<PAGE> 1
MUNICIPAL INCOME OPPORTUNITIES TRUST III Two World Trade Center,
LETTER TO THE SHAREHOLDERS September 30, 1996 New York, New York 10048
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Municipal
Income Opportunities Trust III for the six-month period ended September 30,
1996.
Stronger economic growth and the potential threat of inflation shifted the tone
of the fixed-income markets from bullish to bearish in early 1996. This change
in market psychology was confirmed in March, when a surprisingly large increase
in payroll employment was reported. Other indicators of economic activity and
rising commodity prices added to this concern. As a result, investors
anticipated that the Federal Reserve Board might reverse its pattern of
reductions in the federal-funds rate which began in 1995. The bond market
reacted to these expectations by pushing long-term yields higher. More than
three-quarters of the rise was attributed to market weakness on the days that
strong monthly employment figures were reported.
MUNICIPAL MARKET CONDITIONS
Between August 1995 and February 1996, 30-year insured revenue bond yields
declined 70 basis points from 6.00 percent to 5.30 percent. Yields subsequently
moved higher, reaching 6.15 percent in April and again in mid-June. By September
yields stood at 5.70 percent, compared to 3.85 percent for 1-year municipal
notes. In September, the yield curve pickup for extending maturities from 1 to
30 years was 185 basis points.
As the risk diminished that flat-tax proposals would cause a radical change in
the tax code, tax-exempt bonds outperformed U.S. Treasury securities. The ratio
of insured revenue bond yields to 30-year U.S. Treasury yields, which began the
year at 92 percent, declined to 83 percent by the end of September. A declining
ratio means that municipal bond prices were stronger than U.S. Treasury prices.
<PAGE> 2
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS September 30, 1996, continued
The municipal market also benefited from steady demand. In addition to regular
maturities and calls for redemption this year, it has been estimated that
investors also face the retirement of more than $60 billion of previously
refunded debt. On the supply side, new issues increased 19 percent to $128
billion during the first nine months of 1996. However, as interest rates rose,
underwritings were frequently postponed and the pace of activity slowed.
PERFORMANCE
The net asset value (NAV) of Municipal Income Opportunities Trust III (OIC) rose
from $9.66 to $9.76 per share during the six-month period ended September 30,
1996. Based on this NAV change plus reinvestment of tax-free dividends of $0.33
per share, the Fund's total return was 4.77 percent. Over the same period, the
Fund's market price on the New York Stock Exchange increased from $9.125 to
$9.375 per share. Based on this market price change and reinvestment of tax-free
dividends, the Fund's total return was 6.43 percent.
The OIC's market price was trading at a four percent discount to NAV on
September 30, 1996. Undistributed net investment income was $0.181 per share on
September 30, 1996, versus $0.178 per share six months ago. The Fund's monthly
dividend was increased to $0.06 per share beginning with the November 26, 1996
payment.
PORTFOLIO STRUCTURE
The five largest investment sectors represented 69 percent of the Fund's net
assets. On September 30th, 1996, two loans, representing less than one percent
of the Fund's net assets, were not accruing interest. An additional two loans,
totaling three percent of net assets, were accruing income but may face
difficulty meeting future debt-service payments. The Fund's net assets of $103.2
million were diversified among 14 long-term sectors and 56 credits.
FIVE LARGEST SECTORS AS OF SEPTEMBER 30, 1996
(% OF NET ASSETS)
IDR/PCR* 20%
NURSING/HEALTH RELATED 16%
MORTGAGE 11%
TAX ALLOCATION 11%
HOSPITAL 10%
OTHER 32%
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE
<PAGE> 3
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS September 30, 1996, continued
LOOKING AHEAD
The balance between the supply of new issues and demand created by maturities is
expected to remain positive for the municipal market. Long-term insured
municipal securities currently yield 83 percent to the yield on U.S. Treasury
securities and may be expected to move in tandem with the Treasury market.
