<PAGE> 1
<TABLE>
<S> <C>
MUNICIPAL INCOME OPPORTUNITIES TRUST III Two World Trade Center, New York, New York 10048
</TABLE>
LETTER TO THE SHAREHOLDERS September 30, 1998
DEAR SHAREHOLDER:
We are pleased to present the semiannual report on the operations of Municipal
Income Opportunities Trust III (OIC) for the period ended September 30, 1998.
Since our last report six months ago, the securities markets continued to be
impacted by global financial developments. International financial turmoil led
to a flight-to-quality rally for U.S. Treasury bonds. Yields on Treasury bonds
fell to 30-year lows. Two recent events: the collapse of Russia's currency and a
coordinated bailout of a large hedge fund highlighted the ongoing difficulties.
The deflationary impact of the world financial crisis had begun to temper U.S.
economic growth prior to the summer's tumultuous market activity. Lower prices
for oil and other commodities, cheaper imports and improved productivity offset
the potential inflationary impact of high employment conditions. With inflation
held in check, the Federal Reserve was able to provide liquidity by lowering
short-term interest rates. In two
BOND YIELDS 1994 - 1998
<TABLE>
<CAPTION>
30-Year Insured 30-Year U.S. Insured Municipal Yields as a
Municipal Yields Treasury Yields Percentage of U.S. Treasury Yields
<S> <C> <C> <C>
1994 5.4% 6.34% 85.17%
5.4 6.24 86.54
5.8 6.66 87.09
6.4 7.09 90.27
6.35 7.32 86.75
6.25 7.43 84.12
6.5 7.61 85.41
6.25 7.39 84.57
6.3 7.45 84.56
6.55 7.81 83.87
6.75 7.96 84.8
7 8.00 87.5
6.75 7.88 85.66
1995 6.4 7.70 83.12
6.15 7.44 82.66
6.15 7.43 82.77
6.2 7.34 84.47
5.8 6.66 87.09
6.1 6.62 92.15
6.1 6.86 88.92
6 6.66 90.09
5.95 6.48 91.82
5.75 6.33 90.84
5.5 6.14 89.58
5.35 5.94 90.07
1996 5.4 6.03 89.55
5.6 6.46 86.69
5.85 6.66 87.84
5.95 6.89 86.36
6.05 6.99 86.55
5.9 6.89 85.63
5.85 6.97 83.93
5.9 7.11 82.98
5.7 6.93 82.25
5.65 6.64 85.09
5.5 6.35 86.61
5.6 6.63 84.46
1997 5.7 6.79 83.95
5.65 6.80 83.09
5.9 7.10 83.1
5.75 6.94 82.85
5.65 6.91 81.77
5.6 6.78 82.6
5.3 6.30 84.13
5.5 6.61 83.21
5.4 6.40 84.38
5.35 6.15 86.99
5.3 6.05 87.6
5.15 5.92 86.99
1998 5.15 5.80 88.79
5.2 5.92 87.84
5.25 5.93 88.53
5.35 5.95 89.92
5.2 5.80 89.66
5.2 5.65 92.04
5.18 5.71 90.72
5.03 5.27 95.45
4.95 5.00 99.00
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
separate moves since the end of September, the Federal Reserve Open Market
Committee cut the federal funds rate 50 basis points from 5.50 percent to 5.00
percent.
MUNICIPAL MARKET CONDITIONS
Municipal bond yields followed the downward trend in Treasury yields at a more
moderate pace. At the end of September long-term insured index yields stood at
4.95 percent, their lowest level in the last 25 years. Over the last 12 months
index yields declined 45 basis points from 5.40 percent. In contrast, the
30-year U.S. Treasury yield fell 140 basis points during the same period.
As municipals lagged the rally in Treasuries, the ratio of municipal yields to
Treasury yields rose sharply to 99 percent. (A rising ratio means that
municipals have underperformed Treasuries and have become more attractive on a
relative basis.) The rise in this ratio is similar to the jump witnessed in 1986
when radical tax-reform proposals threatened the favorable tax advantage of
municipal bonds.
The overall decline in interest rates led to a substantial increase in new issue
municipal volume. Municipal issuance is on a pace to challenge 1993's record of
$292 billion. Year-to-date, total municipal volume of $214 billion is up 37
percent. Half the underwritings were enhanced with bond insurance. Refundings
represented nearly one-third of total new issues.
