UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-8497
Name of Fund: Corporate High Yield Fund III, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Corporate High
Yield Fund III, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536.
Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 05/31/04
Date of reporting period: 06/01/03 - 11/30/03
Item 1 - Attach shareholder report
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Corporate High Yield
Fund III, Inc.
Semi-Annual Report
November 30, 2003
[LOGO] Merrill Lynch Investment Managers
Corporate High Yield Fund III, Inc.
The Benefits and Risks of Leveraging
Corporate High Yield Fund III, Inc. utilizes leveraging through borrowings or
issuance of short-term debt securities or shares of Preferred Stock. The concept
of leveraging is based on the premise that the cost of assets to be obtained
from leverage will be based on short-term interest rates, which normally will be
lower than the income earned by the Fund on its longer-term portfolio
investments. Since the total assets of the Fund (including the assets obtained
from leverage) are invested in higher-yielding portfolio investments, the Fund's
Common Stock shareholders are the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its net asset value and market
price. If the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, the Fund's
net income will be less than if leverage had not been used, and therefore the
amount available for distribution to Common Stock shareholders will be reduced.
Proxy Results
During the six-month period ended November 30, 2003, Corporate High Yield Fund
III, Inc.'s shareholders voted on the following proposal. The proposal was
approved at a shareholders' meeting on August 25, 2003. A description of the
proposal and number of shares voted are as follows:
------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
------------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors: Terry K. Glenn 34,377,433 1,234,636
James H. Bodurtha 34,377,689 1,234,380
Joe Grills 34,357,369 1,254,700
Herbert I. London 34,376,501 1,235,568
Andre F. Perold 34,350,884 1,261,185
Roberta Cooper Ramo 34,372,983 1,239,086
Robert S. Salomon, Jr. 34,344,284 1,267,785
Stephen B. Swensrud 34,339,028 1,273,041
------------------------------------------------------------------------------------------------------
Electronic Delivery
The Fund is now offering electronic delivery of communications to its
shareholders. In order to receive this service, you must register your account
and provide us with e-mail information. To sign up for this service, simply
access this website http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification number
(PIN). You will need this PIN should you wish to update your e-mail address,
choose to discontinue this service and/or make any other changes to the service.
This service is not available for certain retirement accounts at this time.
2 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
A Letter From the President
Dear Shareholder
As 2003 closes, it seems appropriate to reflect on what has been a meaningful
year in many respects. We saw all-out war begin and end in Iraq, equity market
uncertainty turned to strength and sub par gross domestic product growth of 1.4%
in the first quarter of 2003 grew to an extraordinary 8.2% in the third quarter.
Amid the good news, fixed income investments, which had become the asset class
of choice during the preceding three-year equity market decline, faced new
challenges.
The good news was evident in the high yield market, which benefited from the
improving economy, favorable corporate earnings reports, a shrinking number of
defaults by high yield corporate borrowers and low interest rates. As measured
by the Credit Suisse First Boston High Yield Index, the high yield market posted
year-to-date and 12-month returns of +25.04% and +26.56%, respectively, as of
November 30, 2003. With these -- the greatest returns of any fixed income sector
-- high yield investors were clearly rewarded for their participation in the
market and willingness to accept the associated risks.
Against this backdrop, our portfolio managers continued to work diligently to
deliver on our commitment to provide superior performance within reasonable
expectations for risk and return. With that said, remember that the advice and
guidance of a skilled financial advisor often can mean the difference between
successful and unsuccessful investing. A financial professional can help you
choose those investments that will best serve you as you plan for your financial
future.
Finally, I am proud to premiere a new look to our shareholder communications.
Our portfolio manager commentaries have been trimmed and organized in such a way
that you can get the information you need at a glance, in plain language.
Today's markets are confusing enough. We want to help you put it all in
perspective. The report's new size also allows us certain mailing efficiencies.
Any cost savings in production or postage are passed on to the Fund and,
ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Managers
A strong rally in the high yield market continued through the period, and
performance benefited significantly.
How did the Fund perform in light of the existing market conditions?
For the six months ended November 30, 2003, the Common Stock of Corporate High
Yield Fund III, Inc. had net annualized yields of 12.22% and 12.35%, based on a
period-end per share net asset value of $8.44 and a per share market price of
$8.35, respectively, and $.517 per share income dividends. Over the same period,
the total investment return of the Fund's Common Stock was +14.32%, based on a
change in per share net asset value from $7.86 to $8.44, and assuming
reinvestment of $.510 per share ordinary income dividends.
The Fund's return exceeded that of the high yield market, as measured by the
Credit Suisse First Boston (CSFB) High Yield Index, which returned +9.70% for
the six-month period ended November 30, 2003. The Fund also outperformed the
Lipper High Current Yield Funds (Leveraged) category, which had an average
return of +13.36% for the same period.
For a description of the Fund's total investment return based on a change in the
per share market value (as measured by the trading price of the Fund's shares on
the New York Stock Exchange), and assuming reinvestment of dividends, please
refer to the Financial Highlights section of the Financial Statements included
in this report. As a closed-end fund, the Fund's shares may trade in the
secondary market at a premium or a discount to the Fund's net asset value. As a
result, total investment returns based on changes in the Fund's market value can
vary significantly from total investment returns based on changes in the Fund's
net asset value.
The Fund benefited from the continuation of the high yield market rally that
began in mid-October 2002 following several years of anemic results. The main
drivers of the upturn were the improving economy, favorable corporate earnings
reports, a shrinking number of defaults by high yield corporate borrowers and
low interest rates. Certain technical factors also provided solid support to the
high yield market, including strong cash inflows from institutional investors
increasing their allocations to the high yield sector and from retail investors
who were searching for yield in the low interest rate environment.
Leverage and security selection also had a meaningful positive impact on the
Fund's relative performance over the past six months. Additionally, the
strongest performers in the high yield market during the period were bonds that
had been out of favor prior to the rally, particularly issues of
utilities/independent power producers and airlines. The prices of these
securities rose, as investors' views on these sectors became more positive. The
utility sector, in particular, was drastically undervalued in the aftermath of
Enron Corporation's financial misdealings and because of fears that a faltering
economy would place financial pressure on the more highly leveraged players in
the sector. Utilities have been our single-largest sector weighting.
The strengthening economy benefited airlines in the form of increased travel,
and our holdings of secured airline paper showed strong gains. We were
underweight in the information technology sector, which experienced a sharp
recovery during the period. Our sole holding in the sector, SCG Holdings
Corporation, recovered smartly from depressed levels, but we continue to be
concerned about the suitability of such a volatile sector for high yield bonds
and remain underweight in the sector.
What changes were made to the portfolio during the period?
We did not change our investment strategy appreciably in response to the run-up
in the high yield market. We believe that long-term results in the market come
from attention to both value and quality. We continue to invest in a core of
solid credits and maintain a diverse portfolio, while identifying downtrodden
names that, in our opinion, represent significant value. We attempt to take
advantage of market volatility and to add to, or establish positions in,
securities of companies that we believe have favorable long-term fundamentals.
4 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
For the six-month period ended November 30, 2003, the Fund was about 28%
leveraged. Thus, the Fund borrowed the equivalent of 28% of total assets
invested, earning incremental yield on the investments we made with the borrowed
funds. For the six months ended November 30, 2003, the average amount borrowed
was $109.8 million, and the daily weighted average borrowing rate was 1.39%.
While leverage can primarily hinder total return in a weak market, the converse
also is true. (For a more complete explanation of the benefits and risks of
leveraging, see page 2 of this report to shareholders.)
