CORPORATE
HIGH YIELD
FUND III, INC.
STRATEGIC
Performance
[GRAPHIC OMITTED]
Annual Report
May 31, 1998
<PAGE>
CORPORATE HIGH YIELD FUND III, INC.
The Benefits and Risks of Leveraging
Corporate High Yield Fund III, Inc. has the ability to utilize leverage 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 return 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 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. In this case, the
Fund may nevertheless decide to maintain its leveraged position in order to
avoid capital losses on securities purchased with leverage. However, the Fund
will not generally utilize leverage if it anticipates that its leveraged capital
structure would result in a lower rate of return for its Common Stock than would
be obtained if the Common Stock were unleveraged for any significant amount of
time.
Portfolio Profile
As of May 31, 1998
The quality ratings* of securities in the Fund as of May 31, 1998 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Long-Term Investments
- --------------------------------------------------------------------------------
BBB/Baa........................................................... 5.7%
BB/Ba............................................................. 30.7
B/B............................................................... 55.4
CCC/Caa........................................................... 4.0
NR (Not Rated).................................................... 4.2
- --------------------------------------------------------------------------------
* In cases where bonds are rated differently by Standard & Poor's Corp. and
Moody's Investors Service, Inc., bonds are categorized according to the
higher of the two ratings.
Percent of Total
Foreign Holdings Long-Term Investments
- --------------------------------------------------------------------------------
Total Foreign Holdings............................................ 27.2%
Emerging Markets Holdings......................................... 13.5
- --------------------------------------------------------------------------------
Percent of Total
Five Largest Foreign Countries* Long-Term Investments
- --------------------------------------------------------------------------------
Argentina......................................................... 5.2%
Brazil............................................................ 3.8
Canada............................................................ 3.6
United Kingdom.................................................... 2.8
Bermuda........................................................... 2.2
- --------------------------------------------------------------------------------
* All holdings are denominated in US dollars.
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1998
DEAR SHAREHOLDER
We are pleased to provide you with the first shareholder report for Corporate
High Yield Fund III, Inc. The Fund seeks 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 or are unrated
securities of comparable quality. In this and future reports to shareholders, we
will provide information on the Fund's performance, discuss our investment
strategies and highlight some of the Fund's holdings.
High-Yield Market Overview
The high-yield market entered 1998 on a note of optimism. As the year
progressed, a heavy new-issue calendar and a move by fixed-income investors
toward the perceived safety of the US Treasury market dampened returns and
widened yield spreads. Benefiting from larger coupon payments, the high-yield
market, as measured by the unmanaged CS First Boston High Yield Index, returned
+2.33% despite sagging bond prices since the Fund's inception (January 30, 1998)
through May 31, 1998. By comparison, the ten-year Treasury bond returned +0.74%
during the same period, despite a +2.10% return in May. The yield spread between
ten-year Treasury securities and the high-yield market widened to 395 basis
points (3.95%) by May 31, 1998 from 384 basis points on January 31, 1998. This
modest yield spread widening masks a tightening of spreads that began the week
following the Fund's inception and that persisted through the middle of May. The
high-yield market reached tight spreads near 360 basis points in February, March
and April, before widening to current levels.
New-issue supply for the 12 months ended May 31, 1998 totaled nearly $90 billion
as compared to $42 billion for the previous year, continuing the acceleration in
new-issue volume that has led to a near doubling of the high-yield market since
1993. The abundance of new issues caused purchasers to be more selective and to
demand better pricing. Reassessment of relative value led to lower prices and
increasing yields throughout the high-yield market. Toward the middle of May,
investors became concerned about the Asian economic turmoil and its potentially
adverse effect on corporate profits. Investors fled higher risk fixed-income
instruments, including bonds of both high-yield and emerging markets issuers,
for the safer haven of the US Treasury market.
Though changes in investor sentiment and an ample supply of new issues may lead
to a choppy market, we believe that current spreads offer a reasonable risk
premium for high-yield bonds relative to Treasury securities and represent a
good investment value. Fundamentals for the high-yield market have remained
favorable. Many companies have acted to shore up balance sheets in recent years
through debt repayment and equity issuance and are better able to withstand an
earnings shortfall. Cash continues to enter the high-yield market, providing an
ongoing level of demand that tends to support prices.
Fund Performance
Since inception (January 30, 1998) through May 31, 1998, total investment return
on the Fund's Common Stock was +2.00%, based on a change in the per share net
asset value from $15.00 to $14.99, and assuming reinvestment of $0.296 per share
income dividends. During the same period, the net annualized yield of the Fund's
Common Stock was 8.26%. Performance for the period reflects the Fund's initial
investment process. The Fund was fully invested, but not yet leveraged, by May
31, 1998.
