<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III Two World Trade Center,
Letter to the Shareholders February 29, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The U.S. economy continued its unprecedented expansion into the new year with
strong growth sustaining full employment. Rising commodity prices, led by oil,
which moved above $30 per barrel, heightened concern about inflation. The
Federal Reserve Board reacted by raising the federal funds rate by 25 basis
points in February and March. This marked the fourth and fifth times in less
than a year that the central bank has increased short-term rates. Economic
growth and a less accommodative monetary policy caused long-term interest rates
to rise throughout 1999 and into January 2000. In February, the U.S. Treasury
announced its plan to use the federal budget surplus to retire debt,
precipitating a rally in long Treasury securities.
MUNICIPAL MARKET CONDITIONS
The long-term insured municipal index began 1999 near a record low yield of 5.05
percent, but increased to 5.97 percent by year-end. This index reached a high of
6.18 percent in January 2000 before closing February at 6.04 percent. Because
bond prices move inversely to changes in interest rates, higher yields caused
bond prices to decline significantly. For the 1999 calendar year the increase in
the index yield translated into a 13 percent price decline for a generic
insured-municipal bond with a 30-year maturity.
The ratio of municipal yields as a percentage of Treasury yields has been used
historically as a measure of relative value. Over the past five years the ratio
has ranged between an average high of 93 percent and an average low of 85
percent. The increase in the ratio from 92 percent at the beginning of 1999, to
98 percent in February 2000 is primarily attributed to the magnitude of the
rally in long-term Treasuries. A rising yield ratio indicates weaker relative
performance by municipals.
Higher interest rates reduced municipal market underwriting in 1999. New-issue
volume declined 20 percent. Refunding activity, the most
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders February 29, 2000, continued
interest-rate-sensitive component of supply, was down more than 50 percent. In
the first two months of this year, volume was 30 percent lower than the same
period last year.
30-YEAR BOND YIELDS 1994-2000
AAA AAA
Date Ins Tsy % Relationship Date Ins Tsy % Relationship
12/31/93 5.40% 6.34% 85.17% 02/28/97 5.65 6.80 83.09%
01/31/94 5.40 6.24 86.54% 03/31/97 5.90 7.10 83.10%
02/28/94 5.80 6.66 87.09% 04/30/97 5.75 6.94 82.85%
03/31/94 6.40 7.09 90.27% 05/30/97 5.65 6.91 81.77%
04/29/94 6.35 7.32 86.75% 06/30/97 5.60 6.78 82.60%
05/31/94 6.25 7.43 84.12% 07/30/97 5.30 6.30 84.13%
06/30/94 6.50 7.61 85.41% 08/31/97 5.50 6.61 83.21%
07/29/94 6.25 7.39 84.57% 09/30/97 5.40 6.40 84.38%
08/31/94 6.30 7.45 84.56% 10/31/97 5.35 6.15 86.99%
09/30/94 6.55 7.81 83.87% 11/30/97 5.30 6.05 87.60%
10/31/94 6.75 7.96 84.80% 12/31/97 5.15 5.92 86.99%
11/30/94 7.00 8.00 87.50% 01/31/98 5.15 5.80 88.79%
12/30/94 6.75 7.88 85.66% 02/28/98 5.20 5.92 87.84%
01/31/95 6.40 7.70 83.12% 03/31/98 5.25 5.93 88.53%
02/28/95 6.15 7.44 82.66% 04/30/98 5.35 5.95 89.92%
03/31/95 6.15 7.43 82.77% 05/29/98 5.20 5.80 89.66%
04/28/95 6.20 7.34 84.47% 06/30/98 5.20 5.65 92.04%
05/31/95 5.80 6.66 87.09% 07/31/98 5.18 5.71 90.72%
06/30/95 6.10 6.62 92.15% 08/31/98 5.03 5.27 95.45%
07/31/95 6.10 6.86 88.92% 09/30/98 4.95 5.00 99.00%
08/31/95 6.00 6.66 90.09% 10/31/98 5.05 5.16 97.87%
09/29/95 5.95 6.48 91.82% 11/30/98 5.00 5.06 98.81%