How would you characterize the portfolio's position at the close of the period?
The low valuations found in the market over the past year have largely
evaporated, leaving more limited potential for strong market moves for high
yield as a whole and for individual sectors. While the market yield on November
30, 2003 -- 8.2% as measured by the CSFB High Yield Index -- remained attractive
relative to other investment alternatives, valuations of high yield securities
have surpassed historical averages. At the close of the period, yield spreads
relative to U.S. Treasury issues were 509 basis points (5.09%) versus 742 basis
points at May 31, 2003. Near term, the most significant risk for the high yield
market is the possibility of higher interest rates. Offsetting this is a strong
technical picture and potential improvement in corporate earnings, which
ultimately should benefit high yield securities.
While we question a dramatic upside to the high yield market, we continue to
believe the utility and independent power producer sector represents good
relative value. As of November 30, 2003, the Fund's largest industry allocations
were in utilities, at 7.6% of total assets, and chemicals, at 6.8%. In our
opinion, the utility sector has exhibited favorable fundamentals, and the
independent power producer segment of this sector offers attractive valuations.
Within the chemical sector, we have found what we believe to be good relative
value in the specialty chemical business, which has been hurt by high energy
prices but avoids dramatically volatile end markets.
The Fund maintains an underweight versus the benchmark in information
technology, given our perception of high valuations, unstable earnings and
potentially limited recovery value if earnings decline in the sector. We have
limited exposure to the retail, food and drug, and finance sectors based on what
we believe is inadequate and uncertain asset protection in these areas of the
market. Like the CSFB High Yield Index, the Fund had an average credit rating of
B at the close of the period.
B. Daniel Evans
Vice President and Portfolio Manager
Elizabeth M. Phillips
Vice President and Portfolio Manager
December 12, 2003
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Aerospace & B+ B1 $ 975,000 Esterline Technologies, 7.75% due 6/15/2013 (a) $ 1,038,375
Defense--2.1% K & F Industries, Inc.:
B B3 350,000 9.25% due 10/15/2007 361,375
B B3 350,000 9.625% due 12/15/2010 388,500
BB- Ba3 3,000,000 L-3 Communications Corporation, 8% due 8/01/2008 3,135,000
B- B3 375,000 TD Funding Corporation, 8.375% due 7/15/2011 (a) 397,500
B B2 1,000,000 Titan Corporation, 8% due 5/15/2011 (a) 1,145,000
-----------
6,465,750
=================================================================================================================================
Airlines--2.4% A Ba3 1,900,000 Airborne Inc., 5.75% due 4/01/2007 2,042,500
BB- B1 1,300,000 American Airlines, 7.80% due 10/01/2006 1,159,394
Continental Airlines, Inc.:
B+ B2 694,934 6.541% due 9/15/2008 637,881
BB- B2 1,507,559 7.033% due 6/15/2011 1,275,018
BB+ Ba2 1,331,313 6.90% due 1/02/2017 1,095,989
NR* Ca 3,780,240 USAir Inc., 10.375% due 3/01/2013 (b) 1,285,282
-----------
7,496,064
=================================================================================================================================
Automotive--2.2% BB+ Ba2 1,725,000 AutoNation Inc., 9% due 8/01/2008 1,962,187
General Motors Corp.:
BBB Baa1 300,000 7.125% due 7/15/2013 315,626
BBB Baa1 575,000 8.25% due 7/15/2023 620,083
Metaldyne Corporation:
B Caa1 2,625,000 11% due 6/15/2012 2,231,250
B B3 1,000,000 10% due 11/01/2013 (a) 960,000
CCC+ B2 550,000 Tenneco Automotive Inc., 10.25% due 7/15/2013 624,250
B B3 250,000 United Auto Group, Inc., 9.625% due 3/15/2012 277,500
-----------
6,990,896
=================================================================================================================================
Broadcasting--2.9% B- B2 1,900,000 Emmis Communications Corporation, 8.125% due 3/15/2009 1,995,000
B B2 1,750,000 Lin Television Corporation, 6.50% due 5/15/2013 (a) 1,728,125
B- B3 1,375,000 Nextmedia Operating Inc., 10.75% due 7/01/2011 1,553,750
Salem Communications Holding Corporation:
B- B3 1,175,000 7.75% due 12/15/2010 1,213,188
B- B3 2,100,000 9% due 7/01/2011 2,262,750
B B2 300,000 Sinclair Broadcasting Group, 8% due 3/15/2012 320,250
-----------
9,073,063
=================================================================================================================================
Cable-- C Caa2 3,450,000 Diamond Holdings PLC, 9.125% due 2/01/2008 (d) 3,536,250
International--3.7% C Caa2 4,400,000 NTL Incorporated, 11.20% due 11/15/2007 4,488,000
D Ca 6,000,000 TeleWest Communications PLC, 11% due 10/01/2007 (b) 3,495,000
-----------
11,519,250
=================================================================================================================================
6 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Cable--U.S.--8.1% CCC- Caa1 $ 375,000 Avalon Cable LLC, 10.528%** due 12/01/2008 $ 386,250
CSC Holdings Inc.:
BB- B1 2,750,000 8.125% due 8/15/2009 2,860,000
BB- B1 2,600,000 7.625% due 4/01/2011 2,639,000
NR* NR* 2,050,000 Century Cable Holdings LLC, Term, due 12/31/2009 (c) 1,860,375
Charter Communications Holdings, LLC:
CCC- Ca 3,500,000 8.625% due 4/01/2009 2,800,000
CCC- Ca 2,000,000 9.625% due 11/15/2009 1,615,000
B- Caa2 3,025,000 Insight Communications, 12.25%** due 2/15/2011 2,401,094
Insight Midwest, LP:
B+ B2 1,025,000 9.75% due 10/01/2009 1,081,375
B+ B2 1,400,000 10.50% due 11/01/2010 1,526,000
NR* Caa1 4,019,000 Loral Cyberstar Inc., 10% due 7/15/2006 (b) 3,014,250
NR* Ca 275,000 Loral Space & Communications Ltd., 9.50% due 1/15/2006 108,625
B+ B2 3,975,000 Mediacom Broadband LLC, 11% due 7/15/2013 4,263,188
B+ Ba3 675,000 Panamsat Corporation, 8.50% due 2/01/2012 734,063
-----------
25,289,220
=================================================================================================================================
Chemicals--9.9% BB- B2 1,000,000 Geon Company, 6.875% due 12/15/2005 950,000
CCC+ NR* 2,200,000 HMP Equity Holdings Corporation, 14.909%** due 5/15/2008 (d) 1,166,000
CCC+ Caa1 2,500,000 Huntsman ICI Chemicals, 10.125% due 7/01/2009 2,493,750
CCC+ Caa2 2,300,000 Huntsman ICI Holdings, 13.898%** due 12/31/2009 1,006,250
B- B3 525,000 Huntsman International LLC, 9.875% due 3/01/2009 (a) 563,063
B+ B1 2,225,000 IMC Global Inc., 11.25% due 6/01/2011 2,358,500
BB- B2 2,025,000 ISP ChemCo., 10.25% due 7/01/2011 2,268,000
B+ B2 2,000,000 ISP Holdings, Inc., 10.625% due 12/15/2009 2,200,000
B B2 575,000 Koppers Industries Inc., 9.875% due 10/15/2013 (a) 623,875
BB- B1 2,400,000 Millennium America Inc., 7% due 11/15/2006 2,400,000
Nalco Company (a):
