27 95.45%
09/30/98 4.95 5.00 99.00%
10/31/98 5.05 5.16 97.87%
11/30/98 5.00 5.06 98.81%
12/31/98 5.05 5.10 99.02%
01/31/99 5.00 5.09 98.23%
02/28/99 5.10 5.58 91.40%
03/31/99 5.15 5.63 91.47%
04/30/99 5.20 5.66 91.87%
05/31/99 5.30 5.83 90.91%
06/30/99 5.47 5.96 91.78%
07/31/99 5.55 6.10 90.98%
08/31/99 5.75 6.06 94.88%
Source: Municipal Market Data - A Division of Thomson Financial Municipal Group
and Bloomberg L.P.
PERFORMANCE
The net asset value (NAV) of Morgan Stanley Dean Witter Municipal Income Trust
III (TFC) declined from $10.12 to $9.49 per share for the fiscal year ended
August 31, 1999. This change plus the reinvestment of tax-free dividends
totaling $0.46 per share and a short-term capital gain distribution of $0.00276
per share and a long-term capital gain distribution of $0.06 per share produced
a total return based on NAV of --0.50 percent. TFC's value on the New York
Stock Exchange (NYSE) fell from $9.1875 to $7.8125 per share during the same
period. This change plus the reinvestment of dividends and distributions
produced a total return based on market value of --9.78 percent. On August 31,
1999, TFC's NYSE market price was at a 17.7 percent discount to its NAV.
2
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1999, continued
<TABLE>
LARGEST SECTORS AS OF AUGUST 31, 1999 CREDIT RATINGS AS OF AUGUST 31, 1999
(% OF NET ASSETS) (% OF TOTAL LONG-TERM PORTFOLIO)
[BAR CHART OMITTED] [PIE CHART]
<S> <C> <C> <C> <C> <C> <C>
TRANSPORTATION 17% Aaa or AAA NR Baa or BBB A or A Aa or AA
ELECTRIC 13% 63% 12% 10% 11% 4%
MORTGAGE 13%
HOSPITAL 10%
WATER & SEWER 9%
GENERAL OBLIGATION 7%
IDR/PCR* 7%
NURSING & HEALTH 5%
*INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE. AS MEASURED BY MOODY'S INVESTORS SERVICE, INC.
OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE. PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
</TABLE>
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
August 31, 1999
<TABLE>
<S> <C>
Alabama ...................... 3.4%
California ................... 8.4
Colorado ..................... 0.3
Connecticut .................. 1.6
District of Columbia ......... 1.6
Florida ...................... 3.0
Georgia ...................... 5.4
Hawaii ....................... 0.1
Illinois ..................... 8.1
</TABLE>
<TABLE>
<S> <C>
Idaho ........................ 1.1%
Indiana ...................... 0.6
Iowa ......................... 1.7
Kentucky ..................... 6.8
Louisiana .................... 2.6
Maine ........................ 0.6
Massachusetts ................ 5.2
Missouri ..................... 13.0
Nevada ....................... 4.7
</TABLE>
<TABLE>
<S> <C>
New York ..................... 5.4%
Ohio ......................... 8.8
Puerto Rico .................. 2.9
Texas ........................ 6.8
Utah ......................... 6.1
Virginia ..................... 1.5
Washington ................... 1.8
-----
Total ........................ 101.5%
=====
</TABLE>
Portfolio structure is subject to change.
3
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1999, continued
CALL AND COST (BOOK) YIELD STRUCTURE*
AUGUST 31, 1999
<TABLE>
WEIGHTED AVERAGE
CALL PROTECTION: 7 YEARS
CALL STRUCTURE
[BAR CHART OMITTED]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12% 2% 5% 0% 8% 22% 2% 12% 14% 9% 14%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010+
YEARS BONDS CALLABLE
</TABLE>
<TABLE>
WEIGHTED AVERAGE
BOOK YIELD: 6.43%
COST (BOOK) YIELD**
[LINE CHART OMITTED]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.100% 5.450% 5.460% 0.000% 6.070% 6.040% 5.620% 6.080% 5.490% 5.220% 7.340%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010+
* % BASED ON LONG-TERM PORTFOLIO.