10/31/95 5.75 6.33 90.84% 12/31/98 5.05 5.10 99.02%
11/30/95 5.50 6.14 89.58% 01/31/99 5.00 5.09 98.23%
12/29/95 5.35 5.94 90.07% 02/28/99 5.10 5.58 91.40%
01/31/96 5.40 6.03 89.55% 03/31/99 5.15 5.63 91.47%
02/29/96 5.60 6.46 86.69% 04/30/99 5.20 5.66 91.87%
03/29/96 5.85 6.66 87.84% 05/31/99 5.30 5.83 90.91%
04/30/96 5.95 6.89 86.36% 06/30/99 5.47 5.96 91.78%
05/31/96 6.05 6.99 86.55% 07/31/99 5.55 6.10 90.98%
06/28/96 5.90 6.89 85.63% 08/31/99 5.75 6.06 94.88%
07/31/96 5.85 6.97 83.93% 09/30/99 5.85 6.05 96.69%
08/30/96 5.90 7.11 82.98% 10/31/99 6.03 6.16 97.89%
09/30/96 5.70 6.93 82.25% 11/30/99 6.00 6.29 95.39%
10/31/96 5.65 6.64 85.09% 12/31/99 5.97 6.48 92.13%
11/29/96 5.50 6.35 86.61% 01/31/00 6.18 6.49 95.22%
12/31/96 5.60 6.63 84.46% 02/29/00 6.04 6.14 98.37%
01/31/97 5.70 6.79 83.95%
PERFORMANCE
The performance of Morgan Stanley Dean Witter Municipal Income Trust III (TFC)
was affected by the higher-interest-rate environment outlined above. The Fund's
net asset value (NAV) declined from $9.49 to $9.25 per share for the six-month
period ended February 29, 2000. Based on this change, plus reinvestment of
tax-free dividends totaling $0.23 per share and a long-term capital gain
distribution of $0.02709 per share paid on December 17, 1999, the Fund's total
NAV return was 0.67 percent. TFC's price on the New York Stock Exchange (NYSE)
moved from $7.8125 to $7.625 per share during the same period. Based on this
change, plus the reinvestment of distributions, TFC's total market return was
0.81 percent. As of February 29, 2000 TFC's share price was at a 17.6 percent
discount to its NAV.
2
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders February 29, 2000, continued
Monthly dividends for the first quarter of 2000, declared in January were
unchanged at $0.0375 per share. The Fund's level of undistributed net investment
income declined from $0.083 per share to $0.10 per share over the past six
months.
PORTFOLIO STRUCTURE
The Fund's net assets of $55 million were diversified among 14 long-term sectors
and 43 credits. At the end of February the portfolio's average maturity was 19
years and its average duration, a measure of sensitivity to interest rate
changes was 8.7 years. The accompanying charts provide current information on
the portfolio's credit quality, sector distribution and geographic
diversification. Optional call provisions by year and their respective cost
(book) yields are also charted.
LOOKING AHEAD
The Federal Reserve Board has expressed concern over prices and rising consumer
wealth. It is anticipated that the central bank will continue to increase
short-term interest rates in an effort to slow the economy. 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 6-month period ended February 29,
2000, the Fund purchased and retired 213,600 shares of common stock at a
weighted average market discount of 16.61 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 /s/ Mitchell M. Merin
- -------------------------- ---------------------
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
3
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders February 29, 2000, continued
LARGEST SECTORS AS OF FEBRUARY 29, 2000
(% OF NET ASSETS)
[GRAPHIC OMITTED] (BAR CHART)
GENERAL OBLIGATION 16%
TRANSPORTATION 15%
HOSPITAL 11%
MORTGAGE 11%
WATER & SEWER 11%
ELECTRIC 9%
IDR/PCR* 5%
NURSING & HEALTH 5%
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CREDIT RATINGS AS OF FEBRUARY 29, 2000
(% OF TOTAL LONG-TERM PORTFOLIO)
[GRAPHIC OMITTED] (PIE CHART)
Aaa or AAA 54%
Aa or AA 6%
A or A 11%
Baa or BBB 11%
NR 18%
AS MEASURED BY MOODY'S INVESTORS SERVICE, INC.