B B2 450,000 7.75% due 11/15/2011 469,125
B Caa1 375,000 8.875% due 11/15/2013 390,000
BB- B2 3,125,000 Omnova Solutions Inc., 11.25% due 6/01/2010 3,343,750
BB- B2 3,125,000 Polyone Corporation, 10.625% due 5/15/2010 3,031,250
CCC+ Caa1 475,000 Resolution Performance, 13.50% due 11/15/2010 375,250
B B3 2,975,000 Rhodia SA, 8.875% due 6/01/2011 (a) 2,632,875
B- B3 1,825,000 Rockwood Specialties Corporation, 10.625% due 5/15/2011 (a) 1,989,250
B- Caa1 2,700,000 Terra Capital Inc., 11.50% due 6/01/2010 2,781,000
-----------
31,041,938
=================================================================================================================================
Consumer Products-- B- B2 3,262,000 Chattem, Inc., 8.875% due 4/01/2008 3,359,860
3.1% B B3 1,200,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 (a) 1,299,000
CCC+ Caa1 3,875,000 Samsonite Corporation, 10.75% due 6/15/2008 (a) 4,020,313
B- B3 900,000 Tempur-Pedic, 10.25% due 8/15/2010 1,010,250
-----------
9,689,423
=================================================================================================================================
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Diversified Media-- B- B3 $1,950,000 CBD Media/CBD Finance, 8.625% due 6/01/2011 (a) $ 2,120,625
7.5% B B2 525,000 DEX Media East LLC, 9.875% due 11/15/2009 595,875
B Caa1 675,000 Dex Media, Inc., 8% due 11/15/2013 (a) 685,125
B B3 1,400,000 Dex Media West, 9.875% due 8/15/2013 (a) 1,589,000
Houghton Mifflin Company:
B B2 1,900,000 8.25% due 2/01/2011 2,009,250
B B3 500,000 9.875% due 2/01/2013 535,000
B Caa1 3,400,000 11.50%** due 10/15/2013 (a) 2,065,500
B B2 800,000 PEI Holdings Inc., 11% due 3/15/2010 929,000
Primedia, Inc.:
B B3 2,475,000 7.625% due 4/01/2008 2,462,625
B B3 875,000 8.875% due 5/15/2011 905,625
R.H. Donnelley Financial Corporation I:
B+ B1 200,000 8.875% due 12/15/2010 224,500
B+ B2 725,000 10.875% due 12/15/2012 (a) 856,406
Vivendi Universal SA (a):
BB B1 2,525,000 6.25% due 7/15/2008 2,651,250
BB B1 2,500,000 9.25% due 4/15/2010 2,925,000
B+ B2 3,302,000 Yell Finance BV, 12.52%** due 8/01/2011 3,029,585
-----------
23,584,366
=================================================================================================================================
Energy--Exploration CCC+ Caa1 825,000 Continental Resources, 10.25% due 8/01/2008 825,000
& Production--3.0% B B2 1,475,000 Nuevo Energy Company, 9.375% due 10/01/2010 1,622,500
Plains Exploration & Production Company:
B B2 825,000 8.75% due 7/01/2012 903,375
B NR* 1,700,000 8.75% due 7/01/2012 1,861,500
BB- Ba3 1,150,000 Vintage Petroleum, 8.25% due 5/01/2012 1,253,500
B+ Ba3 2,675,000 Westport Resources Corporation, 8.25% due 11/01/2011 2,915,750
-----------
9,381,625
=================================================================================================================================
Energy-- BB Ba3 1,925,000 CITGO Petroleum Corporation, 11.375% due 2/01/2011 2,223,375
Other--6.5% B B2 1,500,000 Dresser Inc., 9.375% due 4/15/2011 1,575,000
B B2 2,075,000 Ferrellgas Partners LP, 8.75% due 6/15/2012 2,256,562
B- B3 925,000 Giant Industries, Inc., 9% due 9/01/2007 929,625
CCC B3 3,500,000 Ocean Rig Norway AS, 10.25% due 6/01/2008 3,185,000
BB Ba3 3,700,000 Port Arthur Finance Corporation, 12.50% due 1/15/2009 4,366,000
B B3 2,250,000 Star Gas Partners, 10.25% due 2/15/2013 2,441,250
CCC Caa1 2,025,000 Trico Marine Services, 8.875% due 5/15/2012 1,245,375
B- Caa1 2,750,000 United Refining Co., 10.75% due 6/15/2007 2,213,750
-----------
20,435,937
=================================================================================================================================
Food/Tobacco--6.2% B B3 750,000 American Seafood Group LLC, 10.125% due 4/15/2010 894,375
Commonwealth Brands, Inc. (a):
NR* NR* 1,925,000 9.75% due 4/15/2008 2,098,250
NR* NR* 1,475,000 10.625% due 9/01/2008 1,593,000
B+ Ba3 725,000 Constellation Brands Inc., 8.125% due 1/15/2012 795,687
B+ B2 3,250,000 Cott Beverages Inc., 8% due 12/15/2011 3,497,812
B B2 1,250,000 Del Monte Corporation, 8.625% due 12/15/2012 (a) 1,362,500
CCC B2 2,000,000 Doane Pet Care Company, 10.75% due 3/01/2010 2,040,000
BB- B2 1,400,000 Dole Foods Company, 8.875% due 3/15/2011 1,513,750
B- B3 1,975,000 Merisant Company, 9.50% due 7/15/2013 (a) 2,024,375
NR* NR* 1,375,000 New World Pasta Company, 9.25% due 2/15/2009 357,500
NR* Ba2 2,100,000 Smithfield Foods Inc., 8% due 10/15/2009 2,328,375
B- Caa1 1,625,000 Tabletop Holdings, Inc., 12.25%** due 5/15/2014 (a) 877,500
-----------
19,383,124
=================================================================================================================================
8 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Gaming--7.4% B+ B1 $3,250,000 Boyd Gaming Corporation, 8.75% due 4/15/2012 $ 3,542,500
BB+ Ba1 1,550,000 MGM Mirage, Inc., 8.50% due 9/15/2010 1,763,125
B B2 2,175,000 Majestic Star Casino LLC, 9.50% due 10/15/2010 (a) 2,202,188
BB- Ba2 3,000,000 Park Place Entertainment, 7.875% due 3/15/2010 3,277,500
B B2 2,500,000 Resorts International Hotel/Casino, 11.50% due 3/15/2009 2,656,250
B+ B2 2,250,000 Sun International Hotels, 8.875% due 8/15/2011 2,446,875
B- B3 2,525,000 Trump Holdings and Funding, 11.625% due 3/15/2010 2,266,188
B- B3 2,800,000 Venetian Casino/LV Sands, 11% due 6/15/2010 3,241,000
CCC+ B3 1,475,000 Wynn Las Vegas LLC, 12% due 11/01/2010 1,718,375
-----------
23,114,001
=================================================================================================================================
Health Care--5.8% B B3 1,550,000 Alaris Medical Inc., 7.25% due 7/01/2011 1,592,625
B B3 1,550,000 Alpharma Inc., 8.625% due 5/01/2011 (a) 1,538,375
BB- B2 950,000 Biovail Corporation, 7.875% due 4/01/2010 921,500
Fisher Scientific International Inc.:
B+ B2 2,627,000 8.125% due 5/01/2012 2,817,457
B+ B2 250,000 8% due 9/01/2013 266,875
BB- Ba2 3,750,000 Fresenius Medical Capital Trust II, 7.875% due 2/01/2008
(Convertible) 3,951,562
B- B3 1,600,000 Insight Health Services, 9.875% due 11/01/2011 1,672,000
BB+ Ba2 750,000 OmniCare Inc., 6.125% due 6/01/2013 750,000
Tenet Healthcare Corporation:
BB- B1 1,000,000 5.375% due 11/15/2006 962,500
BB- B1 1,800,000 6.375% due 12/01/2011 1,665,000
B B3 2,050,000 Triad Hospitals, Inc., 7% due 11/15/2013 (a) 2,044,875
-----------
18,182,769
=================================================================================================================================
Housing--3.2% Building Materials Corporation:
B B2 400,000 7.75% due 7/15/2005 409,500
B B2 4,500,000 8% due 12/01/2008 4,421,250
BB- Ba3 1,600,000 Forest City Enterprises Inc., 7.625% due 6/01/2015 1,672,000
Nortek Holdings, Inc.:
B- Caa1 1,775,000 10%** due 5/15/2011 (a) 1,260,250
B- B3 550,000 9.875% due 6/15/2011 605,000
