<PAGE> 1
MUNICIPAL INCOME OPPORTUNITIES TRUST III Two World Trade Center, New York, New
York 10048
LETTER TO THE SHAREHOLDERS March 31, 1998
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of Municipal
Income Opportunities Trust III (OIC) for the fiscal year ended March 31, 1998.
Since our interim report six months ago, the securities markets have been
influenced by the Asian financial crisis and its potential impact on the U.S.
economy. Foreign currency turmoil strengthened the value of the U.S. dollar and
created a "flight to quality" demand for U.S. Treasury securities. Municipal
bonds followed the trend of Treasuries with yields declining to a range last
seen 20 years ago. Domestic employment conditions strengthened as unemployment
declined to its lowest level since 1973. The bond market rally was also aided by
prospects of the first federal budget surplus in more than two decades.
Inflation remained subdued despite the economy's strength.
<TABLE>
<CAPTION>
BOND YIELDS 1994-1998
Insured Municipal
Revenue Yields
30-Year 30-Year as a Percentage of
Insured Municipal Yields U.S. Treasury Yields U.S. Treasury Yields
<S> <C> <C> <C>
Dec '93 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%
Jun '94 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 84.80%
7 8 87.50%
Dec '94 6.75 7.88 85.66%
6.4 7.7 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%
Jun '95 6.1 6.62 92.15%
6.1 6.86 88.92%
6 6.66 90.08%
5.95 6.48 91.82%
5.75 6.33 90.84%
5.5 6.14 89.56%
Dec '95 5.35 5.94 90.07%
5.4 6.03 89.55%
5.8 6.46 86.69%
5.85 6.66 87.84%
5.95 6.89 86.36%
6.05 6.99 86.55%
Jun '96 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%
Dec '96 5.6 6.63 84.46%
5.7 6.79 83.95%
5.65 6.8 83.08%
5.9 7.1 83.10%
5.75 6.94 82.85%
5.65 6.91 81.77%
Jun '97 5.6 6.78 82.60%
5.3 6.3 84.00%
5.5 6.61 83.00%
5.4 6.4 84.40%
5.35 6.15 86.90%
5.3 6.05 87.60%
Dec '97 5.15 5.92 86.90%
Jan '98 5.15 5.8 88.80%
Feb '98 5.2 5.92 87.80%
Mar '98 5.25 5.93 88.50%
</TABLE>
Source: Municipal Market Data
<PAGE> 2
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS March 31, 1998, continued
MUNICIPAL MARKET CONDITIONS
Long-term insured municipal index yields declined 25 basis points from 5.50
percent in August 1997 to 5.25 percent at the end of March 1998. The municipal
bond rally lagged the rally in Treasuries. The ratio of municipal yields to
Treasury yields improved from a historically rich 83 percent in August to a more
attractive 89 percent in March. A rising ratio means that municipals have
underperformed Treasuries and have become relatively more attractive.
Total municipal volume increased 20 percent to $220 billion in 1997. Half of the
underwritings were enhanced by bond insurance. Much of this growth came from
refunding issues sold in the second half of the year as interest rates declined.
Overall, refundings represented one quarter of total new volume. So far in 1998,
the pace of refunding activity has increased and total volume has exceeded last
year's level.
PERFORMANCE
The Fund's net asset value (NAV) increased from $9.69 to $10.02 over the fiscal
year. Based on the NAV change plus reinvestment of tax-free dividends totaling
$0.675 per share, the Fund's total NAV return was 10.38 percent. The Fund's
market price on the New York Stock Exchange declined slightly from $10.00 to
$9.875 per share during the year. Based on the market price change and
reinvestment of dividends, OIC's total market return was 5.41 percent. On March
31, 1998, OIC's market price was trading at a modest discount of 1.45 percent to
its NAV.
Monthly dividends for the first quarter of 1998 were declared in December. The
Fund's current monthly dividend is $0.0525 per share. The level of undistributed
net investment income totaled $0.073 per share on March 31, 1998, versus $0.142
per share a year ago.
The Fund's procedure for reinvestment of all dividends and distributions is
through purchases of common stock 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.
PORTFOLIO STRUCTURE
At the end of March, the Fund's net assets of $106 million were diversified
among 15 long-term sectors and 56 credits. The portfolio's average maturity was
18 years. The distribution of bond call dates
2
<PAGE> 3
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS March 31, 1998, continued
(illustrated in the accompanying chart) produced an average call protection of 5
years. One issue, representing 2 percent of net assets, was not accruing
interest. Non-rated securities continued to comprise nearly 60 percent of the
portfolio.
