<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III Two World Trade Center,
Letter to the Shareholders August 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The U.S. economy continued its unprecedented expansion during the fiscal year
ended August 31, 2000. Real personal consumption accelerated and unemployment
reached a 30-year low. At the same time a surge in oil prices also heightened
the risk of inflation. The Federal Reserve Board responded by further
tightening monetary policy. Three increases in the federal funds rate, totaling
100 basis points have occurred since February. The rate now stands at a
nine-year high of 6.50 percent.
Strong economic growth and a less accommodative monetary policy caused
long-term interest rates to increase throughout 1999. In January, however, the
U.S. Treasury announced plans to use the federal budget surplus to reduce its
debt. This announcement initially precipitated a 50 to 75 basis point drop in
yields of longer-maturity Treasuries. Municipal bond yields also declined but
lagged the downward trend of Treasury yields. Although long-term interest rates
rose in April and May, indications of a slowdown in economic growth caused
rates to decline over the last three months.
MUNICIPAL MARKET CONDITIONS
The long-term insured municipal index began the year at 5.97 percent. This
index reached a high of 6.19 percent in mid January before ending August at
5.62 percent. Because bond prices move inversely to changes in interest rates,
bond prices declined significantly last year but improved in the first eight
months of 2000.
The ratio of municipal yields as a percentage of Treasury yields has
historically been used as a measure of relative value. This ratio increased
from 92 percent at the end of 1999 to 99 percent at the end of August and can
be attributed primarily to the magnitude of the rally in long-term Treasuries.
Over the past five years the ratio has ranged between an average high of 93
percent and an average low of 85 percent. A rising yield ratio indicates weaker
relative performance by municipals.
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders August 31, 2000, continued
During the first eight months of 2000, municipal underwriting was 22 percent
lower than in the same period last year. Refunding activity, the most
interest-rate-sensitive component of supply, dropped more than 70 percent and
represented less than 10 percent of total volume. Approximately 40 percent of
the underwritings were enhanced with bond insurance.
30-YEAR BOND YIELDS 1994-2000
<TABLE>
<CAPTION>
DATE AAA INS TSY % RELATIONSHIP
---- ------- --- --------------
<S> <C> <C> <C>
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%
09/30/99 5.85 6.05 96.69%
10/31/99 6.03 6.16 97.89%
11/30/99 6.00 6.29 95.39%
12/31/99 5.97 6.48 92.13%
01/31/00 6.18 6.49 95.22%
02/29/00 6.04 6.14 98.37%
03/31/00 5.82 5.83 99.83%
04/30/00 5.91 5.96 99.16%
05/31/00 5.91 6.01 98.34%
06/30/00 5.84 5.90 98.98%
07/31/00 5.73 5.78 99.13%
08/31/00 5.62 5.67 99.12%
</TABLE>
U.S. Treasury Yields
Insured Municipal Yields
Insured Municipal Yields as a Percentage of U.S. Treasury Yields
Source: Municipal Market Data - A Division of Thomson Financial Municipal
Group and Bloomberg L.P.
PERFORMANCE
For the 12-month period ended August 31, 2000, the net asset value (NAV) of
Morgan Stanley Dean Witter Municipal Income Trust III (TFC) increased from
$9.49 to $9.65 per share. Based on this change plus the reinvestment of
tax-free dividends totaling $0.45 per share and a long-term capital gain
distribution of $0.027087 per share paid in December, the Fund's total NAV
return was 8.04 percent. TFC's value on the New York Stock Exchange (NYSE)
increased from $7.8125 to $9.1875 per share during the same period. Based on
this change plus reinvestment of distributions TFC's total market return was
24.94 percent. TFC's share price was trading at a 4.79 percent discount to its
NAV on August 31, 2000.
2
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders August 31, 2000, continued
Monthly dividends for the fourth quarter of 2000 were declared in September.
Beginning with the October payment, the monthly dividend was increased from
$0.0375 to $0.0425 per share. The Fund's level of undistributed net investment
income was $0.115 per share on August 31, 2000, versus $0.083 per share 12
months earlier. This indicated that TFC earned more than it distributed in
Fiscal 2000.