Leverage Strategy
We commenced the leveraging process with bank borrowings in mid-June. Based on
the current market, we plan to leverage the Fund 15%-20%. Leveraging at 15%
means that we will have borrowed from the banks an amount equal to 15% of total
assets, including those assets acquired with the borrowed funds. Depending on
market conditions, we foresee reaching our anticipated leverage over the next
two months-three months. We expect to be able to earn incremental income based
on the spread between the borrowing cost and the interest paid on our
investments. Leverage can add volatility to the Fund's returns and net asset
value, heightening upside potential in strong markets and accentuating losses in
weak markets. (For a complete explanation of the benefits and risks of
leveraging, see page 1 of this report to shareholders.)
Investment Strategy
During the Fund's initial investment phase, we attempted to select a variety of
investments that balance high current yield with total return potential. We
purchased, and still hold, a variety of higher-quality, high current yield bonds
that, in our opinion, are likely to have limited volatility. Among these issues
are B-rated First Nationwide Holdings Inc., 12.50% due 2003 and Midland
Cogeneration Venture Limited Partnership, 10.33% due 2002, split BB/B-rated Sea
Containers Ltd., 12.50% due 2004 and BB-rated Reliance Group Holdings Inc.,
9.75% due 2003. To seek to enhance total return, we also purchased some
out-of-favor names such as B-rated oriented strand board producer Ainsworth
Lumber Company at a 12.50% yield and unrated television broadcaster ACME
Intermediate Holdings/Finance zero coupon bonds at a 12.28% yield. Both bonds
have appreciated since our purchase.
Still in the total return category, but with value to be realized over a longer
time horizon, are bonds of issuers in emerging markets, such as CSN Iron S.A.
and media conglomerate Globo Comunicacoes Partcipacoes, Ltd. in Brazil, and
Mexican shipping company Transportacion Maritima Mexicana S.A. These will
clearly be a volatile element in the portfolio as these bonds react to the
unsettled conditions in emerging markets, particularly now in Asia. However, we
have attempted to invest in companies with strong financial profiles and/or
solid market positions that we believe have good staying power over the long
term.
We found value in the new-issue market, as the large volume of new issues pushed
up yields and widened spreads in this sector of the market. A significant
portion of the new-issue market was in the communications and telephony sector.
We made selective purchases in that sector, including Level 3 Communications
Corp., an internet telecommunications provider with an $8.5 billion equity
market capitalization, and Intermedia Communications Inc., a competitor to the
local telephone companies with a $1.7 billion equity market capitalization.
However, we avoided companies that we believe have serious competitive threats
or the potential for inadequate financing to fund their investment plans.
Portfolio Characteristics
Communications and media was our largest broad industry category, totaling
nearly 21% of total long-term investments. Of the narrowly classified sectors,
the largest allocations were: financial services, 8.0% of net assets;
transportation, 7.1%; utilities, 4.9%; energy, 4.9%; and wireless
communications--domestic paging & cellular, 4.6%. Non-US bonds totaled near 27%
of the portfolio, with emerging market issues accounting for about 14% of net
assets. See the foreign holdings table on page 1 of this report for the
distribution of dollar-denominated, non-US, investments in the portfolio. At May
31, 1998, the average maturity for the portfolio was 8 years, and the average
rating was B.
In Conclusion
We thank you for your investment in Corporate High Yield Fund III, Inc., and we
look forward to assisting you with your financial needs in the months and years
ahead.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent T. Lathbury III
Vincent T. Lathbury III
Senior Vice President
and Portfolio Manager
/s/ Elizabeth M. Phillips
Elizabeth M. Phillips
Vice President and Portfolio Manager
June 29, 1998
2 & 3
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Automotive--1.0% B+ B3 $5,000,000 Breed Technologies, Inc., 9.25% due
4/15/2008 (c) $ 5,000,000 $ 5,050,000
====================================================================================================================================
Broadcasting--Radio CCC NR* 5,000,000 ACME Intermediate Holdings/Finance,
& Television--2.5% 12.28%** due 9/30/2005 2,983,448 3,150,000
B- B2 5,000,000 LIN Television Corp., 8.375% due
3/01/2008 (c) 4,988,300 4,987,500
B B2 5,000,000 Sinclair Broadcasting Group Inc.,
8.75% due 12/15/2007 5,175,000 5,062,500
------------ ------------
13,146,748 13,200,000
====================================================================================================================================
Building BB Ba3 7,000,000 Building Materials Holding Corp.,
Materials--1.6% 9.475%** due 7/01/2004 6,796,306 6,685,000
NR* B2 1,500,000 International Comfort Products
Corp., 9.75% due 3/01/2000 1,526,250 1,528,125
------------ ------------
8,322,556 8,213,125
====================================================================================================================================
Cable-- B- B2 5,000,000 Comcast UK Cable Partners Ltd.,
International--3.6% 9.775%** due 11/15/2007 4,213,974 4,112,500
