<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III Two World Trade Center,
LETTER TO THE SHAREHOLDERS February 28, 1999 New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Morgan
Stanley Dean Witter Municipal Income Trust III (TFC) for the period ended
February 28, 1999.
Continued economic turmoil in Asia and Latin America, a currency crisis in
Russia and the orchestrated bailout of a major U.S. hedge fund contributed to
the volatility in the global financial markets during the second half of 1998.
These events precipitated a "flight to quality" demand for U.S. Treasury
securities. U.S. Treasury bond yields reached a 30-year low in October 1998.
During the fourth quarter, the Federal Reserve Board sought to restore
stability to the financial markets by cutting the federal-funds rate 75 basis
points in three moves from 5.50 percent to 4.75 percent.
U.S. economic growth and employment remained strong in early 1999. Although
inflation remained subdued, concern developed that the Federal Reserve might
become more restrictive if the pace of growth did not slacken.
MUNICIPAL MARKET CONDITIONS
Municipal yields did not decline as much as U.S. Treasury yields during 1998.
At the end of December, long-term insured municipal index yields were 5.05
percent. This level was only 10 basis points lower than the beginning of the
year. In contrast, U.S. Treasury bond yields fell 80 basis points, from 5.90
percent to 5.10 percent. When U.S. Treasury yields reversed direction in
February 1999 and rose 50 basis points, municipal yields were less volatile and
rose only 10 basis points to 5.15 percent.
The modest rally of municipals during 1998 created a favorable relative value
relationship versus Treasuries. Municipals underperformed Treasuries and the
ratio of municipal yields to Treasury yields climbed to 99 percent by year-end.
The higher the ratio, the more attractive municipals are relative to
Treasuries. The ratio declined to 92 percent by the end of February, as
municipals outperformed Treasuries. Over the past five years, the annual
high-low range of the municipal/Treasury yield ratio has averaged 93-84
percent.
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1999, continued
In addition to lagging the Treasury "flight to quality" rally in 1998,
municipals also experienced a glut of new issue supply. Underwriting volume of
$284 billion was up 28 percent from the prior year and approached 1993's record
level. Issuers actively refinanced at lower interest rates and refundings were
29 percent of the total volume. New-money issues set a record and included the
largest single municipal underwriting of $3.3 billion for the Long Island Power
Authority. In the first two months of 1999, volume slowed and was down 25
percent compared to the same period last year.
PERFORMANCE
The Fund's net asset value (NAV) declined from $10.12 to $10.00 per share
during the six month period. Based on this change, plus reinvestment of
tax-free dividends totaling $0.23 per share and capital gains distributions
totaling $0.063, the Fund's total return based on NAV was 2.08 percent. TFC's
price on the New York Stock Exchange fell from $9.1875 to $8.75 per share
during the same period. Based on this market value and reinvestment of tax-free
dividends and capital gains distributions, the Fund's total return based on
market value was --1.61 percent. As of February 28, 1999, TFC's market value
was trading at a 12.5 percent discount to its NAV.
[LINE CHART]
MMD 30 YEAR AAA INSURED AND TREASURY YIELD
The January & February 1999 data needs to be added to the Bond Yield Graph
for the following annual report:
Morgan Stanley Dean Witter Municipal Income Trust III
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 87.605
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%
07/31/95 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%
2
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1999, continued
[BAR GRAPH] [PIE CHART]
LARGEST SECTORS AS OF FEBRUARY 28, 1999 CREDIT RATINGS AS OF FEBRUARY 28, 1999
(% OF NET ASSETS) (% OF TOTAL LONG-TERM PORTFOLIO)
Transportation 17% Aaa or AAA 64%
Electric 13% Aa or AA 6%
Mortgage 13% A or A 11%
Water and Sewer 11% Baa or BBB 8%
Hospital 11% N/R 11%
IDR/PCR* 9%
General Obligation 7%
Nursing and Health 5%
Refunded 3%
All Others 11%
*Industrial Development/Pollution As measured by Moody's Investor
Revenue. Service Inc. or Standard & Poor's
Corp.
Portfolio structure is subject to
change. Portfolio structure is subject to
change.