BB- B1 1,475,000 Texas Industries Inc., 10.25% due 6/15/2011 (a) 1,659,375
-----------
10,027,375
=================================================================================================================================
Information CCC+ Caa2 1,300,000 SCG Holdings Corporation, 12% due 8/01/2009 1,397,500
Technology--0.5%
=================================================================================================================================
Leisure--3.4% B B1 1,550,000 Felcor Lodging LP, 10% due 9/15/2008 1,654,625
B+ Ba3 975,000 HMH Properties, Inc., 8.45% due 12/01/2008 1,016,437
B+ Ba3 1,525,000 Host Marriott LP, 9.50% due 1/15/2007 1,673,687
BB+ Ba1 1,900,000 ITT Corporation, 7.375% due 11/15/2015 2,014,000
Intrawest Corporation:
B+ B1 1,225,000 10.50% due 2/01/2010 1,350,563
B+ B1 1,050,000 7.50% due 10/15/2013 (a) 1,057,875
B- B2 1,450,000 Six Flags Inc., 9.50% due 2/01/2009 1,464,500
B B2 475,000 Vail Resorts Inc., 8.75% due 5/15/2009 494,000
-----------
10,725,687
=================================================================================================================================
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Manufacturing--6.4% BB- Ba3 $1,700,000 Case New Holland Inc., 9.25% due 8/01/2011 (a) $ 1,904,000
CCC+ Caa1 800,000 Columbus McKinnon Corp., 8.50% due 4/01/2008 744,000
B- B3 2,500,000 Eagle-Picher, Inc., 9.75% due 9/01/2013 (a) 2,656,250
B B2 2,475,000 JohnsonDiversey Inc., 9.625% due 5/15/2012 2,734,875
B- B3 775,000 Rexnord Corporation, 10.125% due 12/15/2012 840,875
BB+ Ba3 1,900,000 SPX Corporation, 7.50% due 1/01/2013 2,033,000
B B3 3,125,000 Trimas Corporation, 9.875% due 6/15/2012 3,218,750
Tyco International Group SA:
BBB- Ba2 1,425,000 6.375% due 2/15/2006 1,508,719
BBB- Ba2 3,330,000 2.75% due 1/15/2018 3,862,800
BBB- Ba2 500,000 2.75% due 1/15/2018 (Convertible) (a) 580,000
-----------
20,083,269
=================================================================================================================================
Metal--Other--1.4% BB Ba3 2,925,000 Luscar Coal Ltd., 9.75% due 10/15/2011 3,319,875
NR* NR* 5,000,000 Ormet Corporation, 11% due 8/15/2008 (a)(b) 975,000
-----------
4,294,875
=================================================================================================================================
Packaging--5.7% B+ B2 1,800,000 Anchor Glass Container, 11% due 2/15/2013 2,070,000
Crown Euro Holdings SA:
B+ B1 950,000 9.50% due 3/01/2011 1,064,000
B B2 500,000 10.875% due 3/01/2013 577,500
CCC+ Caa2 2,625,000 Graham Packaging Company, 10.75% due 1/15/2009 2,710,313
BB B1 1,825,000 Owens-Brockway Glass Container, 8.875% due 2/15/2009 1,975,563
B+ B3 1,550,000 Owens-Illinois Inc., 7.15% due 5/15/2005 1,588,750
B- Caa1 3,550,000 Pliant Corporation, 13% due 6/01/2010 3,255,875
B- B3 2,025,000 Tekni-Plex Inc., 12.75% due 6/15/2010 2,159,156
U.S. Can Corporation:
CCC+ B3 375,000 10.875% due 7/15/2010 (a) 385,313
CCC+ Caa1 2,450,000 12.375% due 10/01/2010 2,107,000
-----------
17,893,470
=================================================================================================================================
Paper--6.9% D Ca 1,000,000 APP International Finance, 11.75% due 10/01/2005 (b) 392,500
B- B3 2,275,000 Ainsworth Lumber Company, 12.50% due 7/15/2007 (e) 2,639,000
B+ B2 2,125,000 Caraustar Industries Inc., 9.875% due 4/01/2011 2,263,125
Doman Industries Limited (b):
D NR* 9,700,000 8.75% due 3/15/2004 1,455,000
D NR* 550,000 9.25% due 11/15/2007 82,500
Georgia-Pacific Corporation:
BB+ Ba2 1,425,000 7.375% due 7/15/2008 1,514,062
BB+ Ba2 1,925,000 9.375% due 2/01/2013 2,208,937
Graphic Packaging International (a):
B- B2 825,000 8.50% due 8/15/2011 907,500
B- B3 950,000 9.50% due 8/15/2013 1,048,562
B B2 2,975,000 Jefferson Smurfit Corporation, 8.25% due 10/01/2012 3,186,969
MDP Acquisitions PLC:
B B2 1,625,000 9.625% due 10/01/2012 1,803,750
B B3 59,330 15.50% due 10/01/2013 (e)(h) 67,636
B B3 755,301 15.50% due 10/01/2013 (a)(e)(h) 861,043
BB Ba2 2,450,000 Norske Skog Canada Ltd., 8.625% due 6/15/2011 (a) 2,511,250
BB Ba3 550,000 Tembec Industries, Inc., 8.625% due 6/30/2009 545,875
-----------
21,487,709
=================================================================================================================================
10 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Services--4.8% Allied Waste North America:
BB- Ba3 $ 550,000 7.625% due 1/01/2006 $ 574,750
BB- Ba3 2,075,000 8.875% due 4/01/2008 2,287,687
BB- Ba3 950,000 7.875% due 4/15/2013 1,016,500
B B2 2,900,000 Coinmach Corporation, 9% due 2/01/2010 3,146,500
B B1 2,725,000 Corrections Corporation of America, 7.50% due 5/01/2011 2,854,437
BB- B2 1,150,000 NationsRent, Inc., 9.50% due 10/15/2010 (a) 1,201,750
Williams Scotsman, Inc.:
B B3 3,750,000 9.875% due 6/01/2007 3,656,250
B+ B2 375,000 10% due 8/15/2008 406,875
-----------
15,144,749
=================================================================================================================================
Steel--2.2% B+ B2 2,250,000 AK Steel Corporation, 7.875% due 2/15/2009 1,563,750
B+ B2 2,000,000 Gerdau Ameristeel Corporation, 10.375% due 7/15/2011 (a) 2,120,000
B B3 2,950,000 UCAR Finance Inc., 10.25% due 2/15/2012 3,259,750
-----------
6,943,500
=================================================================================================================================
Telecommunications B- B2 2,475,000 Alaska Communications System Holdings, Inc., 9.875%
--7.3% due 8/15/2011 (a) 2,598,750
B- Caa1 3,250,000 Fairpoint Communications, 12.50% due 5/01/2010 3,526,250
Intelsat, Ltd. (a):
BBB+ Baa3 250,000 5.25% due 11/01/2008 254,426
BBB+ Baa3 2,200,000 6.50% due 11/01/2013 2,279,532
Qwest Capital Funding:
CCC+ Caa2 1,050,000 5.875% due 8/03/2004 1,050,000
CCC+ Caa2 4,025,000 7.25% due 2/15/2011 3,813,688
CCC+ NR* 1,350,000 Qwest Services Corporation, 13.50% due 12/15/2010 (a) 1,587,938
CCC+ B3 2,025,000 Time Warner Telecom Inc., 10.125% due 2/01/2011 2,090,813
CCC+ B3 500,000 Time Warner Telecom LLC, 9.75% due 7/15/2008 505,000
CCC+ Caa2 1,425,000 US West Capital Funding, 6.25% due 7/15/2005 1,439,250
WorldCom, Inc.:
NR* NR* 950,000 7.50% due 8/20/2004 (b) 767,125
NR* NR* 1,000,000 8.25% due 1/20/2023 (b) 807,500
NR* NR* 1,825,000 7.125% due 6/15/2027 (b) 1,473,688
NR* NR* 1,500,000 8.25% due 5/15/2031 504,375
-----------
22,698,335
=================================================================================================================================
Transportation-- B+ B1 1,350,000 General Maritime Corporation, 10% due 3/15/2013 1,515,375
2.4% B+ B2 1,900,000 Laidlaw International Inc., 10.75% due 6/15/2011 (a) 2,090,000
B+ B1 500,000 OMI Corporation, 7.625% due 12/01/2013 (a) 502,500