Although municipal performance relative to Treasuries has improved, tax-exempts
could again be affected by market uncertainty if new tax-reduction proposals
surface.
The Fund's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps to
support the market value of the Fund's shares. In addition, we would like to
remind you that the Trustees have approved a procedure whereby the Fund, when
appropriate, may purchase shares in the open market or in privately negotiated
transactions at a price not above market value or net asset value, whichever is
lower at the time of purchase. During the period under review, the Fund
purchased and retired 40,000 shares of common stock at a weighted average market
discount of 3.65 percent.
We appreciate your ongoing support of Municipal Income Opportunities 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
<PAGE> 4
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1996 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (96.4%)
General Obligation (0.9%)
$ 1,000 New York City, New York, 1994 Ser D..................................... 5.75 % 08/15/10 $ 962,940
- -------- ------------
Educational Facilities Revenue (0.9%)
1,000 New York State Dormitory Authority, State University 1993 Ser A......... 5.25 05/15/15 923,870
- -------- ------------
Electric Revenue (2.6%)
1,000 Intermountain Power Agency, Utah, Refg 1996 Ser D....................... 5.00 07/01/21 893,070
1,750 Swanton, Vermont, Ser 1993.............................................. 6.70 12/01/23 1,788,220
- -------- ------------
2,750 2,681,290
- -------- ------------
Hospital Revenue (10.2%)
2,000 Corona, California, Vista Hospital System Inc Ser 1992 B COPs........... 9.50 07/01/20 2,219,460
2,000 Dixon, Illinois, Katherine Shaw Bethea Hospital Ser 1990................ 9.75 12/01/10 2,154,760
Illinois Health Facilities Authority,
1,250 Edward Hospital Refg Ser 1993........................................... 6.00 02/15/19 1,228,763
645 Hinsdale Hospital Ser 1990 C............................................ 9.50 11/15/19 734,997
Massachusetts Health & Educational Facilities Authority,
1,000 Dana Farber Cancer Institute Ser G-1.................................... 6.25 12/01/14 1,025,770
1,000 Dana Farber Cancer Institute Ser G-1.................................... 6.25 12/01/22 1,016,780
1,505 North Central Texas Health Facilities Development Corporation,
University Medical Center Inc Ser 1987................................. 7.75 04/01/17 1,551,745
1,825 Tarrant County Health Facilities Development Corporation, Texas,
Community Health Care Foundation Inc Ser 1991.......................... 9.875 04/01/01 638,750
- -------- ------------
11,225 10,571,025
- -------- ------------
Industrial Development/Pollution Control Revenue (20.4%)
1,500 Pope County, Arkansas, Arkansas Power & Light Co Ser 1990 (AMT)......... 8.00 11/01/20 1,633,875
1,750 Metropolitan Washington Airports Authority, District of Columbia,
CaterAir International Corp Ser 1991 (AMT)+............................ 10.125 09/01/11 1,752,012
1,500 Chicago, Illinois, Chicago-O'Hare Int'l Airport/American Airlines Inc
Ser 1990 A (AMT)....................................................... 7.875 11/01/25 1,613,115
3,000 Perry County, Kentucky, TJ International Inc Ser 1994 (AMT)............. 7.00 06/01/24 3,072,990
1,500 Massachusetts Industrial Finance Agency, Eastern Edison Co Refg Ser
1993................................................................... 5.875 08/01/08 1,454,145
2,500 Port Authority of New York & New Jersey, Continental Airlines Inc &
Eastern Airlines Inc/LaGuardia Airport 1990 Ser 2 (AMT)++.............. 9.125 12/01/15 2,762,175
1,000 Beaver County Industrial Development Authority, Pennsylvania, Toledo
Edison Co Collateralized Ser 1995 B.................................... 7.75 05/01/20 1,069,020
2,000 Brazos River Authority, Texas, Texas Utilities Electric Co 1990 Ser A
(AMT).................................................................. 8.125 02/01/20 2,193,420
2,000 Sabine River Authority, Texas, Texas Utilities Electric Co Ser 1990 B
(AMT).................................................................. 8.25 10/01/20 2,230,080