[BAR GRAPH]
CALL STRUCTURE AS OF FEBRUARY 28, 1999
(% OF TOTAL LONG-TERM PORTFOLIO) WEIGHTED AVERAGE
PERCENT CALLABLE CALL PROTECTION: 8 YEARS
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010+
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
4% 9% 2% 4% 0% 7% 20% 4% 16% 15% 3% 16%
YEARS BONDS CALLABLE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
3
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
LETTER TO THE SHAREHOLDERS February 28, 1999, continued
Monthly dividends for the first quarter of 1998 were declared in December. The
Fund's level of earned but undistributed net investment income totaled $0.066
per share on February 28, 1999, versus $0.058 per share six months ago.
PORTFOLIO STRUCTURE
The Fund's investments were diversified among 13 long-term sectors and 46
credits. At the end of February the portfolio's average maturity was 21 years.
Average duration, a measure of sensitivity to interest rate changes, was 7.9
years.
The accompanying charts provide information on the Fund's call structure,
largest sectors and distribution by credit quality as of February 28, 1999.
LOOKING AHEAD
The combination of a "flight to quality" and the flood of new municipal issues
made the municipal-to-Treasury yield relationship more favorable last year than
it has been in the previous 10 years. Although municipals have outperformed
Treasuries in early 1999, we believe that municipals still offer investors
considerable value versus their historical relationship with 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, 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,
1999 the Fund purchased and retired 60,200 shares of common stock at a weighted
average market discount of 11.11 percent.
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
CHARLES A. FIUMEFREDDO
Chairman of the Board
4
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (96.7%)
General Obligation (7.0%)
$ 1,000 Michigan Municipal Bond Authority, School Ser 1998 ........................... 5.25% 12/01/13 $ 1,052,970
1,000 New York City, New York, 1995 Ser D (MBIA) ................................... 6.20 02/01/07 1,129,510
1,000 New York State, Refg Ser 1995 B .............................................. 5.70 08/15/10 1,093,020
1,000 Washington, Ser 1995 A ....................................................... 5.80 09/01/08 1,084,670
-------- -----------
4,000 4,360,170
-------- -----------
Educational Facilities Revenue (1.9%)
1,250 New Jersey Economic Development Authority, Educational Testing Service
-------- Ser 1998 A (MBIA) ............................................................ 4.75 05/15/18 1,214,612
-----------
Electric Revenue (12.6%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA) .... 5.75 01/01/15 1,068,140
3,000 Southern California Public Power Authority, Mead-Adelanto 1994 Ser A
(AMBAC) ...................................................................... 5.15 07/01/15 3,163,050
Intermountain Power Agency, Utah,
2,500 Refg 1998 Ser A (MBIA) ....................................................... 5.25 07/01/15 2,576,325
1,000 Refg 1997 Ser B (MBIA) ....................................................... 5.75 07/01/19 1,066,600
-------- -----------
7,500 7,874,115
-------- -----------
Hospital Revenue (11.3%)
2,000 Birmingham-Carraway Special Care Facilities Financing Authority,
Alabama, Carraway Methodist Health Ser 1995 A (Connie Lee) ................... 5.875 08/15/15 2,130,960
2,000 Michigan Hospital Finance Authority, Detroit Medical Center Ser 1997 A
(AMBAC) ...................................................................... 5.25 08/15/27 1,982,440
1,000 Missouri Health & Educational Facilities Authority, SSM Health Care
Ser 1998 A (MBIA) ............................................................ 5.00 06/01/22 982,380
1,000 University of Missouri, Health Ser 1996 A (AMBAC) ............................ 5.50 11/01/16 1,041,820
1,000 Delaware County Authority, Pennsylvania, Catholic Health East Ser 1998 A
-------- (AMBAC) ...................................................................... 4.875 11/15/26 946,170
-----------
7,000 7,083,770
-------- -----------
Industrial Development/Pollution Control Revenue (8.6%)
1,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) .............. 6.30 12/01/14 1,087,020
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 1,090,140
2,005 Alliance Airport Authority, Texas, American Airlines Inc Ser 1990 (AMT) ...... 7.50 12/01/29 2,149,881
1,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
-------- Texas, American Airlines Inc Ser 1995 ........................................ 6.00 11/01/14 1,051,170
-----------
5,005 5,378,211
-------- -----------
Mortgage Revenue -- Multi-Family (1.6%)
960 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT)