OR STANDARD & POOR'S CORP.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
GEOGRAPHIC SUMMARY OF INVESTMENTS
BASED ON MARKET VALUE AS A PERCENT OF NET ASSETS
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ALABAMA ...................... 3.6% IDAHO ........................ 0.9% NEVADA ....................... 4.6%
CALIFORNIA ................... 8.8 INDIANA ...................... 0.6 NEW YORK ..................... 3.8
CONNECTICUT .................. 1.6 IOWA ......................... 1.8 OHIO ......................... 8.9
DISTRICT OF COLUMBIA ......... 1.6 KENTUCKY ..................... 7.1 PUERTO RICO .................. 2.8
FLORIDA ...................... 5.9 LOUISIANA .................... 2.2 TEXAS ........................ 7.1
GEORGIA ...................... 1.5 MAINE ........................ 0.4 UTAH ......................... 1.9
HAWAII ....................... 3.5 MASSACHUSETTS ................ 6.4 VIRGINIA ..................... 1.5
ILLINOIS ..................... 8.2 MISSOURI ..................... 5.9 WASHINGTON ................... 1.9
----
TOTAL .............. 92.5%
====
</TABLE>
- ------------
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
4
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Letter to the Shareholders February 29, 2000, continued
CALL AND COST (BOOK) YIELD STRUCTURE
FEBRUARY 29, 2000
[GRAPHIC OMITTED]
WEIGHTED AVERAGE
PERCENT CALLABLE* CALL PROTECTION: 7 YEARS
12% 2% 6% 0% 7% 18% 2% 11% 7% 17% 18%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010+
YEARS BONDS CALLABLE
WEIGHTED AVERAGE
COST (BOOK) YIELD** BOOK YIELD: 6.45%
[GRAPHIC OMITTED]
9.13% 5.42% 5.69% 0.00% 6.09% 6.06% 5.62% 6.08% 5.87% 5.66% 6.85%
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 9.13% ON 12% OF THE LONG-TERM
PORTFOLIO THAT ARE CALLABLE IN 2000.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Portfolio of Investments February 29, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (92.5%)
General Obligation (15.5%)
$ 1,000 District of Columbia, Ser 1999 A (FSA) ........................................ 5.375% 06/01/24 $ 894,790
2,000 Florida Board of Education, Capital Outlay Refg Ser 1999 B (MBIA) ............. 4.50 06/01/24 1,582,480
1,900 Hawaii, 1999 Ser CT (FSA) ..................................................... 5.875 09/01/16 1,915,010
1,000 Massachusetts, 2000 Ser A ..................................................... 6.00 02/01/16 1,023,270
1,000 New York City, New York, 1995 Ser D (MBIA) .................................... 6.20 02/01/07 1,057,700
1,000 New York State, Refg Ser 1995 B ............................................... 5.70 08/15/10 1,016,970
1,000 Washington, Ser 1994 A ........................................................ 5.80 09/01/08 1,023,940
-------- -----------
8,900 8,514,160
-------- -----------
Electric Revenue (8.7%)
1,000 Sacramento Municipal Utility District, California, Refg 1994 Ser I (MBIA) ..... 5.75 01/01/15 1,009,770
3,000 Southern California Public Power Authority, Mead-Adelanto 1994 Ser A
(AMBAC) ..................................................................... 5.15 07/01/15 2,832,510
1,000 Intermountain Power Agency, Utah, Refg 1997 Ser B (MBIA) ...................... 5.75 07/01/19 978,230
-------- -----------
5,000 4,820,510
-------- -----------
Hospital Revenue (10.9%)
2,000 Birmingham-Carraway Special Care Facilities Financing Authority,
Alabama, Carraway Methodist Health Ser 1995 A (Connie Lee)* ................. 5.875 08/15/15 1,998,940
1,000 Missouri Health & Educational Facilities Authority, SSM Health Care
Ser 1998 A (MBIA) ........................................................... 5.00 06/01/22 860,400
1,000 University of Missouri, Health Ser 1996 A (AMBAC) ............................. 5.50 11/01/16 957,830
2,000 Henderson, Nevada, Catholic Health West 1998 Ser A ............................ 5.375 07/01/26 1,512,400
700 Akron Bath & Copley Joint Township Hospital District, Ohio,
Summa Health Ser 1992 A ....................................................... 6.25 11/15/07 691,096
-------- -----------
6,700 6,020,666
-------- -----------
Industrial Development/Pollution Control Revenue (5.4%)
1,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMBAC) ............... 6.30 12/01/14 1,032,830
1,000 Alliance Airport Authority, Texas, AMR Corp Ser 1990 (AMT) .................... 7.50 12/01/29 1,016,170
1,000 Dallas-Fort Worth International Airport Facility Improvement Corporation,
Texas, American Airlines Inc Ser 1995 ......................................... 6.00 11/01/14 940,470
-------- -----------
3,000 2,989,470
-------- -----------
Mortgage Revenue - Multi-Family (1.6%)
860 Massachusetts Housing Finance Agency, Rental 1994 Ser A (AMT)
-------- (AMBAC) ....................................................................... 6.60 07/01/14 886,789