Teekay Shipping Corporation:
BB+ Ba1 775,000 8.32% due 2/01/2008 833,125
BB- Ba2 2,325,000 8.875% due 7/15/2011 2,638,875
-----------
7,579,875
=================================================================================================================================
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 11
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Utility--12.1% The AES Corporation:
B- B3 $1,558,000 9.375% due 9/15/2010 $ 1,659,270
B+ B2 2,100,000 8.75% due 5/15/2013 (a) 2,273,250
B+ B2 2,850,000 9% due 5/15/2015 (a) 3,102,937
D C 850,000 AES Drax Energy Ltd., 11.50% due 8/30/2010 (b) 5,312
CCC+ Caa1 5,125,000 Calpine Canada Energy Finance, 8.50% due 5/01/2008 3,792,500
CCC+ Caa1 1,500,000 Calpine Corporation, 8.25% due 8/15/2005 1,402,500
B Caa1 3,875,000 Coastal Corporation, 7.75% due 6/15/2010 3,390,625
BB Ba1 1,372,000 ESI Tractebel Acquisition Corp., 7.99% due 12/30/2011 1,418,305
B- Ba2 825,000 Edison International Inc., 6.875% due 9/15/2004 849,750
BB- Ba2 875,000 MSW Energy Finance Co. II, Inc., 7.375% due 9/01/2010 (a) 901,250
BB Ba1 1,500,000 MSW Energy Holdings, 8.50% due 9/01/2010 (a) 1,616,250
CCC Caa2 4,100,000 Mission Energy Holdings, 13.50% due 7/15/2008 3,751,500
Nevada Power Company:
NR* Ba2 3,300,000 10.875% due 10/15/2009 3,741,375
BB Ba2 600,000 9% due 8/15/2013 (a) 655,500
Northwest Pipeline Corporation:
B+ B1 550,000 6.625% due 12/01/2007 576,125
B+ B1 250,000 8.125% due 3/01/2010 276,875
BB Ba2 1,650,000 Sierra Pacific Power Company, 8% due 6/01/2008 1,751,063
B+ B1 925,000 Southern Natural Gas, 8.875% due 3/15/2010 1,019,813
The Williams Companies, Inc.:
B+ B3 1,975,000 6.50% due 8/01/2006 2,034,250
B+ B3 3,350,000 8.125% due 3/15/2012 3,618,000
------------
37,836,450
=================================================================================================================================
Wireless--6.8% CCC Caa1 3,200,000 American Tower Corporation, 9.375% due 2/01/2009 3,360,000
CCC B3 825,000 American Tower Escrow, 14.887%** due 8/01/2008 565,125
CCC B3 1,275,000 American Towers, Inc., 7.25% due 12/01/2011 (a) 1,278,187
CCC Caa1 2,300,000 Centennial Communications Corp., 10.125% due 6/15/2013 2,426,500
CCC B3 2,800,000 Crown Castle International Corporation, 9.375% due 8/01/2011 3,080,000
B- B3 2,050,000 Millicom International Cellular SA, 10% due 12/01/2013 (a) 2,101,250
CCC+ B3 1,800,000 MobiFon Holdings B.V., 12.50% due 7/31/2010 2,061,000
NR* NR* 2,034,235 NII Holdings Inc., 13.07%** due 11/01/2009 (a) 1,973,208
CC Caa2 2,050,000 SBA Communications Corporation, 10.25% due 2/01/2009 1,880,875
CCC+ B3 925,000 Spectrasite Inc., 8.25% due 5/15/2010 (a) 980,500
CCC Caa2 1,450,000 Western Wireless Corporation, 9.25% due 7/15/2013 1,508,000
------------
21,214,645
=================================================================================================================================
Total Investments in Corporate Bonds
(Cost--$403,209,523)--133.9% 418,974,865
=================================================================================================================================
Shares
Held Common Stocks
=================================================================================================================================
Consumer Products-- 34,173 WKI Holding Co. Inc. (b) 341,730
0.1%
=================================================================================================================================
Total Investments in Common Stocks (Cost--$8,410,000)--0.1% 341,730
=================================================================================================================================
Preferred Stocks
=================================================================================================================================
Automotive--1.2% 128,000 General Motors Corp. 3,600,640
=================================================================================================================================
Utility--1.3% 84,800 Citizens Utilities Trust (5% Convertible) 4,223,040
=================================================================================================================================
Total Investments in Preferred Stocks (Cost--$7,456,532)--2.5% 7,823,680
=================================================================================================================================
12 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Schedule of Investments (concluded) (in U.S. dollars)
Shares
Industry+ Held Warrants (f) Value
===============================================================================================================================
Packaging--0.0% 4,000 Pliant Corporation $ 480
===============================================================================================================================
Paper--0.0% 700 MDP Acquisitions PLC 5,600
===============================================================================================================================
Wireless--0.0% 825 American Tower Corporation 105,600
32,981 Loral Space & Communications Ltd. 989
------------
106,589
===============================================================================================================================
Total Investments in Warrants (Cost--$112,171)--0.0% 112,669
===============================================================================================================================
Beneficial
Interest Short-Term Securities
===============================================================================================================================
$6,891,458 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (g) 6,891,458
===============================================================================================================================
Total Investments in Short-Term Securities
(Cost--$6,891,458)--2.2% 6,891,458
===============================================================================================================================
Total Investments (Cost--$426,079,684)--138.7% 434,144,402
Unrealized Appreciation on Swaps***--0.0% 51,420
Liabilities in Excess of Other Assets--(38.7%) (121,280,087)
------------
Net Assets--100.0% $312,915,735
============
+ For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease.
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
*** Swaps entered into as of November 30, 2003 were as follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Receive a variable rate return equal to
1-month USD LIBOR and pay a fixed
rate of 1.56%
Broker, UBS Warburg
Expires June 2005 $30,000,000 $51,420
--------------------------------------------------------------------------
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) Non-income producing security.