3,000 Pittsylvania County Industrial Development Authority, Virginia,
Multi-Trade Ser 1994 A (AMT)........................................... 7.45 01/01/09 3,114,690
- -------- ------------
19,750 20,895,522
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Mortgage Revenue - Multi-Family (8.2%)
$ 2,353 Saint Tammany Public Trust Financing Authority, Louisiana, Refg Ser
1990................................................................... 10.00 % 10/01/20 $ 2,576,411
Alexandria Redevelopment & Housing Authority, Virginia,
1,760 Courthouse Commons Apts Ser 1990 A (AMT)................................ 10.00 01/01/21 1,762,411
10,683 Courthouse Commons Apts Ser 1990 B (AMT)................................ 0.00 01/01/21 945,898
3,000 Washington Housing Finance Commission, FNMA Collateralized Refg Ser 1990
A...................................................................... 7.50 07/01/23 3,164,730
- -------- ------------
17,796 8,449,450
- -------- ------------
Mortgage Revenue - Single Family (2.9%)
215 Indiana Housing Finance Authority, GNMA Collateralized 1990 Ser E-2
(AMT).................................................................. 8.00 01/01/22 217,010
1,225 Louisiana Housing Finance Agency, GNMA Collateralized Ser 1988 (AMT).... 8.30 11/01/20 1,275,813
1,465 Ohio Housing Finance Agency, GNMA-Backed 1990 Ser C (AMT)............... 7.85 09/01/21 1,546,821
- -------- ------------
2,905 3,039,644
- -------- ------------
Nursing & Health Related Facilities Revenue (16.4%)
2,280 Champaign, Illinois, Hoosier Care Inc/Champaign Children's Home Ser 1989
A...................................................................... 9.75 08/01/19 2,436,932
1,435 Winchester, Indiana, Hoosier Care II Inc Ser 1990....................... 10.375 06/01/20 1,533,427
2,000 Iowa Health Facilities Development Finance Authority, Care Initiatives
Ser 1996............................................................... 9.25 07/01/25 2,317,720
1,500 Westside Habilitation Center, Louisiana, Intermediate Care Facility for
the Mentally Retarded Refg Ser 1993.................................... 8.375 10/01/13 1,576,455
2,100 Massachusetts Health & Educational Facilities Authority, Farren Care
Center Inc 1990 Ser A.................................................. 10.375 06/01/10 2,382,702
Massachusetts Industrial Finance Agency,
2,975 Kennedy-Donovan Center Inc 1990 Issue................................... 9.75 06/01/10 3,195,775
100 Pioneer Valley Living Care Center at Amherst 1990 Issue................. 7.00 10/01/01 93,335
59 Pioneer Valley Living Care Center at Amherst 1990 Issue................. 0.00 10/01/20 1,183
980 New York State Medical Care Facilities Finance Agency, Mental Health
1990 Ser B............................................................. 7.875 08/15/08 1,098,296
1,945 Hurricane, Utah, Mission Health Service Ser 1990........................ 10.50 07/01/20 2,180,228
- -------- ------------
15,374 16,816,053
- -------- ------------
Public Facilities Revenue (4.3%)
1,000 Nevada County, California, Western Nevada Cnty Solid Waste Mgmt 1991
COPs................................................................... 7.50 06/01/21 1,023,740
2,000 Geo L Smith II - Georgia World Congress Center Authority, Domed Stadium
Ser 1990 (AMT)......................................................... 7.875 07/01/20 2,197,180
780 Angelina County Jail Facilities Financing Corporation, Texas, Criminal
Detention Center (a)................................................... 9.75 08/01/09 8
1,230 Newton County, Texas, Detention Phase II COPs........................... 9.875 12/15/11 1,258,222
- -------- ------------
5,010 4,479,150
- -------- ------------
Retirement & Lifecare Facilities Revenue (6.7%)
1,000 Colorado Health Facilities Authority, Liberty Heights 1990 Ser A (a).... 10.00 07/01/19 500,000
Connecticut Development Authority,
350 Seabury Life Care Ser 1996.............................................. 8.75 09/01/06 350,368
2,325 Seabury Life Care Ser 1991.............................................. 10.00 09/01/16 2,456,292
1,000 Lorain County, Ohio, Laurel Lakes Ser 1993.............................. 7.30 12/15/14 1,025,620