PORTFOLIO STRUCTURE
The Fund's net assets of $56 million were diversified among 13 long-term
sectors and 41 credits. At the end of August, the portfolio's average maturity
was 18 years. Average duration, a measure of sensitivity to interest-rate
changes, was 7.3 years. Bonds with longer durations have greater volatility.
For example, the duration of a new 30-year insured municipal bond was
approximately 14 years. The accompanying charts provide current information on
the portfolio's credit quality, sector concentrations and maturity
distribution. Optional call provisions and their respective cost (book) yields
by year are also charted.
LOOKING AHEAD
While the Federal Reserve Board has continued to express concern about
inflation, the slower pace of economic growth has reduced the pressure on the
Fed to further tighten monetary policy. We believe municipal bonds continue to
offer tax-conscious investors good long-term value.
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, whichever is
lower at the time of purchase. During the fiscal period ended August 31, 2000
the Fund purchased and retired 370,133 shares of common stock at a weighted
average market discount of 15.6 percent. The anti-dilutive effect on NAV of the
share repurchase program is shown in the table of Financial Highlights.
On August 24, 2000, the Board of Trustees of Morgan Stanley Dean Witter
Municipal Income Trust III approved a proposed reorganization plan into Morgan
Stanley Dean Witter Tax-Exempt Securities Trust, an open-end investment
company. Pursuant to an Agreement and Plan of Reorganization, substantially all
of the assets of TFC would be combined with the assets of Morgan Stanley Dean
Witter Tax-Exempt Securities Trust, effectively open-ending TFC. Shareholders
of the TFC would receive Class D shares of Morgan Stanley Dean Witter
Tax-Exempt Securities Trust with a value equal to the net asset value of their
respective holdings in TFC. If shareholders of TFC approve its Agreement and
Plan of
3
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders August 31, 2000, continued
Reorganization, they would become Class D shareholders of Morgan Stanley Dean
Witter Tax-Exempt Securities Trust and the shares of TFC will no longer be
listed or traded on the New York Stock Exchange.
The Agreement and Plan of Reorganization will be submitted to shareholders at a
Special Meeting presently scheduled to take place in January 2001. A proxy
statement, which describes the Agreement and Plan of Reorganization in fuller
detail will be mailed to shareholders in October 2000. If shareholders do not
approve the Agreement and Plan of Reorganization, the Fund will hold its next
annual meeting in June 2001.
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
4
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders August 31, 2000, continued
LARGEST SECTORS as of August 31, 2000
(% of Net Assets)
Transportation 18%
General Obligation 16%
Hospital 11%
Mortgage 11%
Water & Sewer 11%
Electric 10%
Portfolio structure is subject to change.
CREDIT RATINGS as of August 31, 2000
(% of Total Long-Term Portfolio)
Aaa or AAA 62%
Aa or AA 5%
A or A 9%
NR 13%
Baa or BBB 11%
As measured by Moody's Investors Service Inc.
or Standard & Poor's Corp.
Portfolio structure is subject to change.
Weighted Average
Maturity 17 years
DISTRIBUTION BY MATURITY
(% OF NET ASSETS)
20 - TFC
Under 1 year 3.6%
% Mkt Value
1-5 years 0.00%
% Mkt Value
5-10 years 8.30%
% Mkt Value
10-20 years 52.1%
% Mkt Value
20-30 years 29.9%
% Mkt Value
over 30 years 4.7%
% Mkt Value
** % MKT VALUE IS CALCULATED BY DIVIDING THE NET ASSET BY THE MKT VALUE FOR
EACH YEAR BRACKET
5
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders August 31, 2000, continued
CALL AND COST (BOOK) YIELD STRUCTURE
(Bar Graph)
AUGUST 31, 2000
YEARS BONDS PERCENT
CALLABLE CALLABLE *
2000 2%
2001 11%
2002 5%
2003 -
2004 6%
2005 18%
2006 3%
2007 11%
2008 7%
2009 17%
2010+ 20%
Weighted Average Call Protection: 7 Years
COST (BOOK) YIELD **
2000 8.4%
2001 8.7%
2002 5.6%
2003 -
2004 6.2%
2005 6.1%
2006 5.8%
2007 6.1%
2008 5.1%
2009 5.7%
2010+ 6.6%
Weighted Average Book Yield: 6.4%
* % 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 8.4% on 2% of the bonds in the
long-term portfolio that are callable in 2000.