(c) Floating rate corporate debt in which the Fund invests generally pay
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. These base lending rates are generally
(i) the lending rate offered by one or more major European banks, such as
LIBOR (London Inter-Bank Offered Rate), (ii) the prime rate offered by one
or more major United States banks or (iii) the certificate of deposit
rate. Floating rate corporate debt is generally considered to be
restricted in that the Fund ordinarily is contractually obligated to
receive approval from the agent bank and/or borrower prior to its
disposition. Corporate loans represent 0.6% of the Fund's net assets.
(d) Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $4,702,000, representing 1.5% of
net assets.
--------------------------------------------------------------------------
Acquisition
Issue Dates Cost Value
--------------------------------------------------------------------------
Diamond Holdings PLC, 1/30/1998 -
9.125% due 2/01/2008 9/11/2003 $3,436,327 $3,536,250
HMP Equity Holdings
Corporation, 14.909% 4/30/2003 -
due 5/15/2008 5/07/2003 1,158,209 1,166,000
--------------------------------------------------------------------------
Total $4,594,536 $4,702,250
===========================
(e) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(f) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(g) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2 (a)(3) of the
Investment Company Act of 1940) are as follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $6,891,458 $4,643
--------------------------------------------------------------------------
(h) Fund Asset Management, L.P. ("FAM"), the Investment Adviser to the Fund,
is in the process of attempting to have the MDP Acquisitions PLC security
registered for resale under the Securities Act of 1933. To the extent that
it is not successful in registering the security for resale, FAM may have
an obligation to the Fund for the difference in value, if any, between
the unregistered security held by the Fund and the same security of the
issuer that has been registered for resale.
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 13
[LOGO] Merrill Lynch Investment Managers
Statement of Assets, Liabilities and Capital
As of November 30, 2003
=========================================================================================================================
Assets
-------------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$426,079,684) ............. $ 434,144,402
Due from broker on swaps .......................................... 51,420
Receivables:
Interest ....................................................... $ 10,014,269
Securities sold ................................................ 1,829,740 11,844,009
-------------
Prepaid expenses and other assets ................................. 65,811
-------------
Total assets ...................................................... 446,105,642
-------------
=========================================================================================================================
Liabilities
-------------------------------------------------------------------------------------------------------------------------
Loans ............................................................. 123,600,000
Payables:
Securities purchased ........................................... 7,091,458
Custodian bank ................................................. 1,888,246
Dividends to shareholders ...................................... 300,107
Investment adviser ............................................. 201,100
Interest on loans .............................................. 31,534
Other affiliates ............................................... 2,679 9,515,124
-------------
Accrued expenses .................................................. 74,783
-------------
Total liabilities ................................................. 133,189,907
-------------
=========================================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------------------------
Net Assets ........................................................ $ 312,915,735
=============
=========================================================================================================================
Capital
-------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 200,000,000 shares authorized ....... $ 3,708,144
Paid-in capital in excess of par .................................. 538,743,313
Undistributed investment income--net .............................. $ 5,938,734
Accumulated realized capital losses on investments--net ........... (243,590,594)
Unrealized appreciation on investments--net ....................... 8,116,138
-------------
Total accumulated losses--net ..................................... (229,535,722)
-------------
Total--Equivalent to $8.44 per share based on 37,081,438
shares of capital stock outstanding (market price--$8.35) ....... $ 312,915,735
=============
See Notes to Financial Statements.
14 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Statement of Operations
For the Six Months Ended November 30, 2003
=========================================================================================================================
Investment Income
-------------------------------------------------------------------------------------------------------------------------
Interest .......................................................... $ 18,375,881
Interest on swaps ................................................. 112,511
Other ............................................................. 65,397
-------------
Total income ...................................................... 18,553,789
-------------
=========================================================================================================================
Expenses
-------------------------------------------------------------------------------------------------------------------------
Investment advisory fees .......................................... $ 1,221,976
Loan interest expense ............................................. 760,271
Borrowing costs ................................................... 80,819
Accounting services ............................................... 53,425
Professional fees ................................................. 43,247
Transfer agent fees ............................................... 29,590
Printing and shareholder reports .................................. 20,126
Listing fees ...................................................... 15,452
Pricing services .................................................. 15,262
Custodian fees .................................................... 14,459
Directors' fees and expenses ...................................... 7,837
Other ............................................................. 12,046
-------------
Total expenses .................................................... 2,274,510
-------------
Investment income--net ............................................ 16,279,279
-------------
=========================================================================================================================
Realized & Unrealized Gain on Investments--Net
-------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ................................. 4,749,177
Change in unrealized appreciation/depreciation on investments--net 16,729,062
-------------
Total realized and unrealized gain on investments--net ............ 21,478,239
-------------
Net Increase in Net Assets Resulting from Operations .............. $ 37,757,518
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 15
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
November 30, May 31,
Increase (Decrease) in Net Assets: 2003 2003
=========================================================================================================================
Operations
-------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ $ 16,279,279 $ 33,621,413
Realized gain (loss) on investments--net .......................... 4,749,177 (54,338,746)
Change in unrealized appreciation/depreciation on investments--net 16,729,062 61,048,097
-------------------------------
Net increase in net assets resulting from operations .............. 37,757,518 40,330,764
-------------------------------
=========================================================================================================================
Dividends to Shareholders
-------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income--net ............. (16,182,063) (33,386,856)
-------------------------------
=========================================================================================================================
Capital Stock Transactions
-------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in reinvestment
of dividends .................................................... 1,520,511 3,503,982
-------------------------------
=========================================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ...................................... 23,095,966 10,447,890
Beginning of period ............................................... 289,819,769 279,371,879
-------------------------------
End of period* .................................................... $ 312,915,735 $ 289,819,769
===============================
* Undistributed investment income--net ......................... $ 5,938,734 $ 5,841,518
===============================
See Notes to Financial Statements.