** COST OR "BOOK" YIELD IS THE ANNUAL INCOME EARNED ON A PORTFOLIO INVESTMENT BASED ON ITS ORIGINAL PURCHASE PRICE BEFORE
FUND OPERATING EXPENSES. FOR EXAMPLE, THE FUND EARNED A BOOK YIELD OF 9.1% ON 12% OF THE LONG-TERM PORTFOLIO THAT IS
CALLABLE IN 2000.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
</TABLE>
4
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1999, continued
Monthly dividends for the fourth quarter of 1999, declared in September, were
unchanged at 0.0375 per share. The Fund's level of undistributed net investment
income at August 31, 1999 increased from $0.058 per share to $0.083 per share
over the past 12 months.
PORTFOLIO STRUCTURE
The Fund's net assets of $58.5 million were diversified among 12 long-term
sectors and 42 credits. At the end of August, the portfolio's average maturity
was 17 years. Average duration, a measure of sensitivity to interest rate
changes, was 6.8 years. The accompanying charts provide current information on
the portfolio's credit quality, sector distribution and geographic
diversification. Optional call provisions by year with their respective cost
(book) yields are also shown.
LOOKING AHEAD
The Federal Reserve Board's recent interest-rate increases confirmed its
previously signaled intention of becoming less accommodative in the face of
continued strong domestic economic growth. It is anticipated that the central
bank may raise short-term interest rates further. However, we believe municipal
bonds continue to offer long-term investors good value, especially in
relationship to Treasuries.
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps
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 may,
when appropriate, purchase shares in the open market or in privately negotiated
transactions at a price not above market value or net asset value, which ever
is lower at the time of purchase. During the 12-month period ended August 31,
1999, the Fund purchased and retired 163,000 shares of common stock at a
weighted average market discount of 13.05 percent.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is the President and Chief Operating Officer of Asset
Management for Morgan Stanley Dean Witter & Co. and President, Chief Executive
Officer and Director of Morgan Stanley Dean Witter Advisors Inc. He also serves
as Chairman, Chief Executive Officer and Director of Morgan Stanley Dean Witter
Distributors Inc. and Morgan Stanley Dean Witter Trust FSB.
5
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS August 31, 1999, continued
We appreciate your ongoing support of Morgan Stanley Dean Witter Municipal
Income Trust III and look forward to continuing to serve your investment needs.
Very truly yours,
/S/Charles A. Fiumefreddo /s/ Mitchell M. Merin
- -------------------------- -----------------------
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
6
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On June 22, 1999, 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:
Wayne E. Hedien
For .............. 5,129,945
Withheld ......... 510,243
Dr. Manuel H. Johnson
For .............. 5,172,732
Withheld ......... 467,456
John L. Schroeder
For .............. 5,132,245
Withheld ......... 507,943
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, Michael E. Nugent and
Philip J. Purcell
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
ACCOUNTANTS:
For ............. 5,459,569
Against ......... 67,927
Abstain ......... 112,692
(3) SHAREHOLDER PROPOSAL TO AMEND THE FUND'S DECLARATION OF TRUST TO REQUIRE
EACH TRUSTEE, WITHIN THIRTY DAYS OF ELECTION, TO BECOME A SHAREHOLDER OF
THE TRUST:
For ............. 1,356,322
Against ......... 1,631,956
Abstain ......... 302,784
7
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (88.7%)
General Obligation (7.0%)
$ 1,000 District of Columbia, Ser 1999 A (FSA) ........................................ 5.375% 06/01/24 $ 938,190
1,000 New York City, New York, 1995 Ser D (MBIA) .................................... 6.20 02/01/07 1,082,040