LOOKING AHEAD
The economic fundamentals are in place for another year of solid, albeit less
spectacular, domestic growth in 1998. Events in the Far East have strengthened
the U.S. dollar and led to lower interest rates. The Asian financial crisis
<TABLE>
<CAPTION>
LARGEST SECTORS AS OF MARCH 31, 1998
(% OF NET ASSETS)
<S> <C>
IDR/PCR* 23%
MORTGAGE 16%
NURSING & HEALTH 16%
HOSPITAL 8%
TAX ALLOCATION 8%
RETIREMENT & LIFE CARE 7%
TRANSPORTATION 5%
ALL OTHERS 17%
</TABLE>
*INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
CALL PROTECTION: 5 YEARS
CALL STRUCTURE AS OF MARCH 31, 1998
(% OF TOTAL LONG-TERM PORTFOLIO) PERCENT CALLABLE
<S> <C>
1998 1%
1999 2%
2000 34%
2001 14%
2002 0%
2003 7%
2004 6%
2005 7%
2006 12%
2007 6%
2008+ 11%
YEARS BONDS CALLABLE
</TABLE>
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
3
<PAGE> 4
MUNICIPAL INCOME OPPORTUNITIES TRUST III
LETTER TO THE SHAREHOLDERS March 31, 1998, continued
seems likely to moderate U.S. economic growth and inflationary pressures. While
this outlook is favorable for municipal bonds it is possible that the Federal
Reserve Board may tighten monetary policy if cost pressures mount.
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
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On October 24, 1997, an annual meeting of the Fund's shareholders was held for
the purpose of voting on two separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Edwin J. Garn
For......................................................... 7,794,047
Withheld.................................................... 130,732
John R. Haire
For......................................................... 7,795,694
Withheld.................................................... 129,085
Michael E. Nugent
For......................................................... 7,796,975
Withheld.................................................... 127,804
Philip J. Purcell
For......................................................... 7,793,709
Withheld.................................................... 131,070
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Wayne E. Hedien, Dr. Manuel H. Johnson
and John L. Schroeder.
(2) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................... 7,703,811
Against..................................................... 50,290
Abstain..................................................... 170,678
</TABLE>
5
<PAGE> 6
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TAX-EXEMPT MUNICIPAL BONDS (95.6%)
General Obligation (0.9%)
$ 1,000 New York City, New York, 1994 Ser D......................... 5.75 % 08/15/10 $ 1,044,450
- -------- -----------
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 1,068,690
1,000 New York State Dormitory Authority, State University 1993
Ser A...................................................... 5.25 05/15/15 1,021,530
- -------- -----------
2,000 2,090,220
- -------- -----------
Electric Revenue (1.8%)
2,000 Intermountain Power Agency, Utah, Refg 1996 Ser D (Secondary
FSA)**..................................................... 5.00 07/01/21 1,938,360
- -------- -----------
Hospital Revenue (8.2%)
1,500 Duarte, California, City of Hope National Medical Center Ser
1993 COPs.................................................. 6.125 04/01/13 1,581,450
1,000 Flint Hospital Building Authority, Michigan, Hurley Medical
Center Refg Ser 1998 A (WI)................................ 5.375 07/01/20 981,460
400 Hawaii Department of Budget & Finance, Wilcox Memorial
Hospital Ser 1998 (WI)..................................... 5.35 07/01/18 395,580
2,000 Dixon, Illinois, Katherine Shaw Bethea Hospital Ser 1990.... 9.75 12/01/10 2,237,200
1,250 Illinois Health Facilities Authority, Edward Hospital Refg
Ser 1993................................................... 6.00 02/15/19 1,291,825
Massachusetts Health & Educational Facilities Authority,
1,000 Dana Farber Cancer Institute Ser G-1....................... 6.25 12/01/14 1,087,060
1,000 Dana Farber Cancer Institute Ser G-1....................... 6.25 12/01/22 1,085,060
- -------- -----------
8,150 8,659,635
- -------- -----------
Industrial Development/Pollution Control Revenue (23.0%)
1,500 Pope County, Arkansas, Arkansas Power & Light Co Ser 1990
(AMT)...................................................... 8.00 11/01/20 1,638,420
1,650 Metropolitan Washington Airports Authority, District of