(AMBAC) ...................................................................... 6.60 07/01/14 1,035,610
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Mortgage Revenue -- Single Family (11.7%)
$ 225 Colorado Housing Finance Authority, Ser A-2 (AMT) ..................... 8.25% 08/01/20 $ 229,730
70 Hawaii Housing Finance & Development Corporation, Purchase
Ser 1989 A (AMT) ...................................................... 7.80 07/01/29 71,751
730 Idaho Housing Agency, Ser 1988 D-2 (AMT) .............................. 8.25 01/01/20 796,452
1,650 Saint Tammany Public Trust Financing Authority, Louisiana,
Refg Ser 1990 B ....................................................... 7.25 07/25/11 1,803,220
495 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT) .................. 6.40 11/15/23 516,414
480 Missouri Housing Development Commission, Homeownership
GNMA/FNMA Backed 1998 Ser B-2 (AMT) ................................... 6.40 03/01/29 529,800
2,985 Ohio Housing Finance Agency, Residential GNMA Collateralized
1996 Ser B-2 (AMT) .................................................... 6.10 09/01/28 3,168,697
Utah Housing Finance Agency,
60 Ser 1991 Issue A-2 (AMT) ............................................. 7.75 01/01/23 61,537
175 Ser 1991 Issue B-2 (AMT) .............................................. 7.75 01/01/23 182,681
------- -----------
6,870 7,360,282
------- -----------
Nursing & Health Related Facilities Revenue (4.8%)
945 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990 .......................... 10.25 01/01/20 996,408
1,910 Lexington-Fayette Urban County Government, Kentucky,
------- AHF/Kentucky-Iowa Inc Ser 1990 ........................................ 10.25 01/01/20 2,013,904
-----------
2,855 3,010,312
------- -----------
Public Facilities Revenue (2.2%)
1,000 Marion County Convention & Recreational Facilities Authority, Indiana,
Excise Tax Sub Ser 1997 A (MBIA) ...................................... 0.00 06/01/17 392,970
1,000 Washington County/St George Interlocal Agency, Utah, Ser 1997 A
------- (AMBAC) ............................................................... 5.125 12/01/22 991,100
-----------
2,000 1,384,070
------- -----------
Tax Allocation Revenue (1.5%)
800 Hodgkins, Illinois, Ser 1991 .......................................... 9.50 12/01/09 921,480
------- -----------
Transportation Facilities Revenue (16.5%)
1,000 Chicago, Illinois, Midway Airport Ser 1998 A (AMT) (MBIA) ............. 5.125 01/01/35 965,750
2,200 Southwestern Development Authority, Illinois, Tri-City Regional Port
District Ser 1989 A (AMT) (a) ......................................... 7.90 07/01/14 2,274,228
2,000 Kentucky Turnpike Authority, Economic Development Road Revitalization
Refg Ser 1995 (AMBAC) ................................................. 5.625 07/01/15 2,126,380
1,000 Ohio Turnpike Commission, Ser 1998 B (FGIC) ........................... 4.50 02/15/24 925,090
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA) ............. 6.125 11/15/25 2,179,580
2,000 Puerto Rico Highway & Transportation Authority, 1998 Ser A ............ 4.75 07/01/38 1,894,500
------- -----------
10,200 10,365,528
------- -----------
Water & Sewer Revenue (10.6%)
1,000 East Bay Municipal Utility District, California, Water Ser 1998 (MBIA) 4.75 06/01/34 953,920
1,000 Massachusetts Water Resources Authority, 1993 Ser C ................... 5.25 12/01/20 1,006,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,300 Ohio Water Development Authority, Water Pollution Ser 1995 (MBIA) ........... 5.75% 12/01/17 $ 1,377,857
3,755 Pittsburgh Water & Sewer Authority, Pennsylvania, 1998 Ser B (FGIC) ......... 0.00 09/01/26 899,435
1,000 Loudoun County Sanitation Authority, Virginia, Ser 1998 (MBIA) .............. 4.75 01/01/21 959,240
1,500 Upper Occoquan Sewerage Authority, Virginia, Ser 1995 A (MBIA) .............. 5.00 07/01/25 1,480,425
------- -----------
9,555 6,677,127
------- -----------
Other Revenue (3.3%)
1,000 Pasadena, California, Refg & Cap 1992 COPs .................................. 5.75 01/01/13 1,042,340
1,000 Mashantucket (Western) Pequot Tribe, Connecticut, 1997 Ser B (a) ............ 5.75 09/01/27 1,024,560
------- -----------
2,000 2,066,900
------- -----------
Refunded (3.1%)
750 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc
Refg 1990 Ser D (ETM) ....................................................... 9.50 11/15/15 843,660
1,000 Massachusetts, 1995 Ser B (AMBAC) ........................................... 5.50 07/01/05+ 1,095,790
------- -----------
1,750 1,939,450
------- -----------
61,745 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $56,919,323)....................................... 60,671,637