16 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Statement of Cash Flows
For the Six Months Ended November 30, 2003
=======================================================================================================
Cash Used for Operating Activities
-------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations .......... $ 37,757,518
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Increase in receivables .................................... (265,612)
Decrease in prepaid expenses and other assets .............. 26,588
Increase in other liabilities .............................. 1,964,531
Realized and unrealized gain on investments--net ........... (21,478,239)
Amortization of discount ................................... (1,437,768)
Proceeds from sales and paydowns of long-term investments ..... 158,300,702
Purchases of long-term investments ............................ (179,226,852)
Purchases of short-term investments--net ...................... (6,891,458)
Cash receipts from borrowings ................................. 101,700,000
Cash payments on borrowings ................................... (76,900,000)
Dividends paid to shareholders ................................ (14,361,491)
-------------
Net cash used for operating activities ........................ (812,081)
-------------
=======================================================================================================
Cash
-------------------------------------------------------------------------------------------------------
Net decrease in cash .......................................... (812,081)
Cash at beginning of period ................................... 812,081
-------------
Cash at end of period ......................................... $ --
=============
=======================================================================================================
Cash Flow Information
-------------------------------------------------------------------------------------------------------
Cash paid for interest ........................................ $ 762,892
=============
=======================================================================================================
Non-Cash Financing Activities
-------------------------------------------------------------------------------------------------------
Reinvestment of dividends paid to shareholders ................ $ 1,520,511
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 17
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended For the Year Ended May 31,
November 30, -------------------------------------------------
Increase (Decrease) in Net Asset Value: 2003 2003 2002 2001 2000
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ....... $ 7.86 $ 7.68 $ 9.11 $ 10.65 $ 12.98
----------------------------------------------------------------
Investment income--net** ................... .44 .92 1.15 1.31 1.46
Realized and unrealized gain (loss) on
investments--net ......................... .58 .17 (1.47) (1.48) (2.30)
----------------------------------------------------------------
Total from investment operations ........... 1.02 1.09 (.32) (.17) (.84)
----------------------------------------------------------------
Less dividends from investment income--net . (.44) (.91) (1.11) (1.37) (1.49)
----------------------------------------------------------------
Capital charge resulting from issuance of
Common Stock ............................. -- -- -- -- --+
----------------------------------------------------------------
Net asset value, end of period ............. $ 8.44 $ 7.86 $ 7.68 $ 9.11 $ 10.65
================================================================
Market price per share, end of period ...... $ 8.35 $ 8.36 $ 8.22 $ 9.38 $10.1875
================================================================
==================================================================================================================================
Total Investment Return***
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ......... 14.32%@ 16.46% (3.13%) (1.44%) (6.06%)
================================================================
Based on market price per share ............ 6.33%@ 15.73% .59% 6.21% (8.96%)
================================================================
==================================================================================================================================
Ratios to Average Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense ....... 1.02%* 1.04% 1.10% 1.00% .97%
================================================================
Expenses ................................... 1.53%* 1.59% 2.14% 3.47% 3.07%
================================================================
Investment income--net ..................... 10.93%* 13.35% 14.37% 13.26% 12.13%
================================================================
==================================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings outstanding, end of
period (in thousands) .................... $123,600 $ 98,800 $ 84,900 $109,700 $137,400
================================================================
Average amount of borrowings outstanding
during the period (in thousands) ......... $109,762 $ 75,558 $ 98,924 $132,070 $146,410
================================================================
Average amount of borrowings outstanding per
share during the period .................. $ 2.96 $ 2.07 $ 2.75 $ 3.73 $ 4.16
================================================================
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ... $312,916 $289,820 $279,372 $325,000 $375,465
================================================================
Portfolio turnover ...................... 37.62% 76.61% 65.44% 46.99% 45.40%
================================================================
+ Amount is less than $.01 per share.
@ Aggregate total investment return.
* Annualized.
** Based on average shares outstanding.
*** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
18 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Notes to Financial Statements
1. Significant Accounting Policies:
Corporate High Yield Fund III, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America, which may require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal, recurring
nature. The Fund determines and makes available for publication the net asset
value of its Common Stock on a weekly basis. The Fund's Common Stock is listed
on the New York Stock Exchange ("NYSE") under the symbol CYE. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available ask
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the NYSE. The values of such securities
used in computing the net asset value of the Fund's shares are determined as of
such times. Foreign currency exchange rates also are generally determined prior
to the close of business on the NYSE. Occasionally, events affecting the values
of such securities and such exchange rates may occur between the times at which
they are determined and the close of business on the NYSE that may not be
reflected in the computation of the Fund's net asset value. If events (for
example, a company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined in
good faith by the Fund's Board of Directors or by the Investment Adviser using a
pricing service and/or procedures approved by the Fund's Board of Directors.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 19
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Options -- The Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market
value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added
to (or deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option expires
(or the Fund enters into a closing transaction), the Fund realizes a gain
or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized 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.
o Swaps -- The Fund may enter into swap agreements, which are
over-the-counter contracts in which the Fund and a counterparty agree to
make periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by a
pre-determined credit event. The net periodic payments may be based on a
fixed or variable interest rate; the change in market value of a specified
security, basket of securities, or index; or the return generated by a
security.
(c) Income taxes -- 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 income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is
20 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Notes to Financial Statements (continued)
required to return borrowed securities within five business days. The Fund may
pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
(g) Custodian bank -- The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft, which resulted from management estimates of
available cash.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operation of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .60% of the Fund's average weekly net assets plus the proceeds
of any outstanding principal borrowed. FAM has entered into a Sub-Advisory
Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
affiliate of FAM, pursuant to which MLAM U.K. provides investment advisory
services to FAM with respect to the Fund. There is no increase in the aggregate
fees paid by the Fund for these services.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by FAM
or its affiliates.
In addition, MLPF&S received $4,500 in commissions on the execution of portfolio
security transactions for the Fund for the six months ended November 30, 2003.
For the six months ended November 30, 2003, the Fund reimbursed FAM $3,094 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, MLAM U.K., and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended November 30, 2003 were $178,493,120 and $150,841,742, respectively.
Net realized gains for the six months ended November 30, 2003 and net unrealized
gains as of November 30, 2003 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
--------------------------------------------------------------------------------
Long-term investments .................. $4,749,177 $8,064,718
Swaps .................................. -- 51,420
------------------------------
Total .................................. $4,749,177 $8,116,138
==============================
As of November 30, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $10,071,052, of which $35,659,551 related to appreciated
securities and $25,588,499 related to depreciated securities. The aggregate cost
of investments at November 30, 2003 for Federal income tax purposes was
$424,073,350.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued shares
of capital stock without approval of the holders of Common Stock.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 21
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
Shares issued and outstanding during the six months ended November 30, 2003 and
for the year ended May 31, 2003 increased by 187,977 and 496,500, respectively,
as a result of dividend reinvestment.
5. Short-Term Borrowings:
On May 28, 2003, the Fund entered into a $160,000,000 revolving credit and
security agreement with Citibank, N.A. and other lenders (the "Lenders"). Under
the revolving credit and security agreement, the Fund may borrow money through
(i) a line of credit from certain Lenders at the Eurodollar rate plus .75% or
the highest of the Federal Funds rate plus .50%, a base rate as determined by
Citibank, N.A. and/or the latest three-week moving average of secondary market
morning offering rates in the United States for three-month certificates of
deposit of major United States money market banks plus .50%, or (ii) the
issuance of commercial paper notes by certain Lenders at rates of interest based
upon the weighted average of the per annum rates paid or payable by such Lenders
in respect of those commercial paper notes. As security for its obligations to
the Lenders under the revolving credit and security agreement, the Fund has
granted a security interest in substantially all of its assets to and in favor
of the Lenders.
For the six months ended November 30, 2003, the average amount borrowed was
approximately $109,762,000 and the daily weighted average interest rate was
1.39%.
6. Capital Loss Carryforward:
On May 31, 2003, the Fund had a net capital loss carryforward of $235,005,228,
of which $6,419,421 expires in 2007, $21,954,305 expires in 2008, $34,200,029
expires in 2009, $52,918,036 expires in 2010 and $119,513,437 expires in 2011.
This amount will be available to offset like amounts of any future taxable
gains.
7. Subsequent Event:
The Fund paid an ordinary income dividend in the amount of $.075200 per share on
December 22, 2003 to shareholders of record on December 9, 2003.
Officers and Directors
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
B. Daniel Evans, Vice President
Elizabeth M. Phillips, Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
NYSE Symbol
CYE
22 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003
Portfolio Information
Percent of
As of November 30, 2003 Total Assets
===============================================================================================================
Top Ten Holdings*
---------------------------------------------------------------------------------------------------------------
NTL Incorporated NTL provides communications services to residential, business
and wholesale customers. The company offers residential
telephony, cable television and Internet access services. 1.8%
---------------------------------------------------------------------------------------------------------------
Qwest* Qwest provides a broad range of telecommunications services,
including broadband Internet-based data, voice and image
communication, local exchange services, and data and
long-distance services to residential and business customers.