Portfolio structure is subject to change.
6
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Results of Annual Meeting
* * * * *
On July 26, 2000, an annual meeting of the Fund's shareholders was held for the
purpose of voting on two separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
Edwin J. Garn
For .............. 4,662,239
Withheld ......... 595,251
Michael E. Nugent
For .............. 4,679,367
Withheld ......... 578,123
Philip J. Purcell
For .............. 4,667,544
Withheld ......... 589,946
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Wayne E. Hedien, Dr. Manuel H. Johnson
and John L. Schroeder.
Additionally, James F. Higgins was elected as a Trustee of the Fund by the
Board of Trustees effective August 24, 2000.
(2) 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
FUND:
For ............. 1,588,506
Against ......... 1,555,954
Abstain ......... 162,337
A majority of the shares represented in person or by proxy and entitled to vote
at this meeting is required to approve the Proposal. Because abstentions are
not counted as a vote "FOR", the Proposal was not approved.
7
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Portfolio of Investments August 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (95.1%)
General Obligation (16.0%)
$ 1,000 District of Columbia, Ser 1999 A (FSA) ........................................ 5.375% 06/01/24 $ 969,270
2,000 Florida Board of Education, Capital Outlay Refg Ser 1999 B (MBIA) ............. 4.50 06/01/24 1,696,520
1,900 Hawaii, 1999 Ser CT (FSA) ..................................................... 5.875 09/01/16 1,993,442
1,000 Massachusetts, 2000 Ser A ..................................................... 6.00 02/01/16 1,064,490
1,000 New York City, New York, 1995 Ser D (MBIA) .................................... 6.20 02/01/07 1,088,560
1,000 New York State, Refg Ser 1995 B ............................................... 5.70 08/15/10 1,047,600
1,000 Washington, Ser 1994 A ........................................................ 5.80 09/01/08 1,041,460
-------- -----------
8,900 8,901,342
-------- -----------
Electric Revenue (9.8%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA) ..... 5.75 01/01/15 1,043,210
3,000 Southern California Public Power Authority, Mead-Adelanto 1994 Ser A
(AMBAC) ....................................................................... 5.15 07/01/15 2,981,340
Intermountain Power Agency, Utah,
1,000 Refg 1997 Ser B (MBIA) ........................................................ 5.75 07/01/19 1,018,620
500 Refg 1996 Ser D (Secondary FSA) ............................................... 5.00 07/01/21 462,185
-------- -----------
5,500 5,505,355
-------- -----------
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 2,056,760
1,000 Missouri Health & Educational Facilities Authority, SSM Health Care
Ser 1998 A (MBIA) ............................................................. 5.00 06/01/22 928,560
1,000 University of Missouri, Health Ser 1996 A (AMBAC) ............................. 5.50 11/01/16 1,003,830
2,000 Henderson, Nevada, Catholic Health West 1998 Ser A ............................ 5.375 07/01/26 1,636,460
700 Akron Bath & Copley Joint Township Hospital District, Ohio,
--------
Summa Health Ser 1992 A ....................................................... 6.25 11/15/07 704,277
-----------
6,700 6,329,887
-------- -----------
Industrial Development/Pollution Control Revenue (5.4%)
1,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) ............... 6.30 12/01/14 1,039,190
1,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) .................... 7.50 12/01/29 1,023,170
1,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
--------
Texas, American Airlines Inc Ser 1995 ......................................... 6.00 11/01/14 979,380
-----------
3,000 3,041,740
-------- -----------
Mortgage Revenue - Multi-Family (1.6%)
860 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT) (AMBAC) ......... 6.60 07/01/14 896,567
-------- -----------
Mortgage Revenue - Single Family (9.0%)
385 Idaho Housing Agency, Ser 1988 D-2 (AMT) ...................................... 8.25 01/01/20 395,626
1,020 Saint Tammany Public Trust Finance Authority, Louisiana, Refg Ser 1990 B ...... 7.25 07/25/11 1,102,341