Columbia, CaterAir International Corp Ser 1991 (AMT)+...... 10.125 09/01/11 1,718,343
1,500 Chicago, Illinois, Chicago-O'Hare Int'l Airport/American
Airlines Inc Ser 1990 A (AMT).............................. 7.875 11/01/25 1,643,805
1,000 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT)............ 6.00 06/01/27 1,045,790
3,000 Perry County, Kentucky, T J International Ser 1994 (AMT).... 7.00 06/01/24 3,321,030
1,500 Massachusetts Industrial Finance Agency, Eastern Edison Co
Refg Ser 1993.............................................. 5.875 08/01/08 1,554,030
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 2,811,875
1,750 Cleveland - Cuyahoga County Port Authority, Ohio, C & P
Docks Ser 1997-1 (AMT)..................................... 6.00 03/01/07 1,793,575
1,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995-B... 7.75 05/01/20 1,163,380
2,000 Brazos River Authority, Texas, Texas Utilities Electric Co
1990 Ser A (AMT)........................................... 8.125 02/01/20 2,158,940
2,000 Sabine River Authority, Texas, Texas Utilities Electric Co
Ser 1990 B (AMT)........................................... 8.25 10/01/20 2,205,900
3,000 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade Ser 1994 A (AMT)**................... 7.45 01/01/09 3,318,450
- -------- -----------
22,400 24,373,538
- -------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Mortgage Revenue - Multi-Family (8.1%)
$ 2,318 Saint Tammany Public Trust Financing Authority, Louisiana,
Refg Ser 1990.............................................. 10.00 % 10/01/20 $ 2,519,374
Alexandria Redevelopment & Housing Authority, Virginia,
1,760 Courthouse Commons Apts Ser 1990 A (AMT)................... 10.00 01/01/21 1,784,112
10,594 Courthouse Commons Apts Ser 1990 B (AMT)................... 0.00 01/01/21 1,148,206
3,000 Washington Housing Finance Commission, FNMA Collateralized
Refg Ser 1990 A............................................ 7.50 07/01/23 3,168,270
- -------- -----------
17,672 8,619,962
- -------- -----------
Mortgage Revenue - Single Family (7.7%)
2,500 Chicago, Illinois, GNMA-Collateralized Ser 1998 B (AMT)
(WI)....................................................... 6.45 09/01/29 2,719,800
1,070 Louisiana Housing Finance Agency, GNMA-Collateralized Ser
1988 (AMT)................................................. 8.30 11/01/20 1,104,829
1,000 New Hampshire Housing Finance Authority, 1997 Ser D (AMT)... 5.90 07/01/28 1,037,690
Ohio Housing Finance Agency,
1,085 GNMA-Backed 1990 Ser C (AMT)............................... 7.85 09/01/21 1,150,523
2,000 Residential GNMA-Collateralized 1996 Ser B-2 (AMT)......... 6.10 09/01/28 2,102,440
- -------- -----------
7,655 8,115,282
- -------- -----------
Nursing & Health Related Facilities Revenue (15.6%)
2,250 Champaign, Illinois, Hoosier Care Inc/Champaign Children's
Home Ser 1989 A............................................ 9.75 08/01/19 2,396,385
1,415 Winchester, Indiana, Hoosier Care II Inc Ser 1990........... 10.375 06/01/20 1,526,431
1,000 Iowa Health Facilities Development Financing Authority, Care
Initiatives Ser 1996....................................... 9.25 07/01/25 1,327,740
1,500 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993........... 8.375 10/01/13 1,686,765
1,970 Massachusetts Health & Educational Facilities Authority,
Farren Care Center Inc 1990 Ser A.......................... 10.375 06/01/10 2,278,561
2,865 Massachusetts Industrial Finance Agency, Kennedy-Donovan
Center Inc 1990 Issue...................................... 9.75 06/01/10 3,134,826
1,000 New Jersey Economic Development Authority, Franciscan Oaks
Project Ser 1997........................................... 5.75 10/01/23 1,010,800
1,000 Allegheny County Hospital Development Authority,
Pennsylvania, Allegheny Valley School Ser 1990............. 8.00 02/01/02 1,055,720
1,930 Hurricane, Utah, Mission Health Service Ser 1990............ 10.50 07/01/20 2,163,877
- -------- -----------
14,930 16,581,105
- -------- -----------
Public Facilities Revenue (1.2%)
1,173 Newton County, Texas, Detention Phase II COPs............... 9.875 12/15/11 1,245,263
- -------- -----------
Retirement & Lifecare Facilities Revenue (7.4%)
Connecticut Development Authority,
350 Seabury Life Care Ser 1991................................. 8.75 09/01/06 373,828
2,325 Seabury Life Care Ser 1996................................. 10.00 09/01/16 2,607,883
Massachusetts Industrial Finance Agency,
