<PAGE> 1
MUNICIPAL INCOME OPPORTUNITIES TRUST III Two World Trade Center, New York, New
York 10048
LETTER TO THE SHAREHOLDERS March 31, 1996
DEAR SHAREHOLDER:
The bond market rally that began in late 1994 was sustained through 1995. This
favorable environment for bonds was created by proposals to achieve a balanced
federal budget over a five- to seven-year period and continued easing of
monetary policy by the Federal Reserve Board. However, a political impasse on
the budget that partially closed government offices in early 1996 was viewed as
a setback for fixed-income investments. The bond market has also recently
developed concerns over rising commodity prices and unexpectedly strong job
growth.
MUNICIPAL MARKET CONDITIONS
Long-term municipal revenue bond yields as tracked by The Bond Buyer Revenue
Bond Index* moved from 6.29 percent in March 1995 to a low of 5.63 percent in
January 1996. Interest rates subsequently began to rise in mid-February on signs
of stronger economic growth and renewed inflationary fears. The Index yield
climbed to 6.15 percent by March 1996. Yields on one-year municipal notes moved
from 4.42 percent to 3.52 percent during the Fund's fiscal year ended March 31,
1996. The yield pickup for extending maturities from one to thirty years widened
from 187 to 263 basis points over the period.
Municipal market concern over the risk of flat-tax legislation caused the ratio
of Revenue Bond Index yields to 30-year U.S. Treasury bond yields to rise from
85 to 95 percent between March and September 1995. A rising ratio means that
municipal bond prices have underperformed U.S. Treasury prices. As the
possibility of a flat tax faded, the yield ratio improved to 92 percent by March
1996. Over an eight-year period prior to the flat tax debate, long municipal
yields had averaged 89 percent of U.S. Treasury yields.
- ---------------
*The Bond Buyer Revenue Bond Index is an arithmetic average of the yields of 25
selected municipal revenue bonds with 30-year maturities. Credit ratings of
these bonds range from Aa1 to Baa1 by Moody's Investors Service, Inc., and AA+
to A- by Standard & Poor's Corp.
<PAGE> 2
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS March 31, 1996, continued
Municipal underwriting activity was fueled by the pattern of lower interest
rates seen in 1995 and increased by 33 percent over the past six-months. Despite
a resurgence in new-issue volume, dealers continued to withdraw from the
municipal business.
PERFORMANCE
The net asset value (NAV) of Municipal Income Opportunities Trust III (OIC)
moved from $9.57 to $9.65 per share through the last business day of the fiscal
year ended March 31, 1996. Based on this NAV through the last business day of
the fiscal year change plus reinvestment of tax-free dividends of $0.61 per
share, the Fund's total return was 8.07 percent. Over the same period, the
Fund's share price on the New York Stock Exchange appreciated from $8.25 to
$9.125 per share. Based on this market price change and reinvestment of tax-free
dividends, the Fund's total return was 18.54 percent. The shares began the year
trading at a 14 percent discount to NAV and ended at a 6 percent discount.
Undistributed net investment income totaled $0.178 per share on March 31, 1996,
versus $0.11 per share a year earlier. In September 1995, the Trustees voted to
increase the monthly dividend from $0.0475 to $0.055 per share beginning with
the November 1995 payment. This revised dividend rate more closely reflects the
Fund's current earnings.
PORTFOLIO STRUCTURE
On March 31, 1996, the Fund had more FIVE LARGEST SECTORS
than $102 million in net assets (as of March 31, 1996)
diversified among 13 specific
long-term municipal sectors and 57 IDR/PCR* 20%
credits. The five largest sectors Nursing/Health Related 19%
represented 72 percent of the Mortgage 12%
portfolio. Credit quality was Tax Allocation 11%
upgraded by reducing non-rated Hospital 10%
holdings from 70 to 66 percent of the Other Sectors 28%
long-term portfolio.
