CORPORATE
HIGH YIELD
FUND III, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
May 31, 1999
<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, 1999
The quality ratings* of securities in the Fund as of May 31, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Long-Term Investments
- --------------------------------------------------------------------------------
BBB/Baa ............................................................ 2.9%
BB/Ba .............................................................. 30.5
B/B ................................................................ 57.5
CCC/Caa & Lower .................................................... 4.2
NR (Not Rated) ..................................................... 4.9
- --------------------------------------------------------------------------------
* 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 ............................................. 37.5%
Emerging Markets Holdings .......................................... 13.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of Total
Five Largest Foreign Countries* Long-Term Investments
- --------------------------------------------------------------------------------
Canada ............................................................. 11.0%
Argentina .......................................................... 5.6
United Kingdom ..................................................... 5.2
Mexico ............................................................. 2.8
Brazil ............................................................. 2.7
- --------------------------------------------------------------------------------
* All holdings are denominated in US dollars.
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
DEAR SHAREHOLDER
High-Yield Market Overview
Volatility in the financial markets moderated during the six months ended May
31, 1999. However, during the same period, investor sentiment shifted from
concern about global recession and worldwide deflation to a level of comfort
about world economic stability then to fears of an overheated US economy.
Interest rates trended up during the six-month period, and renewed inflation
worries accelerated that trend in April and May.
The yield on the ten-year US Treasury bond, which is commonly compared to the
high-yield market, started the period at 4.73% but reached 5.62% by May
month-end. As often is the case in a rising interest rate environment,
high-yield bonds benefited relative to Treasury issues. Both the earnings-driven
fundamentals of the high-yield market and the higher coupon paid on high-yield
bonds tend to work in favor of the high-yield market when interest rates rise.
For example, the total return and price return of ten-year Treasury issues was
- -4.51% and -6.80%, respectively, as compared to +2.53% and -1.91%, respectively,
for the high-yield market as measured by the unmanaged CS First Boston High
Yield Index.
During the six-month period ended May 31, 1999, the high-yield market also
benefited from a strong cash commitment by a variety of investors, although the
trend reversed in May. The combination of cash outflows from mutual funds,
falling prices on Treasury bonds and an unsettled stock market gave a negative
tone to the high-yield market at that time. However, the spread, or incremental
yield required by investors to assume the additional risk of high-yield
investments, tightened to 564 basis points (5.64%) at May 31, 1999 from 624
basis points at November 30, 1998. This yield spread remains wide relative to
historic levels.
Within the high-yield market, lower-tier credits (which are less sensitive to
overall changes in long-term interest rates) outperformed better-rated bonds.
Telecommunications and media, as well as selected cyclical sectors such as paper
and chemicals, had a strong showing over the past six months. Industries wracked
by weak fundamentals, such as healthcare, energy and shipping, significantly
underperformed the broad high-yield market.
We believe that, although markets may yet experience near-term volatility, the
high-yield market represents good long-term value, supported by favorable
economic growth trends, wide spreads to Treasury securities and default rates
near historic averages of 3%-4%.
Fund Performance
For the year ended May 31, 1999, total investment return on the Fund's Common
Stock was -2.73%, based on a change in the per share net asset value from $14.99
to $12.98, and assuming reinvestment of $1.489 per share ordinary income
dividends. For the six months ended May 31, 1999, total investment return for
the Fund was +3.39%, based on a change in the per share net asset value from
$13.36 to $12.98, and assuming reinvestment of $0.781 per share ordinary income
dividends. During this period, the net annualized yield of the Fund's Common
Stock was 11.74%. The Fund benefited from improvements in the fundamentals of a
number of its holdings, including Canadian telecommunications operator Metronet
Communications Corp. with an investment by AT&T Corp. and computer chip
manufacturer Zilog Inc. with a turnaround in operations. A rebound from emerging
markets' highly depressed levels also helped Fund performance for the six months
ended May 31, 1999, with our 13.0% exposure to these markets. Weak sectors
within the portfolio included energy, healthcare and transportation.
Investment Strategy
We believe that the market will continue to be unsettled over the next few
months. There are many conflicting forces that could push the market toward
strength or weakness. Inflationary expectations and interest rates, equity
market fluctuation, events in emerging markets, corpo-rate earnings expectations
and supply/demand imbalances specific to the high-yield market are all likely
to take their turn influencing the market.
Given the general unease in the high-yield market at the end of May, we sought
to modestly improve portfolio quality. To that end, we added holdings such as
BB-rated Lyondell Chemical Company. We also disposed of positions where downside
risk outweighed upside potential or swapped into names that we believed had
better prospects. At the same time, there are good values in so-called
distressed issues and out-of-favor sectors, and we have selectively added here
in modest size. An example is Forcenergy, Inc., purchased at a deep discount,
which offers both asset protection and substantial upside potential. Such
companies may require restructuring of their balance sheets, as high debt usage
and weak markets limit liquidity. Thus, there may be an increase in the default
rate, with good returns as asset values are realized. We believe there will also
be opportunities in the months ahead to add to portfolio holdings in companies
with solid fundamentals as favorable valuations emerge.
Portfolio Characteristics
Communications and media remained our largest broad industry category, totaling
nearly 28% of total long-term investments. Of the narrowly classified sectors,
the largest industry allocations were: telephony,9.0% of total long-term
investments; transportation, 6.5%; wireless communications--international paging
& cellular, 5.9%; cable--international, 5.3%; and health services, 5.2%. Non-US
dollar-denominated bonds totaled nearly 38% of the portfolio, with emerging
market holdings accounting for nearly 13% of total long-term investments. (See
the foreign holdings table on page 1 of this report for the distribution of
non-US, dollar-denominated investments in the portfolio.) At May 31, 1999, the
average maturity for the portfolio was 6 years, 8 months.
