UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-06052
Morgan Stanley Municipal Income Opportunities Trust III
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: March 31, 2005
Date of reporting period: March 31, 2005
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Municipal Income Opportunities Trust III performed during the annual period. We
will provide an overview of the market conditions, and discuss some of the
factors that affected performance during the reporting period. In addition, this
report includes the Fund's financial statements and a list of Fund investments.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND.
FUND REPORT
For the year ended March 31, 2005
MARKET CONDITIONS
During the 12 months ended March 31, 2005, growth in consumer spending and
business investment helped the U.S. economy expand at a solid pace. Interest
rates moved higher at the beginning of the period after the April release of the
March 2004 employment report was significantly stronger than expected and
included upward revisions. The bond market also began to focus on global
commodity supply pressures, and specifically, on the rapid climb in oil prices.
In the summer, uncertainty over the ability of the economy to sustain its
recovery caused yields to decline on longer maturity bonds. This environment
persisted through the fall and early winter. Renewed signs of economic strength
and a pick-up in inflation moved interest rates higher during the final quarter
of the Fund's fiscal year.
During the period, investors' attention also focused on the Federal Open Market
Committee's (the "Fed") policy shift, which began in June 2004 with the first of
seven consecutive 25 basis point rate hikes. These increases took the federal
funds target rate to 2.75 percent by the end of March 2005, and represented a
reversal of the Fed's rate reductions between January 2001 and June 2003. At the
end of the period, the forward yield curve reflected a widespread view that the
Fed would continue its current pace of rate increases.
Against this setting, municipal bond yields peaked in June, moved lower through
the fall, and rose as the fiscal year ended. Lower-quality municipal bonds
performed strongly in this environment and the yield spread between investment
grade bonds and lower-quality issues narrowed significantly.
Total municipal underwriting volume in calendar 2004 was $359 billion, only 7
percent below 2003's record level. For the March 2005 quarter, volume increased
11 percent compared to the same period one year earlier. Issuers in California,
Texas, New York, Florida and New Jersey accounted for 44 percent of the total.
On the demand side, the municipal-to-Treasury yield ratio, which gauges relative
performance between the two markets, remained attractive for tax-exempts. As a
result, fixed income investors that normally focus on taxable sectors (such as
insurance companies and hedge funds) supported municipals by "crossing over" to
purchase bonds. However, retail investors continued to experience rate shock
from the absolute level of rates and largely remained on the sidelines.
PERFORMANCE ANALYSIS
For the 12-month period ended March 31, 2005, the net asset value (NAV) of the
Morgan Stanley Municipal Income Opportunities Trust III (OIC) increased from
$9.39 to $9.51 per share. Based on this change plus reinvestment of
distributions totaling $0.531549 per share the Fund's total NAV return was 7.85
percent. The Fund's value on the New York Stock Exchange (NYSE) moved from $8.92
to $8.27 per share during the same period. Based on this change plus
reinvestment of distributions, the Fund's total market return was -1.27 percent.
On March 31, 2005, the Fund's NYSE market price was at a 13.04 percent discount
to its NAV. During the 12-month period ended March 31, 2005, the Fund purchased
and retired
2
233,495 shares of common stock at a weighted average market discount of 10.25
percent. Past performance is no guarantee of future results.
Beginning in the fourth quarter of 2004, monthly dividends were reduced from
$0.045 per share to $0.0425 per share. The dividend reflects the current level
of the Fund's net investment income. The Fund's level of undistributed net
investment income was $0.10 per share on March 31, 2005, which remained
unchanged from 12 months earlier.*
The Fund is a non-leveraged closed-end fund that has historically benefited by
investing in better-than-average quality issues within the high yield sector of
the municipal market. Currently, nearly 60 percent of the portfolio is invested
in non-rated issues. The Fund's net assets of $84 million were diversified
across 82 credits in 11 sectors.
The Fund's procedure for reinvesting all dividends and distributions on common
shares is through purchases in the open market. This method helps support the
market value of the Fund's shares. In addition, we would like to remind
investors 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 NAV, whichever is lower at the
time of purchase.
- ----------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. Investment return, net asset value and common share market price will
fluctuate and Fund shares, when sold, may be worth more or less than their
original cost.
* Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
There is no guarantee that any sectors mentioned will continue to perform well
or be held by the Fund in the future.
FOR MORE INFORMATION
ABOUT PORTFOLIO HOLDINGS
Each Morgan Stanley fund provides a complete schedule of portfolio holdings in
its semiannual and annual reports within 60 days of the end of the fund's second
and fourth fiscal quarters by filing the schedule electronically with the
Securities and Exchange Commission (SEC). The semiannual reports are filed on
Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also
delivers the semiannual and annual reports to fund shareholders and makes these
reports available on its public Web site, www.morganstanley.com. Each Morgan
Stanley fund also files a complete schedule of portfolio holdings with the SEC
for the fund's first and third fiscal quarters on Form N-Q. Morgan Stanley does
not deliver the reports for the first and third fiscal quarters to shareholders,
nor are the reports posted to the Morgan Stanley public Web site. You may,
however, obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS
filings) by accessing the SEC's Web site, http://www.sec.gov. You may also
review and copy them at the SEC's Public Reference Room in Washington, DC.
Information on the operation of the SEC's Public Reference Room may be obtained
by calling the SEC at (800) SEC-0330. You can also request copies of these
materials, upon payment of a duplicating fee, by electronic request at the SEC's
e-mail address (publicinfo@sec.gov) or by writing the Public Reference section
of the SEC, Washington, DC 20549-0102. You may obtain copies of a fund's fiscal
quarter filings by contacting Morgan Stanley Client Relations at (800) 869-NEWS.
3
<Table>
<Caption>
TOP FIVE SECTORS
Hospital 17.2%
Retirement & Life Care Facilities 16.8%
Recreational Facilities 15.8%
IDR/PCR+ 13.4%
Nursing & Health Related Facilities 10.3%
</Table>
<Table>
<Caption>
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 6.9%
Aa/AA 0.3%
A/A 0.6%
Baa/BBB 26.3%
Ba/BB or Less 9.3%
NR 56.6%
</Table>
+ Industrial Development/Pollution Control Revenue
Data as of March 31, 2005. Subject to change daily. All percentages for top five
sectors are as a percentage of net assets and all percentages for long-term
credit analysis are as a percentage of total long-term investments. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.