----------
Three loans representing less than * Industrial Development Revenue/
one percent of the Fund's net assets Pollution Control Revenue
are not accruing interest. An
additional five loans, totaling ten
percent of net assets, are currently
accruing income but may have
difficulty meeting future debt
service payments.
<PAGE> 3
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS March 31, 1996, continued
LOOKING AHEAD
Tax-reduction proposals may continue to receive publicity. However, the positive
balance in the municipal market should continue between the supply of new issues
and demand for bonds to replace maturities and redemptions. Overall, long-term
municipal securities are likely to move in line with the Treasury market.
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 fiscal year, the Fund purchased and
retired 355,200 shares of common stock at a weighted average market discount of
10.3 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 March 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (96.8%)
General Obligation (0.9%)
$ 1,000 New York City, New York, 1994 Ser D..................................... 5.75 % 08/15/10 $ 942,990
- -------- ------------
Educational Facilities Revenue (0.9%)
1,000 New York State Dormitory Authority, State University Refg Ser 1993 A.... 5.25 05/15/15 907,880
- -------- ------------
Electric Revenue (1.7%)
1,750 Swanton, Vermont, Ser 1993.............................................. 6.70 12/01/23 1,755,950
- -------- ------------
Hospital Revenue (10.5%)
2,000 Corona, California, Vista Hospital System Inc Ser 1992 B COPs........... 9.50 07/01/20 2,218,280
2,000 Dixon, Illinois, Katherine Shaw Bethea Hospital Ser 1990................ 9.75 12/01/10 2,159,920
Illinois Health Facilities Authority,
1,250 Edward Hospital Refg Ser 1993.......................................... 6.00 02/15/19 1,201,850
645 Hinsdale Hospital Ser 1990 C........................................... 9.50 11/15/19 748,052
Massachusetts Health & Educational Facilities Authority,
1,000 Dana Farber Cancer Institute Ser G -1.................................. 6.25 12/01/14 1,007,310
1,000 Dana Farber Cancer Institute Ser G -1.................................. 6.25 12/01/22 1,005,650
1,505 North Central Texas Health Facilities Development Corporation,
University Medical Center Inc Ser 1987................................. 7.75 04/01/17 1,551,670
2,100 Tarrant County Health Facilities Development Corporation, Texas,
Community Health Care Foundation Inc Ser 1991.......................... 9.875 04/01/01 840,000
- -------- ------------
11,500 10,732,732
- -------- ------------
Industrial Development/Pollution Control Revenue (20.4%)
1,500 Pope County, Arkansas, Arkansas Power & Light Co Ser 1990 (AMT)......... 8.00 11/01/20 1,628,010
1,750 Metropolitan Washington Airports Authority, District of Columbia,
CaterAir International Corp Ser 1991 (AMT)+............................ 10.125 09/01/11 1,747,690
1,500 Chicago, Illinois, Chicago-O'Hare Int'l Airport/American Airlines Inc
Ser 1990 A (AMT)....................................................... 7.875 11/01/25 1,617,825
3,000 Perry County, Kentucky, TJ International Inc Ser 1994 (AMT)............. 7.00 06/01/24 3,055,260
1,500 Massachusetts Industrial Finance Agency, Eastern Edison Co Refg Ser
1993................................................................... 5.875 08/01/08 1,465,050
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 2,772,400
1,000 Beaver County Industrial Development Authority, Pennsylvania, Toledo
Edison Co Collateralized Ser 1995-B.................................... 7.75 05/01/20 1,035,480
2,000 Brazos River Authority, Texas, Texas Utilities Electric Co 1990 Ser A
(AMT).................................................................. 8.125 02/01/20 2,198,940
2,000 Sabine River Authority, Texas, Texas Utilities Electric Co Ser 1990 B
(AMT).................................................................. 8.25 10/01/20 2,175,020