Leverage Strategy
The Fund was on average 26% leveraged during the six-month period ended May 31,
1999. This means that we borrowed the equivalent of 26% of total assets
invested, earning incremental yield on the investments we made with the borrowed
funds. On May 31, 1999, the Fund was 25.6% leveraged, having borrowed $155.7
million at a borrowing cost of 5.4%. While we may adjust leverage to react to
market conditions, we expect leverage on balance to remain near present levels.
(For a complete explanation of the benefits and risks of leveraging, see page 1
of this report to shareholders.)
In Conclusion
We appreciate 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/ Terry K. Glenn
Terry K. Glenn
President and Director
/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
July 1, 1999
================================================================================
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on Corporate High Yield Fund III, Inc.'s Board of Directors.
We are pleased to announce that Terry K. Glenn has been elected President and
Director of the Fund. Mr. Glenn has held the position of Executive Vice
President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors in wishing
him well in his retirement from Merrill Lynch and are pleased that he will
continue as a member of the Fund's Board of Directors.
================================================================================
2 & 3
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
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>
Aerospace & B B2 $ 5,000,000 L-3 Communications Corp., 8% due 8/01/2008 $ 4,984,300 $ 4,787,500
Defense--1.1%
===================================================================================================================================
Automotive--1.2% CCC Caa3 5,000,000 Breed Technologies Inc., 9.25% due 4/15/2008 5,000,000 1,400,000
BB+ Ba2 4,250,000 Federal-Mogul Corporation, 7.375% due 1/15/2006
(c) 4,232,278 4,037,589
------------ ------------
9,232,278 5,437,589
===================================================================================================================================
Broadcasting/Radio NR* NR* 5,000,000 Acme Intermediate Holdings/Finance, 12.28%** due
& Television--2.5% 9/30/2005 3,356,104 3,300,000
BB- Ba3 5,000,000 Antenna TV SA, 9% due 8/01/2007 5,112,500 4,831,250
CCC+ B3 3,000,000 Cumulus Media, Inc., 10.375% due 7/01/2008 3,000,000 3,195,000
------------ ------------
11,468,604 11,326,250
===================================================================================================================================
Building B+ B1 7,000,000 Nortek Inc., 8.875% due 8/01/2008 (c) 6,974,870 7,017,500
Materials--1.5%
===================================================================================================================================
Cable--1.2% B+ B2 5,500,000 Charter Communications Holding LLC, 8.625% due
4/01/2009 (c) 5,483,225 5,362,500
===================================================================================================================================
Cable-- BB NR* 6,500,000 Cablevision SA, 13.75% due 5/01/2009 (c) 6,500,000 6,093,750
International--7.1% B- B2 5,000,000 Comcast UK Cable Partners Ltd., 9.775%** due
11/15/2007 4,508,802 4,550,000
B- B3 1,500,000 Diamond Cable Communications PLC, 10.839%** due
9/30/2004 1,472,773 1,554,375
B- B3 4,000,000 Diamond Holdings PLC, 9.125% due 2/01/2008 4,000,000 4,155,000
BB+ Ba3 5,000,000 Multicanal SA, 10.50% due 4/15/2018 4,916,500 4,150,000
B- B3 2,250,000 NTL Inc., 9.085%** due 4/01/2008 1,629,532 1,473,750
D Caa3 4,050,000 Supercanal Holdings SA, 11.50% due 5/15/2005
(c)(d) 1,852,625 1,984,500
B+ B1 6,875,000 Telewest Communications PLC, 9.25%** due
4/15/2009 (c) 4,424,422 4,468,750
B B3 5,750,000 United International Holdings, 10.757%** due
2/15/2008 3,898,447 3,708,750
------------ ------------
33,203,101 32,138,875
===================================================================================================================================
Chemicals--6.3% BBB- Baa3 5,250,000 Equistar Chemicals LP, 8.50% due 2/15/2004 (c) 5,249,580 5,330,042
NR* B2 3,000,000 Huntsman Corp., 9.50% due 7/01/2007 (c) 2,962,500 2,880,000
BB- Ba3 7,000,000 ISP Holdings Inc., 9.75% due 2/15/2002 7,498,750 7,148,750
Lyondell Chemical Company (c):
BB Ba3 6,000,000 9.625% due 5/01/2007 6,195,000 6,060,000
BB Ba3 2,750,000 9.875% due 5/01/2007 2,750,000 2,756,875
B+ B2 4,250,000 Octel Developments PLC, 10% due 5/01/2006 4,250,000 4,398,750
------------ ------------
28,905,830 28,574,417
===================================================================================================================================
Communications-- B+ B1 9,700,000 Orion Network Systems, Inc., 15.781%** due
2.5% 1/15/2007 5,803,607 5,747,250
B- B3 7,000,000 Satelites Mexicanos SA, 10.125% due 11/01/2004 5,748,600 5,530,000
------------ ------------
11,552,207 11,277,250
===================================================================================================================================
Computer Services/ B Ba3 75,000 Advanced Micro Devices, Inc., 11% due 8/01/2003 76,312 77,625
Electronics--5.4% BB- Ba3 5,250,000 Amkor Technologies Inc., 9.25% due 5/01/2006 (c) 5,215,000 5,092,500
B+ B1 1,300,000 Celestica International, 10.50% due 12/31/2006 1,420,250 1,417,000
CCC+ B3 7,250,000 MCMS Inc., 9.75% due 3/01/2008 6,171,250 4,712,500