------- -----------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (2.1%)
500 Illinois Health Facilities Authority, Northwestern Memorial Hospital
Ser 1995 (Demand 03/01/99) .................................................. 3.25* 08/15/25 500,000
800 Harris County Health Facilities Development Corporation, Texas, Methodist
------- Hospital Ser 1994 (Demand 03/01/99) ......................................... 3.25* 12/01/25 800,000
-----------
1,300 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
------- (Identified Cost $1,300,000)......................................................................... 1,300,000
-----------
$63,045 TOTAL INVESTMENTS (Identified Cost $58,219,323) (b)................................... 98.8% 61,971,637
======= CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES ....................................... 1.2 762,994
-----------
NET ASSETS ........................................................................... 100.0% $62,734,631
===========
</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
$3,797,594 and the aggregate gross unrealized depreciation is
$45,280, resulting in net unrealized appreciation of $3,752,314.
Bond Insurance:
- ---------------
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
PORTFOLIO OF INVESTMENTS February 28, 1999 (unaudited) continued
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
February 28, 1999
Alabama ......... 3.4% Iowa ............ 4.8% New York ....... 5.3%
California ..... 9.9 Kentucky ........ 3.4 Ohio ............ 8.7
Colorado ........ 0.4 Louisiana ...... 2.9 Pennsylvania .... 1.4
Connecticut ..... 1.6 Maine ........... 0.8 Puerto Rico ..... 3.0
Delaware ........ 1.5 Massachusetts .. 5.0 Texas ........... 10.0
Hawaii ......... 0.1 Michigan ........ 4.8 Utah ............ 7.8
Idaho ........... 1.3 Missouri ........ 4.1 Virginia ....... 3.9
Illinois ....... 8.8 Nevada .......... 1.7 Washington ...... 1.7
Indiana ......... 0.6 New Jersey ..... 1.9 ----
Total .......... 98.8%
====
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1999 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $58,219,323) ................................ $61,971,637
Cash ........................................................... 107,932
Receivable for:
Interest ..................................................... 754,075
Investments sold ............................................. 10,000
Prepaid expenses and other assets .............................. 3,738
-----------
TOTAL ASSETS ................................................. 62,847,382
-----------
LIABILITIES:
Payable for:
Investment advisory fee ...................................... 20,744
Administration fee ........................................... 12,965
Accrued expenses and other payables ............................ 79,042
-----------
TOTAL LIABILITIES ............................................ 112,751
-----------
NET ASSETS ................................................... $62,734,631
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................................ $58,231,159
Net unrealized appreciation .................................... 3,752,314
Accumulated undistributed net investment income ................ 428,042
Accumulated undistributed net realized gain .................... 323,116
-----------
NET ASSETS ................................................... $62,734,631
===========
NET ASSET VALUE PER SHARE,
6,271,286 shares outstanding (unlimited shares
authorized of $.01 par value) ................................ $10.00
======
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the six months ended February 28, 1999 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME ................................................. $1,775,273
----------
EXPENSES
Investment advisory fee ......................................... 126,221
Administration fee .............................................. 78,888
Transfer agent fees and expenses ................................ 14,204
Professional fees ............................................... 11,399
Shareholder reports and notices ................................. 10,366
Registration fees ............................................... 8,397
Trustees' fees and expenses ..................................... 6,230
Custodian fees .................................................. 2,314
Other ........................................................... 8,117
----------
TOTAL EXPENSES ................................................ 266,136
Less: expense offset ............................................ (2,310)
----------
NET EXPENSES .................................................. 263,826
----------
NET INVESTMENT INCOME ......................................... 1,511,447