SHAREHOLDER VOTING RESULTS
ON OCTOBER 26, 2004, AN ANNUAL MEETING OF THE FUND'S SHAREHOLDERS WAS HELD FOR
THE PURPOSE OF VOTING ON THE FOLLOWING MATTER, THE RESULTS OF WHICH WERE AS
FOLLOWS:
ELECTION OF TRUSTEES:
<Table>
- -------------------------------------------------
MICHAEL BOZIC
FOR: 7,679,144
WITHHELD: 165,234
- -------------------------------------------------
CHARLES A. FIUMEFREDDO
FOR: 7,675,203
WITHHELD: 169,175
- -------------------------------------------------
JAMES F. HIGGINS
FOR: 7,678,664
WITHHELD: 165,714
- -------------------------------------------------
</Table>
THE FOLLOWING TRUSTEES WERE NOT STANDING FOR REELECTION AT THIS MEETING: EDWIN
J. GARN, WAYNE E. HEDIEN, DR. MANUEL H. JOHNSON, JOSEPH J. KEARNS, MICHAEL E.
NUGENT AND FERGUS REID.
4
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of March 31, 2005
WEIGHTED AVERAGE MATURITY: 20 YEARS
<Table>
1-5 10
5-10 12
10-15 7
15-20 13
20-25 27
25-30 26
30+ 5
</Table>
Portfolio structure is subject to change.
Geographic Summary of Investments
Based on Market Value as a Percent of Net Assets
<Table>
Alabama................ 1.2%
Arizona................ 2.6
California............. 8.8
Colorado............... 4.8
Connecticut............ 2.5
District of Columbia... 1.3
Florida................ 8.9
Hawaii................. 4.5
Illinois............... 2.9
Indiana................ 2.6
Iowa................... 2.6
Kansas................. 1.3
Louisiana.............. 1.4
Maryland............... 1.0
Massachusetts.......... 3.7
Missouri............... 8.4
Nevada................. 3.0
New Hampshire.......... 1.2
New Jersey............. 6.8
New York............... 3.2
Oklahoma............... 1.3
Pennsylvania........... 5.8
South Carolina......... 2.0
Tennessee.............. 2.1
Texas.................. 4.5
Virginia............... 8.9
Washington............. 0.4
Wyoming................ 1.8
Joint exemption*....... (1.3)
-----
Total.................. 98.2%
=====
</Table>
* Joint exemptions have been included in each geographic location.
5
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of March 31, 2005
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 5 YEARS
<Table>
2005(a) 17
2006 4
2007 3
2008 8
2009 13
2010 12
2011 10
2012 14
2013 11
2014 7
2015+ 1
</Table>
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 6.7%
<Table>
2005(a) 7.3
2006 6.2
2007 5.7
2008 6.4
2009 6.1
2010 6.8
2011 7.4
2012 6.7
2013 6.7
2014 6.1
2015+ 6.0
</Table>
(a) May include issues callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Fund's operating expenses.
For example, the Fund is earning a book yield of 7.3% on 17% of the
long-term portfolio that is callable in 2005.
Portfolio structure is subject to change.
6
Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2005
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Tax-Exempt Municipal Bonds (97.4%)
Educational Facilities Revenue (8.1%)
$ 1,000 Pima County Industrial Development Authority, Arizona, Noah
Webster Basic School Ser 2004 A.......................... 6.125% 12/15/34 $ 1,011,550
800 ABAG Finance Authority for Nonprofit Corporations,
California, National Center for International Schools
COPs..................................................... 7.50 05/01/11 839,160
1,200 San Diego County, California, The Burnham Institute COPs... 6.25 09/01/29 1,256,484
500 Bellalago Educational Facilities Benefits District,
Florida, Bellalago Charter School 2004 Ser B............. 5.80 05/01/34 506,235
1,000 Volusia County Educational Facilities Authority, Florida,
Embry-Riddle Aeronautical University Ser 1996 A.......... 6.125 10/15/16 1,056,230
500 Illinois Finance Authority, Fullerton Village Ser 2004 A... 5.125 06/01/35 493,310
1,500 Upland, Indiana, Taylor University Ser 2002................ 6.25 09/01/28 1,636,905
-----------
-------
6,799,874
6,500
-----------
-------
Hospital Revenue (17.2%)
1,000 Colbert County - Northwest Health Care Authority, Alabama,
Helen Keller Hospital Ser 2003........................... 5.75 06/01/27 1,007,490
1,000 Arizona Health Facilities Authority, John C Lincoln Health
Ser 2002................................................. 6.375 12/01/37 1,079,190
Hawaii Department of Budget & Finance,
200 Kapiolani Health Care Ser 1996........................... 6.25 07/01/21 207,266
1,500 Wilcox Memorial Hospital Ser 1998........................ 5.50 07/01/28 1,507,320
500 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002........................................ 6.125 08/01/31 526,940
1,000 Nevada, Missouri, Nevada Regional Medical Center Ser
2001..................................................... 6.75 10/01/31 1,025,370
1,000 Henderson, Nevada, Catholic Health West Ser 1998 A......... 5.125 07/01/28 999,240
1,000 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Association Ser 1998 A..... 6.00 05/01/28 963,930
1,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994...................... 7.25 07/01/27 1,041,400
1,000 Oklahoma Development Finance Authority, Comanche County
Hospital 2000 Ser B...................................... 6.60 07/01/31 1,098,180
500 St Mary Hospital Authority, Pennsylvania, Catholic Health
East 2004 Ser B.......................................... 5.375 11/15/34 514,385
1,000 South Carolina Jobs Economic Development Authority,
Palmetto Health Refg & Impr Ser 2003 C................... 6.875 08/01/27 1,106,890
1,000 Knox County Health, Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002..... 6.50 04/15/31 1,031,490
500 Decatur Hospital Authority, Texas, Wise Regional Health Ser
2004 A................................................... 7.125 09/01/34 534,825
</Table>
7
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2005 continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 380 Hidalgo County Health Services Corporation, Texas, Mission
Hospital Ser 2005........................................ 5.00 % 08/15/13 $ 381,786
1,500 Teton County Hospital District, Wyoming, St John's Medical
Center Ser 2002.......................................... 6.75 12/01/27 1,514,985
-----------
-------
14,540,687
14,080
-----------
-------
Industrial Development/Pollution Control Revenue (13.4%)
1,000 Los Angeles, California, American Airlines Inc Terminal 4
Ser 2002 C (AMT)......................................... 7.50 12/01/24 1,018,820
1,105 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser 1991
(AMT)+................................................... 10.125 09/01/11 1,106,448
Hawaii Department of Budget & Finance,
500 Hawaiian Electric Co Ser 1999 B (AMT) (Ambac)............ 5.75 12/01/18 542,530
200 Hawaiian Electric Co Ser 1996 A (AMT) (MBIA)............. 6.20 05/01/26 208,670
600 Chicago, Illinois, United Airlines Inc Refg Ser 2001 C
(a)...................................................... 6.30 05/01/16 102,000
1,000 Iowa Finance Authority, IPSCO Inc Ser 1997 (AMT)........... 6.00 06/01/27 1,029,110
1,235 Maryland Industrial Development Financing Authority,
Medical Waste Associates LP 1989 Ser (AMT)............... 8.75 11/15/10 866,044
1,000 New Jersey Economic Development Authority, Continental
Airlines Inc Ser 1999 (AMT).............................. 6.625 09/15/12 919,640
1,000 New York City Industrial Development Agency , New York, 7
World Trade Center LLC Ser A............................. 6.50 03/01/35 1,021,670
1,000 Beaver County Industrial Development Authority,
Pennsylvania, Toledo Edison Co Collateralized Ser 1995
B........................................................ 7.75 05/01/20 1,050,950