The company also provides Web hosting, high-speed Internet
access and private networks. 1.8
---------------------------------------------------------------------------------------------------------------
The AES Corporation* AES is a worldwide power producer with operations in the United
States, Europe, Latin America and Asia. Electricity generation
and sales are primarily to wholesale customers, although the
company has a direct distribution business to end users. 1.6
---------------------------------------------------------------------------------------------------------------
The Williams Companies, Inc.* Williams is involved in a number of energy-related businesses.
Activities include transport and storage of natural gas and
other petroleum products, as well as oil and gas exploration and
production. The company is also a refiner of petroleum products
and trades energy and related commodities. 1.5
---------------------------------------------------------------------------------------------------------------
Sierra Pacific Resources* Sierra Pacific Resources is the holding company for two
utilities, Nevada Power Company and Sierra Pacific Power
Company. Both utilities primarily serve the state of Nevada. 1.4
---------------------------------------------------------------------------------------------------------------
Tyco International Group SA* Tyco is a diversified manufacturing and service company with a
global footprint. The company's businesses include electrical
and electronics components, undersea telecommunications systems,
fire protection and security systems, flow control products,
health care products and specialty products. 1.4
---------------------------------------------------------------------------------------------------------------
Vivendi Universal* Vivendi is a diversified media company. The company records and
publishes music, produces and distributes television programming
and movies, publishes interactive games and offers
communications services. 1.3
---------------------------------------------------------------------------------------------------------------
Cablevision Systems Corporation* Cablevision Systems New York Group provides telecommunications
and entertainment services. The company has operations in
multimedia delivery, subscription cable television services,
championship professional sports teams and national television
program networks. Cablevision serves cable customers primarily
in the New York metropolitan area. 1.3
---------------------------------------------------------------------------------------------------------------
American Tower Corporation* American Tower owns and operates wireless communications and
broadcast towers in the United States. The company leases
antenna sites on these towers to a range of wireless
communications companies, including those offering cellular
telephone, paging and personal communications services. 1.2
---------------------------------------------------------------------------------------------------------------
Calpine Corporation* Calpine owns, develops and operates power generation facilities,
in addition to selling electricity in the United States. The
company also provides thermal energy for industrial customers. 1.2
---------------------------------------------------------------------------------------------------------------
* Includes combined holdings and/or affiliates, where applicable.
Portfolio Profile
Quality Ratings by Percent of
Standard & Poor's Long-Term Investments
--------------------------------------------------------------------------------
BBB .................................................................... 3%
BB ..................................................................... 23
B ...................................................................... 52
CCC .................................................................... 20
NR (Not Rated) ......................................................... 2
--------------------------------------------------------------------------------
Percent of
Five Largest Industries* Long-Term Investments
--------------------------------------------------------------------------------
Utility ................................................................ 9.8%
Chemicals .............................................................. 7.3
Cable U.S. ............................................................. 5.9
Diversified Media ...................................................... 5.5
Gaming ................................................................. 5.4
--------------------------------------------------------------------------------
* For Fund compliance purposes, "Industries" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease.
Percent of
Five Largest Foreign Countries* Long-Term Investments
--------------------------------------------------------------------------------
Canada ................................................................. 4.5%
Bahamas ................................................................ 2.2
Luxembourg ............................................................. 1.8
Bermuda ................................................................ 1.6
United Kingdom ......................................................... 1.6
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
Percent of
Foreign Holdings* Long-Term Investments
--------------------------------------------------------------------------------
Total Foreign Holdings ................................................. 16.6%
Emerging Markets Holdings .............................................. 0
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2003 23
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Corporate High Yield Fund III, Inc. seeks to provide shareholders with current
income by investing primarily in a diversified portfolio of fixed income
securities that are rated in the lower rating categories of the established
rating services (Ba or lower by Moody's Investors Service, Inc. or BB or lower
by Standard & Poor's Corporation) or are unrated securities of comparable
quality.
This report, including the financial information herein, is transmitted to
shareholders of Corporate High Yield Fund III, Inc. for their information. It is
not a prospectus. The Fund has leveraged its Common Stock to provide Common
Stock shareholders with a potentially higher rate of return. Leverage creates
risk for Common Stock shareholders, including the likelihood of greater
volatility of net asset value and market price of Common Stock shares, and the
risk that fluctuations in short-term interest rates may reduce the Common
Stock's yield. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
website at http://www.sec.gov.
Corporate High Yield Fund III, Inc.
Box 9011
Princeton, NJ
08543-9011
#COYIII -- 11/03
Item 2 - Did registrant adopt a code of ethics, as of the end of the period
covered by this report, that applies to the registrant's 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 registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request-- N/A (annual requirement only)
Item 3 - Did the registrant's board of directors determine that the registrant
either: (i) has at least one audit committee financial expert serving
on its audit committee; or (ii) does not have an audit committee
financial expert serving on its audit committee? If yes, disclose name
of financial expert and whether he/she is "independent," (fund may, but
is not required, to disclose name/independence of more than one
financial expert) If no, explain why not. - N/A (annual requirement
only)
Item 4 - Disclose annually only (not answered until December 15, 2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last
two fiscal years for professional services rendered by
the principal accountant for the audit of the
registrant's annual financial statements or services
that are normally provided by the accountant in
connection with statutory and regulatory filings or
engagements for those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the
last two fiscal years for assurance and
related services by the principal accountant
that are reasonably related to the performance
of the audit of the registrant's financial
statements and are not reported under
paragraph (a) of this Item. Registrants shall
describe the nature of the services comprising
the fees disclosed under this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two
fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and
tax planning. Registrants shall describe the nature of
the services comprising the fees disclosed under this
category. N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the last
two fiscal years for products and services
provided by the principal accountant, other than
the services reported in paragraphs (a) through
(c) of this Item. Registrants shall describe the
nature of the services comprising the fees
disclosed under this category. N/A.
(e)(1) Disclose the audit committee's pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of
Regulation S-X. N/A.
(e)(2) Disclose the percentage of services described in each of
paragraphs (b) through (d) of this Item that were approved by
the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended on
the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for each
of the last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence. N/A.
Item 5 - If the registrant is a listed issuer as defined in Rule 10A-3 under the
Exchange Act, state whether or not the registrant has a
separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. If the
registrant has such a committee, however designated, identify each
committee member. If the entire board of directors is acting as the
registrant's audit committee in Section 3(a)(58)(B) of the Exchange
Act, so state.
If applicable, provide the disclosure required by Rule 10A-3(d) under
the Exchange Act regarding an exemption from the listing standards for
audit committees. N/A
(Listed issuers must be in compliance with the new listing rules by the
earlier of their first annual shareholders meeting after January 2004,
or October 31, 2004 (annual requirement))
Item 6 - Reserved
Item 7 - For closed-end funds that contain voting securities in their portfolio,
describe the policies and procedures that it uses to determine how to
vote proxies relating to those portfolio securities.
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers
the interests of its clients, including the Funds, and not the
interests of the Investment Adviser, when voting proxies and that real
(or perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 -- Reserved
Item 9(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
Item 9(b) -- There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon request
without charge. N/A.
10(b) - Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
Attached hereto.
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.
Corporate High Yield Fund III, Inc.
By: /s/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Corporate High Yield Fund III, Inc.
Date: January 21, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
By: /s/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Corporate High Yield Fund III, Inc.
Date: January 21, 2004
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Corporate High Yield Fund III, Inc.
Date: January 21, 2004
Attached hereto as a furnished exhibit are the certifications pursuant
to Section 906 of the Sarbanes-Oxley Act.