1,000 New York State, Refg Ser 1995 B ............................................... 5.70 08/15/10 1,036,820
1,000 Washington, Ser 1994 A ........................................................ 5.80 09/01/08 1,042,540
--------- -----------
4,000 4,099,590
--------- -----------
Electric Revenue (12.6%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA) ..... 5.75 01/01/15 1,020,090
3,000 Southern California Public Power Authority, Mead-Adelanto 1994 Ser A
(AMBAC) ..................................................................... 5.15 07/01/15 2,926,860
Intermountain Power Agency, Utah,
2,500 Refg 1998 Ser A (MBIA) ...................................................... 5.25 07/01/15 2,434,300
1,000 Refg 1997 Ser B (MBIA) ...................................................... 5.75 07/01/19 1,006,630
--------- -----------
7,500 7,387,880
--------- -----------
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 2,019,520
1,000 Missouri Health & Educational Facilities Authority, SSM Health Care
Ser 1998 A (MBIA) ........................................................... 5.00 06/01/22 900,710
1,000 University of Missouri, Health Ser 1996 A (AMBAC) ............................. 5.50 11/01/16 983,570
2,000 Henderson, Nevada, Catholic Healthcare West 1998 Ser A ........................ 5.375 07/01/26 1,713,620
--------- -----------
6,000 5,617,420
--------- -----------
Industrial Development/Pollution Control Revenue (7.0%)
1,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) ............... 6.30 12/01/14 1,056,070
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 1,015,400
1,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) .................... 7.50 12/01/29 1,047,060
1,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
Texas, American Airlines Inc Ser 1995 ........................................ 6.00 11/01/14 987,660
- ---------- ----------
4,000 4,106,190
--------- -----------
Mortgage Revenue -- Multi-Family (1.7%)
960 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT) (AMBAC) ......... 6.60 07/01/14 1,011,571
--------- -----------
Mortgage Revenue -- Single Family (10.8%)
180 Colorado Housing Finance Authority, Ser A-2 (AMT) ............................. 8.25 08/01/20 182,794
45 Hawaii Housing Finance & Development Corporation, Purchase
Ser 1989 A (AMT) ............................................................ 7.80 07/01/29 45,934
590 Idaho Housing Agency, Ser 1988 D-2 (AMT) ...................................... 8.25 01/01/20 617,618
1,418 Saint Tammany Public Trust Finance Authority, Louisiana,
Refg Ser 1990 B ............................................................. 7.25 07/25/11 1,496,782
325 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT) .......................... 6.40 11/15/23 327,815
480 Missouri Housing Development Commission, Homeownership
GNMA/FNMA Backed 1998 Ser B-2 (AMT) ......................................... 6.40 03/01/29 499,402
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
$ 2,985 Ohio Housing Finance Agency, Residential GNMA Collateralized
1996 Ser B-2 (AMT) .................................................... 6.10% 09/01/28 $2,999,954
Utah Housing Finance Agency,
35 Ser 1991 Issue A-2 (AMT) .............................................. 7.75 01/01/23 35,313
80 Ser 1991 Issue B-2 (AMT) .............................................. 7.75 01/01/23 82,572
-------- ----------
6,138 6,288,184
-------- ----------
Nursing & Health Related Facilities Revenue (5.1%)
945 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990 ............................. 10.25 01/01/20 980,683
1,910 Lexington-Fayette Urban County Government, Kentucky,
AHF/Kentucky-Iowa Inc Ser 1990 ........................................ 10.25 01/01/20 1,982,122
-------- ----------
2,855 2,962,805
-------- ----------
Public Facilities Revenue (0.6%)
1,000 Marion County Convention & Recreational Facilities Authority, Indiana,
-------- Excise Tax Sub Ser 1997 A (MBIA) ...................................... 0.00 06/01/17 359,960
----------