480 Missouri Housing Development Commission, Homeownership
GNMA/FNMA Backed 1998 Ser B-2 (AMT) ........................................... 6.40 03/01/29 488,222
</TABLE>
See Notes to Financial Statements
8
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Portfolio of Investments August 31, 2000, 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 $ 3,026,462
-----------
4,870 5,012,651
-------- -----------
Nursing & Health Related Facilities Revenue (5.0%)
935 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990 .............................. 10.25 01/01/20 934,981
1,880 Lexington-Fayette Urban County Government, Kentucky,
--------
AHF/Kentucky-Iowa Inc Ser 1990 ............................................ 10.25 01/01/20 1,879,963
-----------
2,815 2,814,944
-------- -----------
Public Facilities Revenue (0.7%)
1,000 Marion County Convention & Recreational Facilities Authority, Indiana,
========
Excise Tax Sub Ser 1997 A (MBIA) .......................................... 0.00 06/01/17 393,270
-----------
Recreational Facilities Revenue (3.4%)
1,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special 1997 Ser B ...... 5.75 09/01/27 931,130
1,000 American National Fish & Wildlife Museum District, Missouri, Ser 1999 ..... 7.00 09/01/19 980,480
-------- -----------
2,000 1,911,610
-------- -----------
Tax Allocation Revenue (1.4%)
700 Hodgkins, Illinois, Ser 1991 .............................................. 9.50 12/01/09 759,703
-------- -----------
Transportation Facilities Revenue (17.7%)
1,000 Chicago, Illinois, Midway Airport Ser 1998 A (AMT) (MBIA) ................. 5.125 01/01/35 898,520
2,035 Southwestern Development Authority, Illinois, Tri-City Regional Port
District Ser 1989 A (AMT) (a) ............................................. 7.90 07/01/14 2,080,991
2,000 Kentucky Turnpike Authority, Economic Development Road Revitalization
Refg Ser 1995 (AMBAC) ..................................................... 5.625 07/01/15 2,041,280
1,000 Maine Turnpike Authority, Ser 2000 (FGIC) ................................. 5.875 07/01/15 1,058,690
2,000 Puerto Rico Highway & Transportation Authority, Ser 1998 A ................ 4.75 07/01/38 1,728,280
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA) ................. 6.125 11/15/25 2,053,020
-------- -----------
10,035 9,860,781
-------- -----------
Water & Sewer Revenue (10.7%)
2,000 Lee County, Florida, Water & Sewer 1999 Ser A (AMBAC) ..................... 4.75 10/01/23 1,788,320
1,000 Fulton County, Georgia, Water & Sewerage Ser 1998 (FGIC) .................. 4.75 01/01/28 876,630
1,000 Massachusetts Water Resources Authority, 2000 Ser A (FGIC) ................ 6.125 08/01/11 1,111,520
1,300 Ohio Water Development Authority, Water Pollution Ser 1995 (MBIA) ......... 5.75 12/01/17 1,335,685
1,000 Loudoun County Sanitation Authority, Virginia, Ser 1998 (MBIA) ............ 4.75 01/01/21 893,050
-------- -----------
6,300 6,005,205
-------- -----------
Other Revenue (1.8%)
1,000 Pasadena, California, Refg & Cap 1992 COPs ................................ 5.75 01/01/13 1,028,560
-------- -----------
Refunded (1.3%)
720 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc
========
Refg 1990 Ser D (ETM) ..................................................... 9.50 11/15/15 741,787
-----------
54,400 TOTAL TAX-EXEMPT MUNICIPAL BONDS
========
(Cost $52,184,703) .............................................................................. 53,203,402
-----------
</TABLE>
See Notes to Financial Statements
9
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Portfolio of Investments August 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATION (3.6%)
$ 2,000 Collier County Health Facilities Authority, Florida, Cleveland Clinic
=========
Foundation Ser 1999 (Demand 09/01/00) (Cost $2,000,000).............. 4.30*% 01/01/33 $ 2,000,000
-----------
$ 56,400 TOTAL INVESTMENTS (Cost $54,184,703) (b)........................................... 98.7% 55,203,402
=========
OTHER ASSETS IN EXCESS OF LIABILITIES ............................................. 1.3 750,701
-----------
NET ASSETS ........................................................................ 100.0% $55,954,103
===========
</TABLE>
---------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
* Current coupon of variable rate demand obligation.