PERFORMANCE
The Fund's net asset value (NAV) increased from $10.02 to $10.07 per share
during the six-month period ended September 30, 1998. Based on this NAV change
plus reinvestment of tax-free dividends of $0.315 per share, the Fund's total
NAV return was 3.7 percent. OIC's price on the New York Stock Exchange declined
from $9.875 to $9.5625 per share. Based on this change in market price plus
reinvestment of dividends, the Fund's total market return was -0.08 percent. On
September 30, 1998, the Fund traded at a 5.0 percent discount to NAV.
Monthly dividends for the fourth quarter of 1998 were declared in September.
Beginning with the October 1998 dividend, the monthly dividend was reduced from
$0.0525 per share to $0.045 per share, to more closely reflect the Fund's
anticipate income. The level of undistributed net investment income declined
from $0.073 to $0.045 per share.
2
<PAGE> 3
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
PORTFOLIO STRUCTURE
On September 30, 1998 OIC's investments were diversified among 15 long-term
sectors and 57 credits. As illustrated in the accompanying chart of bond calls,
weighted average call protection was 6 years. The average maturity of the
portfolio was 19 years. Non-rated securities comprised 59 percent of the Fund's
assets. The bonds of one issuer representing two percent of net assets were not
accruing interest.
<TABLE>
<CAPTION>
LARGEST SECTORS AS OF SEPTEMBER 30, 1998 (% OF NET ASSETS)
<S> <C>
IDR/PCR* 25%
MORTGAGE 16%
NURSING & HEALTH 13%
HOSPITAL 9%
TAX ALLOCATION 8%
RETIREMENT & LIFE CARE 8%
ALL OTHERS 21%
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTRol Revenue
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
</TABLE>
<TABLE>
<CAPTION>
CALL STRUCTURE AS OF SEPTEMBER 30, 1998
(% OF TOTAL LONG-TERM PORTFOLIO)
WEIGHTED AVERAGE
CALL PROTECTION: 6 YEARS
YEARS BONDS CALLABLE PERCENT CALLABLE
<S> <C>
1998 3%
1999 2%
2000 26%
2001 13%
2002 0%
2003 7%
2004 6%
2005 6%
2006 12%
2007 6%
2008 11%
2009+ 8%
Portfolio structure is subject to change.
</TABLE>
3
<PAGE> 4
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
LOOKING AHEAD
World economic conditions seem likely to keep inflationary pressures under
control and have contributed to lower interest rates. The fixed income markets
have also begun to anticipate the possibility of additional interest rate cuts
by the Fed. With the municipal relationship to Treasuries as strong as it has
been in the last ten years, the outlook for municipal bonds continues to be
favorable.
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 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. There were no purchases during the last six
months.
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
4
<PAGE> 5
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (96.2%)
General Obligation (1.0%)
$ 1,000 New York City, New York, 1994 Ser D......................... 5.75% 08/15/10 $ 1,067,090
- -------- -----------
Educational Facilities Revenue (2.0%)
1,000 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs....................................................... 7.50 05/01/11 1,092,780
1,000 New York State Dormitory Authority, State University 1993
Ser A...................................................... 5.25 05/15/15 1,066,490
- -------- -----------
2,000 2,159,270
- -------- -----------
Electric Revenue (1.9%)
2,000 Intermountain Power Agency, Utah, Refg 1996 Ser D (Secondary
FSA)....................................................... 5.00 07/01/21 1,999,840
- -------- -----------
Hospital Revenue (8.8%)
1,500 Duarte, California, City of Hope National Medical Center Ser
1993 COPs.................................................. 6.125 04/01/13 1,588,500
1,000 Hawaii Department of Budget & Finance, Wilcox Memorial
Hospital Ser 1998.......................................... 5.35 07/01/18 1,009,910
2,000 Dixon, Illinois, Katherine Shaw Bethea Hospital Ser 1990.... 9.75 12/01/10 2,217,240
1,250 Illinois Health Facilities Authority, Edward Hospital Refg
Ser 1993................................................... 6.00 02/15/19 1,325,438
Massachusetts Health & Educational Facilities Authority,
1,000 Dana Farber Cancer Institute Ser G-1....................... 6.25 12/01/14 1,119,380
1,000 Dana Farber Cancer Institute Ser G-1....................... 6.25 12/01/22 1,110,910
1,000 Flint Hospital Building Authority, Michigan, Hurley Medical
Center Refg Ser 1998 A..................................... 5.375 07/01/20 1,006,850
- -------- -----------