----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ............................................... 231,701
Net change in unrealized appreciation ........................... (673,680)
----------
NET LOSS ...................................................... (441,979)
----------
NET INCREASE .................................................... $1,069,468
==========
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
- ----------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 1,511,447 $ 3,219,238
Net realized gain .................................... 231,701 658,094
Net change in unrealized appreciation ................ (673,680) 1,085,042
----------- -----------
NET INCREASE ....................................... 1,069,468 4,962,374
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................ (1,450,409) (3,271,045)
Net realized gain .................................... (397,258) (173,466)
----------- -----------
TOTAL DIVIDENDS AND DISTRIBUTIONS .................. (1,847,667) (3,444,511)
----------- -----------
Net decrease from transactions in shares of beneficial
interest ........................................... (538,594) (436,425)
----------- -----------
NET INCREASE (DECREASE) ............................ (1,316,793) 1,081,438
NET ASSETS:
Beginning of period .................................. 64,051,424 62,969,986
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$428,042 and $367,004, respectively) .............. $62,734,631 $64,051,424
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (unaudited)
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
12
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (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 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.
13
<PAGE>
MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III
NOTES TO FINANCIAL STATEMENTS February 28, 1999 (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, 1999,
aggregated $5,088,454 and $6,365,291, 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
PAR VALUE IN 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 11.11%)* ..... (60,200) (602) (537,992)
--------- ------- -----------
Balance, February 28, 1999 ................ 6,271,286 $62,713 $58,168,446
========= ======= ===========
</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>
December 29, 1998 $0.0375 March 5, 1999 March 19, 1999
March 30, 1999 $0.0375 April 9, 1999 April 23, 1999
March 30, 1999 $0.0375 May 7, 1999 May 21, 1999
March 30, 1999 $0.0375 June 4, 1999 June 18, 1999
</TABLE>
14
<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 SIX FOR THE YEAR ENDED AUGUST 31*
MONTHS ENDED -------------------------------------------------------------
FEBRUARY 28, 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $10.12 $ 9.87 $ 9.75 $ 9.91 $ 9.81 $10.05
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income ............................. 0.24 0.51 0.53 0.56 0.60 0.60
Net realized and unrealized gain (loss) ........... (0.08) 0.29 0.19 (0.09) 0.11 (0.25)
------ ------ ------ ------ ------ ------
Total income from investment operations ............ 0.16 0.80 0.72 0.47 0.71 0.35
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income ............................. (0.23) (0.52) (0.58) (0.59) (0.54) (0.56)
Net realized gain ................................. (0.06) (0.03) (0.02) (0.04) (0.07) (0.03)
------ ------ ------ ------ ------ ------
Total dividends and distributions .................. (0.29) (0.55) (0.60) (0.63) (0.61) (0.59)
------ ------ ------ ------ ------ ------
Anti-dilutive effect of acquiring treasury shares .. 0.01 -- -- -- -- --
Net asset value, end of period ..................... $10.00 $10.12 $ 9.87 $ 9.75 $ 9.91 $ 9.81
====== ====== ====== ====== ====== ======
Market value, end of period ........................ $ 8.75 $9.188 $ 9.50 $9.875 $8.875 $ 9.00
====== ====== ====== ====== ====== ======
TOTAL RETURN+ ...................................... (1.61)%(1) 2.50% 2.57% 18.83% 5.71% (6.60)%
RATIOS TO AVERAGE NET ASSETS:
Expenses ........................................... 0.84%(2) 0.90% 0.91% 0.91% 0.94% 0.93%
Net investment income .............................. 4.79%(2) 5.07% 5.41% 5.61% 6.24% 5.99%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $62,735 $64,051 $62,970 $62,297 $63,515 $64,011
Portfolio turnover rate ............................ 8%(1) 29% 4% 17% 22% 23%
</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.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
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
- ---------------------------------------------
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
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.
MORGAN STANLEY
DEAN WITTER
MUNICIPAL
INCOME TRUST III
[GRAPHIC]
SEMIANNUAL REPORT
FEBRUARY 28, 1998