725 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT).................................................... 6.65 05/01/10 782,898
500 Pennsylvania Economic Development Financing Authority,
Reliant Energy Inc Ser 2001A (AMT)....................... 6.75 12/01/36 535,855
575 Lexington County, South Carolina, Ellett Brothers Inc Refg
Ser 1988................................................. 7.50 09/01/08 564,253
650 Brazos River Authority, Texas, TXU Electric Co Refg Ser
1999 A (AMT)............................................. 7.70 04/01/33 767,286
800 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade of Pittsylvania County Ser 1994 A
(AMT).................................................... 7.45 01/01/09 819,984
-----------
-------
11,336,158
11,890
-----------
-------
</Table>
8
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2005 continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Mortgage Revenue - Multi-Family (4.0%)
$ 500 Honolulu City & County, Hawaii, Smith-Beretania FHA Insured
Ser 2002 A............................................... 5.45 % 01/01/25 $ 500,980
Alexandria Redevelopment & Housing Authority, Virginia,
1,760 Courthouse Commons Apts Ser 1990 A (AMT)................. 10.00 01/01/21 1,605,314
8,947 Courthouse Commons Apts Ser 1990 B (AMT)................. 0.00 01/01/21 940,714
290 Washington Housing Finance Commission, FNMA Collateralized
Refg Ser 1990 A.......................................... 7.50 07/01/23 290,528
-----------
-------
3,337,536
11,497
-----------
-------
Mortgage Revenue - Single Family (1.4%)
120 Maricopa County Industrial Development Authority, Arizona,
Ser 2000-1C (AMT)........................................ 6.25 12/01/30 120,661
265 Colorado Housing Finance Authority, 1998 Ser B-2 (AMT)..... 7.25 10/01/31 275,316
250 Hawaii Housing Finance & Development Corporation, 1994 Ser
B (MBIA)................................................. 5.90 07/01/27 255,825
560 Chicago, Illinois, GNMA-Collateralized Ser 1998 A-1
(AMT).................................................... 6.45 09/01/29 567,314
-----------
-------
1,219,116
1,195
-----------
-------
Nursing & Health Related Facilities Revenue (10.3%)
2,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999........ 6.75 04/01/34 1,727,580
1,000 Pinellas County Health Facilities Authority, Florida, Oaks
of Clearwater Ser 2004................................... 6.25 06/01/34 1,028,500
970 Iowa Health Facilities Development Financing Authority,
Care Initiatives Ser 1996................................ 9.25 07/01/25 1,167,550
1,200 Westside Habilitation Center, Louisiana, Intermediate Care
Facility for the Mentally Retarded Refg Ser 1993......... 8.375 10/01/13 1,214,748
1,690 Massachusetts Development Finance Agency, Kennedy-Donovan
Center Inc 1990 Issue.................................... 7.50 06/01/10 1,746,514
760 New Jersey Health Care Facilities Financing Authority,
Spectrum
for Living - FHA Insured Mortgage Refg Ser B............. 6.50 02/01/22 761,444
1,000 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999...................... 6.20 06/01/29 1,005,180
-----------
-------
8,651,516
8,620
-----------
-------
Public Facilities Revenue (1.2%)
1,000 Kansas City Industrial Development Authority, Missouri,
------- Plaza Library Ser 2004................................... 5.90 03/01/24 991,620
-----------
</Table>
9
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2005 continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
Recreational Facilities Revenue (15.8%)
$ 1,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A.................................. 6.25% 01/01/30 $ 1,054,560
1,300 San Diego County, California, San Diego Natural History
Museum COPs.............................................. 5.60 02/01/18 1,221,792
3,250 Metropolitan Football Stadium District, Colorado, Sales Tax
Ser 1999 A (MBIA)........................................ 0.00 01/01/10 2,729,285
500 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1996 Ser A (b)........................................... 6.40 09/01/11 526,265
1,500 Mohegan Tribe of Indians of Connecticut Gaming Authority,
Ser 2001................................................. 6.25 01/01/31 1,595,265
1,000 Overland Park Development Corporation, Kansas, Convention
Center Hotel Ser 2000 A.................................. 7.375 01/01/32 1,091,280
3,000 St Louis Industrial Development Authority, Missouri, Kiel
Center Refg Ser 1992 (AMT)............................... 7.75 12/01/13 3,052,500
1,000 Philadelphia Authority, The Franklin Institute Ser 1998.... 5.20 06/15/26 1,000,240
1,000 Austin Convention Enterprises Inc, Texas, Convention Center
Hotel Ser 2000 A......................................... 6.70 01/01/32 1,059,370
-----------
-------
13,330,557
13,550
-----------
-------
Retirement & Life Care Facilities Revenue (16.8%)
2,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A...................................... 8.00 01/01/30 2,116,480
500 Hawaii Department of Budget & Finance, Kahala Nui 2003 Ser
A........................................................ 8.00 11/15/33 546,280
750 Illinois Health Facilities Authority, Villa St Benedict Ser
2003 A-1................................................. 6.90 11/15/33 764,693
1,425 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A................................... 5.625 07/01/15 1,395,032
1,000 Kansas City Industrial Development Authority, Missouri,
Bishop Spencer 2004 Ser I................................ 6.25 01/01/24 1,013,720
New Jersey Economic Development Authority,
1,000 Cedar Crest Village Inc Ser 2001 A....................... 7.25 11/15/31 1,046,250
1,000 Franciscan Oaks Ser 1997................................. 5.70 10/01/17 993,210
1,000 Franciscan Oaks Ser 1997................................. 5.75 10/01/23 978,520
500 Montgomery County Industry Development Authority,
Pennsylvania, Whitemarsh Community Ser 2005.............. 6.25 02/01/35 510,620
750 Shelby County Health, Educational & Housing Facilities
Board, Tennessee, Village at Germantown Ser 2003 A....... 7.25 12/01/34 769,162
1,000 Bexar County Health Facilities Development Corporation,
Texas, Army Retirement Residence Ser 2002................ 6.30 07/01/32 1,050,620
</Table>
10
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2005 continued
<Table>
<Caption>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------------
$ 2,625 Chesterfield County Industrial Development Authority,
Virginia, Brandermill Woods Ser 1998..................... 6.50% 01/01/28 $ 2,481,638
500 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes Ser 2003 A......................................... 7.375 12/01/32 523,860
-----------
-------
14,190,085
14,050
-----------
-------
Tax Allocation Revenue (8.0%)
1,000 Capistrano Unified School District, California, Community
Facilities District #98-2 Ladera Ser 1999 Special Tax.... 5.75 09/01/29 1,031,010
1,000 San Marcos Community Facilities District No 2002-01,
California, University Commons Ser 2004.................. 5.90 09/01/28 1,023,730
Elk Valley Public Improvement Corporation, Colorado,
500 Ser 2001 A............................................... 7.30 09/01/22 536,895
500 Ser 2001 A............................................... 7.35 09/01/31 532,720
1,000 Midtown Miami Community Development District, Florida,
Parking Garage Ser 2004 A................................ 6.25 05/01/37 1,033,580