8,750 9,378,228
- -------- -----------
Industrial Development/Pollution Control Revenue (24.6%)
1,500 Pope County, Arkansas, Arkansas Power & Light Co Ser 1990
(AMT)...................................................... 8.00 11/01/20 1,625,760
1,605 Metropolitan Washington Airports Authority, District of
Columbia, CaterAir International Corp Ser 1991 (AMT)++..... 10.125 09/01/11 1,678,637
1,500 Chicago, Illinois, Chicago-O'Hare Int'l Airport/American
Airlines Inc Ser 1990 A (AMT).............................. 7.875 11/01/25 1,624,470
1,000 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT)............ 6.00 06/01/27 1,068,120
3,000 Perry County, Kentucky, TJ International Ser 1994 (AMT)..... 7.00 06/01/24 3,334,950
1,500 Massachusetts Industrial Finance Agency, Eastern Edison Co
Refg Ser 1993.............................................. 5.875 08/01/08 1,571,115
3,000 New Jersey Economic Development Authority, Kapkowski Road
Landfill Reclaimation Improvement District Ser 1998 A...... 6.375 04/01/31 3,007,500
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 2,780,300
1,750 Cleveland-Cuyahoga County Port Authority, Ohio, C & P Docks
Ser 1997-1 (AMT)........................................... 6.00 03/01/07 1,821,400
1,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo
Edison Co Collateralized Ser 1995-B........................ 7.75 05/01/20 1,160,140
1,000 Brazos River Authority, Texas, Texas Utilities Electric Co
Ser 1995 C (AMT)........................................... 5.55 06/01/30 1,010,590
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,000 Sabine River Authority, Texas, Texas Utilities Electric Co
Ser 1990 B (AMT)........................................... 8.25% 10/01/20 $ 2,183,660
3,000 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade Ser 1994 A (AMT)..................... 7.45 01/01/09 3,336,900
- -------- -----------
24,355 26,203,542
- -------- -----------
Mortgage Revenue - Multi-Family (8.2%)
2,305 Saint Tammany Public Trust Financing Authority, Louisiana,
Refg Ser 1990.............................................. 10.00 10/01/20 2,500,748
Alexandria Redevelopment & Housing Authority, Virginia,
1,760 Courthouse Commons Apts Ser 1990 A (AMT)................... 10.00 01/01/21 1,808,682
10,550 Courthouse Commons Apts Ser 1990 B (AMT)................... 0.00 01/01/21 1,216,069
3,000 Washington Housing Finance Commission, FNMA Collateralized
Refg Ser 1990 A............................................ 7.50 07/01/23 3,164,520
- -------- -----------
17,615 8,690,019
- -------- -----------
Mortgage Revenue - Single Family (7.4%)
2,500 Chicago, Illinois, GNMA-Collateralized Ser 1998 B (AMT)..... 6.45 09/01/29 2,783,050
910 Louisiana Housing Finance Agency, GNMA-Collateralized Ser
1998 (AMT)................................................. 8.30 11/01/20 929,984
1,000 New Hampshire Housing Finance Authority, 1997 Ser D (AMT)... 5.90 07/01/28 1,057,230
Ohio Housing Finance Agency,
930 GNMA-Backed 1990 Ser C (AMT)............................... 7.85 09/01/21 989,771
2,000 Residential GNMA-Collateralized 1996 Ser B-2 (AMT)......... 6.10 09/01/28 2,138,320
- -------- -----------
7,340 7,898,355
- -------- -----------
Nursing & Health Related Facilities Revenue (13.2%)
2,220 Champaign, Illinois, Hoosier Care Inc/Champaign Children's
Home Ser 1989 A............................................ 9.75 08/01/19 2,340,835
1,385 Winchester, Indiana, Hoosier Care II Inc Ser 1990........... 10.375 06/01/20 1,485,232
1,000 Iowa Health Facilities Development Financing Authority, Care
Initiatives Ser 1996....................................... 9.25 07/01/25 1,362,680
1,500 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993........... 8.375 10/01/13 1,693,515
2,745 Massachusetts Industrial Finance Agency, Kennedy-Donovan
Center Inc 1990 Issue...................................... 7.50 06/01/10 3,042,284
1,000 New Jersey Economic Development Authority, Franciscan Oaks
Project Ser 1997........................................... 5.70 10/01/17 1,009,240
1,000 Allegheny County Hospital Development Authority,
Pennsylvania, Allegheny Valley School Ser 1990............. 8.00 02/01/02 1,049,610
1,910 Hurricane, Utah, Mission Health Service Ser 1990............ 10.50 07/01/20 2,113,491
- -------- -----------
12,760 14,096,887
- -------- -----------
Public Facilities Revenue (1.2%)
1,154 Newton County, Texas, Detention Phase II COPs............... 9.875 12/15/11 1,231,941