100 Pioneer Valley Living Care Center at Amherst 1990 Issue.... 7.00 10/01/01 96,404
59 Pioneer Valley Living Care Center at Amherst 1990 Issue.... 0.00 10/01/20 1,183
1,000 Glen Cove Housing Authority, New York, The Mayfair at Glen
Cove Ser 1996 (AMT)........................................ 8.25 10/01/26 1,115,310
1,000 Lorain County, Ohio, Laurel Lakes Ser 1993.................. 7.30 12/15/14 1,093,340
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1998, 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 (b)........................... 6.00 % 07/01/16 $ 2,484,000
500 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/17 5,000
500 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/18 5,000
500 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/19 5,000
500 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/20 5,000
500 Brandermill Woods Ser 1991 A (b)........................... 0.00 07/01/21 5,000
- -------- -----------
10,784 7,796,948
- -------- -----------
Tax Allocation (8.2%)
2,785 Lely Community Development District, Florida, Ser 1991...... 9.00 10/01/11 3,191,443
1,500 Bradley Illinois, Bradley North Redev Ser 1990.............. 9.125 01/01/05 1,700,415
990 Bridgeview, Illinios, Tax Increment Refg Ser 1995........... 9.00 01/01/11 1,153,162
400 Hodgkins, Illinois, Ser 1991................................ 9.50 12/01/09 473,072
1,907 Muskegon Downtown Development Authority, Michigan, 1989 Ser
A-1 (a).................................................... 9.75 06/01/18 2,119,306
- -------- -----------
7,582 8,637,398
- -------- -----------
Transportation Facilities Revenue (4.8%)
5,000 E-470 Public Highway Authority, Colorado, Ser 1997 B
(MBIA)..................................................... 0.00 09/01/16 1,921,750
1,000 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover Refg
Ser 1993 A (AMBAC)......................................... 5.85 10/01/13 1,081,790
2,000 Ohio Turnpike Commission, 1996 Ser A (MBIA)**............... 5.50 02/15/26 2,061,320
- -------- -----------
8,000 5,064,860
- -------- -----------
Water & Sewer Revenue (0.4%)
2,660 Pittsburgh Water & Sewer Authority, Pennsylvania, 1998 Ser B
(FGIC)..................................................... 0.00 09/01/30 486,168
- -------- -----------
Other Revenue (5.6%)
Del Mar Race Track Authority, California,
2,000 Refg Ser 1996.............................................. 6.00 08/15/06 2,160,440
2,000 Refg Ser 1996.............................................. 6.00 08/15/08 2,160,200
500 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1996 Ser A (a)............................................. 6.40 09/01/11 555,645
1,000 Northern Palm Beach County Improvement District, Florida,
Water Control & Impr # 9A Ser 1996 A....................... 7.30 08/01/27 1,093,480
- -------- -----------
5,500 5,969,765
- -------- -----------
Refunded (0.7%)
605 Illinois Health Facilities Authority, Hindsdale Hospital Ser
1990 C (ETM)............................................... 9.50 11/15/19 705,956
- -------- -----------
112,111 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $93,305,738).................. 101,328,910
- -------- -----------
SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS (5.7%)
3,500 Harris County Health Facilities Development Corporation,
Texas, Methodist Hospital Ser 1994 (Demand 04/01/98)....... 3.80* 12/01/25 3,500,000
2,000 Nueces River Authority, Texas, Reynolds Metal Co Ser 1985
(Demand 04/01/98).......................................... 3.90 12/01/99 2,000,000
500 Washington Health Care Facilities Authority, Fred Hutchinson
Cancer Center Ser 1996 (Demand 04/01/98)................... 3.80* 01/01/23 500,000
- -------- -----------
6,000 TOTAL SHORT-TERM TAX-EXEMPT MUNICIPAL OBLIGATIONS
- --------
(Identified Cost $6,000,000).................................................... 6,000,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$118,111 TOTAL INVESTMENTS (Identified Cost $99,305,738) (c)................... 101.3% $107,328,910
========
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS......................... (1.3) (1,419,718)
----- ------------
NET ASSETS............................................................ 100.0% $105,909,192
===== ============
</TABLE>
- ---------------------
<TABLE>
<S> <C>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Securities purchased on a "when-issued" basis.