B- Caa1 1,500,000 Diamond Cable Communications PLC,
10.839%** due 9/30/2004 1,397,322 1,402,500
B- B3 4,000,000 Diamond Holdings PLC, 9.125% due
2/01/2008 (c) 4,000,000 4,100,000
B- B3 7,500,000 NTL Inc., 9.085%** due 4/01/2008 (c) 5,006,018 4,837,500
B B3 6,750,000 United International Holdings, Inc.,
10.75%** due 2/15/2008 4,121,841 4,227,187
------------ ------------
18,739,155 18,679,687
====================================================================================================================================
Chemicals-- BB- Ba3 7,000,000 ISP Holdings Inc., 9.75% due
2.2% 2/15/2002 7,498,750 7,402,500
B+ B2 4,250,000 Octel Development PLC, 10% due
5/01/2006 (c) 4,250,000 4,345,625
------------ ------------
11,748,750 11,748,125
====================================================================================================================================
Computer Services/ B Ba3 5,000,000 Advanced Micro Devices, Inc., 11%
Electronics--7.4% due 8/01/2003 5,355,625 5,350,000
B B2 2,000,000 Celestica International Inc., 10.50%
due 12/31/2006 2,185,000 2,190,000
B B2 5,000,000 Hadco Corp., 9.50% due 6/15/2008 (c) 4,983,000 5,043,750
B- B3 4,000,000 MCMS Inc., 9.75% due 3/01/2008 (c) 4,000,000 3,940,000
B- B3 5,000,000 PSINet Inc., 10% due 2/15/2005 (c) 5,000,000 5,087,500
BB- Ba3 6,000,000 UNISYS Corporation, 11.75% due
10/15/2004 7,011,200 6,930,000
B- NR* 4,000,000 Verio Inc., 10.375% due 4/01/2005 (c) 4,000,000 4,160,000
B B2 7,250,000 Zilog, Inc., 9.50% due 3/01/2005 (c) 6,846,250 5,981,250
------------ ------------
39,381,075 38,682,500
====================================================================================================================================
Conglomerates-- B- B3 5,000,000 Eagle-Picher Industries, 9.375% due
3.0% 3/01/2008 (c) 4,991,800 5,050,000
BB Ba2 6,000,000 Sequa Corp., 8.75% due 12/15/2001 6,157,500 6,135,000
BB- NR* 5,000,000 Voto-Votorantim Overseas Trading
Operations N.V., 8.50% due 6/27/2005 (c) 4,765,625 4,506,250
------------ ------------
15,914,925 15,691,250
====================================================================================================================================
Consumer Products-- B- B2 4,000,000 Chattem Inc., 8.875% due 4/01/2008
2.5% (c) 4,000,000 3,980,000
B B2 3,000,000 Revlon Consumer Products Corp.,
9.50% due 6/01/1999 3,090,000 3,075,000
B- B3 6,500,000 Syratech Corp., 11% due 4/15/2007 5,397,500 5,850,000
------------ ------------
12,487,500 12,905,000
====================================================================================================================================
Energy--4.9% B+ B1 4,000,000 Chesapeake Energy Corp., 9.625% due
5/01/2005 (c) 4,000,000 4,005,000
B B1 7,000,000 KCS Energy Inc., 11% due 1/15/2003 7,726,250 7,577,500
B+ B1 5,000,000 Parker Drilling Co., 9.75% due
11/15/2006 (c) 5,191,650 5,250,000
B+ B2 3,000,000 Pool Energy Services Co., 8.625% due
4/01/2008 (c) 3,000,000 2,962,500
NR* B3 7,000,000 TransAmerican Energy Corp.,
13.145%** due 6/15/2002 6,115,524 5,810,000
------------ ------------
26,033,424 25,605,000
====================================================================================================================================
Entertainment--1.0% B- B3 5,000,000 Premier Parks, Inc., 9.25% due
4/01/2006 5,000,000 5,075,000
====================================================================================================================================
Financial Services-- B B2 4,750,000 AMRESCO, Inc., 9.875% due 3/15/2005 4,750,000 4,868,750
8.0% First Nationwide Holdings Inc.:
BB- Ba2 2,000,000 12.25% due 5/15/2001 2,227,500 2,190,000
B B3 5,000,000 12.50% due 4/15/2003 5,737,500 5,650,000
BB+ Baa2 4,000,000 Fuji JGB Investments LLC
(Preferred), 9.87% (b)(c) 4,000,000 3,470,000
NR* Baa2 4,000,000 IBJ Preferred Capital Co. LLC, 8.79%
(b)(c) 3,957,500 3,525,000
Reliance Group Holdings Inc.:
BB+ Ba1 1,500,000 9% due 11/15/2000 1,582,500 1,567,800
BB- Ba2 8,500,000 9.75% due 11/15/2003 8,956,875 8,901,115
BBB- Baa1 4,000,000 SB Treasury Company LLC, 9.40% (b)(c) 4,000,000 3,880,000
BB- NR* 5,000,000 Veritas Capital Trust, 10% due
1/01/2028 (c) 5,312,500 5,250,000
BB NR* 2,300,000 Veritas Holdings GMBH, 9.625% due
12/15/2003 2,501,250 2,438,000
------------ ------------
43,025,625 41,740,665
====================================================================================================================================
Food & Beverage-- BB+ Ba3 7,000,000 Keebler Corp., 10.75% due 7/01/2006 8,023,750 7,962,500
1.5%
====================================================================================================================================
Furniture--1.5% B B1 7,000,000 Lifestyle Furnishings International,
10.875% due 8/01/2006 7,883,750 7,805,000
====================================================================================================================================
Gaming--3.6% BB Ba2 5,000,000 Empress River Casino Finance, 10.75%
due 4/01/2002 5,446,875 5,412,500
CCC+ B2 5,000,000 Planet Hollywood International,
Inc., 12% due 4/01/2005 (c) 5,000,000 4,812,500
CCC+ Caa1 9,000,000 Venetian Casino Resort LLC, 10% due
11/15/2005 (c) 8,377,222 8,460,000
------------ ------------
18,824,097 18,685,000
====================================================================================================================================
Health Services-- Columbia/HCA Healthcare Corp.:
2.8% BBB Ba2 2,500,000 6.41% due 6/15/2000 2,442,950 2,443,200