500 Chicago, Illinois, Lake Shore East Ser 2002................ 6.75 12/01/32 516,230
1,000 Des Peres, Missouri, West County Center Ser 2002........... 5.75 04/15/20 1,025,830
500 Clark County Special Improvement District 142, Nevada,
Mountains Edge Ser 2003.................................. 6.375 08/01/23 515,540
500 Allegheny County Redevelopment Authority, Pennsylvania,
Pittsburgh Mills Ser 2004................................ 5.60 07/01/23 524,830
-----------
-------
6,740,365
6,500
-----------
-------
Transportation Facilities Revenue (1.2%)
1,000 Nevada Department of Business & Industry, Las Vegas
------- Monorail 2nd Tier Ser 2000............................... 7.375 01/01/40 1,040,800
-----------
89,882 Total Tax-Exempt Municipal Bonds (Cost $81,051,318)........................... 82,178,314
-----------
-------
Short-Term Tax-Exempt Municipal Obligation (0.8%)
700 New York City Transitional Finance Authority, New York,
------- 2003 Ser C Subser C4 (Demand 04/01/05) (Cost $700,000)... 2.29* 08/01/31 700,000
-----------
$90,582 Total Investments (Cost $81,751,318) (c)........................... 98.2% 82,878,314
=======
Other Assets in Excess of Liabilities.............................. 1.8 1,501,724
----- -----------
Net Assets......................................................... 100.0% $84,380,038
===== ===========
</Table>
11
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
PORTFOLIO OF INVESTMENTS - MARCH 31, 2005 continued
- ---------------------
<Table>
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
* Current coupon of variable rate demand obligation.
+ Joint exemption in locations shown.
(a) Bond in default; issuer in bankruptcy.
(b) Resale is restricted to qualified institutional investors.
(c) The aggregate cost for federal income tax purposes is
$81,631,418. The aggregate gross unrealized appreciation is
$3,684,834 and the aggregate gross unrealized depreciation
is $2,437,938, resulting in net unrealized appreciation of
$1,246,896.
</Table>
<Table>
Bond Insurance:
- ---------------
Ambac Ambac Assurance Corporation.
MBIA Municipal Bond Investors Assurance Corporation.
</Table>
12
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
March 31, 2005
<Table>
Assets:
Investments in securities, at value (cost $81,751,318)...... $82,878,314
Cash........................................................ 7,150
Receivable for:
Interest................................................ 1,493,086
Investments sold........................................ 180,368
Prepaid expenses and other assets........................... 12,475
-----------
Total Assets............................................ 84,571,393
-----------
Liabilities:
Payable for:
Investment advisory fee................................. 39,441
Shares of beneficial interest repurchased............... 31,609
Administration fee...................................... 6,310
Accrued expenses and other payables......................... 113,995
-----------
Total Liabilities....................................... 191,355
-----------
Net Assets.............................................. $84,380,038
===========
Composition of Net Assets:
Paid-in-capital............................................. $84,551,590
Net unrealized appreciation................................. 1,126,996
Accumulated undistributed net investment income............. 865,557
Accumulated net realized loss............................... (2,164,105)
-----------
Net Assets.............................................. $84,380,038
===========
Net Asset Value Per Share,
8,876,378 shares outstanding (unlimited shares authorized of
$.01 par value)............................................. $9.51
===========
</Table>
13
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS continued
Statement of Operations
For the year ended March 31, 2005
<Table>
Net Investment Income:
Interest Income............................................. $5,549,277
----------
Expenses
Investment advisory fee..................................... 421,922
Administration fee.......................................... 175,948
Professional fees........................................... 57,968
Transfer agent fees and expenses............................ 38,600
Shareholder reports and notices............................. 35,641
Registration fees........................................... 16,773
Custodian fees.............................................. 9,633
Trustees' fees and expenses................................. 8,329
Other....................................................... 15,795
----------
Total Expenses.......................................... 780,609
Less: expense offset........................................ (9,568)
----------
Net Expenses............................................ 771,041
----------
Net Investment Income................................... 4,778,236
----------
Net Realized and Unrealized Gain (Loss):
Net realized loss........................................... (891,137)
Net change in unrealized depreciation....................... 1,695,270
----------
Net Gain................................................ 804,133
----------
Net Increase................................................ $5,582,369
==========
</Table>
14
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 4,778,236 $ 4,818,421
Net realized gain (loss).................................... (891,137) 352,229
Net change in unrealized depreciation....................... 1,695,270 398,174
----------- -----------
Net Increase............................................ 5,582,369 5,568,824
Dividends to shareholders from net investment income........ (4,789,919) (5,107,395)
Decrease from transactions in shares of beneficial
interest.................................................. (1,961,269) (1,479,902)
----------- -----------
Net Decrease............................................ (1,168,819) (1,018,473)
Net Assets:
Beginning of period......................................... 85,548,857 86,567,330
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $865,557 and $876,902, respectively)..................... $84,380,038 $85,548,857
=========== ===========
</Table>
15
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2005
1. Organization and Accounting Policies
Morgan Stanley 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 following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid 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 mean between the last reported bid and
asked price. 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.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; and (3) 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. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the
16
Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2005 continued
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments known as variation margin are recorded by
the Fund as unrealized gains and losses. Upon closing of the contract, the Fund
realizes a gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
D. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
E. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
F. Use of Estimates -- 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.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser") the Fund pays the Investment Adviser an
advisory fee, calculated weekly and payable monthly, by applying the annual rate
of 0.50% to the Fund's weekly net assets.