-----------
Mortgage Revenue - Single Family (9.8%)
35 Hawaii Housing Finance & Development Corporation, Purchase
Ser 1989 A (AMT) ............................................................ 7.80 07/01/29 35,388
485 Idaho Housing Agency, Ser 1988 D-2 (AMT) ...................................... 8.25 01/01/20 489,360
1,189 Saint Tammany Public Trust Finance Authority, Louisiana, Refg Ser 1990 B 7.25 07/25/11 1,217,232
240 Maine Housing Authority, Purchase 1990 Ser A-4 (AMT) .......................... 6.40 11/15/23 240,434
480 Missouri Housing Development Commission, Homeownership
GNMA/FNMA Backed 1998 Ser B-2 (AMT) ......................................... 6.40 03/01/29 480,374
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Portfolio of Investments February 29, 2000 (unaudited) 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 $ 2,872,078
Utah Housing Finance Agency,
35 Ser 1991 Issue A-2 (AMT) ................................................ 7.75 01/01/23 35,297
55 Ser 1991 Issue B-2 (AMT) ................................................ 7.75 01/01/23 56,025
-------- -----------
5,504 5,426,188
-------- -----------
Nursing & Health Related Facilities Revenue (5.3%)
935 Marion, Iowa, AHF/Kentucky-Iowa Inc Ser 1990 .............................. 10.25 01/01/20 964,256
1,880 Lexington-Fayette Urban County Government, Kentucky,
AHF/Kentucky-Iowa Inc Ser 1990 ............................................ 10.25 01/01/20 1,938,788
-------- -----------
2,815 2,903,044
-------- -----------
Public Facilities Revenue (0.6%)
1,000 Marion County Convention & Recreational Facilities Authority, Indiana,
-------- Excise Tax Sub Ser 1997 A (MBIA) ........................................ 0.00 06/01/17 351,020
-----------
Recreational Facilities Revenue (3.4%)
1,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special 1997 Ser B ...... 5.75 09/01/27 885,560
1,000 American National Fish & Wildlife Museum District, Missouri, Ser 1999 ..... 7.00 09/01/19 962,030
-------- -----------
2,000 1,847,590
-------- -----------
Tax Allocation Revenue (1.4%)
700 Hodgkins, Illinois, Ser 1991 .............................................. 9.50 12/01/09 764,505
-------- -----------
Transportation Facilities Revenue (15.4%)
1,000 Chicago, Illinois, Midway Airport Ser 1998 A (AMT) (MBIA) ................. 5.125 01/01/35 818,390
2,120 Southwestern Development Authority, Illinois, Tri-City Regional Port
District Ser 1989 A (AMT) (a) ........................................... 7.90 07/01/14 2,164,160
2,000 Kentucky Turnpike Authority, Economic Development Road Revitalization
Refg Ser 1995 (AMBAC) ................................................... 5.625 07/01/15 1,982,600
2,000 Puerto Rico Highway & Transportation Authority, 1998 Ser A ................ 4.75 07/01/38 1,562,820
2,000 Austin, Texas, Airport Prior Lien Ser 1995 A (AMT) (MBIA) ................. 6.125 11/15/25 1,973,020
-------- -----------
9,120 8,500,990
-------- -----------
Water & Sewer Revenue (11.3%)
2,000 Lee County, Florida, Water & Sewer 1999 Ser A (AMBAC) ..................... 4.75 10/01/23 1,660,180
1,000 Fulton County, Georgia, Water & Sewerage Ser 1998 (FGIC) .................. 4.75 01/01/28 808,220
Massachusetts Water Resources Authority,
1,000 2000 Ser A (FGIC) WI .................................................... 6.125 08/01/11 1,065,990
595 1993 Ser C .............................................................. 5.25 12/01/20 532,632
1,300 Ohio Water Development Authority, Water Pollution Ser 1995 (MBIA) ......... 5.75 12/01/17 1,299,870
1,000 Loudoun County Sanitation Authority, Virginia, Ser 1998 (MBIA) ............ 4.75 01/01/21 834,650
-------- -----------
6,895 6,201,542
-------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Portfolio of Investments February 29, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Revenue (1.8%)
$ 1,000 Pasadena, California, Refg & Cap 1992 COPs ....................... 5.75 % 01/01/13 $ 1,006,060
-------- -----------
Refunded (1.4%)
720 Illinois Health Facilities Authority, Glen Oaks Medical Center Inc
-------- Refg 1990 Ser D (ETM) ............................................ 9.50 11/15/15 761,198
-----------
$54,214 TOTAL INVESTMENTS (Identified Cost $52,003,633) (b) ....................... 92.5% 50,993,732
=======
OTHER ASSETS IN EXCESS OF LIABILITIES ..................................... 7.5 4,117,479
----- -----------
NET ASSETS ................................................................ 100.0% $55,111,211
===== ===========
</TABLE>
- ---------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Security purchased on a "when-issued" basis.
* This security is segregated in connection with the purchase of
"when-issued" securities.