3,000 Pittsylvania County Industrial Development Authority, Virginia, Multi
Trade of Pittsylvania County Ser 1994 A (AMT).......................... 7.45 01/01/09 3,209,250
- -------- ------------
19,750 20,904,925
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
<C> <S> <C> <C> <C>
Mortgage Revenue - Multi-Family (8.2%)
$ 2,363 Saint Tammany Public Trust Financing Authority, Louisiana, Refg Ser
1990................................................................... 10.00 % 10/01/20 $ 2,593,152
Alexandria Redevelopment & Housing Authority, Virginia,
1,760 Courthouse Commons Apts Ser 1990 A (AMT)............................... 10.00 01/01/21 1,756,744
10,750 Courthouse Commons Apts Ser 1990 B (AMT)............................... 0.00 01/01/21 894,512
3,000 Washington Housing Finance Commission, FNMA Collateralized Refg Ser 1990
A...................................................................... 7.50 07/01/23 3,165,540
- -------- ------------
17,873 8,409,948
- -------- ------------
Mortgage Revenue - Single Family (3.5%)
370 Indiana Housing Finance Authority, GNMA Collateralized 1990 Ser E-2
(AMT).................................................................. 8.00 01/01/22 373,700
1,405 Louisiana Housing Finance Agency, GNMA Collateralized Ser 1988 (AMT).... 8.30 11/01/20 1,467,916
1,645 Ohio Housing Finance Agency, GNMA-Backed 1990 Ser C (AMT)............... 7.85 09/01/21 1,729,191
- -------- ------------
3,420 3,570,807
- -------- ------------
Nursing & Health Related Facilities Revenue (19.1%)
2,210 North Miami, Florida, Hallmark Homes for Better Living Foundation Ser
1990 A (a)............................................................. 10.50 08/01/20 22,101
2,305 Champaign, Illinois, Hoosier Care Inc/Champaign Children's Home Ser 1989
A...................................................................... 9.75 08/01/19 2,532,342
1,450 Winchester, Indiana, Hoosier Care II Inc Ser 1990....................... 10.375 06/01/20 1,553,602
2,000 Iowa Financial Authority, Mercy Health Initiatives Ser 1989............. 9.95 07/01/19 2,130,340
1,500 Westside Habilitation Center, Louisiana, Intermediate Care Facility for
the Mentally Retarded Refg Ser 1993.................................... 8.375 10/01/13 1,573,125
2,200 Massachusetts Health & Educational Facilities Authority, Farren Care
Center 1990 Ser A...................................................... 10.375 06/01/10 2,518,956
3,075 Massachusetts Industrial Finance Agency, Kennedy-Donovan Center Inc 1990
Issue.................................................................. 9.75 06/01/10 3,316,633
980 New York State Medical Care Facilities Finance Agency, Mental Health
1990 Ser B............................................................. 7.875 08/15/08 1,093,758
2,410 Maury County Health & Educational Facilities Board, Tennessee, Southern
Healthcare/Heritage Manor of Monteagle, Rogersville & Columbus
Ser 1990 E............................................................. 10.50 03/01/20 2,685,873
1,965 Hurricane, Utah, Mission Health Service Ser 1990........................ 10.50 07/01/20 2,225,991
- -------- ------------
20,095 19,652,721
- -------- ------------
Public Facilities Revenue (4.4%)
1,000 Nevada County, California, Western Nevada Cnty Solid Waste Mgmt 1991
COPs................................................................... 7.50 06/01/21 1,011,700
2,000 Geo L Smith II - Georgia World Congress Center Authority, Domed Stadium
Ser 1990 (AMT)......................................................... 7.875 07/01/20 2,192,760
780 Angelina County Jail Facilities Financing Corporation, Texas, Criminal
Detention Center (a)................................................... 9.75 08/01/09 8
1,249 Newton County, Texas, Detention Phase II COPs........................... 9.875 12/15/11 1,278,367
- -------- ------------
5,029 4,482,835
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
<C> <S> <C> <C> <C>
Retirement & Lifecare Facilities Revenue (8.2%)
$ 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 09/01/06 343,935