BB- Ba3 6,000,000 Unisys Corp., 11.75% due 10/15/2004 7,011,200 6,705,000
B- B2 7,500,000 Zilog Inc., 9.50% due 3/01/2005 7,061,250 6,600,000
------------ ------------
26,955,262 24,604,625
===================================================================================================================================
Conglomerates-- B- B3 5,000,000 Eagle-Picher Industries, 9.375% due 3/01/2008 4,991,800 4,825,000
3.3% BB Ba2 6,000,000 Sequa Corp., 8.75% due 12/15/2001 6,157,500 6,075,000
B+ NR* 5,000,000 Voto-Votorantim O/S Trading, 8.50% due
6/27/2005 (c) 4,765,625 4,225,000
------------ ------------
15,914,925 15,125,000
===================================================================================================================================
Consumer Products-- B- B3 7,000,000 Albecca Inc., 10.75% due 8/15/2008 6,660,000 5,740,000
6.3% Chattem, Inc.:
B- B2 1,000,000 12.75% due 6/15/2004 1,118,750 1,088,750
B- B2 7,250,000 8.875% due 4/01/2008 7,248,437 7,159,375
B B3 8,500,000 Corning Consumer Products, 9.625% due 5/01/2008 8,410,000 7,458,750
NR* NR* 3,000,000 Revlon Consumer Products, 9.50% due 6/01/1999 3,090,000 3,022,500
CCC+ Caa1 6,500,000 Syratech Corp., 11% due 4/15/2007 5,397,500 4,355,000
------------ ------------
31,924,687 28,824,375
===================================================================================================================================
Energy--5.4% B B3 5,000,000 Chesapeake Energy Corp., 9.625% due 5/01/2005 4,938,125 4,425,000
NR* Ca 5,000,000 Forcenergy, Inc., 8.50% due 2/15/2007 2,082,500 3,100,000
B+ B1 5,000,000 Parker Drilling Co., 9.75% due 11/15/2006 5,118,750 4,450,000
B+ B2 3,000,000 Pool Energy Services Co., 8.625% due 4/01/2008 3,000,000 3,000,000
BB- B1 7,000,000 Tesoro Petroleum Corp., 9% due 7/01/2008 6,960,030 6,895,000
D C 7,000,000 TransAmerican Energy Corp., 13.145%** due
6/15/2002 (d) 6,787,229 752,500
B- B3 2,750,000 United Refining Co., 10.75% due 6/15/2007 2,072,813 2,014,375
------------ ------------
30,959,447 24,636,875
===================================================================================================================================
Entertainment--4.0% CCC+ B3 7,000,000 AMF Bowling Worldwide Inc., 14.444%** due
3/15/2006 5,076,357 4,480,000
BB- Ba2 3,000,000 Imax Corp., 7.875% due 12/01/2005 3,000,000 2,850,000
B+ B1 5,800,000 Intrawest Corp., 9.75% due 8/15/2008 5,860,025 5,945,000
B- B3 5,000,000 Premier Parks, Inc., 9.25% due 4/01/2006 5,000,000 5,075,000
------------ ------------
18,936,382 18,350,000
===================================================================================================================================
Financial Services-- CCC+ Caa3 5,000,000 Amresco Inc., 9.875% due 3/15/2005 5,042,187 4,100,000
4.3% BB- Ba3 1,000,000 RBF Finance Co., 11% due 3/15/2006 (c) 1,007,500 1,000,000
Reliance Group Holdings, Inc.:
BBB- Ba1 1,500,000 9% due 11/15/2000 1,582,500 1,532,955
BB+ Ba2 8,500,000 9.75% due 11/15/2003 8,956,875 8,673,315
B NR* 5,000,000 Veritas Capital Trust, 10% due 1/01/2028 5,312,500 4,250,000
------------ ------------
21,901,562 19,556,270
===================================================================================================================================
</TABLE>
4 & 5
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Food & Beverage-- B B3 $ 5,000,000 Agrilink Foods, Inc., 11.875% due 11/01/2008 $ 5,000,000 $ 5,175,000
2.2% B+ B1 5,000,000 Aurora Foods Inc., 8.75% due 7/01/2008 5,000,000 5,025,000
------------ ------------
10,000,000 10,200,000
===================================================================================================================================
Gaming--3.6% BB+ Ba2 7,750,000 Harrah's Operating Co. Inc., 7.875% due
12/15/2005 7,812,500 7,536,875
CCC+ Caa1 9,000,000 Venetian Casino/LV Sands, 10%** due 11/15/2005 8,701,472 8,865,000
------------ ------------
16,513,972 16,401,875
===================================================================================================================================
Health Services-- B- B3 2,000,000 ALARIS Medical Systems, Inc., 9.75% due
6.9% 12/01/2006 1,878,125 2,000,000
BB+ Ba2 2,500,000 Columbia HCA/Healthcare Corp., 6.41% due
6/15/2000 2,442,950 2,453,310
B- B2 5,000,000 Extendicare Health Services, 9.35% due 12/15/2007 5,026,250 3,643,750
B+ ba3 2,000,000 Fresenius Medical Capital Trust I, 9% due
12/01/2006 1,987,500 2,060,000
B- B3 6,500,000 Kinetic Concepts, Inc., 9.625% due 11/01/2007 6,641,250 6,288,750
B- Caa1 7,500,000 Magellan Health Services, 9% due 2/15/2008 7,478,125 6,300,000
CCC B3 5,250,000 Mariner Post--Acute Network, 9.50% due 11/01/2007 1,693,125 1,732,500
B+ Ba3 7,000,000 Quorum Health Group Inc., 8.75% due 11/01/2005 6,755,625 6,947,500
------------ ------------
33,902,950 31,425,810
===================================================================================================================================
Hotels & HMH Properties, Inc.:
Motels--2.9% BB Ba2 5,000,000 7.875% due 8/01/2005 4,998,600 4,737,500
BB Ba2 2,000,000 7.875% due 8/01/2008 1,965,000 1,842,500
B B3 7,000,000 Signature Resorts, Inc., 9.75% due 10/01/2007 6,630,000 6,440,000
------------ ------------
13,593,600 13,020,000
===================================================================================================================================
Independent Power BB B2 7,500,000 Midland Funding II, 13.25% due 7/23/2006 (b) 9,478,125 9,026,100