Pursuant to an Administration Agreement with Morgan Stanley 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 0.08% to the Fund's weekly net assets. Prior to November 1,
2004, the annual rate was 0.30%.
3. 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, 2005 aggregated $13,885,005
and $15,397,631, respectively. Included in the aforementioned transactions are
purchases and sales of $5,795,997 and $2,037,950, respectively, with other
Morgan Stanley funds including a net realized gain of $57,811.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent. At March 31, 2005, the Fund had transfer agent
fees and expenses payable of approximately $7,000.
17
Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2005 continued
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain 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 factors which include years of service and compensation.
Aggregate pension costs for the year ended March 31, 2005 included in Trustees'
fees and expenses in the Statement of Operations amounted to $7,272. At March
31, 2005, the Fund had an accrued pension liability of $59,833 which is included
in accrued expenses in the Statement of Assets and Liabilities. On December 2,
2003, the Trustees voted to close the plan to new participants and eliminate the
future benefits growth due to increases to compensation after July 31, 2003.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund.
4. 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
--------- --------- -----------
Balance, March 31, 2003..................................... 9,279,573 $92,796 $87,900,811
Treasury shares purchased and retired (weighted average
discount 6.08%)*.......................................... (169,700) (1,697) (1,478,205)
Reclassification due to permanent book/tax differences...... -- -- (786)
--------- ------- -----------
Balance, March 31, 2004..................................... 9,109,873 91,099 86,421,820
Treasury shares purchased and retired (weighted average
discount 10.25%)*......................................... (233,495) (2,335) (1,958,934)
Reclassification due to permanent book/tax differences...... -- -- (60)
--------- ------- -----------
Balance, March 31, 2005..................................... 8,876,378 $88,764 $84,462,826
========= ======= ===========
</Table>
- ---------------------
* The Trustees have voted to retire the shares purchased.
18
Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2005 continued
5. Dividends
On March 29, 2005, the Fund declared the following dividends from net investment
income:
<Table>
<Caption>
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
- --------- --------------- ---------------
$0.0425 April 8, 2005 April 22, 2005
$0.0425 May 6, 2005 May 20, 2005
$0.0425 June 3, 2005 June 17, 2005
</Table>
6. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Fund.
7. Risks Relating to Certain Financial Instruments
The Fund may invest a portion of its assets in residual interest bonds, which
are inverse floating rate municipal obligations. The prices of these securities
are subject to greater market fluctuations during periods of changing prevailing
interest rates than are comparable fixed rate obligations.
To hedge against adverse interest rate changes, the Fund may invest in financial
futures contracts or municipal bond index futures contracts ("futures
contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
8. Federal Income Tax Status
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 tax purposes are reported as distributions of paid-in-capital.
19
Morgan Stanley Municipal Income Opportunities Trust III
NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2005 continued
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
Tax-exempt income........................................... $ 4,731,105 $5,107,395
Ordinary income............................................. 58,814 --
----------- ----------
Total distributions......................................... $ 4,789,919 $5,107,395
=========== ==========
</Table>
As of March 31, 2005, the tax-basis components of accumulated losses were as
follows:
<Table>
Undistributed tax-exempt income............................. $ 824,450
Undistributed long-term gains............................... --
-----------
Net accumulated earnings.................................... 824,450
Capital loss carryforward*.................................. (2,164,105)
Temporary differences....................................... (78,793)
Net unrealized appreciation................................. 1,246,896
-----------
Total accumulated losses.................................... $ (171,552)
===========
</Table>
* As of March 31, 2005, the Fund had a net capital loss carryforward of
$2,164,105 of which $1,188,743 will expire on March 31, 2011 and $975,362 will
expire on March 31, 2013 to offset future capital gains to the extent provided
by regulations.
As of March 31, 2005, the Fund had temporary book/tax differences primarily
attributable to book amortization of discounts on debt securities and permanent
book/tax differences primarily attributable to tax adjustments on debt
securities sold by the Fund. To reflect reclassifications arising from the
permanent differences, paid-in-capital was charged $60, accumulated net realized
loss was charged $278 and accumulated undistributed net investment income was
credited $338.