2,325 Seabury Life Care Ser 1991............................................. 10.00 09/01/16 2,393,518
Massachusetts Industrial Finance Agency, Pioneer Valley Living Care
Center at Amherst
135 1993 Issue............................................................. 7.00 10/01/01 125,015
59 1993 Issue............................................................. 0.00 10/01/20 1,183
1,500 Charlotte Housing Authority, North Carolina, Merrywood Senior Adult
Community Ser 1989 A (AMT)............................................. 9.75 05/01/19 1,505,670
1,000 Lorain County, Ohio, Laurel Lakes Ser 1993.............................. 7.30 12/15/14 1,022,850
Chesterfield County Industrial Development Authority, Virginia,
Brandermill Woods
3,450 Ser 1991 A............................................................. 6.00 07/01/16 2,484,000
500 Ser 1991 A............................................................. 0.00 07/01/17 10,000
500 Ser 1991 A............................................................. 0.00 07/01/18 10,000
500 Ser 1991 A............................................................. 0.00 07/01/19 10,000
500 Ser 1991 A............................................................. 0.00 07/01/20 10,000
500 Ser 1991 A............................................................. 0.00 07/01/21 10,000
- -------- ------------
12,319 8,426,171
- -------- ------------
Tax Allocation (10.7%)
2,975 Lely Community Development District, Florida, Ser 1991.................. 9.00 10/01/11 3,402,746
1,750 Bradley, Illinois, Bradley North Redev Ser 1990......................... 9.125 01/01/05 1,947,575
1,000 Bridgeview, Illinois, Tax Increment Refg Ser 1995....................... 9.00 01/01/11 1,082,980
1,690 Carol Stream, Illinois, Carol Pointe Ser 1990 B......................... 9.50 01/15/10 1,903,447
400 Hodgkins, Illinois, Ser 1991............................................ 9.50 12/01/09 467,952
1,958 Muskegon Downtown Development Authority, Michigan, Ltd Oblig 1989 Ser
A-1 (b)................................................................ 9.75 06/01/18 2,235,693
- -------- ------------
9,773 11,040,393
- -------- ------------
Transportation Facilities Revenue (1.9%)
1,000 Foothills/Eastern Transportation Corridor Agency, California, Toll Road
Sr Lien Ser 1995 A..................................................... 6.00 01/01/34 933,800
1,000 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg Ser 1993 A.... 6.00 10/01/13 973,610
- -------- ------------
2,000 1,907,410
- -------- ------------
Refunded (6.4%)
2,285 Bedford Park, Illinois, Tax Allocation First Lien Ser 1990.............. 9.70 01/01/02++ 2,762,679
1,540 Bridgeview, Illinois, Tax Allocation Ser 1991........................... 9.50 01/01/01++ 1,748,916
1,600 Hodgkins, Illinois, Tax Allocation Ser 1991............................. 9.50 12/01/01++ 2,016,336
- -------- ------------
5,425 6,527,931
- -------- ------------
110,934 TOTAL MUNICIPAL BONDS (Identified Cost $96,052,145).............................................. 99,262,693
- -------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1996, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM MUNICIPAL OBLIGATION (0.9%)
$ 900 Harris County Health Facilities Development Corporation, Texas,
- -------- Methodist Hospital Ser 1994 (Demand 04/01/96) (Identified Cost
$900,000).............................................................. 3.85*% 12/01/25 $ 900,000
------------
$111,834 TOTAL INVESTMENTS (Identified Cost $96,952,145) (c)..................................... 97.7%
======== 100,162,693
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................ 2.3 2,325,675
---- ------------
NET ASSETS............................................................................... 100.0% $102,488,368
====== ============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
+ 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.
(b) Resale is restricted to qualified institutional investors.