(a) Sale is restricted to qualified institutional investors.
(b) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $1,667,311 and the aggregate gross
unrealized depreciation is $648,612, resulting in net unrealized
appreciation of $1,018,699.
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.
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
<TABLE>
<S> <C> <C> <C> <C> <C>
Alabama ....................... 3.7% Indiana ....................... 0.7% Ohio .......................... 9.1%
California .................... 9.0 Iowa .......................... 1.7 Puerto Rico ................... 3.1
Connecticut ................... 1.7 Kentucky ...................... 7.0 Texas ......................... 7.2
District of Columbia .......... 1.7 Louisiana ..................... 2.0 Utah .......................... 2.6
Florida ....................... 9.8 Maine ......................... 1.9 Virginia ...................... 1.6
Georgia ....................... 1.6 Massachusetts ................. 5.5 Washington .................... 1.9
Hawaii ........................ 3.6 Missouri ...................... 6.0 ----
Illinois ...................... 8.0 Nevada ........................ 4.8 Total ......................... 98.7%
Idaho ......................... 0.7 New York ...................... 3.8 ====
</TABLE>
See Notes to Financial Statements
10
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $54,184,703) ...................................... $55,203,402
Cash ...................................................... 49,121
Interest receivable ....................................... 796,498
Prepaid expenses and other assets ......................... 1,721
-----------
TOTAL ASSETS ........................................... 56,050,742
-----------
LIABILITIES:
Payable for:
Investment advisory fee ................................ 20,898
Administration fee ..................................... 13,061
Accrued expenses and other payables ....................... 62,680
-----------
TOTAL LIABILITIES ...................................... 96,639
-----------
NET ASSETS ................................................ $55,954,103
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital ........................................... $54,455,961
Net unrealized appreciation ............................... 1,018,699
Accumulated undistributed net investment income ........... 664,637
Accumulated net realized loss ............................. (185,194)
-----------
NET ASSETS ............................................. $55,954,103
===========
NET ASSET VALUE PER SHARE,
5,798,353 shares outstanding
(unlimited shares authorized of $.01 par value) ......... $9.65
=====
</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, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ............................... $3,397,000
----------
EXPENSES
Investment advisory fee ....................... 224,473
Administration fee ............................ 140,296
Professional fees ............................. 107,034
Shareholder reports and notices ............... 23,848
Registration fees ............................. 22,839
Transfer agent fees and expenses .............. 13,525
Trustees' fees and expenses ................... 11,740
Custodian fees ................................ 5,746
Other ......................................... 9,418
----------
TOTAL EXPENSES ............................. 558,919
Less: expense offset .......................... (5,739)
----------
NET EXPENSES ............................... 553,180
----------
NET INVESTMENT INCOME ...................... 2,843,820
----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss ............................. (185,194)
Net change in unrealized appreciation ......... 529,344
----------
NET GAIN ................................... 344,150
----------
NET INCREASE .................................. $3,187,970
==========
</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, 2000 AUGUST 31, 1999
----------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ........................................... $ 2,843,820 $ 3,000,218
Net realized gain (loss) ........................................ (185,194) 73,188
Net change in unrealized appreciation ........................... 529,344 (3,936,639)
----------- -----------
NET INCREASE (DECREASE) ...................................... 3,187,970 (863,233)
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................... (2,692,487) (2,853,918)
Net realized gain ............................................... (164,603) (397,258)
----------- -----------
TOTAL DIVIDENDS AND DISTRIBUTIONS ............................ (2,857,090) (3,251,176)
----------- -----------
Decrease from transactions in shares of beneficial interest ..... (2,917,964) (1,395,828)
----------- -----------
NET DECREASE ................................................. (2,587,084) (5,510,237)
NET ASSETS:
Beginning of period ............................................. 58,541,187 64,051,424
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$664,637 and $513,304, respectively).......................... $55,954,103 $58,541,187
=========== ===========
</TABLE>
See Notes to Financial Statements
13
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Notes to Financial Statements August 31, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter 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 income and net realized capital
gains are determined in accordance with federal income tax regulations
14
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Notes to Financial Statements August 31, 2000, continued
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 tax purposes are reported as distributions of paid-in-capital.