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Retirement & Life Care Facilities Revenue (8.1%)
Connecticut Development Authority,
$ 2,325 Seabury Life Care Ser 1991................................. 10.00% 09/01/16 $ 2,593,352
350 Seabury Life Care Ser 1996................................. 8.75 09/01/06 379,281
Massachusetts Industrial Finance Agency,
60 Pioneer Valley Living Care Center at Amherst 1990 Issue.... 7.00 10/01/01 58,144
59 Pioneer Valley Living Care Center at Amherst 1990 Issue.... 0.00 10/01/20 1,183
1,000 New Jersey Economic Development Authority, Franciscan Oaks
Ser 1997................................................... 5.75 10/01/23 1,009,210
1,000 Glen Cove Housing Authority, New York, The Mayfair at Glen
Cove Ser 1996 (AMT)........................................ 8.25 10/01/26 1,127,860
1,000 Lorain County, Ohio, Laurel Lakes Ser 1993.................. 7.30 12/15/14 1,099,970
Chesterfield County Industrial Development Authority,
Virginia,
3,212 Brandermill Woods Ser 1991 A (b)........................... 7.25 07/01/16 2,312,784
498 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/17 4,984
499 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/18 4,985
499 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/19 4,987
499 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/20 4,988
499 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/21 4,989
- -------- -----------
11,500 8,606,717
- -------- -----------
Tax Allocation Revenue (7.9%)
2,680 Lely Community Development District, Florida, Ser 1991...... 9.00 10/01/11 3,052,091
1,500 Bradley, Illinois, Bradley North Redev Ser 1990............. 9.125 01/01/05 1,681,935
990 Bridgeview, Illinois, Tax Increment Refg Ser 1995........... 9.00 01/01/11 1,155,677
400 Hodgkins, Illinois, Ser 1991................................ 9.50 12/01/09 471,484
1,877 Muskegon Downtown Development Authority, Michigan, 1989 Ser
A-1 (a).................................................... 9.75 06/01/18 2,057,209
- -------- -----------
7,447 8,418,396
- -------- -----------
Transportation Facilities Revenue (3.1%)
5,000 E-470 Public Highway Authority, Colorado, Ser 1997 B
(MBIA)..................................................... 0.00 09/01/16 2,133,400
1,000 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg
Ser 1993 A (AMBAC)......................................... 5.85 10/01/13 1,121,970
- -------- -----------
6,000 3,255,370
- -------- -----------
Water & Sewer Revenue (0.5%)
2,660 Pittsburgh Water & Sewer Authority, Pennsylvania, 1998 Ser B
(FGIC)..................................................... 0.00 09/01/30 556,445
- -------- -----------
Other Revenue (5.6%)
Del Mar Race Track Authority, California,
2,000 Refg Ser 1996.............................................. 6.00 08/15/06 2,148,940
2,000 Refg Ser 1996.............................................. 6.00 08/15/08 2,169,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 500 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1996 Ser A (a)............................................. 6.40% 09/01/11 $ 557,280
1,000 Northern Palm Beach County Improvement District, Florida,
Water Control & Impr # 9A Ser 1996 A....................... 7.30 08/01/27 1,110,070
- -------- -----------
5,500 5,985,790
- -------- -----------
Refunded (2.7%)
605 Illinois Health Facilities Authority, Hindsdale Hospital Ser
1990 C (ETM)............................................... 9.50 11/15/19 687,492
2,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)................. 5.50 02/15/06+ 2,225,180
- -------- -----------
2,605 2,912,672
- -------- -----------
112,686 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $93,952,741).................. 102,460,562
- -------- -----------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATION (1.9%)
2,000 Washington Health Care Facilities Authority, Fred Hutchinson
- -------- Cancer Center Ser 1996 (Demand 10/01/98) (Identified Cost
$2,000,000)................................................ 4.10* 01/01/23 2,000,000
-----------
$114,686 TOTAL INVESTMENTS (Identified Cost $95,952,741) (c).................... 98.1% 104,460,562
========
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................... 1.9 2,069,209
----- -----------
NET ASSETS.............................................................. 100.0% $106,529,771
===== ===========
</TABLE>
- ---------------------
<TABLE>
<C> <S>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
++ 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 demand obligation.