Tax Allocation Revenue (1.5%)
800 Hodgkins, Illinois, Ser 1991 ............................................. 9.50 12/01/09 891,416
-------- ----------
Transportation Facilities Revenue (16.5%)
1,000 Chicago, Illinois, Midway Airport Ser 1998 A (AMT) (MBIA) ................ 5.125 01/01/35 876,080
2,120 Southwestern Development Authority, Illinois, Tri-City Regional Port
District Ser 1989 A (AMT) (a) ......................................... 7.90 07/01/14 2,185,042
2,000 Kentucky Turnpike Authority, Economic Development Road Revitalization
Refg Ser 1995 (AMBAC) ................................................. 5.625 07/01/15 2,018,100
1,000 Ohio Turnpike Commission, Ser 1998 B (FGIC) .............................. 4.50 02/15/24 821,040
2,000 Puerto Rico Highway & Transportation Authority, 1998 Ser A ............... 4.75 07/01/38 1,687,820
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA) ................ 6.125 11/15/25 2,032,620
-------- ----------
10,120 9,620,702
-------- ----------
Water & Sewer Revenue (9.1%)
2,000 Lee County, Florida, Water & Sewer 1999 Ser A (AMBAC) .................... 4.75 10/01/23 1,736,200
1,000 Fulton County, Georgia, Water & Sewerage Ser 1998 (FGIC) ................. 4.75 01/01/28 852,260
595 Massachusetts Water Resources Authority, 1993 Ser C ...................... 5.25 12/01/20 549,798
1,300 Ohio Water Development Authority, Water Pollution Ser 1995 (MBIA) ........ 5.75 12/01/17 1,318,525
1,000 Loudoun County Sanitation Authority, Virginia, Ser 1998 (MBIA) ........... 4.75 01/01/21 872,350
-------- ----------
5,895 5,329,133
-------- ----------
Other Revenue (3.3%)
1,000 Pasadena, California, Refg & Cap 1992 COPs ............................... 5.75 01/01/13 1,010,970
1,000 Mashantucket (Western) Pequot Tribe, Connecticut, 1997 Ser B (a) ......... 5.75 09/01/27 946,890
-------- ----------
2,000 1,957,860
-------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS August 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Refunded (3.9%)
$ 750 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc
Refg 1990 Ser D (ETM) ................................................ 9.50% 11/15/15 $ 815,100
1,000 Massachusetts, 1995 Ser B (AMBAC) ....................................... 5.50 07/01/05+ 1,054,770
405 Massachusetts Water Resources Authority, 1993 Ser C ..................... 5.25 12/01/04+ 426,420
------- -----------
2,155 2,296,290
------- -----------
53,423 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $51,439,646)................................. 51,929,001
------- -----------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (12.8%)
2,300 Hapeville Development Authority, Georgia, Hapeville Hotel Ser 1985
(Demand 09/01/99) .................................................... 2.80* 11/01/15 2,300,000
500 Missouri Health & Education Facilities Authority, Cox Health Ser 1997
(Demand 09/01/99) .................................................... 3.00* 06/01/15 500,000
4,700 Missouri Health & Educational Facilities Authority, Washington University
-------- Ser C (Demand 09/01/99) .............................................. 3.00* 09/01/30 4,700,000
-----------
7,500 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
--------
(Identified Cost $7,500,000)................................................................... 7,500,000
-----------
$60,923 TOTAL INVESTMENTS (Identified Cost $58,939,646) (b) ............................... 101.5 % 59,429,001
=======
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS .................................... (1.5) (887,814)
-------- -----------
NET ASSETS ........................................................................ 100.0 % $58,541,187
======== ===========
</TABLE>
- ---------------
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) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$1,501,929 and the aggregate gross unrealized depreciation is
$1,012,574, resulting in net unrealized appreciation of $489,355.
Bond Insurance:
AMBAC AMBAC Assurance Corporation.