20
Morgan Stanley 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
----------------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Selected Per Share Data:
Net asset value, beginning of period....................... $9.39 $9.33 $9.32 $9.48 $9.34
----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income*................................. 0.53 0.52 0.56 0.57 0.57
Net realized and unrealized gain (loss)................ 0.10 0.09 0.01 (0.12) 0.11
----- ----- ----- ----- -----
Total income from investment operations.................... 0.63 0.61 0.57 0.45 0.68
----- ----- ----- ----- -----
Less dividends and distributions from:
Net investment income.................................. (0.53) (0.56) (0.57) (0.57) (0.56)
Net realized gain...................................... -- -- -- (0.05) (0.01)
----- ----- ----- ----- -----
Total dividends and distributions.......................... (0.53) (0.56) (0.57) (0.62) (0.57)
----- ----- ----- ----- -----
Anti-dilutive effect of acquiring treasury shares*......... 0.02 0.01 0.01 0.01 0.03
----- ----- ----- ----- -----
Net asset value, end of period............................. $9.51 $9.39 $9.33 $9.32 $9.48
===== ===== ===== ===== =====
Market value, end of period................................ $8.27 $8.92 $8.63 $8.72 $8.85
===== ===== ===== ===== =====
Total Return+.............................................. (1.27)% 10.00% 5.58% 5.56% 23.09%
Ratios to Average Net Assets:
Expenses................................................... 0.93%(1) 1.02%(1) 0.98%(1) 0.99%(1) 0.97%(1)
Net investment income...................................... 5.68% 5.59% 5.96% 6.02% 6.05%
Supplemental Data:
Net assets, end of period, in thousands.................... $84,380 $85,549 $86,567 $88,271 $91,424
Portfolio turnover rate.................................... 17% 12% 8% 18% 14%
</Table>
- ---------------------
<Table>
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends and
distributions are assumed to be reinvested at the prices
obtained under the Fund's dividend reinvestment plan. Total
return does not reflect brokerage commissions.
(1) Does not reflect the effect of expense offset of 0.01%.
</Table>
21
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust III
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Morgan Stanley Municipal Income Opportunities Trust III:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Municipal Income Opportunities Trust III (the "Fund"), including the
portfolio of investments, as of March 31, 2005, and the related statements of
operations for the year then ended and changes in 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. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
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, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of March 31, 2005, by correspondence with the custodian.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Municipal Income Opportunities Trust III as of March 31, 2005, 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
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
May 17, 2005
22
Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION
Independent Trustees:
<Table>
<Caption>
Number of
Portfolios in
Position(s) Term of Office Fund Complex
Name, Age and Address of Held with and Length of Principal Occupation(s) During Overseen by
Independent Trustee Registrant Time Served* Past 5 Years** Trustee***
- --------------------------------------- ----------- -------------- ------------------------------ -------------
Michael Bozic (64) Trustee Since April Private Investor; Director or 197
c/o Kramer Levin Naftalis & Frankel LLP 1994 Trustee of the Retail Funds
Counsel to the Independent Trustees (since April 1994) and the
1177 Avenue of the Americas Institutional Funds (since
New York, NY 10036 July 2003); formerly Vice
Chairman of Kmart Corporation
(December 1998-October 2000),
Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November
1995-November 1998) and
President and Chief Executive
Officer of Hills Department
Stores (May 1991-July 1995);
formerly variously Chairman,
Chief Executive Officer,
President and Chief Operating
Officer (1987-1991) of the
Sears Merchandise Group of
Sears, Roebuck & Co.
Edwin J. Garn (72) Trustee Since January Consultant; Director or 197
1031 N. Chartwell Court 1993 Trustee of the Retail Funds
Salt Lake City, UT 84103 (since January 1993) and the
Institutional Funds (since
July 2003); member of the Utah
Regional Advisory Board of
Pacific Corp.; formerly
Managing Director of Summit
Ventures LLC (2000-2004);
United States Senator (R-Utah)
(1974-1992) and Chairman,
Senate Banking Committee
(1980-1986), Mayor of Salt
Lake City, Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19, 1985),
and Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197
c/o Kramer Levin Naftalis & Frankel LLP September 1997 of the Retail Funds (since
Counsel to the Independent Trustees September 1997) and the
1177 Avenue of the Americas Institutional Funds (since
New York, NY 10036 July 2003); formerly
associated with the Allstate
Companies (1966-1994), most
recently as Chairman of The
Allstate Corporation (March
1993-December 1994) and
Chairman and Chief Executive
Officer of its wholly-owned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
<Caption>
Name, Age and Address of
Independent Trustee Other Directorships Held by Trustee
- --------------------------------------- -----------------------------------
Michael Bozic (64) Director of various business
c/o Kramer Levin Naftalis & Frankel LLP organizations.
Counsel to the Independent Trustees
1177 Avenue of the Americas
New York, NY 10036
Edwin J. Garn (72) Director of Franklin Covey (time
1031 N. Chartwell Court management systems), BMW Bank of
Salt Lake City, UT 84103 North America, Inc. (industrial
loan corporation), Escrow Bank USA
(included loan corporation); United
Space Alliance (joint venture
between Lockheed Martin and the
Boeing Company) and Nuskin Asia
Pacific (multilevel marketing);
member of the board of various
civic and charitable organizations.
Wayne E. Hedien (71) Director of The PMI Group Inc.
c/o Kramer Levin Naftalis & Frankel LLP (private mortgage insurance);
Counsel to the Independent Trustees Trustee and Vice Chairman of The
1177 Avenue of the Americas Field Museum of Natural History;
New York, NY 10036 director of various other business
and charitable organizations.
</Table>
23
Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION continued
<Table>
<Caption>
Number of
Portfolios in
Position(s) Term of Office Fund Complex
Name, Age and Address of Held with and Length of Principal Occupation(s) During Overseen by
Independent Trustee Registrant Time Served* Past 5 Years** Trustee***
- --------------------------------------- ----------- -------------- ------------------------------ -------------
Dr. Manuel H. Johnson (56) Trustee Since July Senior Partner, Johnson Smick 197
c/o Johnson Smick Group, Inc. 1991 International, Inc., a
888 16th Street, NW consulting firm; Chairman of
Suite 740 the Audit Committee and
Washington, D.C. 20006 Director or Trustee of the
Retail Funds (since July 1991)
and the Institutional Funds
(since July 2003); Co-
Chairman and a founder of the
Group of Seven Council (G7C),
an international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (62) Trustee Since July President, Kearns & Associates 198
c/o Kearns & Associates LLC 2003 LLC (investment consulting);
PMB754 Deputy Chairman of the Audit
23852 Pacific Coast Highway Committee and Director or
Malibu, CA 90265 Trustee of the Retail Funds
(since July 2003) and the
Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (68) Trustee Since July General Partner of Triumph 197
c/o Triumph Capital, L.P. 1991 Capital, L.P., a private
445 Park Avenue investment partnership;
New York, NY 10022 Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (72) Trustee Since July Chairman of Lumelite Plastics 198
c/o Lumelite Plastics Corporation 2003 Corporation; Chairman of the
85 Charles Colman Blvd. Governance Committee and
Pawling, NY 12564 Director or Trustee of the
Retail Funds (since July 2003)
and the Institutional Funds
(since June 1992).