(a) Resale is restricted to qualified institutional investors.
(b) Non-income producing security; bond in default.
(c) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $8,649,543 and the aggregate gross
unrealized depreciation is $141,722, resulting in net
unrealized appreciation of $8,507,821.
Bond Insurance:
- --------------
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Securities Association.
MBIA Municipal Bond Investors Assurance Corporation.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS September 30, 1998 (unaudited) continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
September 30, 1998
<TABLE>
<S> <C>
Arkansas................. 1.5%
California............... 6.6
Colorado................. 2.0
Connecticut.............. 3.3
District of Columbia..... 1.6
Florida.................. 5.0
Hawaii................... 0.9
Illinois................. 13.4
Indiana.................. 1.4
Iowa..................... 2.3%
Kentucky................. 3.1
Louisiana................ 4.8
Massachusetts............ 6.5
Michigan................. 2.9
New Hampshire............ 1.0
New Jersey............... 7.3
New York................. 5.7
Ohio..................... 7.8
Pennsylvania............. 2.6%
Texas.................... 4.1
Utah..................... 3.9
Virginia................. 8.2
Washington............... 4.8
Joint Exemptions*........ (2.6)
----
Total.................... 98.1%
====
</TABLE>
- ---------------------
* Joint exemptions have been included in each location.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $95,952,741).............................. $104,460,562
Cash........................................................ 281,251
Receivable for:
Interest................................................ 1,869,406
Investments sold........................................ 105,000
Prepaid expenses and other assets........................... 16,150
-----------
TOTAL ASSETS............................................ 106,732,369
-----------
LIABILITIES:
Payable for:
Investment advisory fee................................. 47,983
Administration fee...................................... 28,789
Accrued expenses and other payables......................... 125,826
Contingencies (Note 8)...................................... --
-----------
TOTAL LIABILITIES....................................... 202,598
-----------
NET ASSETS.............................................. $106,529,771
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $98,915,046
Net unrealized appreciation................................. 8,507,821
Accumulated undistributed net investment income............. 478,703
Accumulated net realized loss............................... (1,371,799)
-----------
NET ASSETS.............................................. $106,529,771
===========
NET ASSET VALUE PER SHARE
10,573,906 shares outstanding
(unlimited shares authorized of $.01 par value)............ $10.07
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $3,575,952
EXPENSES
Investment advisory fee..................................... 265,290
Administration fee.......................................... 159,174
Professional fees........................................... 51,220
Transfer agent fees and expenses............................ 20,007
Shareholder reports and notices............................. 12,867
Registration fees........................................... 12,334
Trustees' fees and expenses................................. 11,247
Custodian fees.............................................. 2,843
Other....................................................... 8,962
----------
TOTAL EXPENSES.......................................... 543,944
Less: expense offset........................................ (2,833)
----------
NET EXPENSES............................................ 541,111
----------
NET INVESTMENT INCOME................................... 3,034,841
----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 431,799
Net change in unrealized appreciation....................... 484,649
----------
NET GAIN................................................ 916,448
----------
NET INCREASE................................................ $3,951,289
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
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, 1998 MARCH 31, 1998
- ------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................ $ 3,034,841 $ 6,410,173
Net realized gain................................ 431,799 1,308,636
Net change in unrealized appreciation............ 484,649 2,822,696
------------ ------------
NET INCREASE................................. 3,951,289 10,541,505
Dividends from net investment income............. (3,330,710) (7,137,217)
------------ ------------
NET INCREASE................................. 620,579 3,404,288
NET ASSETS:
Beginning of period.............................. 105,909,192 102,504,904
------------ ------------
END OF PERIOD
(Including undistributed net investment
income of $478,703 and $774,572,
respectively)................................ $106,529,771 $105,909,192
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1998 (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 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
13
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MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1998 (unaudited), continued
income and net realized capital gains are determined in accordance with federal
income tax regulations which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent they exceed net investment
income and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement Morgan Stanley Dean Witter Advisors
Inc. (the "Investment Advisor"), formerly Dean Witter InterCapital Inc., the
Fund pays the Investment Advisor 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 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 annual rate of 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.