Connie Lee Connie Lee Insurance Company -- A wholly owned subsidiary of AMBAC
Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $58,939,646)........................................ $ 59,429,001
Cash .................................................................. 255,629
Interest receivable ................................................... 731,933
Prepaid expenses and other assets ..................................... 4,567
------------
TOTAL ASSETS ....................................................... 60,421,130
------------
LIABILITIES:
Payable for:
Investment purchased ............................................... 1,740,077
Shares of beneficial interest repurchased .......................... 26,086
Investment advisory fee ............................................ 20,694
Administration fee ................................................. 12,933
Accrued expenses and other payables ................................... 80,153
------------
TOTAL LIABILITIES .................................................. 1,879,943
------------
NET ASSETS ......................................................... $ 58,541,187
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ....................................................... $ 57,373,925
Net unrealized appreciation ........................................... 489,355
Accumulated undistributed net investment income ....................... 513,304
Accumulated undistributed net realized gain ........................... 164,603
------------
NET ASSETS ......................................................... $ 58,541,187
============
NET ASSET VALUE PER SHARE,
6,168,486 shares outstanding (unlimited shares authorized of $.01 par
value) .............................................................. $ 9.49
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended August 31, 1999
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ............................... $ 3,557,962
------------
EXPENSES
Investment advisory fee ....................... 249,647
Administration fee ............................ 156,029
Professional fees ............................. 57,852
Transfer agent fees and expenses .............. 29,287
Registration fees ............................. 19,077
Shareholder reports and notices ............... 17,700
Trustees' fees and expenses ................... 15,146
Custodian fees ................................ 4,515
Other ......................................... 12,999
------------
TOTAL EXPENSES ............................. 562,252
Less: expense offset .......................... (4,508)
------------
NET EXPENSES ............................... 557,744
------------
NET INVESTMENT INCOME ...................... 3,000,218
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ............................. 73,188
Net change in unrealized appreciation ......... (3,936,639)
------------
NET LOSS ................................... (3,863,451)
------------
NET DECREASE .................................. $ (863,233)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
AUGUST 31, 1999 AUGUST 31, 1998
----------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS :
OPERATIONS :
Net investment income .............................. $ 3,000,218 $ 3,219,238
Net realized gain .................................. 73,188 658,094
Net change in unrealized appreciation .............. (3,936,639) 1,085,042
------------ ------------
NET INCREASE (DECREASE) ......................... (863,233) 4,962,374
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................. (2,853,918) (3,271,045)
Net realized gain .................................. (397,258) (173,466)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ............... (3,251,176) (3,444,511)
------------ ------------
Net decrease from transactions in shares of
beneficial interest .............................. (1,395,828) (436,425)
------------ ------------
NET INCREASE (DECREASE) ......................... (5,510,237) 1,081,438
NET ASSETS:
Beginning of period ................................ 64,051,424 62,969,986
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$513,304 and $367,004, respectively)............. $ 58,541,187 $ 64,051,424
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Municipal Income Trust III (the "Fund"), formerly
Municipal Income Trust III, 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
14
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1999, 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 with Morgan Stanley Dean Witter
Advisors Inc. (the "Investment Advisor" ), the Fund pays the Investment Advisor
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 Advisor pays the salaries of all personnel,
including officers of the Fund, who are employees of the Investment Advisor.
3. ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement with Morgan Stanley Dean Witter
Services Company Inc. ("the Administrator"), an affiliate of the Investment
Advisor, 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.
15
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS August 31, 1999, 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, 1999,
aggregated $13,294,147 and $19,938,031, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor
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
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
------------- ----------- --------------
<S> <C> <C> <C>
Balance, August 31, 1997 ................................................. 6,378,986 $ 63,790 $ 59,142,388
Treasury shares purchased and retired (weighted average discount 7.62%)* . (47,500) (475) (435,950)
--------- -------- ------------
Balance, August 31, 1998 ................................................. 6,331,486 63,315 58,706,438
Treasury shares purchased and retired (weighted average discount 13.05%)* (163,000) (1,630) (1,394,198)
--------- -------- ------------
Balance, August 31, 1999 ................................................. 6,168,486 $ 61,685 $ 57,312,240
========= ======== ============
</TABLE>
- ---------------
* The Trustees have voted to retire the shares purchased.