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
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.
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.
3. 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, 2000,
aggregated $8,780,219 and $7,841,843, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor
and Administrator, is the Fund's transfer agent. At August 31, 2000 the Fund
had transfer agent fees and expenses payable of approximately $400.
15
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Notes to Financial Statements August 31, 2000, continued
4. 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, 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
Treasury shares purchased and retired (weighted average discount 15.57%)* (370,133) (3,701) (2,914,263)
--------- -------- ------------
Balance, August 31, 2000 ................................................. 5,798,353 $ 57,984 $ 54,397,977
========= ======== ============
</TABLE>
-----------------
* The Trustees have voted to retire the shares purchased.
5. 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>
June 27, 2000 $ 0.0375 September 8, 2000 September 22, 2000
September 26, 2000 $ 0.0425 October 6, 2000 October 20, 2000
September 26, 2000 $ 0.0425 November 3, 2000 November 17, 2000
September 26, 2000 $ 0.0425 December 8, 2000 December 22, 2000
</TABLE>
6. FEDERAL INCOME TAX STATUS
At August 31, 2000, the Fund had a net capital loss carryover of approximately
$68,000 which will be available through August 31, 2008 to offset future
capital gains to the extent provided by regulations.
Capital losses incurred after October 31 ("post-October losses") within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. The Fund incurred and will elect to defer net capital losses of
approximately $117,000 during fiscal 2000.
7. FUND MERGER
On August 24, 2000, the Trustees of the Fund and Morgan Stanley Dean Witter
Tax-Exempt Securities Trust ("Tax-Exempt") approved a plan of reorganization
("the Plan") whereby the Fund would be merged into Tax-Exempt. The Plan is
subject to the consent of the Fund's shareholders. If approved, the assets of
16
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Notes to Financial Statements August 31, 2000, continued
the Fund would be combined with the assets of Tax-Exempt and shareholders of
the Fund would become Class D shareholders of Tax-Exempt, receiving Class D
shares of Tax-Exempt equal to the value of their holdings in the Fund.
17
<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*
----------------------------------
2000 1999
------------------- --------------
<S> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ..................... $ 9.49 $ 10.12
---------- -------
Income (loss) from investment operations:
Net investment income ................................... 0.48 0.48
Net realized and unrealized gain (loss) ................. 0.07 (0.62)
---------- -------
Total income (loss) from investment operations ........... 0.55 (0.14)
---------- -------
Less dividends and distributions from:
Net investment income ................................... (0.45) (0.46)
Net realized gain ....................................... (0.03) (0.06)
----------- -------
Total dividends and distributions ........................ (0.48) (0.52)
----------- -------
Anti-dilutive effect of acquiring treasury shares ........ 0.09 0.03
----------- -------
Net asset value, end of period ........................... $ 9.65 $ 9.49
=========== =======
Market value, end of period .............................. $ 9.188 $ 7.813
=========== ========
TOTAL RETURN+ ............................................ 24.94% (9.78)%
RATIOS TO AVERAGE NET ASSETS:
Expenses ................................................. 1.01%(1) 0.90%(1)
Net investment income .................................... 5.06% 4.81%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .................. $ 55,954 $58,541
Portfolio turnover rate .................................. 15% 22%
<CAPTION>
FOR THE YEAR ENDED AUGUST 31*
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ..................... $ 9.87 $ 9.75 $ 9.91
------- -------- -------
Income (loss) from investment operations:
Net investment income ................................... 0.51 0.53 0.56
Net realized and unrealized gain (loss) ................. 0.29 0.19 (0.09)
------- -------- -------
Total income (loss) from investment operations ........... 0.80 0.72 0.47
------- -------- -------
Less dividends and distributions from:
Net investment income ................................... (0.52) (0.58) (0.59)
Net realized gain ....................................... (0.03) (0.02) (0.04)
-------- --------- -------
Total dividends and distributions ........................ (0.55) (0.60) (0.63)
-------- --------- -------
Anti-dilutive effect of acquiring treasury shares ........ - - -