Producers--2.9% BB Ba2 5,000,000 Monterrey Power, SA de CV, 9.625% due
11/15/2009 (c) 4,990,800 4,000,000
------------ ------------
14,468,925 13,026,100
===================================================================================================================================
Industrial Services-- Neff Corp.:
1.4% B B3 5,000,000 10.25% due 6/01/2008 5,000,000 5,200,000
B B3 1,000,000 10.25% due 6/01/2008 985,160 1,005,000
------------ ------------
5,985,160 6,205,000
===================================================================================================================================
Internet Transport-- B- B3 5,000,000 PSInet Inc., 11.50% due 11/01/2008 5,000,000 5,200,000
2.2% NR* NR* 5,250,000 Splitrock Services Inc., 11.75% due 7/15/2008 5,192,250 4,987,500
------------ ------------
10,192,250 10,187,500
===================================================================================================================================
Metals & Mining-- BB Ba2 5,000,000 Great Central Mines Ltd., 8.875% due 4/01/2008 5,000,000 4,787,500
5.4% CCC+ B3 7,000,000 Kaiser Aluminum & Chemical Corp., 12.75% due
2/01/2003 7,460,600 7,070,000
CCC+ Caa1 5,500,000 Metal Management Inc., 10% due 5/15/2008 3,426,250 4,400,000
B B3 5,000,000 Ormet Corporation, 11% due 8/15/2008 (c) 5,000,000 4,900,000
B- Caa1 5,000,000 Simcala Inc., 9.625% due 4/15/2006 5,012,500 3,500,000
------------ ------------
25,899,350 24,657,500
===================================================================================================================================
Paper & Forest CCC+ Caa1 1,000,000 APP International Finance, 11.75% due 10/01/2005 877,500 730,000
Products--6.5% B B3 5,250,000 Ainsworth Lumber Company, 12.50% due 7/15/2007 (a) 5,107,361 5,840,625
B+ Caa1 8,000,000 Doman Industries Limited, 8.75% due 3/15/2004 5,840,000 5,440,000
BB+ Ba3 7,500,000 Malette Inc., 12.25% due 7/15/2004 8,462,950 7,987,500
CCC+ Caa1 6,000,000 Pindo Deli Financial Mauritius, 10.75% due
10/01/2007 3,642,500 3,660,000
BB+ Ba3 4,000,000 Tembec Industries, Inc., 8.625% due 6/30/2009 3,979,000 4,020,000
CCC+ Caa1 3,300,000 Tjiwi Kimia Finance Mauritius, 10% due 8/01/2004 1,934,625 2,128,500
------------ ------------
29,843,936 29,806,625
===================================================================================================================================
Product Distribution-- B- B3 1,500,000 Nebraska Book Company, 8.75% due 2/15/2008 1,500,000 1,380,000
0.3%
===================================================================================================================================
Publishing & B B2 7,000,000 MDC Communications Corp., 10.50% due 12/01/2006 6,885,750 7,280,000
Printing--1.6%
===================================================================================================================================
Real Estate--1.5% BB- Ba3 6,875,000 Forest City Enterprises Inc., 8.50% due 3/15/2008 6,890,469 6,875,000
===================================================================================================================================
Specialty Retailing-- B B2 6,000,000 Jo-Ann Stores Inc., 10.375% due 5/01/2007 (c) 5,910,000 5,940,000
1.3%
===================================================================================================================================
Steel--2.3% NR* B2 5,000,000 CSN Iron SA, 9.125% due 6/01/2007 (c) 4,370,000 3,700,000
B B2 6,250,000 Ucar Global Enterprises, 12% due 1/15/2005 6,592,188 6,656,250
------------ ------------
10,962,188 10,356,250
===================================================================================================================================
Telephony--12.0% Call-Net Enterprises Inc.:
BB- B2 2,000,000 8% due 8/15/2008 1,990,840 1,780,000
BB- B2 12,000,000 8.94%** due 8/15/2008 8,305,190 7,080,000
B- Caa1 4,250,000 Esprit Telecom Group PLC, 10.875% due 6/15/2008 4,339,063 4,526,250
B+ B2 7,000,000 Globo Comunicacoes e Participacoes, Ltd., 10.625%
due 12/05/2008 (c) 7,046,000 4,847,500
B B2 4,000,000 Intermedia Communications Inc., 8.60% due
6/01/2008 4,000,000 3,750,000
MetroNet Communications Corp.:
B B3 10,000,000 10%** due 6/15/2008 6,729,822 7,425,000
B B3 2,000,000 10.625% due 11/01/2008 (c) 2,000,000 2,285,000
Nextlink Communications Inc.:
B B3 2,000,000 12.50% due 4/15/2006 2,155,000 2,180,000
B B3 5,000,000 9% due 3/15/2008 4,989,900 4,568,750
B B3 3,000,000 10.75% due 6/01/2009 3,000,000 3,000,000
B- B2 7,000,000 RSL Communications PLC, 12% due 11/01/2008 6,625,432 7,560,000
NR* NR* 5,500,000 Tele1 Europe BV, 13% due 5/15/2009 (c) 5,500,000 5,555,000
------------ ------------
56,681,247 54,557,500
===================================================================================================================================
Textiles--1.8% B B3 3,500,000 Dan River, Inc., 10.125% due 12/15/2003 3,750,110 3,570,000
B B2 4,750,000 Polymer Group Inc., 8.75% due 3/01/2008 4,750,000 4,595,625
------------ ------------
8,500,110 8,165,625
===================================================================================================================================
</TABLE>
6 & 7
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
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>
Transportation--8.7% B- B3 $ 4,250,000 American Reefer Co. Ltd., 10.25% due 3/01/2008 $ 4,250,000 $ 2,677,500