6. DIVIDENDS
The Fund declared the following dividend from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ---------------------- -------------- -------------------- --------------------
<S> <C> <C> <C>
June 29, 1999 $ 0.0375 September 3, 1999 September 17, 1999
September 28, 1999 $ 0.0375 October 8, 1999 October 22, 1999
September 28, 1999 $ 0.0375 November 5, 1999 November 19, 1999
September 28, 1999 $ 0.0375 December 3, 1999 December 17, 1999
</TABLE>
16
<PAGE>
MORGAN STANLEY DEAN WITTER 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*
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ...................... $ 10.12 $ 9.87
------- --------
Income (loss) from investment operations:
Net investment income .................................... 0.48 0.51
Net realized and unrealized gain (loss) .................. (0.62) 0.29
-------- --------
Total income (loss) from investment operations ............ (0.14) 0.80
-------- --------
Less dividends and distributions from:
Net investment income .................................... (0.46) (0.52)
Net realized gain ........................................ (0.06) (0.03)
-------- --------
Total dividends and distributions ......................... (0.52) (0.55)
-------- --------
Anti-dilutive effect of acquiring treasury shares ......... 0.03 --
-------- --------
Net asset value, end of period ............................ $ 9.49 $ 10.12
======== ========
Market value, end of period ............................... $ 7.813 $ 9.188
======== ========
TOTAL RETURN+ ............................................. (9.78)% 2.50 %
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................................. 0.90 %(1) 0.90 %
Net investment income ..................................... 4.81 % 5.07 %
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................... $58,541 $ 64,051
Portfolio turnover rate ................................... 22 % 29 %
<CAPTION>
FOR THE YEAR ENDED AUGUST 31*
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ...................... $ 9.75 $ 9.91 $ 9.81
-------- -------- --------
Income (loss) from investment operations:
Net investment income .................................... 0.53 0.56 0.60
Net realized and unrealized gain (loss) .................. 0.19 (0.09) 0.11
-------- -------- --------
Total income (loss) from investment operations ............ 0.72 0.47 0.71
-------- -------- --------
Less dividends and distributions from:
Net investment income .................................... (0.58) (0.59) (0.54)
Net realized gain ........................................ (0.02) (0.04) (0.07)
--------- -------- --------
Total dividends and distributions ......................... (0.60) (0.63) (0.61)
--------- -------- --------
Anti-dilutive effect of acquiring treasury shares ......... -- -- --
--------- -------- --------
Net asset value, end of period ............................ $ 9.87 $ 9.75 $ 9.91
========= ======== ========
Market value, end of period ............................... $ 9.50 $ 9.875 $ 8.875
========= ======== ========
TOTAL RETURN+ ............................................. 2.57 % 18.83 % 5.71 %
RATIOS TO AVERAGE NET ASSETS:
Expenses .................................................. 0.91 % 0.91 % 0.94 %
Net investment income ..................................... 5.41 % 5.61 % 6.24 %
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ................... $62,970 $62,297 $63,515
Portfolio turnover rate ................................... 4 % 17 % 22 %
</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) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER 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 Morgan Stanley Dean Witter
Municipal Income Trust III (the "Fund") at August 31, 1999, 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, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
October 8, 1999
1999 FEDERAL TAX NOTICE (unaudited)
During the year ended August 31, 1999, the Fund paid to shareholders $0.46
per share from tax-exempt income.
For the year ended August 31, 1999, the Fund paid to shareholders $0.06 per
share from long-term capital gains.
18
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
MORGAN STANLEY
DEAN WITTER
MUNICIPAL
INCOME TRUST III
TRUSTEES
- --------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- --------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- --------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISOR
- --------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
Annual Report
August 31, 1999