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Chesterfield County Industrial Development Authority, Virginia,
$ 3,450 Brandermill Woods Ser 1991 A............................................ 6.00 % 07/01/16 $ 2,484,000
500 Brandermill Woods Ser 1991 A............................................ 0.00 07/01/17 10,000
500 Brandermill Woods Ser 1991 A............................................ 0.00 07/01/18 10,000
500 Brandermill Woods Ser 1991 A............................................ 0.00 07/01/19 10,000
500 Brandermill Woods Ser 1991 A............................................ 0.00 07/01/20 10,000
500 Brandermill Woods Ser 1991 A............................................ 0.00 07/01/21 10,000
- -------- ------------
10,625 6,866,280
- -------- ------------
Tax Allocation (10.7%)
2,885 Lely Community Development District, Florida, Ser 1991.................. 9.00 10/01/11 3,326,866
1,750 Bradley, Illinois, Bradley North Redev Ser 1990......................... 9.125 01/01/05 1,944,670
1,000 Bridgeview, Illinois, Tax Increment Refg Ser 1995....................... 9.00 01/01/11 1,093,240
1,690 Carol Stream, Illinois, Carol Pointe Ser 1990 B......................... 9.50 01/15/10 2,019,212
400 Hodgkins, Illinois, Ser 1991............................................ 9.50 12/01/09 466,784
1,934 Muskegon Downtown Development Authority, Michigan, 1989 Ser A-1 (b)..... 9.75 06/01/18 2,206,949
- -------- ------------
9,659 11,057,721
- -------- ------------
Transportation Facilities Revenue (2.8%)
1,000 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg Ser 1993 A.... 6.00 10/01/13 990,550
2,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)............................. 5.50 02/15/26 1,948,700
- -------- ------------
3,000 2,939,250
- -------- ------------
Other Revenue (4.0%)
2,100 Del Mar Race Track Authority, California, Refg Ser 1996................. 6.00 08/15/06 2,098,278
1,000 Mashantuket (Western) Pequot Tribe, Connecticut, Special 1996 Ser A (b)
(WI)................................................................... 6.40 09/01/11 998,030
1,000 Northern Palm Beach County Improvement District, Florida, Water Control
& Impr #9A Ser 1996 A.................................................. 7.30 08/01/27 1,015,770
- -------- ------------
4,100 4,112,078
- -------- ------------
Refunded (5.4%)
2,285 Bedford Park, Illinois, First Lien Ser 1990............................. 9.70 01/01/02++ 2,724,108
2,410 Maury County Health & Educational Facilities Board, Tennessee, Southern
Healthcare/Heritage Manor of Monteagle Ser 1990 E...................... 10.50 03/01/00++ 2,872,528
- -------- ------------
4,695 5,596,636
- -------- ------------
108,889 TOTAL MUNICIPAL BONDS
- -------- (Identified Cost $94,034,565).................................................................. 99,390,909
------------
SHORT-TERM MUNICIPAL OBLIGATIONS (2.4%)
1,200 Valdez, Alaska, Marine Terminal Exxon Pipeline Co Ser C (Demand
10/01/96).............................................................. 3.70* 12/01/33 1,200,000
1,000 Metropolitan Nashville Airport Authority, Tennessee, American Airlines
Inc Refg Ser 1995 B (Demand 10/01/96).................................. 3.90* 10/01/12 1,000,000
300 Platte County, Wyoming, Tri-State Generation & Transmission Assn Inc Ser
1984 B (Demand 10/01/96)............................................... 4.05* 07/01/14 300,000
- -------- ------------
2,500 TOTAL SHORT-TERM MUNICIPAL OBLIGATIONS
- -------- (Identified Cost $2,500,000)................................................................... 2,500,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1996 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$111,389 TOTAL INVESTMENTS (Identified Cost $96,534,565) (c)................................... 98.8% $101,890,909
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES.......................................... 1.2 1,284,441
------ ------------
NET ASSETS............................................................................. 100.0% $103,175,350
====== ============
</TABLE>
- ---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when issued basis.