14
<PAGE> 15
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1998 (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, 1998 aggregated
$6,205,718 and $5,824,665, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor and
Administrator, is the Fund's transfer agent. At September 30, 1998, the Fund had
transfer agent fees and expenses payable of approximately $7,100.
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, 1998,
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,217. At September 30, 1998, the Fund had an accrued pension liability of
$48,505 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, 1997..................................... 10,573,906 $105,739 $98,806,170
Reclassification due to permanent book/tax difference....... -- -- 3,137
---------- -------- -----------
Balance, March 31, 1998 and September 30, 1998.............. 10,573,906 $105,739 $98,809,307
========== ======== ===========
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
6. DIVIDENDS
On September 29, 1998, the Fund declared the following dividends from net
investment income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ---------------- -----------------
<S> <C> <C>
$0.045 October 9, 1998 October 23, 1998
$0.045 November 6, 1998 November 20, 1998
$0.045 December 4, 1998 December 18, 1998
</TABLE>
15
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MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS September 30, 1998 (unaudited), continued
7. FEDERAL INCOME TAX STATUS
At March 31, 1998, the Fund had a net capital loss carryover of approximately
$1,804,000 of which $776,000 will be available through March 31, 2003 and
$1,028,000 will be available through March 31, 2005 to offset future capital
gains to the extent provided by regulations.
8. LITIGATION
On July 23, 1997, an action against the Fund and the Investment Advisor was
commenced in Supreme Court of the State of New York, County of Suffolk. The
complaint alleges that the Fund and the Investment Advisor tortiously interfered
with the plaintiff's subordinate interests in a project for which the Fund holds
senior defaulted bond. Since July 1997, the action has been essentially dormant.
Should it proceed, the Fund and the Investment Advisor intend to defend
vigorously.
The ultimate outcome of these matters is not presently determinable, and no
provision has been made in the Fund's financial statements for the effect, if
any, of such matters.
16
<PAGE> 17
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, 1998* 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $10.02 $ 9.69 $ 9.66 $ 9.57 $ 9.32 $ 9.41
------ ------ ------ ------ ------ ------
Net investment income............................... 0.29 0.61 0.65 0.68 0.67 0.66
Net realized and unrealized gain (loss)............. 0.08 0.40 0.07 (0.01) 0.19 (0.04)
------ ------ ------ ------ ------ ------
Total from investment operations.................... 0.37 1.01 0.72 0.67 0.86 0.62
------ ------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income............................ (0.32) (0.68) (0.69) (0.61) (0.59) (0.71)
Net realized gain................................ -- -- -- -- (0.07) --
------ ------ ------ ------ ------ ------
Total dividends and distributions................... (0.32) (0.68) (0.69) (0.61) (0.66) (0.71)
------ ------ ------ ------ ------ ------
Anti-dilutive effect of acquiring treasury shares... -- -- -- 0.03 0.05 --
------ ------ ------ ------ ------ ------
Net asset value, end of period...................... $10.07 $10.02 $ 9.69 $ 9.66 $ 9.57 $ 9.32
====== ====== ====== ====== ====== ======
Market value, end of period......................... $9.563 $9.875 $10.00 $9.125 $ 8.25 $ 8.50
====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+............................ (0.08)%(1) 5.41% 17.64% 18.54% 5.05% (5.04)%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................ 1.03%(2) 1.01%(3) 1.03%(3) 1.06% 1.05% 1.07%
Net investment income............................... 5.75%(2) 6.14% 6.66% 6.91% 7.24% 6.88%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands............. $106,530 $105,909 $102,505 $102,488 $104,937 $106,916
Portfolio turnover rate............................. 6%(1) 11% 20% 8% 6% 12%
</TABLE>
- ---------------------
* The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total investment return is based upon the current market value on the last
day of each period reported.
Dividends and distributions are assumed to be reinvested at the prices
obtained under the Fund's
dividend reinvestment plan. Total investment 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
17
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<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
- -----------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- -----------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
James F. Willison
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- -----------------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISOR
- -----------------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
The financial statements included herein have been taken from the records of
the Fund without examination by the independent accountants and accordingly
they do not express an opinion thereon.
MUNICIPAL
INCOME
OPPORTUNITIES
TRUST III
Semiannual Report
September 30, 1998