BBB Ba2 2,000,000 8.85% due 1/01/2007 2,083,120 2,147,540
B- B3 5,000,000 Kinetic Concepts, Inc., 9.625% due
11/01/2007 5,118,750 5,050,000
B- B3 5,000,000 Magellan Health Services, Inc., 9%
due 2/15/2008 (c) 5,000,000 4,937,500
------------ ------------
14,644,820 14,578,240
====================================================================================================================================
Hotels--0.9% B B3 5,000,000 Signature Resorts, Inc., 9.75% due
10/01/2007 5,000,000 4,912,500
====================================================================================================================================
Independent Power Midland Cogeneration Venture Limited
Producers--2.5% Partnership (d):
BB Ba3 3,000,000 10.33% due 7/23/2002 3,247,500 3,239,130
B B2 7,500,000 13.25% due 7/23/2006 9,478,125 9,660,075
------------ ------------
12,725,625 12,899,205
====================================================================================================================================
Industrials--1.9% B B2 5,000,000 Columbus McKinnon Corp., 8.50% due
4/01/2008 (c) 4,986,700 4,937,500
B B3 5,000,000 Neff Corporation, 10.25% due
6/01/2008 (c) 5,000,000 5,012,500
------------ ------------
9,986,700 9,950,000
====================================================================================================================================
</TABLE>
4 & 5
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Media & BB- Ba3 $ 5,000,000 Antenna TV S.A., 9% due 8/01/2007 $ 5,112,500 $ 5,050,000
Communications BB- B1 7,000,000 Globo Comunicacoes Partcipacoes,
International--3.2% Ltd., 10.625% due 12/05/2008 (c) 7,046,000 6,755,000
BB+ Ba3 5,000,000 Multicanal S.A., 10.50% due
4/15/2018 (c) 4,916,500 4,850,000
------------ ------------
17,075,000 16,655,000
====================================================================================================================================
Metals & Mining-- BB Ba2 5,000,000 Great Central Mines Ltd., 8.875% due
4.3% 4/01/2008 (c) 5,000,000 4,962,500
CCC+ B2 7,000,000 Kaiser Aluminum & Chemical Corp.,
12.75% due 2/01/2003 7,460,600 7,481,250
CCC+ B3 5,000,000 Maxxam Group, Inc., 11.25% due
8/01/2003 5,331,250 5,275,000
B- B2 5,000,000 Simcala, Inc., 9.625% due 4/15/2006(c) 5,012,500 5,012,500
------------ ------------
22,804,350 22,731,250
====================================================================================================================================
Paper & Forest CCC+ Caa1 1,000,000 APP International Finance Co.,
Products--2.8% 11.75% due 10/01/2005 877,500 870,000
B B3 6,000,000 Ainsworth Lumber Company, 12.50% due
7/15/2007 (a) 6,030,000 6,196,667
BB Ba3 7,000,000 Malette Inc., 12.25% due 7/15/2004 7,924,000 7,805,000
------------ ------------
14,831,500 14,871,667
====================================================================================================================================
Product Distribution-- B B2 4,000,000 Corporate Express Holdings Inc.,
1.4% 9.625% due 6/01/2008 (c) 4,000,000 4,020,000
B- B3 3,500,000 Nebraska Book Co., 8.75% due
2/15/2008 (c) 3,500,000 3,368,750
------------ ------------
7,500,000 7,388,750
====================================================================================================================================
Real Estate--1.0% BB- Ba3 5,000,000 Forest City Enterprises Inc., 8.50%
due 3/15/2008 5,000,000 5,000,000
====================================================================================================================================
Specialty Retailing-- B- B3 5,000,000 Eye Care Centers of America, Inc.,
0.9% 9.125% due 5/01/2008 (c) 4,975,550 5,006,250
====================================================================================================================================
Steel--3.4% BB- Ba2 7,000,000 AK Steel Holding Corp., 10.75% due
4/01/2004 7,551,250 7,455,000
NR* B1 5,000,000 CSN Iron S.A., 9.125% due 6/01/2007(c) 4,370,000 4,312,500
B- B1 2,000,000 UCAR Global Enterprises, 12% due
1/15/2005 2,170,000 2,165,000
B B3 4,000,000 WHX Corporation, 10.50% due
4/15/2005 (c) 4,000,000 4,120,000
------------ ------------
18,091,250 18,052,500
====================================================================================================================================
Telephony/Competitive B- NR* 4,250,000 Intelcom Group USA Inc., 9.922%**
Local Exchange due 5/01/2006 3,492,405 3,357,500
Carriers--4.4% B B2 4,000,000 Intermedia Communications Inc.,
8.60% due 6/01/2008 (c) 4,000,000 4,030,000
B B3 2,750,000 Level 3 Communications Corp., 9.125%
due 5/01/2008 (c) 2,738,423 2,681,250
Nextlink Communications Inc. (c):
B B3 5,000,000 9% due 3/15/2008 4,989,900 5,000,000
NR* B3 5,000,000 9.45%** due 4/15/2008 3,187,805 3,068,750
B- B3 8,000,000 RSL Communications PLC, 10.125%**
due 3/01/2008 (c) 5,000,246 4,880,000
------------ ------------
23,408,779 23,017,500
====================================================================================================================================
Textiles--2.6% B B3 7,500,000 Dan River Inc., 10.125% due 12/15/2003 8,035,950 8,006,250
B B2 4,750,000 Polymer Group, Inc., 8.75% due
3/01/2008 (c) 4,750,000 4,785,625
CCC- Caa2 2,000,000 Polysindo International Finance,
9.375% due 7/30/2007 1,140,000 860,000
------------ ------------
13,925,950 13,651,875
====================================================================================================================================