+ Joint exemption in the District of Columbia and Virginia.
++ Joint exemption in New York and New Jersey.
++ Prerefunded to call date shown.
* Current coupon of variable rate security.
(a) Bond in default; non-income producing security.
(b) Resale is restricted to qualified institutional investors.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation was
$7,157,311 and the aggregate gross unrealized depreciation was
$1,800,967, resulting in net unrealized appreciation of
$5,356,344.
Bond Insurance:
- --------------
MBIA Municipal Bond Investors Assurance Corporation.
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
September 30, 1996
<TABLE>
<S> <C>
Alaska................... 1.2%
Arkansas................. 1.6
California............... 5.2
Colorado................. 0.5
Connecticut.............. 3.7
District of Columbia..... 1.7
Florida.................. 5.2
Georgia.................. 2.1
Illinois................. 15.8
Indiana.................. 1.7
Iowa..................... 2.2%
Kentucky................. 3.0
Louisiana................ 5.3
Massachusetts............ 8.9
Michigan................. 2.1
New York................. 5.6
New Jersey............... 2.7
Ohio..................... 4.4
Pennsylvania............. 1.0
Tennessee................ 3.8
Texas.................... 7.6%
Utah..................... 3.0
Vermont.................. 1.7
Virginia................. 9.8
Washington............... 3.1
Wyoming.................. 0.3
Joint Exemptions......... (4.4)
----
Total.................... 98.8%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996 (unaudited)
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $96,534,565)........................................ $101,890,909
Cash.................................................................. 38,793
Receivable for:
Interest.......................................................... 2,227,524
Investments sold.................................................. 150,000
Prepaid expenses...................................................... 9,678
------------
TOTAL ASSETS...................................................... 104,316,904
------------
LIABILITIES:
Payable for:
Investments purchased............................................. 995,626
Investment advisory fee........................................... 43,629
Administration fee................................................ 26,177
Accrued expenses...................................................... 76,122
------------
TOTAL LIABILITIES................................................. 1,141,554
------------
NET ASSETS:
Paid-in-capital....................................................... 98,911,909
Net unrealized appreciation........................................... 5,356,344
Accumulated undistributed net investment income....................... 1,914,543
Accumulated net realized loss......................................... (3,007,446)
------------
NET ASSETS........................................................ $103,175,350
============
NET ASSET VALUE PER SHARE,
10,573,906 shares outstanding
(unlimited shares authorized of $.01 par value)...................... $9.76
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the six months ended September 30, 1996 (unaudited)
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $ 4,047,802
-----------
EXPENSES
Investment advisory fee................................................ 256,930
Administration fee..................................................... 154,158
Professional fees...................................................... 57,601
Transfer agent fees and expenses....................................... 23,582
Shareholder reports and notices........................................ 12,457
Registration fees...................................................... 12,243
Custodian fees......................................................... 9,207
Trustees' fees and expenses............................................ 8,313
Other.................................................................. 652
-----------
TOTAL EXPENSES BEFORE EXPENSE OFFSET............................... 535,143
LESS: EXPENSE OFFSET............................................... (9,190)
-----------
TOTAL EXPENSES AFTER EXPENSE OFFSET................................ 525,953
-----------
NET INVESTMENT INCOME.............................................. 3,521,849
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss...................................................... (1,111,868)
Net change in unrealized appreciation.................................. 2,145,796
-----------
NET GAIN........................................................... 1,033,928
-----------
NET INCREASE........................................................... $ 4,555,777
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
SEPTEMBER 30, 1996 MARCH 31, 1996
- ---------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................... $ 3,521,849 $ 7,267,715
Net realized loss................................... (1,111,868) (234,096)
Net change in unrealized appreciation............... 2,145,796 197,628
------------ -------------