-------- --------- -------
Net asset value, end of period ........................... $ 10.12 $ 9.87 $ 9.75
======== ========= =======
Market value, end of period .............................. $ 9.188 $ 9.50 $ 9.875
======== ========= ========
TOTAL RETURN+ ............................................ 2.50% 2.57% 18.83%
RATIOS TO AVERAGE NET ASSETS:
Expenses ................................................. 0.90% 0.91% 0.91%
Net investment income .................................... 5.07% 5.41% 5.61%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .................. $ 64,051 $ 62,970 $62,297
Portfolio turnover rate .................................. 29% 4% 17%
</TABLE>
-------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total 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
return does not reflect brokerage commissions.
(1) Does not reflect the effect of expense offset of 0.01%.
See Notes to Financial Statements
18
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF MORGAN STANLEY DEAN WITTER MUNICIPAL INCOME TRUST III:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter Municipal Income Trust III (the "Fund"), including the
portfolio of investments, as of August 31, 2000, and the related statements of
operations and changes in net assets, and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended August 31,
1999 and the financial highlights for each of the respective stated periods
ended August 31, 1999 were audited by other independent accountants whose
report, dated October 8, 1999, expressed an unqualified opinion on that
statement and the financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned as of
August 31, 2000, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Morgan Stanley Dean Witter Municipal Income Trust III as of August 31, 2000,
the results of its operations, the changes in its net assets, and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
October 4, 2000
2000 FEDERAL TAX NOTICE (unaudited)
During the year ended August 31, 2000, the Fund paid to shareholders
$0.45 per share from tax-exempt income.
For the year ended August 31, 2000, the Fund paid to shareholders $0.03
per share from long-term capital gains.
19
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Change in Independent Accountants
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Fund.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Fund for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to
make reference thereto in their report on the financial statements for such
years.
The Fund, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
20
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Revised Investment Policy
On January 26, 2000, the Trustees of Morgan Stanley Dean Witter Municipal
Income Trust III (the "Fund") approved an investment policy whereby the Fund
would be permitted to invest up to 10% of its assets in inverse floating rate
municipal obligations. The inverse floating rate municipal obligations in which
the Fund will invest are typically created through a division of a fixed rate
municipal obligation into two separate instruments, a short-term obligation and
a long-term obligation. The interest rate on the short-term obligation is set
at periodic auctions. The interest rate on the long-term obligation is the rate
the issuer would have paid on the fixed income obligation: (i) plus the
difference between such fixed rate and the rate on the short-term obligation,
if the short-term rate is lower than the fixed rate; or (ii) minus such
difference if the interest rate on the short-term obligation is higher than the
fixed rate. The interest rates on these obligations generally move in the
reverse direction of market interest rates. If market interest rates fall, the
interest rate on the obligation will increase and if market interest rates
increase, the interest rate on the obligation will fall. Inverse floating rate
municipal obligations offer the potential for higher income than is available
from fixed rate obligations of comparable maturity and credit rating. They also
carry greater risks. In particular, the prices of inverse floating rate
municipal obligations are more volatile, i.e., they increase and decrease in
response to changes in interest rates to a greater extent than comparable fixed
rate obligations.
21
<PAGE>
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<PAGE>
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<PAGE>
TRUSTEES
---------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
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
---------------------------------------------
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISOR
---------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
MORGAN STANLEY
DEAN WITTER
MUNICIPAL
INCOME TRUST III
ANNUAL REPORT
August 31, 2000