(c) The aggregate cost for federal income tax purposes is $97,206,320; the aggregate gross unrealized
appreciation is $7,032,883 and the aggregate gross unrealized depreciation is $4,076,510, resulting in net
unrealized appreciation of $2,956,373.
</TABLE>
- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
March 31, 1996
<TABLE>
<S> <C>
Arkansas................. 1.6%
California............... 4.0
Colorado................. 0.5
Connecticut.............. 2.6
District of Columbia..... 1.7
Florida.................. 4.3
Georgia.................. 2.1
Illinois................. 19.6
Indiana.................. 1.9
Iowa..................... 2.1%
Kentucky................. 3.0
Louisiana................ 5.5
Massachusetts............ 9.2
Michigan................. 2.2
New Jersey............... 2.7
New York................. 5.5
North Carolina........... 1.5
Ohio..................... 2.7
Pennsylvania............. 1.1%
Tennessee................ 2.6
Texas.................... 8.8
Utah..................... 2.2
Vermont.................. 1.7
Virginia................. 9.9
Washington............... 3.1
Joint Exemption.......... (4.4)
---
Total.................... 97.7%
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
ASSETS:
Investments in securities, at value
(identified cost $96,952,145)....................................... $100,162,693
Cash................................................................. 28,937
Receivable for:
Interest......................................................... 2,368,284
Investments sold................................................. 100,000
Prepaid expenses and other assets.................................... 21,465
------------
TOTAL ASSETS..................................................... 102,681,379
------------
LIABILITIES:
Payable for:
Investment advisory fee.......................................... 52,389
Administration fee............................................... 31,433
Accrued expenses and other payables.................................. 109,189
------------
TOTAL LIABILITIES................................................ 193,011
------------
NET ASSETS:
Paid-in-capital...................................................... 99,284,699
Net unrealized appreciation.......................................... 3,210,548
Accumulated undistributed net investment income...................... 1,888,699
Accumulated net realized loss........................................ (1,895,578)
------------
NET ASSETS....................................................... $102,488,368
============
NET ASSET VALUE PER SHARE
10,613,906 shares outstanding
(unlimited shares authorized of $.01 par value)..................... $9.66
====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended March 31, 1996
NET INVESTMENT INCOME:
INTEREST INCOME........................................................ $8,379,738
----------
EXPENSES
Investment advisory fee................................................ 529,084
Administration fee..................................................... 317,448
Professional fees...................................................... 119,453
Transfer agent fees and expenses....................................... 51,122
Shareholder reports and notices........................................ 28,251
Trustees' fees and expenses............................................ 27,936
Registration fees...................................................... 24,537
Custodian fees......................................................... 7,440
Organizational expenses................................................ 704
Other.................................................................. 13,473
----------
TOTAL EXPENSES BEFORE EXPENSE OFFSET............................... 1,119,448
LESS: EXPENSE OFFSET............................................... (7,425)
----------
TOTAL EXPENSES AFTER EXPENSE OFFSET................................ 1,112,023
----------
NET INVESTMENT INCOME.............................................. 7,267,715
----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss...................................................... (234,096)
Net change in unrealized appreciation.................................. 197,628
----------
NET LOSS........................................................... (36,468)
----------
NET INCREASE........................................................... $7,231,247
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, MARCH 31,
1996 1995
------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................... $ 7,267,715 $ 7,612,577
Net realized loss................................... (234,096) (1,407,306)
Net change in unrealized
appreciation/depreciation.......................... 197,628 3,238,763
------------ ------------
NET INCREASE.................................... 7,231,247 9,444,034
------------ ------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income............................... (6,572,115) (6,612,336)
Net realized gain................................... -- (816,220)
------------ ------------
TOTAL........................................... (6,572,115) (7,428,556)
------------ ------------
Net decrease from transactions in shares of
beneficial interest................................ (3,108,030) (3,993,800)
------------ ------------
TOTAL DECREASE.................................. (2,448,898) (1,978,322)
NET ASSETS:
Beginning of period................................. 104,937,266 106,915,588
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $1,888,699 and $1,193,099, respectively)..... $102,488,368 $104,937,266
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS March 31, 1996
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 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
<PAGE> 12
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS March 31, 1996, continued
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.