NET INCREASE.................................... 4,555,777 7,231,247
Dividends from net investment income................ (3,496,005) (6,572,115)
Net decrease from transactions in shares of
beneficial interest................................ (372,790) (3,108,030)
------------ -------------
TOTAL INCREASE (DECREASE)....................... 686,982 (2,448,898)
NET ASSETS:
Beginning of period................................. 102,488,368 104,937,266
------------ -------------
END OF PERIOD
(Including undistributed net investment income
of $1,914,543 and $1,888,699, respectively)..... $103,175,350 $ 102,488,368
============ =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1996 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Municipal Income Opportunities 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 a
high level of current income which is exempt from federal income tax. The Fund
was organized as a Massachusetts business trust on February 20, 1990 and
commenced operations on April 30, 1990.
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 the portfolio securities, it uses both a
computerized matrix of tax-exempt securities and evaluations by its staff, in
each case based on information concerning market transactions and quotations
from dealers which reflect the bid side of the market each day. The portfolio
securities are thus valued by reference to a combination of transactions and
quotations for the same or other securities believed to be comparable in
quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.
C. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment
<PAGE> 12
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1996, (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 classified 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.
E. ORGANIZATIONAL EXPENSES -- Dean Witter InterCapital Inc. (the "Investment
Adviser") paid the organizational expenses of $43,103 and was fully reimbursed
by the Fund in the amount thereof. Such expenses were fully amortized as of
April 30, 1995.
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, calculated weekly and payable monthly, by applying the
annual rate of 0.50% to the Fund's weekly net assets.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Adviser pays the salaries of all personnel,
including officers of the Fund, who are employees of the Investment Adviser.
3. ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement with Dean Witter Services Company Inc.
(the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an
administration fee, calculated weekly and payable monthly, by applying the 0.30%
to the Fund's weekly net assets.
Under the terms of the Agreement, the Administrator maintains certain of the
Fund's books and records and furnishes, at its own expense, office space,
facilities, equipment, clerical, bookkeeping and certain legal services and pays
the salaries of all personnel, including officers of the Fund who are employees
of the Administrator. The Administrator also bears the cost of telephone
services, heat, light, power and other utilities provided to the Fund.
<PAGE> 13
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1996, (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 September 30, 1996 aggregated
$6,755,215 and $7,670,839, respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At September 30, 1996, the Fund had
transfer agent fees and expenses payable of approximately $11,000.
The Fund has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the six months ended September 30, 1996
included in Trustees' fees and expenses in the Statement of Operations amounted
to $428. At September 30, 1996, the Fund had an accrued pension liability of
$47,206 which is included in accrued expenses in the Statement of Assets and
Liabilities.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, March 31, 1995......................................................... 10,969,106 $109,691 $102,283,038
Treasury shares purchased and retired (weighted average discount 10.325%)*...... (355,200) (3,552) (3,104,478)
---------- -------- ------------
Balance, March 31, 1996......................................................... 10,613,906 106,139 99,178,560
Treasury shares purchased and retired (weighted average discount 3.65%)*........ (40,000) (400) (372,390)
---------- -------- ------------
Balance, September 30, 1996..................................................... 10,573,906 $105,739 $ 98,806,170
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. FEDERAL INCOME TAX STATUS
At March 31, 1996, the Fund had a net capital loss carryover of approximately
$1,248,000 which will be available through March 31, 2003 to offset future
capital gains to the extent provided by regulations. To the extent that this
carryover loss is used to offset future capital gains, it is probable that the
gains so
<PAGE> 14
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1996, (unaudited) continued
offset will not be distributed to shareholders. During the year ended March 31,
1996, the Fund utilized approximately $159,000 of its net capital loss
carryover.