+ Joint exemption in the District of Columbia and Virginia.
++ Joint exemption in New York and New Jersey.
* Current coupon of variable rate demand obligation.
** Some or all of these securities are segregated in connection
with the purchase of "when-issued" securities.
(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 $8,176,175 and the aggregate gross
unrealized depreciation is $153,003, resulting in net
unrealized appreciation of $8,023,172.
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
9
<PAGE> 10
MUNICIPAL INCOME OPPORTUNITIES TRUST III
PORTFOLIO OF INVESTMENTS March 31, 1998, continued
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
March 31, 1998
<TABLE>
<S> <C>
Arkansas................ 1.5%
California.............. 6.6
Colorado................ 1.8
Connecticut............. 3.3
District of Columbia.... 1.6
Florida................. 5.1
Hawaii.................. 0.4
Illinois................ 13.5
Indiana................. 1.5
Iowa.................... 2.2%
Kentucky................ 3.1
Louisiana............... 5.0
Massachusetts........... 8.7
Michigan................ 2.9
New Hampshire........... 1.0
New Jersey.............. 3.6
New York................ 5.7
Ohio.................... 7.7
Pennsylvania............ 2.6%
Texas................... 10.5
Utah.................... 3.9
Virginia................ 9.9
Washington.............. 3.5
Joint Exemptions*....... (4.3)
-------
Total................... 101.3%
=======
</TABLE>
- ---------------------
* Joint exemptions have been included in each location.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $99,305,738).............................. $107,328,910
Cash........................................................ 37,093
Receivable for:
Interest................................................ 1,868,093
Investments sold........................................ 955,180
Prepaid expenses and other assets........................... 23,990
------------
TOTAL ASSETS............................................ 110,213,266
------------
LIABILITIES:
Payable for:
Investments purchased................................... 4,115,573
Investment advisory fee................................. 46,448
Administration fee...................................... 27,869
Accrued expenses and other payables......................... 114,184
Contingencies (Note 8)...................................... --
------------
TOTAL LIABILITIES....................................... 4,304,074
------------
NET ASSETS.............................................. $105,909,192
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $ 98,915,046
Net unrealized appreciation................................. 8,023,172
Accumulated undistributed net investment income............. 774,572
Accumulated net realized loss............................... (1,803,598)
------------
NET ASSETS.............................................. $105,909,192
============
NET ASSET VALUE PER SHARE,
10,573,906 shares outstanding
(unlimited shares authorized of $.01 par value)............ $10.02
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS, continued
STATEMENT OF OPERATIONS
For the year ended March 31, 1998
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 7,458,190
-----------
EXPENSES
Investment advisory fee..................................... 523,806
Administration fee.......................................... 314,284
Professional fees........................................... 93,520
Transfer agent fees and expenses............................ 37,197
Registration fees........................................... 24,322
Shareholder reports and notices............................. 20,482
Trustees' fees and expenses................................. 18,685
Custodian fees.............................................. 5,648
Other....................................................... 15,691
-----------
TOTAL EXPENSES.......................................... 1,053,635
Less: expense offset........................................ (5,618)
-----------
NET EXPENSES............................................ 1,048,017
-----------
NET INVESTMENT INCOME................................... 6,410,173
-----------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................................... 1,308,636
Net change in unrealized appreciation....................... 2,822,696
-----------
NET GAIN................................................ 4,131,332
-----------
NET INCREASE................................................ $10,541,505
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MUNICIPAL INCOME OPPORTUNITIES TRUST III
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR
ENDED FOR THE YEAR
MARCH 31, ENDED
1998 MARCH 31, 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................ $ 6,410,173 $ 6,865,677
Net realized gain (loss)............................. 1,308,636 (1,216,634)
Net change in unrealized appreciation................ 2,822,696 1,989,928
------------ ------------
NET INCREASE..................................... 10,541,505 7,638,971
Dividends from net investment income................. (7,137,217) (7,249,645)
Net decrease from transactions in shares of
beneficial interest................................. -- (372,790)
------------ ------------
NET INCREASE..................................... 3,404,288 16,536
NET ASSETS:
Beginning of period.................................. 102,504,904 102,488,368
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$774,572 and $1,504,731, respectively)........... $105,909,192 $102,504,904
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS March 31, 1998
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.