(a) Resale is restricted to qualified institutional investors.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$808,689 and the aggregate gross unrealized depreciation is
$1,818,590, resulting in net unrealized depreciation of $1,009,901.
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
8
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
February 29, 2000 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $52,003,633).................... $50,993,732
Cash ............................................... 2,115,599
Receivable for:
Investments sold .............................. 2,403,490
Interest ...................................... 761,904
Prepaid expenses and other assets .................. 6,796
-----------
TOTAL ASSETS .................................. 56,281,521
-----------
LIABILITIES:
Payable for:
Investment purchased .......................... 1,064,484
Investment advisory fee ....................... 19,234
Shares of beneficial interest repurchased...... 18,491
Administration fee ............................ 12,021
Accrued expenses and other payables ................ 56,080
-----------
TOTAL LIABILITIES ............................. 1,170,310
-----------
NET ASSETS .................................... $55,111,211
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital .................................... $55,721,192
Net unrealized depreciation ........................ (1,009,901)
Accumulated undistributed net investment
income .......................................... 595,691
Accumulated net realized loss ...................... (195,771)
-----------
NET ASSETS .................................... $55,111,211
===========
NET ASSET VALUE PER SHARE,
5,954,886 shares outstanding
(unlimited shares authorized $.01 par value)..... $ 9.25
===========
</TABLE>
STATEMENT OF OPERATIONS
For the six months ended February 29, 2000 (unaudited)
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ............................... $ 1,698,936
------------
EXPENSES
Investment advisory fee ....................... 112,612
Administration fee ............................ 70,382
Professional fees ............................. 19,984
Shareholder reports and notices ............... 14,726
Registration fees ............................. 13,941
Transfer agent fees and expenses .............. 9,583
Trustees' fees and expenses ................... 3,910
Custodian fees ................................ 3,271
Other ......................................... 4,299
------------
TOTAL EXPENSES ........................... 252,708
Less: expense offset .......................... (3,266)
------------
NET EXPENSES ............................. 249,442
------------
NET INVESTMENT INCOME .................... 1,449,494
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss ............................. (195,769)
Net change in unrealized appreciation ......... (1,499,256)
------------
NET LOSS ................................. (1,695,025)
------------
NET DECREASE .................................. $ (245,531)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<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 29, 2000 AUGUST 31, 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
(unaudited)
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .............................. $ 1,449,494 $ 3,000,218
Net realized gain (loss) ........................... (195,769) 73,188
Net change in unrealized appreciation .............. (1,499,256) (3,936,636)
------------ ------------
NET DECREASE .................................... (245,531) (863,230)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................. (1,367,107) (2,853,918)
Net realized gain .................................. (164,605) (397,258)
------------ ------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ............... (1,531,712) (3,251,176)
------------ ------------
Decrease from transactions in shares of beneficial
interest ......................................... (1,652,733) (1,395,828)
------------ ------------
NET DECREASE .................................... (3,429,976) (5,510,234)
NET ASSETS:
Beginning of period ................................ 58,541,187 64,051,424
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$595,691 and 513,304, respectively).............. $ 55,111,211 $ 58,541,190
============ ============
</TABLE>
10
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Notes to Financial Statements February 29, 2000 (unaudited)
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 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
11
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Notes to Financial Statements February 29, 2000 (unaudited) 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 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.