BB- NR* 6,000,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (c) 5,598,750 4,560,000
BB- Ba3 8,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 8,090,000 7,630,000
CCC+ Caa2 3,750,000 Hvide Marine, Inc., 8.375% due 2/15/2008 2,168,750 2,100,000
BB- B1 6,100,000 Sea Containers Ltd., 12.50% due 12/01/2004 6,927,375 6,649,000
B+ B2 6,000,000 TFM, SA de CV, 11.896%** due 6/15/2009 4,198,636 3,465,000
BB- Ba3 5,000,000 Transportacion Maritima Mexicana, SA de CV, 10%
due 11/15/2006 5,036,875 3,912,500
B- B2 7,000,000 Transtar Holdings LP, 10.547%** due 12/15/2003 6,796,479 6,930,000
CCC Caa3 5,000,000 Trism Inc., 10.75% due 12/15/2000 4,425,000 1,750,000
------------ ------------
47,491,865 39,674,000
===================================================================================================================================
Utilities--4.0% BB Ba3 4,250,000 CMS Energy Corp., 7.50% due 1/15/2009 4,250,000 4,098,058
B+ B2 5,000,000 Espirito Santo--Escelsa, 10% due 7/15/2007 4,817,500 3,725,000
BB NR* 3,000,000 Inversora de Electrica, 9% due 9/16/2004 (c) 2,947,500 2,250,000
BBB- Ba3 8,000,000 MetroGas SA, 12% due 8/15/2000 8,591,250 8,120,000
------------ ------------
20,606,250 18,193,058
===================================================================================================================================
Waste Management-- BB Ba3 4,250,000 Allied Waste North America, 7.375% due 1/01/2004 4,243,752 4,016,250
0.9%
===================================================================================================================================
Wireless B- B2 5,000,000 Cencall Communications Corporation, 8.805%** due
Communications-- 1/15/2004 5,000,000 5,150,000
Domestic Paging & NR* NR* 8,375,000 Pinnacle Holdings Inc., 10%** due 3/15/2008 5,785,545 5,129,688
Cellular--2.8% NR* B3 5,000,000 TeleCorp PCS Inc., 11.625%** due 4/15/2009 (c) 2,882,618 2,575,000
------------ ------------
13,668,163 12,854,688
===================================================================================================================================
Wireless B B1 13,000,000 CTI Holdings SA, 11.625%** due 4/15/2008 8,347,836 6,565,000
Communications-- B+ B3 8,475,000 Comunicacion Celular SA, 13.653%** due
International Paging 3/01/2005 (c) 7,164,420 5,085,000
& Cellular--7.8% CCC+ Caa1 2,750,000 Dolphin Telecom PLC, 17.456%** due 6/01/2008 1,139,215 1,457,500
B- Caa1 4,750,000 McCaw International Ltd., 11.543%** due 4/15/2007 3,546,569 2,850,000
B- Caa1 9,000,000 Millicom International Cellular, 13.171%** due
6/01/2006 7,058,228 7,020,000
BB- Ba3 5,250,000 Orange PLC, 8% due 8/01/2008 5,209,995 5,092,500
Telesystem International Wireless Inc.**:
CCC+ Caa1 6,250,000 17.359% due 6/30/2007 3,287,007 3,687,500
CCC+ Caa1 8,000,000 10.683% due 11/01/2007 5,568,735 3,920,000
------------ ------------
41,322,005 35,677,500
===================================================================================================================================
Total Investments in Corporate Bonds--131.1% 643,458,622 596,919,307
===================================================================================================================================
<CAPTION>
Shares
Held Preferred Stocks & Warrants
===================================================================================================================================
<S> <C> <C> <C> <C>
Broadcasting/Radio 3,223 Cumulus Media, Inc., Series A, 13.75% (a) 3,315,700 3,577,530
& Television--0.8%
===================================================================================================================================
Computer Services/ 5,250 Splitrock Services Inc. (Warrants) (e) 57,750 420,000
Electronics--0.1%
===================================================================================================================================
Product Distribution-- 57,348 Nebco Evans Holding Co. (a) 5,453,075 2,322,594
0.5%
===================================================================================================================================
Wireless 4,474 Rural Cellular Corp. (a) 4,522,355 4,474,000
Communications--
Domestic Paging &
Cellular--1.0%
===================================================================================================================================
Total Investments in Preferred Stocks &
Warrants--2.4% 13,348,880 10,794,124
===================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
===================================================================================================================================
<S> <C> <C> <C> <C>
Commercial $ 349,000 General Electric Capital Corp., 4.93% due
Paper***--0.1% 6/01/1999 349,000 349,000
===================================================================================================================================
Total Investments in Short-Term Securities--0.1% 349,000 349,000
===================================================================================================================================
Total Investments--133.6% $657,156,502 608,062,431
============
Liabilities in Excess of Other Assets--(33.6%) (152,884,459)
------------
Net Assets--100.0% $455,177,972
============
===================================================================================================================================
</TABLE>
* 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.