E. ORGANIZATIONAL EXPENSES -- Dean Witter InterCapital Inc. (the "Investment
Adviser") paid the organizational expenses of $43,103 and was reimbursed by the
Fund in the full 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 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.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended March 31, 1996 aggregated $9,326,330
and $7,620,361, respectively.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At March 31, 1996, the Fund had
transfer agent fees and expenses payable of approximately $5,000.
<PAGE> 13
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS March 31, 1996, continued
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 year ended March 31, 1996 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$8,184. At March 31, 1996, the Fund had an accrued pension liability of $55,195
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
PAR VALUE PAID IN
OF EXCESS OF
SHARES SHARES PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, March 31, 1994.................................................... 11,466,006 $114,660 $106,271,869
Treasury shares purchased and retired (weighted average discount
12.68%)*.................................................................. (496,900) (4,969) (3,988,831)
---------- -------- -------------
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
========== ======== =============
</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 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>
March 26, 1996 $ 0.055 April 4, 1996 April 19, 1996
April 23, 1996 $ 0.055 May 3, 1996 May 17, 1996
</TABLE>
<PAGE> 14
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 YEAR ENDED MARCH 31
--------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 9.57 $ 9.32 $ 9.41 $ 9.51 $ 9.44
---- ---- ---- ---- ----
Net investment income............................................ 0.68 0.67 0.66 0.70 0.73
Net realized and unrealized gain (loss).......................... (0.01) 0.19* (0.04) (0.05) 0.12
---- ---- ---- ---- ----
Total from investment operations................................. 0.67 0.86 0.62 0.65 0.85
---- ---- ---- ---- ----
Less dividends and distributions from:
Net investment income......................................... (0.61) (0.59) (0.71) (0.72) (0.72)
Net realized gain............................................. -- (0.07) -- (0.03) (0.06)
---- ---- ---- ---- ----
Total dividends and distributions................................ (0.61) (0.66) (0.71) (0.75) (0.78)
Anti-dilutive effect of acquiring treasury shares................ 0.03 0.05* -- -- --
---- ---- ---- ---- ----
Net asset value, end of period................................... $ 9.66 $ 9.57 $ 9.32 $ 9.41 $ 9.51
==== ==== ==== ==== ====
Market value, end of period...................................... $9.125 $ 8.25 $ 8.50 $9.625 $ 9.50
==== ==== ==== ==== ====
TOTAL INVESTMENT RETURN+......................................... 18.54% 5.05% (5.04)% 9.84% 12.84%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................................... 1.06% 1.05% 1.07% 1.12% 1.14%
Net investment income............................................ 6.91% 7.24% 6.88% 7.37% 7.61%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......................... $102,488 $104,937 $106,916 $107,912 $109,326
Portfolio turnover rate.......................................... 8% 6% 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.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 15
MUNICIPAL INCOME OPPORTUNITIES TRUST III
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MUNICIPAL INCOME OPPORTUNITIES TRUST III
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Municipal Income Opportunities
Trust III (the "Fund") at March 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at March
31, 1996 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 10, 1996
--------------------------------------------------------------------
1996 FEDERAL TAX NOTICE (unaudited)
During the year ended March 31, 1996, the Fund paid to the
shareholders $0.61 per share from net investment income. All
of the Fund's dividends from net investment income were exempt
interest dividends, excludable from gross income for Federal
income tax purposes.
<PAGE> 16
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
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 ADVISER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
MUNICIPAL
INCOME
OPPORTUNITIES
TRUST III
[PHOTO]
ANNUAL REPORT
MARCH 31, 1996