14
<PAGE> 15
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS March 31, 1998, continued
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 nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement, with Dean Witter InterCapital Inc.
(the "Investment Adviser") 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
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.
15
<PAGE> 16
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS March 31, 1998, 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 year ended March 31, 1998 aggregated $11,506,834
and $11,961,953, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Adviser and
Administrator, is the Fund's transfer agent. At March 31, 1998, the Fund had
transfer agent fees and expenses payable of approximately $1,900.
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, 1998, included
in Trustees' fees and expenses in the Statement of Operations amounted to
$3,264. At March 31, 1998, the Fund had an accrued pension liability of $46,690
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, 1996..................................... 10,613,906 $106,139 $99,178,560
Treasury shares purchased and retired (weighted average
discount 3.68%)*........................................... (40,000) (400) (372,390)
---------- -------- -----------
Balance, March 31, 1997 and 1998............................ 10,573,906 $105,739 $98,806,170
========== ======== ===========
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
16
<PAGE> 17
MUNICIPAL INCOME OPPORTUNITIES TRUST III
NOTES TO FINANCIAL STATEMENTS March 31, 1998, continued
6. DIVIDENDS
On March 24, 1998, the Fund declared the following dividends from net investment
income:
<TABLE>
<CAPTION>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ------------- --------------
<S> <C> <C> <C>
$0.0525 April 3, 1998 April 17, 1998
$0.0525 May 8, 1998 May 22, 1998
$0.0525 June 5, 1998 June 19, 1998
</TABLE>
7. FEDERAL INCOME TAX STATUS
During the year ended March 31, 1998, the Fund utilized approximately $473,000
of its net capital loss carryover. 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 Adviser was
commenced in Supreme Court of the State of New York, County of Suffolk. The
complaint alleges that the Fund and the Investment Adviser tortiously interfered
with the plaintiff's subordinate interests in a project for which the Fund holds
senior defaulted bonds. Since July, the action has been essentially dormant.
Should it proceed, the Fund and the Investment Adviser intend to defend
vigorously.
The ultimate outcome of this matter is not presently determinable, and no
provision has been made in the Fund's financial statements for the effect, if
any, of such matter.
17
<PAGE> 18
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
---------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 9.69 $ 9.66 $ 9.57 $ 9.32 $ 9.41
-------- -------- -------- -------- --------
Net investment income....................................... 0.61 0.65 0.68 0.67 0.66
Net realized and unrealized gain (loss)..................... 0.40 0.07 (0.01) 0.19 (0.04)
-------- -------- -------- -------- --------
Total from investment operations............................ 1.01 0.72 0.67 0.86 0.62
-------- -------- -------- -------- --------
Less dividends and distributions from:
Net investment income.................................... (0.68) (0.69) (0.61) (0.59) (0.71)
Net realized gain........................................ -- -- -- (0.07) --
-------- -------- -------- -------- --------
Total dividends and distributions........................... (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.............................. $ 10.02 $ 9.69 $ 9.66 $ 9.57 $ 9.32
======== ======== ======== ======== ========
Market value, end of period................................. $ 9.875 $ 10.00 $ 9.125 $ 8.25 $ 8.50
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+.................................... 5.41% 17.64% 18.54% 5.05% (5.04)%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.01%(1) 1.03%(1) 1.06% 1.05% 1.07%
Net investment income....................................... 6.14% 6.66% 6.91% 7.24% 6.88%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $105,909 $102,505 $102,488 $104,937 $106,916
Portfolio turnover rate..................................... 11% 20% 8% 6% 12%
</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.
(1) Does not reflect the effect of expense offset of 0.01%.
SEE NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 19
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, 1998, 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, 1998 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
May 8, 1998
--------------------------------------------------------------------
1998 FEDERAL TAX NOTICE (unaudited)
For the year ended March 31, 1998, all of the Fund's dividends
from net investment income were exempt interest dividends,
excludable from gross income for Federal income tax purposes.
19
<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. Willson
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
- -------------------------------------------------
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
MUNICIPAL
INCOME
OPPORTUNITIES
TRUST III
Annual Report
March 31, 1998