Transportation--7.1% BB- B1 5,000,000 Alpha Shipping PLC, 9.50% due
2/15/2008 (c) 4,971,400 4,825,000
B+ B1 4,250,000 American Reefer Co. Ltd., 10.25% due
3/01/2008 (c) 4,250,000 4,260,625
BB- NR* 6,000,000 Autopistas del Sol S.A., 10.25% due
8/01/2009 (c) 5,598,750 5,835,000
BB- B1 6,100,000 Sea Containers Ltd., 12.50% due
12/01/2004 6,927,375 6,832,000
BB- Ba3 5,000,000 Transportacion Maritima Mexicana
S.A., 10% due 11/15/2006 5,036,875 4,875,000
B- B3 7,000,000 Transtar Holdings, Inc., 10.547%**
due 12/15/2003 6,455,972 6,510,000
B- NR* 5,000,000 Trism Inc., 10.75% due 12/15/2000 4,425,000 4,175,000
------------ ------------
37,665,372 37,312,625
====================================================================================================================================
Utilities--4.9% BB+ Baa3 5,000,000 Empresa Electricidad del Norte,
10.50% due 6/15/2005 (c) 5,000,000 5,100,000
BB- B1 5,000,000 Espirito Santo--Escelsa, 10% due
7/15/2007 (c) 4,817,500 4,468,750
BB+ NR* 3,000,000 Inversora de Electrica, 9% due
9/16/2004 (c) 2,947,500 2,925,000
BBB- Ba3 8,000,000 Metrogas S.A., 12% due 8/15/2000 8,591,250 8,460,000
BB Ba2 5,000,000 Monterrey Power, S.A. de C.V.,
9.625% due 11/15/2009 (c) 4,990,800 4,837,500
------------ ------------
26,347,050 25,791,250
====================================================================================================================================
Wireless CCC+ B2 5,000,000 Cencall Communications Corp.,
Communications-- 8.805%** due 1/15/2004 4,900,701 4,887,500
Domestic Paging & B+ B3 8,475,000 Comunicacion Celular S.A., 11.302%**
Cellular--4.6% due 11/15/2003 6,720,674 6,568,125
NR* B3 8,000,000 Pagemart Nationwide Inc., 12.107%**
due 2/01/2005 7,203,403 7,200,000
B- NR* 8,375,000 Pinnacle Holdings Inc., 10%** due
3/15/2008 (c) 5,247,681 5,360,000
------------ ------------
24,072,459 24,015,625
====================================================================================================================================
Wireless B B3 9,000,000 CTI Holdings S.A., 11.314%** due
Communications-- 4/15/2008 (c) 5,298,897 5,220,000
International Paging & CCC+ Caa1 7,500,000 McCaw International Ltd., 11.522%**
Cellular--2.8% due 4/15/2007 5,106,875 4,950,000
CCC+ Caa1 8,000,000 Telesystem International Wireless
Inc., 10.683%** due 11/01/2007 5,020,436 4,800,000
------------ ------------
15,426,208 14,970,000
====================================================================================================================================
Total Investments in Corporate
Bonds--95.8% 507,011,968 501,847,089
====================================================================================================================================
<CAPTION>
Shares
Held Preferred Stocks
====================================================================================================================================
Product Distribution-- 50,000 Nebco Evans Holdings Co., 11.25%(a)(c) 5,000,000 5,075,000
1.0%
====================================================================================================================================
Total Investments in Preferred
Stocks--1.0% 5,000,000 5,075,000
====================================================================================================================================
Total Investments--96.8% $512,011,968 506,922,089
============
Other Assets Less Liabilities--3.2% 16,935,352
------------
Net Assets--100.0% $523,857,441
============
====================================================================================================================================
</TABLE>
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
(a) Represents a pay-in-kind security which may pay interest in additional
shares/face.
(b) The security is a perpetual bond and has no definite maturity date.
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(d) Subject to principal paydowns.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
6 & 7
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of May 31, 1998
====================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$512,011,968) (Note 1a)............. $506,922,089
Receivables:
Interest.................................................................. $ 10,245,240
Securities sold........................................................... 9,089,455 19,334,695
-------------
Deferred organization expenses (Note 1e).................................... 15,864
Prepaid expenses and other assets........................................... 18,690
------------
Total assets................................................................ 526,291,338
------------
====================================================================================================================================
Liabilities: Payables:
Dividends to shareholders (Note 1f)....................................... 1,550,000
Investment adviser (Note 2)............................................... 73,537 1,623,537
-------------
Accrued expenses and other liabilities...................................... 810,360
------------
Total liabilities........................................................... 2,433,897
------------
====================================================================================================================================
Net Assets: Net assets.................................................................. $523,857,441
============