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 $393,000 during fiscal 1996. As of March 31, 1996, the Fund had
temporary book/tax differences primarily attributable to post-October losses and
capital loss deferrals on wash sales.
7. 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>
October 30, 1996 $0.06 November 8, 1996 November 22, 1996
</TABLE>
<PAGE> 15
MUNICIPAL INCOME OPPORTUNITIES 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 MARCH 31
MONTHS ENDED -----------------------------------------
SEPTEMBER 30, 1996 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 9.66 $ 9.57 $ 9.32
------ ------ ------
Net investment income............................. 0.33 0.68 0.67
Net realized and unrealized gain (loss)........... 0.10 (0.01) *0.19
------ ------ ------
Total from investment operations.................. 0.43 0.67 0.86
------ ------ ------
Less dividends and distributions from:
Net investment income.......................... (0.33) (0.61) (0.59)
Net realized gain.............................. -- -- (0.07)
------ ------ ------
Total dividends and distributions................. (0.33) (0.61) (0.66)
------ ------ ------
Anti-dilutive effect of acquiring treasury shares. -- 0.03 *0.05
Net asset value, end of period.................... $ 9.76 $ 9.66 $ 9.57
====== ====== ======
Market value, end of period....................... $9.375 $9.125 $ 8.25
====== ====== ======
TOTAL INVESTMENT RETURN+.......................... 6.43%(1) 18.54% 5.05%
RATIOS TO AVERAGE NET ASSETS:
Total expenses before expense offset.............. 1.04%(2)(3) 1.06% 1.05%
Net investment income............................. 6.84%(2) 6.91% 7.24%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands........... $103,175 $102,488 $104,937
Portfolio turnover rate........................... 7%(1) 8% 6%
<CAPTION>
FOR THE YEAR ENDED MARCH 31
------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 9.41 $ 9.51 $ 9.44
------ ------ ------
Net investment income...................................... 0.66 0.70 0.73
Net realized and unrealized gain (loss).................... (0.04) (0.05) 0.12
------ ------ ------
Total from investment operations........................... 0.62 0.65 0.85
------ ------ ------
Less dividends and distributions from:
Net investment income................................... (0.71) (0.72) (0.72)
Net realized gain....................................... -- (0.03) (0.06)
------ ------ ------
Total dividends and distributions.......................... (0.71) (0.75) (0.78)
------ ------ ------
Anti-dilutive effect of acquiring treasury shares.......... -- -- --
Net asset value, end of period............................. $ 9.32 $ 9.41 $ 9.51
====== ====== ======
Market value, end of period................................ $ 8.50 $9.625 $ 9.50
====== ====== ======
TOTAL INVESTMENT RETURN+................................... (5.04)% 9.84% 12.84%
RATIOS TO AVERAGE NET ASSETS:
Total expenses before expense offset....................... 1.07% 1.12% 1.14%
Net investment income...................................... 6.88% 7.37% 7.61%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.................... $106,916 $107,912 $109,326
Portfolio turnover rate.................................... 12% 3% 11%
</TABLE>
- ---------------------
+ 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 the prices obtained under the Fund's dividend reinvestment
plan. Total investment return does not reflect brokerage commissions.
* Restated for comparative purposes.
(1) Not annualized.
(2) Annualized.
(3) The above expense ratio was 1.02% after expense offset, which reflects
0.02% effect for custody cash credits.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 16
TRUSTEES
- --------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- --------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Sheldon Curtis
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- --------------------------------------------------
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- --------------------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
MUNICIPAL
INCOME
OPPORTUNITIES
TRUST III
SEMIANNUAL REPORT
SEPTEMBER 30, 1996