*** Commercial Paper is traded on a discount basis; the interest rate
shown reflects the discount rate paid at the time of purchase by the
Fund.
(a) Represents a pay-in-kind security which may pay interest/dividends
in additional face/shares.
(b) Subject to principal paydowns.
(c) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(d) Non-income producing security.
(e) 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.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
8 & 9
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of May 31, 1999
====================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$657,156,502) (Note 1a) ... $608,062,431
Interest receivable ............................................... 13,995,774
Deferred organization expenses (Note 1e) .......................... 13,265
Prepaid expenses and other assets ................................. 32,867
------------
Total assets ...................................................... 622,104,337
------------
====================================================================================================================
Liabilities: Loans (Note 5) .................................................... 155,700,000
Payables:
Securities purchased ............................................ $ 5,278,407
Custodian bank (Note 1g) ........................................ 1,181,306
Dividends to shareholders (Note 1f) ............................. 1,161,606
Interest on loans (Note 5) ...................................... 735,907
Investment adviser (Note 2) ..................................... 301,910
Commitment fees ................................................. 12,189 8,671,325
------------
Accrued expenses and other liabilities ............................ 2,555,040
------------
Total liabilities ................................................. 166,926,365
------------
====================================================================================================================
Net Assets: Net assets ........................................................ $455,177,972
============
====================================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized ....... $ 3,506,970
Paid-in capital in excess of par .................................. 521,715,861
Undistributed investment income--net .............................. 5,220,164
Accumulated realized capital losses on investments--net (Note 6) .. (25,135,519)
Accumulated distributions in excess of realized capital gains on
investments--net (Note 1f) ........................................ (1,035,433)
Unrealized depreciation on investments--net ....................... (49,094,071)
------------
Total--Equivalent to $12.98 per share based on 35,069,700 shares
of capital stock outstanding (market price $12.8125) .............. $455,177,972
============
====================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended May 31, 1999
====================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned ...................................... $ 60,590,766
(Note 1d): Dividends ......................................................... 1,719,953
Other ............................................................. 259,568
------------
Total income ...................................................... 62,570,287
------------
====================================================================================================================
Expenses: Loan interest expense (Note 5) .................................... $ 6,973,852
Investment advisory fees (Note 2) ................................. 3,583,302
Borrowing cost (Note 5) ........................................... 218,175
Accounting services (Note 2) ...................................... 72,763
Transfer agent fees ............................................... 57,101
Professional fees ................................................. 46,021
Custodian fees .................................................... 40,273
Printing and shareholder reports .................................. 39,176
Directors' fees and expenses ...................................... 37,689
Listing fees ...................................................... 10,477
Pricing services .................................................. 9,297
Amortization of organization expenses (Note 1e) ................... 3,599
Other ............................................................. 18,725
------------
Total expenses .................................................... 11,110,450
------------
Investment income--net ............................................ 51,459,837
------------
====================================================================================================================
Realized & Realized loss on investments--net ................................. (25,413,003)
Unrealized Loss on Change in unrealized depreciation on investments--net ............. (44,004,192)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations .............. $(17,957,358)
============
====================================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the Period
Year Ended Jan. 30, 1998+
May 31, to May 31,
Increase (Decrease) in Net Assets: 1999 1998
==============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net .................................................. $ 51,459,837 $ 14,458,735
Realized gain (loss) on investments--net ................................ (25,413,003) 1,035,408
Change in unrealized depreciation on investments--net ................... (44,004,192) (5,089,879)
------------ ------------
Net increase (decrease) in net assets resulting from operations ......... (17,957,358) 10,404,264
------------ ------------
==============================================================================================================================
Dividends & Investment income--net .................................................. (51,124,504) (10,331,828)
Distributions to In excess of realized gain on investments--net .......................... (1,035,433) --
Shareholders Net decrease in net assets resulting from dividends and distributions ------------ ------------
(Note 1f): to shareholders ......................................................... (52,159,937) (10,331,828)
------------ ------------
==============================================================================================================================
Capital Stock Value of shares issued to Common Stock shareholders in reinvestment of
Transactions dividends and distributions ............................................. 1,397,095 --
(Notes 1e & 4): Proceeds from issuance of Common Stock .................................. -- 524,250,000
Offering costs resulting from issuance of Common Stock .................. 40,731 (565,000)
------------ ------------
Net increase in net assets derived from capital stock transactions ...... 1,437,826 523,685,000
------------ ------------
==============================================================================================================================
Net Assets: Total increase (decrease) in net assets ................................. (68,679,469) 523,757,436
Beginning of period ..................................................... 523,857,441 100,005
------------ ------------
End of period* .......................................................... $455,177,972 $523,857,441
============ ============
==============================================================================================================================
* Undistributed investment income--net (Note 1h) .......................... $ 5,220,164 $ 4,126,907
============ ============
==============================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended May 31, 1999
==============================================================================================================================
<S> <C> <C>
Cash Provided by Net decrease in net assets resulting from operations ..................................... $(17,957,358)
Operating Activities: Adjustments to reconcile net decrease in net assets resulting from
operations to net cash provided by operating activities:
Increase in receivables ................................................................ (3,750,534)
Increase in other assets ............................................................... (11,578)
Increase in other liabilities .......................................................... 3,902,455