<Caption>
Name, Age and Address of
Independent Trustee Other Directorships Held by Trustee
- --------------------------------------- -----------------------------------
Dr. Manuel H. Johnson (56) Director of NVR, Inc. (home
c/o Johnson Smick Group, Inc. construction); Director of KFX
888 16th Street, NW Energy; Director of RBS Greenwich
Suite 740 Capital Holdings (financial holding
Washington, D.C. 20006 company).
Joseph J. Kearns (62) Director of Electro Rent
c/o Kearns & Associates LLC Corporation (equipment leasing),
PMB754 The Ford Family Foundation, and the
23852 Pacific Coast Highway UCLA Foundation.
Malibu, CA 90265
Michael E. Nugent (68) Director of various business
c/o Triumph Capital, L.P. organizations.
445 Park Avenue
New York, NY 10022
Fergus Reid (72) Trustee and Director of certain
c/o Lumelite Plastics Corporation investment companies in the
85 Charles Colman Blvd. JPMorgan Funds complex managed by
Pawling, NY 12564 J.P. Morgan Investment Management
Inc.
</Table>
24
Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION continued
Interested Trustees:
<Table>
<Caption>
Number of
Portfolios in
Position(s) Term of Office Fund Complex
Name, Age and Address of Held with and Length of Principal Occupation(s) During Overseen by
Interested Trustee Registrant Time Served* Past 5 Years** Trustee***
- ------------------------------------- ----------- -------------- ------------------------------ -------------
Charles A. Fiumefreddo (71) Chairman of Since July Chairman and Director or 197
c/o Morgan Stanley Trust the Board 1991 Trustee of the Retail Funds
Harborside Financial Center, and Trustee (since July 1991) and the
Plaza Two, Institutional Funds (since
Jersey City, NJ 07311 July 2003); formerly Chief
Executive Officer of the
Retail Funds (until September
2002).
James F. Higgins (57) Trustee Since June Director or Trustee of the 197
c/o Morgan Stanley Trust 2000 Retail Funds (since June 2000)
Harborside Financial Center, and the Institutional Funds
Plaza Two, (since July 2003); Senior
Jersey City, NJ 07311 Advisor of Morgan Stanley
(since August 2000); Director
of the Distributor and Dean
Witter Realty Inc.; previously
President and Chief Operating
Officer of the Private Client
Group of Morgan Stanley (May
1999-August 2000), and
President and Chief Operating
Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).
<Caption>
Name, Age and Address of
Interested Trustee Other Directorships Held by Trustee
- ------------------------------------- -----------------------------------
Charles A. Fiumefreddo (71) None.
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ 07311
James F. Higgins (57) Director of AXA Financial, Inc. and
c/o Morgan Stanley Trust The Equitable Life Assurance
Harborside Financial Center, Society of the United States
Plaza Two, (financial services).
Jersey City, NJ 07311
</Table>
- ---------------------
* This is the earliest date the Trustee began serving the funds advised by
Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the
"Retail Funds").
** The dates referenced below indicating commencement of services as
Director/Trustee for the Retail Funds and the funds advised by Morgan
Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the
"Institutional Funds") reflect the earliest date the Director/Trustee began
serving the Retail or Institutional Funds, as applicable.
*** The Fund Complex includes all open-end and closed-end funds (including all
of their portfolios) advised by the Investment Adviser and any funds that
have an investment adviser that is an affiliated person of the Investment
Adviser (including, but not limited to, Morgan Stanley Investment Management
Inc.).
25
Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION continued
Officers:
<Table>
<Caption>
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years**
- ----------------------------- --------------- -------------- ------------------------------------------------------------
Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief
New York, NY 10020 Executive Officer of the Investment Adviser and the
Administrator; Chairman and Director of the Distributor;
Chairman and Director of the Transfer Agent; Director of
various Morgan Stanley subsidiaries; President of the
Institutional Funds (since July 2003) and President of the
Retail Funds; Trustee (since July 2003) and President (since
December 2002) of the Van Kampen Closed-End Funds; Trustee
and President (since October 2002) of the Van Kampen
Open-End Funds.
Ronald E. Robison (66) Executive Vice Since April Principal Executive Officer of Funds in the Fund Complex
1221 Avenue of the Americas President and 2003 (since May 2003); Managing Director of Morgan Stanley & Co.
New York, NY 10020 Principal Incorporated, Morgan Stanley Investment Management Inc. and
Executive Morgan Stanley; Managing Director, Chief Administrative
Officer Officer and Director of the Investment Adviser and the
Administrator; Director of the Transfer Agent; Managing
Director and Director of the Distributor; Executive Vice
President and Principal Executive Officer of the
Institutional Funds (since July 2003) and the Retail Funds
(since April 2003); Director of Morgan Stanley SICAV (since
May 2004); previously President and Director of the
Institutional Funds (March 2001-July 2003) and Chief Global
Operations Officer and Managing Director of Morgan Stanley
Investment Management Inc.
Joseph J. McAlinden (62) Vice President Since July Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas 1995 Investment Adviser and Morgan Stanley Investment Management
New York, NY 10020 Inc.; Chief Investment Officer of the Van Kampen Funds; Vice
President of the Institutional Funds (since July 2003) and
the Retail Funds (since July 1995).
Barry Fink (50) Vice President Since February General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas 1997 (since December 2000) of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director of the
Investment Adviser and the Administrator; Vice President of
the Retail Funds; Assistant Secretary of Morgan Stanley DW;
Vice President of the Institutional Funds (since July 2003);
Managing Director, Secretary and Director of the
Distributor; previously Secretary (February 1997-July 2003)
and General Counsel (February 1997-April 2004) of the Retail
Funds; Vice President and Assistant General Counsel of the
Investment Adviser and the Administrator (February
1997-December 2001).