====================================================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized................. $ 3,495,667
Paid-in capital in excess of par............................................ 520,289,338
Undistributed investment income--net........................................ 4,126,907
Undistributed realized capital gains on investments--net.................... 1,035,408
Unrealized depreciation on investments--net................................. (5,089,879)
------------
Total--Equivalent to $14.99 per share based on
34,956,667 shares of capital stock outstanding
(market price $14.1875)..................................................... $523,857,441
============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period January 30, 1998+ to May 31, 1998
====================================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned................................................ $ 14,566,665
(Note 1d): Other....................................................................... 61,000
------------
Total income................................................................ 14,627,665
------------
====================================================================================================================================
Expenses: Investment advisory fees (Note 2)........................................... $ 1,046,732
Accounting services (Note 2) ............................................... 33,581
Custodian fees.............................................................. 14,661
Directors' fees and expenses................................................ 14,200
Professional fees........................................................... 12,274
Transfer agent fees......................................................... 9,800
Pricing services............................................................ 4,000
Amortization of organization expenses (Note 1e)............................. 1,136
Printing and shareholder reports............................................ 1,000
Other....................................................................... 34,315
------------
Total expenses before reimbursement......................................... 1,171,699
Reimbursement of expenses (Note 2).......................................... (1,002,769)
------------
Total expenses after reimbursement.......................................... 168,930
------------
Investment income--net...................................................... 14,458,735
------------
====================================================================================================================================
Realized & Realized gain on investments--net........................................... 1,035,408
Unrealized Gain Unrealized depreciation on investments--net................................. (5,089,879)
(Loss) on ------------
Investments-- Net Increase in Net Assets Resulting from Operations........................ $ 10,404,264
Net (Notes 1b, ============
1d & 3):
====================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Jan. 30, 1998+
Increase (Decrease) in Net Assets: to May 31, 1998
====================================================================================================================================
<S> <C> <C>
Operations: Investment income--net.................................................................. $ 14,458,735
Realized gain on investments--net....................................................... 1,035,408
Unrealized depreciation on investments--net............................................. (5,089,879)
------------
Net increase in net assets resulting from operations................................... 10,404,264
------------
====================================================================================================================================
Dividends to Investment income--net.................................................................. (10,331,828)
Shareholders ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders.................... (10,331,828)
------------
====================================================================================================================================
Capital Stock Proceeds from issuance of Common Stock................................................. 524,250,000
Transactions Offering costs resulting from the issuance of Common Stock............................. (565,000)
(Notes 1e & 4): ------------
Net increase in net assets derived from capital stock transactions..................... 523,685,000
------------
====================================================================================================================================
Net Assets: Total increase in net assets........................................................... 523,757,436
Beginning of period.................................................................... 100,005
------------
End of period*......................................................................... $523,857,441
============
====================================================================================================================================
* Undistributed investment income--net.................................................. $ 4,126,907
============
====================================================================================================================================
+ Commencement of operations.