Realized and unrealized loss on investments--net ....................................... 69,417,195
Amortization of discount ............................................................... (9,881,025)
------------
Net cash provided by operating activities ................................................ 41,719,155
------------
==============================================================================================================================
Cash Used for Proceeds from sales of long-term investments ............................................. 283,661,396
Investing Activities: Purchases of long-term investments ....................................................... (429,651,399)
Purchases of short-term investments ...................................................... (146,241,647)
Proceeds from sales and maturities of short-term investments ............................. 145,923,000
------------
Net cash used for investing activities ................................................... (146,308,650)
------------
==============================================================================================================================
Cash Provided by Cash receipts from borrowings ............................................................ 360,400,000
Financing Activities: Cash payments on borrowings .............................................................. (204,700,000)
Dividends and distributions paid to shareholders ......................................... (51,151,236)
Offering costs ........................................................................... 40,731
------------
Net cash provided by financing activities ................................................ 104,589,495
------------
==============================================================================================================================
Cash: Net change in cash ....................................................................... --
Cash at beginning of year ................................................................ --
------------
Cash at end of year ...................................................................... $ --
============
==============================================================================================================================
Cash Flow Cash paid for interest ................................................................... $ 6,237,945
Information: ============
==============================================================================================================================
Non-Cash Financing Reinvestment of dividends and distributions paid to shareholders ......................... $ 1,397,095
Activities: ============
==============================================================================================================================
</TABLE>
See Notes to Financial Statements.
12 & 13
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the For the Period
from information provided in the financial statements. Year Ended Jan. 30, 1998+
Increase (Decrease) in Net Asset Value: May 31, 1999 to May 31, 1998
===============================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period ....................................... $ 14.99 $ 15.00
Operating ---------- ----------
Performance: Investment income--net ................................................... 1.47 .42
Realized and unrealized loss on investments--net ......................... (1.99) (.11)
---------- ----------
Total from investment operations ........................................... (.52) .31
---------- ----------
Less dividends and distributions:
Investment income--net ................................................... (1.46) (.30)
In excess of realized gain on investments--net ........................... (.03) --
---------- ----------
Total dividends and distributions .......................................... (1.49) (.30)
---------- ----------
Capital charge resulting from the issuance of Common Stock ................. --++ (.02)
---------- ----------
Net asset value, end of period ............................................. $ 12.98 $ 14.99
========== ==========
Market price per share, end of period ...................................... $ 12.8125 $ 14.1875
========== ==========
===============================================================================================================================
Total Investment Based on net asset value per share ......................................... (2.73%) 2.00%+++
Return:** ========== ==========
Based on market price per share ............................................ 1.45% (3.46%)+++
========== ==========
===============================================================================================================================
Ratios to Average Expenses, excluding interest expense ....................................... .85% --
Net Assets: ========== ==========
Expenses, net of reimbursement ............................................. 2.28% .10%*
========== ==========
Expenses ................................................................... 2.28% .69%*
========== ==========
Investment income--net ..................................................... 10.58% 8.46%*
========== ==========
===============================================================================================================================
Leverage: Amount of borrowings (in thousands) ........................................ $ 155,700 --
========== ==========
Average amount of borrowings outstanding during the period (in thousands) .. $ 126,034 --
========== ==========
Average amount of borrowings outstanding per share during the period ....... $ 3.60 --
========== ==========
===============================================================================================================================
Supplemental Net assets, end of period (in thousands) ................................... $ 455,178 $ 523,857
Data: ========== ==========
Portfolio turnover ......................................................... 46.86% 16.79%
========== ==========
===============================================================================================================================
</TABLE>
+ Commencement of operations.
++ Amount is less than $.01 per share.
+++ 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. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. 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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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).
14 & 15
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 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 period not exceeding five years.
In accordance with Statement of Position 98-5, any unamortized organization
expenses will be expensed on June 1, 1999. This charge will not have any
material impact on the operations of the Fund. 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. Distributions in excess of realized capital gains are due
primarily to post-October losses.
(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.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $757,924 have been reclassified between accumulated net
realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
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 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.
During the year ended May 31, 1999, the Fund paid Merrill Lynch Security Pricing
Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), $1,515 for security price quotations to compute the net asset value
of the Fund.
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
year ended May 31, 1999 were $434,929,806 and $274,571,941, respectively.
Net realized losses for the year ended May 31, 1999 and net unrealized losses as
of May 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
- --------------------------------------------------------------------------------
Long-term investments .............. $(25,463,178) $(49,094,071)
------------ ------------
Total .............................. $(25,463,178) $(49,094,071)
============ ============
- --------------------------------------------------------------------------------
As of May 31, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $50,277,397, of which $9,196,552 related to appreciated securities
and $59,473,949 related to depreciated securities. The aggregate cost of
investments at May 31, 1999 for Federal income tax purposes was $658,339,828.