Amy R. Doberman (43) Vice President Since July Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, Vice President
of the Institutional and Retail Funds (since July 2004);
Vice President of the Van Kampen Funds (since August 2004);
previously, Managing Director and General
Counsel -- Americas, UBS Global Asset Management (July
2000-July 2004) and General Counsel, Aeltus Investment
Management, Inc. (January 1997-July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October 2004);
New York, NY 10020 Officer Executive Director of the Investment Adviser and Morgan
Stanley Investment Management Inc.; formerly Assistant
Secretary and Assistant General Counsel of the Morgan
Stanley Retail Funds.
</Table>
26
Morgan Stanley Municipal Income Opportunities Trust III
TRUSTEE AND OFFICER INFORMATION continued
<Table>
<Caption>
Term of
Position(s) Office and
Name, Age and Address of Held with Length of
Executive Officer Registrant Time Served* Principal Occupation(s) During Past 5 Years**
- ----------------------------- --------------- -------------- ------------------------------------------------------------
Stefanie V. Chang (38) Vice President Since July Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas 2003 Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Vice President of the Institutional Funds (since
December 1997) and the Retail Funds (since July 2003);
formerly practiced law with the New York law firm of Rogers
& Wells (now Clifford Chance US LLP).
Francis J. Smith (39) Treasurer and Treasurer Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial since July Administration (since December 2001); previously, Vice
Harborside Financial Center, Officer 2003 and Chief President of the Retail Funds (September 2002-July 2003);
Plaza Two, Financial Vice President of the Investment Adviser and the
Jersey City, NJ 07311 Officer since Administrator (August 2000- November 2001) and Senior
September 2002 Manager at PricewaterhouseCoopers LLP (January 1998- August
2000).
Thomas F. Caloia (59) Vice President Since July Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust 2003 Treasurer of the Investment Adviser, the Distributor and the
Harborside Financial Center, Administrator; previously Treasurer of the Retail Funds
Plaza Two, (April 1989-July 2003); formerly First Vice President of the
Jersey City, NJ 07311 Investment Adviser, the Distributor and the Administrator.
Mary E. Mullin (38) Secretary Since July Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas 2003 Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Secretary of the Institutional Funds and the Retail
Funds (since July 2003); formerly practiced law with the New
York law firms of McDermott, Will & Emery and Skadden, Arps,
Slate, Meagher & Flom LLP.
</Table>
- ---------------------
* This is the earliest date the Officer began serving the Retail Funds. Each
Officer serves an indefinite term, until his or her successor is elected.
** The dates referenced below indicating commencement of service as an Officer
for the Retail and Institutional Funds reflect the earliest date the Officer
began serving the Retail or Institutional Funds, as applicable.
In accordance with Section 303A.12(a) of the New York Stock Exchange Listed
Company Manual, the Fund's Annual CEO Certification certifying as to compliance
with NYSE's Corporate Governance Listing Standards was submitted to the Exchange
on January 7, 2005.
The Fund's Principal Executive Officer and Principal Financial Officer
Certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 were
filed with the Fund's N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
2005 FEDERAL TAX NOTICE (UNAUDITED)
During the year ended March 31, 2005, the Fund paid to its
shareholders $0.53 per share from tax-exempt income.
27
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Joseph J. McAlinden
Vice President
Barry Fink
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Thomas F. Caloia
Vice President
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
(c) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Municipal Income
Opportunities Trust III
Annual Report
March 31, 2005
[MORGAN STANLEY LOGO]
38513RPT-RA05-00361P-Y03/05
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to
its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by
the shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2005
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 29,002 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,215,745(2)
TAX FEES $ 4,585(3) $ 24,000(4)
ALL OTHER FEES $ -- $ --
TOTAL NON-AUDIT FEES $ 5,037 $ 3,239,745
TOTAL $ 34,039 $ 3,239,745
2004
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 27,930 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 684(2) $ 3,364,576(2)
TAX FEES $ 4,134(3) $ 652,431(4)
ALL OTHER FEES $ -- $ --(5)
TOTAL NON-AUDIT FEES $ 4,818 $ 4,017,007
TOTAL $ 32,748 $ 4,017,007
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors) and any
entity controlling, controlled by or under common control with the
Adviser that provides ongoing services to the Registrant.
(2) Audit-Related Fees represent assurance and related services provided
that are reasonably related to the performance of the audit of the
financial statements of the Covered Entities' and funds advised by the
Adviser or its affiliates, specifically data verification and
agreed-upon procedures related to asset securitizations and
agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and review of the
Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered Entities'
tax returns.
(5) All other fees represent project management for future business
applications and improving business and operational processes.
2
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("general pre-approval"); or require the specific pre-approval of the Audit
Committee or its delegate ("specific pre-approval"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
1 This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "Policy"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
3
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
4
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
5
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
Morgan Stanley Retail Funds
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
6
Morgan Stanley Institutional Funds
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6.
See Item 1.
7
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
The Fund invests in exclusively non-voting securities and therefore this item is
not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports covering periods ending on or after December 31,
2005.
8
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
Period (a) Total (b) Average (c) Total (d) Maximum
Number of Price Paid per Number of Number (or
Shares (or Share (or Unit) Shares (or Approximate
Units) Units) Dollar Value)
Purchased Purchased as of Shares (or
Part of Publicly Units) that May
Announced Yet Be
Plans or Purchased
Programs Under the Plans
or Programs
- ---------------------------------------------------------------------------------------------------
April 1, 2005 -- 18,800 8.4453
April 30, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
May 1, 2005 -- 18,600 8.1821
May 31, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
June 1, 2005 -- 22,200 8.1932
June 30, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
July 1, 2005 -- 13,800 8.2395
July 31, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
August 1, 2005 -- 18,800 8.3978
August 31, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
September 1, 2005 -- 10,100 8.6050
September 30, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
October 1, 2005 -- 9,500 8.6050
October 31, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
November 1, 2005 -- 16,900 8.4090
November 30, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
December 1, 2005 -- 24,400 8.3294
December 31, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
January 1, 2005 -- 29,700 8.4680
January 31, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
February 1, 2005 -- 23,400 8.6489
February 28, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
March 1, 2005 -- 27,295 8.4408
March 31, 2005 N/A N/A
- ---------------------------------------------------------------------------------------------------
Total 233,495 8.4137 N/A N/A
9
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Municipal Income Opportunities Trust III
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
May 19, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
May 19, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
May 19, 2005
11