</TABLE>
See Notes to Financial Statements.
8 & 9
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1998
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Jan. 30, 1998+
Increase (Decrease) in Net Asset Value: to May 31, 1998
====================================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period..................................................... $ 15.00
Operating --------
Performance: Investment income--net.................................................................. .42
Realized and unrealized loss on investments--net........................................ (.11)
--------
Total from investment operations......................................................... .31
--------
Less dividends from investment income--net................................................ (.30)
--------
Capital charge resulting from the issuance of Common Stock............................... (.02)
--------
Net asset value, end of period........................................................... $ 14.99
========
Market price per share, end of period.................................................... $14.1875
========
====================================================================================================================================
Total Investment Based on net asset value per share....................................................... 2.00%++
Return:** ========
Based on market price per share.......................................................... (3.46%)++
========
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement.......................................................... .10%*
Net Assets: ========
Expenses................................................................................ .69%*
========
Investment income--net.................................................................... 8.46%*
========
====================================================================================================================================
Supplemental Net assets, end of period (in thousands)................................................. $523,857
Data: ========
Portfolio turnover....................................................................... 16.79%
========
====================================================================================================================================
</TABLE>
+ Commencement of operations.
++ Aggregate total investment return.
* Annualized.
** 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 loads.
See Notes to Financial Statements.
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 a diversified, closed-end management
investment company. Prior to commencement of operations on January 30, 1998, the
Fund had no operations other than those relating to organizational matters and
the sale of 6,667 shares of Common Stock on January 20, 1998 to Fund Asset
Management, L.P. ("FAM") for $100,005. The Fund will determine and make
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 under
the symbol CYE. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Portfolio securities are valued on the basis of
prices furnished by one or more pricing services which determine prices for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders. In
certain circumstances, portfolio securities are valued at the last sale price on
the exchange that is the primary market for such securities, or the last quoted
bid price for those securities for which the over-the-counter market is the
primary market or for listed securities in which there were no sales during the
day. The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. 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
over-the-counter market, the last asked price. Options purchased are valued at
the last sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last bid price. Obligations
with remaining maturities of sixty days or less are valued at amortized cost,
which approximates market value, unless this method no longer produces fair
valuations. Rights or warrants to acquire stock, or stock acquired pursuant to
the exercise of a right or warrant, may be valued taking into account various
factors such as original cost to the Fund, earnings and net worth of the issuer,
market prices for securities of similar issuers, assessment of the issuer's
future prosperity, liquidation value or third party transactions involving the
issuer's securities. Securities for which there exist no price quotations or
valuations and all other assets including futures contracts and related options
are valued at fair value as determined in good faith by or on behalf of the
Board of Directors of the Fund.
(b) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the debt 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 is authorized to 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 for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures
10 & 11
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
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 Interest rate transactions--The Fund is authorized to enter into interest rate
swaps and purchase or sell interest rate caps and floors. In an interest rate
swap, the Fund exchanges with another party their respective commitments to pay
or receive interest on a specified notional principal amount. The purchase of an
interest rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest rate, to
receive payments of interest equal to the difference between the index and the
predetermined rate on a notional principal amount from the party selling such
interest rate cap (or floor).
(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).
Dividend income is recorded on the ex-dividend dates. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(e) Deferred organization and offering expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period. Direct expenses
relating to the public offering of the Fund's Common Stock were charged to
capital at the time of issuance of the shares.
(f) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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 operations of the Fund. For such services the Fund pays a monthly fee at
an annual rate of 0.60% of the Fund's average weekly net assets plus the
proceeds of any outstanding principal borrowed. For the period January 30, 1998
to May 31, 1998, FAM earned fees of $1,046,732, of which $951,320 was
voluntarily waived. FAM also reimbursed the Fund $51,449 for additional
expenses.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period January 30, 1998 to May 31, 1998 were $566,941,898 and $57,936,491,
respectively.