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 year ended May 31, 1999 increased by
113,033 as a result of dividend reinvestment and during the period January 30,
1998 to May 31, 1998 increased by 34,950,000 as a result of the initial
offering.
5. Short-Term Borrowings:
On June 10, 1998, the Fund entered into a one-year credit agreement with a
syndicate of banks led by BankBoston, N.A. and State Street Bank and Trust
Company. 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%. For the year ended
May 31, 1999, the average amount borrowed was approximately $126,034,000 and the
daily weighted average interest rate was 5.53%. For the year ended May 31, 1999,
facility and commitment fees aggregated $218,175.
6. Capital Loss Carryforward:
At May 31, 1999, the Fund had a net capital loss carryforward of approximately
$6,419,000, all of which expires in 2007. This amount will be available to
offset like amounts of any future taxable gains.
7. Subsequent Events:
On June 9, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.128669 per share,
payable on June 30, 1999 to shareholders of record as of June 23, 1999.
16 & 17
<PAGE>
Corporate High Yield Fund III, Inc., May 31, 1999
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, 1999, the related statements of operations and cash flows for the
year then ended, changes in net assets and the financial highlights for the year
then ended and 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
audits.
We conducted our audits 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,
1999 by correspondence with the custodian and brokers. 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 audits provide 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, 1999, the results of its operations, the changes in
its net assets, and the financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 7, 1999
YEAR 2000 ISSUES (unaudited)
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invests. This negative impact may be greater for companies in
foreign markets, particularly emerging markets, since they may be less prepared
for the Year 2000 Problem than domestic companies and markets. If the companies
in which the Fund invests have Year 2000 Problems, the Fund's returns could be
adversely affected.
PORTFOLIO INFORMATION (unaudited)
Ten Largest Holdings
<TABLE>
<CAPTION>
Percent of Total
As of May 31, 1999 Long-Term Investments
====================================================================================================================
<S> <C> <C>
NTL Inc. NTL provides communications services to residential, business and
wholesale customers. The company offers residential telephony, cable
television and Internet access services. NTL also provides national
and international telecommunications and satellite and radio
communications. We hold bonds of International Cabletel (renamed NTL)
and wholly-owned Diamond Cable. 1.9%
- --------------------------------------------------------------------------------------------------------------------
Reliance Group Reliance owns property/casualty insurance and title insurance
Holdings, Inc. companies. The companies underwrite a broad range of standard
commercial and specialty commercial lines of property and casualty
insurance, as well as title insurance. 1.7
- --------------------------------------------------------------------------------------------------------------------
Nextlink Communications Nextlink provides local, long distance and enhanced telephone
Inc. communications services to commercial customers. The company operates
23 facilities based networks in fourteen states. 1.6
- --------------------------------------------------------------------------------------------------------------------
MetroNet Communications MetroNet is the largest competitive local telephone provider in
Corp. Canada, competing with the telephone companies. The company has high
capacity fiber optic networks in five major Canadian markets: Toronto,
Montreal, Vancouver, Edmonton and Calgary. The company is continuing
to build in target markets and will ultimately reach 11 major markets
in Canada. 1.6
- --------------------------------------------------------------------------------------------------------------------
Midland Funding II Midland operates a natural gas-fired, cogeneration facility located in
Midland County, Michigan. The plant also produces steam for industrial
applications. Consumers Energy Company, who is Midland's main
customer, indirectly owns a 49% stake in the company. 1.5
- --------------------------------------------------------------------------------------------------------------------
Venetian Casino/LV Sands This newly-built casino/resort on the Las Vegas strip has an old
Venice theme and decor and will target the convention market. 1.5
- --------------------------------------------------------------------------------------------------------------------
Call-Net Enterprises Inc. The company is the largest alternative provider of long distance
telephone services in Canada, marketing under the brand name Sprint
Canada. Sprint Communications Company L.P., the third-largest long
distance services carrier in the United States, owns approximately 25%
of the company's shares. 1.5
- --------------------------------------------------------------------------------------------------------------------
Lyondell Chemical Company Lyondell is a global commodity chemical company. The company is the
world's largest producer of propylene oxide and produces a variety of
derivative chemicals based on propylene oxide. Styrene monomer and
tertiary butyl alcohol are also important products. Lyondell's
chemicals have end uses such as flexible foam for automotive seating
and furniture, antifreeze and coolants, personal care products,
coatings, adhesives, sealants, resins and solvents. 1.5
- --------------------------------------------------------------------------------------------------------------------
Chattem, Inc. This branded consumer product company sells over-the-counter
healthcare products, as well as toiletries and skin care products.
Products include Gold Bond medicated powder, Icy Hot topical
analgesic, Dexatrim appetite suppressant, Ban deodorant and Bullfrog
sunblock. 1.4
- --------------------------------------------------------------------------------------------------------------------
MetroGas SA 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. 1.3
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
18 & 19
<PAGE>
Officers and Directors
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Vincent T. Lathbury III, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Elizabeth M. Phillips, Vice President
Donald C. Burke, Vice President and Treasurer
Patrick D. Sweeney, Secretary
- --------------------------------------------------------------------------------
Gerald M. Richard, Treasurer of Corporate High Yield Fund III, Inc. has recently
retired. His colleagues at Merrill Lynch Asset Management, L.P. join the Fund's
Board of Directors in wishing Mr. Richard well in his retirement.
- --------------------------------------------------------------------------------
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--5/99
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