12
<PAGE>
Morgan Stanley Dean Witter Municipal Income Trust III
Notes to Financial Statements February 29, 2000 (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 29, 2000, aggregated
$7,316,839, and $6,553,266, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor and
Administrator, is the Fund's transfer agent. At February 29, 2000 the Fund had
transfer agent fees and expenses payable of approximately $3,200.
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, 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 16.61%)* (213,600) (2,136) (1,650,597)
--------- -------- ------------
Balance, February 29, 2000 ............................................... 5,954,886 $ 59,549 $ 55,661,643
========= ======== ============
</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 28, 1999 $ 0.0375 March 3, 2000 March 17, 2000
March 28, 2000 $ 0.0375 April 7, 2000 April 20, 2000
March 28, 2000 $ 0.0375 May 5, 2000 May 19, 2000
March 28, 2000 $ 0.0375 June 9, 2000 June 23, 2000
</TABLE>
13
<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
MONTHS ENDED
FEBRUARY 29, 2000
-----------------
<S> <C>
(unaudited)
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................. $9.49
-----
Income (loss) from investment operations:
Net investment income ............................... 0.25
Net realized and unrealized gain (loss) ............. (0.28)
-----
Total income (loss) from investment operations ....... (0.03)
-----
Less dividends and distributions from:
Net investment income ............................... (0.23)
Net realized gain ................................... (0.03)
-----
Total dividends and distributions .................... (0.26)
-----
Anti-dilutive effect of acquiring treasury shares .... 0.05
-----
Net asset value, end of period ....................... $9.25
=====
Market value, end of period .......................... $7.625
=====
TOTAL RETURN + ....................................... 0.81%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................. 0.90%(2)(3)
Net investment income ................................ 5.15%(2)(3)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .............. $55,111
Portfolio turnover rate .............................. 12%(1)
<CAPTION>
FOR THE YEAR ENDED AUGUST 31*
-----------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ................. $10.12 $9.87 $ 9.75 $ 9.91 $9.81
------ ----- ------ ------ -----
Income (loss) from investment operations:
Net investment income ............................... 0.48 0.51 0.53 0.56 0.60
Net realized and unrealized gain (loss) ............. (0.62) 0.29 0.19 (0.09) 0.11
------ ----- ------ ------ -----
Total income (loss) from investment operations ....... (0.14) 0.80 0.72 0.47 0.71
------ ----- ------ ------ -----
Less dividends and distributions from:
Net investment income ............................... (0.46) (0.52) (0.58) (0.59) (0.54)
Net realized gain ................................... (0.06) (0.03) (0.02) (0.04) (0.07)
------ ----- ------ ------ -----
Total dividends and distributions .................... (0.52) (0.55) (0.60) (0.63) (0.61)
------ ----- ------ ------ -----
Anti-dilutive effect of acquiring treasury shares .... 0.03 - - - -
------ ----- ------ ------ -----
Net asset value, end of period ....................... $9.49 $10.12 $9.87 $9.75 $9.91
====== ===== ====== ====== =====
Market value, end of period .......................... $7.813 $9.188 $9.50 $9.875 $8.875
====== ===== ====== ====== =====
TOTAL RETURN + ....................................... (9.78)% 2.50% 2.57% 18.83% 5.71%
RATIOS TO AVERAGE NET ASSETS:
Expenses ............................................. 0.90 %(3) 0.90% 0.91% 0.91% 0.94%
Net investment income ................................ 4.81 % 5.07% 5.41% 5.61% 6.24%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands .............. $58,541 $64,051 $62,970 $62,297 $63,515
Portfolio turnover rate .............................. 22 % 29% 4% 17% 22%
</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) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
14
<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 obligations 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.
15
<PAGE>
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 MANAGER
- ----------------------------------------------
Morgan Stanely 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 OMITTED]
SEMIANNUAL REPORT
FEBRUARY 29, 2000