Net realized gains (losses) for the period January 30, 1998 to May 31, 1998 and
net unrealized losses as of May 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- -------------------------------------------------------------------------------
Long-term investments ................ $ 1,037,501 $(5,089,879)
Short-term investments ............... (2,093) --
----------- -----------
- -------------------------------------------------------------------------------
Total ................................ $ 1,035,408 $(5,089,879)
=========== ===========
- --------------------------------------------------------------------------------
As of May 31, 1998, net unrealized depreciation for Federal income tax purposes
aggregated $5,539,058, of which $2,768,905 related to appreciated securities and
$8,307,963 related to depreciated securities. The aggregate cost of investments
at May 31, 1998 for Federal income tax purposes was $512,461,147.
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.
Shares issued and outstanding during the period January 30, 1998 to May 31, 1998
increased by 34,950,000 from shares sold.
5. Subsequent Events:
On June 8, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.118057 per share,
payable on June 30, 1998 to shareholders of record as of June 22, 1998.
On June 10, 1998, the Fund entered into a credit agreement with a syndicate of
banks led by BankBoston, N.A. and State Street Bank and Trust Company through
June 9, 1999. The agreement is for a $250,000,000 credit facility bearing
interest at the Federal Funds rate plus 0.43% and/or LIBOR plus 0.43%.
12 & 13
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Corporate High Yield Fund III, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Corporate High Yield Fund III, Inc. as
of May 31, 1998, the related statements of operations and changes in net assets
and the financial highlights for the period January 30, 1998 (commencement of
operations) to May 31, 1998. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at May 31, 1998 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Corporate High Yield
Fund III, Inc. as of May 31, 1998, the results of its operations, the changes in
its net assets, and the financial highlights for the period January 30, 1998 to
May 31, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 1, 1998
PORTFOLIO INFORMATION (unaudited)
<TABLE>
<CAPTION>
Percent of Total
As of May 31, 1998 Long-Term Investments
====================================================================================================================================
Ten Largest Holdings
<S> <C> <C>
Midland Cogeneration Midland Cogeneration operates a natural gas-fired, cogeneration facility located in
Venture Limited Midland County, Michigan. The plant also produces steam for industrial applications.
Partnership Consumers Energy Company, who is Midland's main customer, indirectly owns a 49%
stake in the company. 2.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Reliance Group Reliance owns property/casualty insurance and title insurance companies. The
Holdings Inc. companies underwrite a broad range of standard commercial and specialty commercial lines of
property and casualty insurance. 2.1
- ------------------------------------------------------------------------------------------------------------------------------------
Metrogas S.A. Metrogas is the largest natural gas distribution company in Argentina. Metrogas accounts for
about 29% of total deliveries to the country's natural gas market and has over 1.8 million
customers in its service area in and around Argentina's capital, Buenos Aires. 1.7
- ------------------------------------------------------------------------------------------------------------------------------------
Venetian Casino Venetian Casino Resort is a major casino resort under construction on the Las Vegas
Resort LLC strip that will target the convention market. 1.7
- ------------------------------------------------------------------------------------------------------------------------------------
Nextlink Communications Nextlink provides local, long distance and enhanced telephone communications
Inc. services to commercial customers. The company operates in 24 markets in seven states. 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
Dan River Inc. Dan River manufactures and markets textile products for home fashion and apparel
markets. Products include comforters, sheets, bed skirts and draperies, sold primarily under
the Dan River and Bed in a Bag brand names. Dan River also produces cotton and cotton-blended
apparel fabrics. 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
Keebler Corp. Cookie manufacturer Keebler Foods has brand names that include Keebler, Cheez-It
and Carr's. The company also makes ice cream cones, pie crusts and custom-baked products for
other companies. 1.6
- ------------------------------------------------------------------------------------------------------------------------------------
First Nationwide First Nationwide is one of the largest thrifts in the United States. Branch offices,
Holdings Inc. mortgage-lending and servicing activities are primarily in California, with some business in
Texas and Florida. 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Lifestyle Furnishings Lifestyle Furnishings manufactures and markets home furniture and furnishings under
International the brand names of Henredon, Drexel Heritage, Universal, Maitland Smith and Lexington. 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Malette Inc. Malette is a Canadian producer of oriented strand board panels and commodity 2x4 lumber
with facilities primarily located in the province of Quebec. Malette is a wholly-owned
subsidiary of Canadian paper and forest products producer Tembec, Inc. 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Officers and Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Vincent T. Lathbury III, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Elizabeth M. Phillips, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian and Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
NYSE Symbol
CYE
This report, including the financial information herein, is transmitted to the
shareholders of Corporate High Yield Fund III, Inc. for their information. It is
not a prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a representation of future
performance. 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.
Statements and other information herein are as dated and are subject to change.
Corporate High
Yield Fund III, Inc.
Box 9011
Princeton, NJ
08543-9011 #COYIII--5/98
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