MUNIHOLDINGS
FLORIDA INSURED
FUND III
---------------
[GRAPHIC OMITTED]
STRATEGIC
Performance
------------------
Semi-Annual Report
March 31, 1999
<PAGE>
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MuniHoldings Florida Insured Fund III
- --------------------------------------------------------------------------------
The Benefits and Risks of Leveraging
MuniHoldings Florida Insured Fund III has the ability to leverage to seek to
enhance the yield and net asset value of its Common Shares. However, these
objectives cannot be achieved in all interest rate environments. To leverage,
the Fund issues Preferred Shares, which pay dividends at pre vailing short-term
interest rates, and invests the proceeds in long-term municipal bonds. The
interest earned on these investments is paid to Common Shareholders in the form
of dividends, and the value of these portfolio holdings is reflected in the per
share net asset value of the Fund's Common Shares. However, in order to benefit
Common Shareholders, the yield curve must be positively sloped; that is,
short-term interest rates must be lower than long-term interest rates. At the
same time, a period of generally declining interest rates will benefit Common
Shareholders. If either of these conditions change, then the risks of leveraging
will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Share capitalization of
$100 million and the issuance of Preferred Shares for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Shares based on the lower short-term interest rates. At the same time, the
fund's total portfolio of $150 million earns the income based on long-term
interest rates. Of course, increases in short-term interest rates would reduce
(and even eliminate) the dividends on the Common Shares.
In this case, the dividends paid to Preferred Share holders are significantly
lower than the income earned on the fund's long-term investments, and therefore
the Common Shareholders are the beneficiaries of the incre mental yield.
However, if short-term interest rates rise, narrowing the dif ferential between
short-term and long-term interest rates, the incremental yield pickup on the
Common Shares will be reduced or eliminated completely. At the same time, the
market value of the fund's Common Shares (that is, their price as listed on the
New York Stock Exchange) may, as a result, decline. Furthermore, if long-term
interest rates rise, the Common Shares' net asset value will reflect the full
decline in the price of the portfolio's investments, since the value of the
fund's Preferred Shares does not fluctuate. In addition to the decline in net
asset value, the market value of the fund's Common Shares may also decline.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Fund to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed-rate, tax-exempt securities. To the extent the Fund invests in
inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in these securities.
<PAGE>
MuniHoldings Florida Insured Fund III, March 31, 1999
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DEAR SHAREHOLDER
- --------------------------------------------------------------------------------
We are pleased to provide you with this first semi-annual report for
MuniHoldings Florida Insured Fund III. In this and future shareholder reports,
we will highlight the Fund's performance and describe recent investment
activities. The Fund seeks to provide shareholders with current income exempt
from Fed eral income tax and the Florida intangible personal property tax by
investing primarily in a portfolio of long-term, investment-grade Florida
municipal obligations.
Since inception (October 1, 1998) through March 31, 1999, the Common Shares of
MuniHoldings Florida Insured Fund III earned $0.398 per share income dividends,
which included earned and unpaid dividends of $0.068. This represents a net
annualized yield of 5.44%, based on a month-end per share net asset value of
$14.69. Over the same period, the total investment return on the Fund's Common
Shares was +0.16%, based on a change in per share net asset value from $15.00 to
$14.69.
For the period October 1, 1998 through March 31, 1999, the Fund's Preferred
Shares had an average yield of 3.00% for Series A and 3.09% for Series B.
The Municipal Market Environment
Since the Fund's inception (October 1, 1998) through March 31, 1999, long-term
tax-exempt revenue bond yields were little changed. However, long-term US
Treasury bond yields were under significant pressure throughout the March
period. Investors became increasingly concerned that the strong growth the US
economy displayed during the fourth quarter in 1998 would continue into the
first half of 1999. Continued strong US equity market performance also reduced
investor interest in long-term fixed-income products. Furthermore, foreign
economic growth, while clearly not expanding, appears to have stabilized. This
reduced much of the strong "flight to quality" benefit the US Treasury market
had enjoyed in recent quarters. These factors helped push US Treasury bond
yields higher throughout the period. US Treasury bond yields rose 65 basis
points (0.65%) to end the March period at 5.625%. Long-term municipal revenue
bond yields rose less than 10 basis points to end the March period at 5.29% as
measured by the Bond Buyer Revenue Bond Index.
The relative stability of the municipal bond market in recent months was largely
the result of a return to a strong technical position within the tax-exempt
market. For much of 1998, new long-term municipal bond issuance was
significantly above recent historic trends. Additionally, the strong demand
exerted by world equity markets also sapped much of the demand for
tax-advantaged products. However, in recent months, a much stronger
supply/demand relationship has developed.
Over the last 12 months, nearly $275 billion in new long-term municipal bonds
was issued, an increase of approximately 10% compared to the same period a year
ago. As interest rates declined in the recent quarters, it has become
increasingly difficult for municipalities to generate the economic savings
necessary for additional tax-free financings. Con sequently, the pace of new
bond issuance slowed in recent quarters. During the six months ended March 31,
1999, more than $125 billion in new long-term municipal securities was
underwritten, a decrease of 6% compared to the same six-month period a year ago.
During the quarter ended March 31, 1999, approximately $60 billion in new
long-term tax-exempt bonds was issued, a decline of almost 20% compared to the
quarter ended March 31, 1998.
Additionally, in January and February, tax-exempt bond holders received over $40
billion from coupon payments, bond maturities and proceeds from early bond
redemptions. Consequently, retail investor demand has been strong in recent
months, easily matching, if not at times exceeding, available supply. We will
monitor this trend closely in the coming months to determine if the supply
pressures exerted in 1998 are abating and fostering a more balanced supply/
demand environment for 1999.
The recent relative outperformance of the municipal bond market has resulted in
a decline in their recent historic high yield ratios. As recently as the end of
1998, long-term, A-rated municipal revenue bond yields were in excess of 100% of
comparable US Treasury bond yields. At March 31, 1999, municipal bond yield
ratios were approximately 95% of their taxable counterparts, still well above
their recent historic average. During 1997, tax-exempt bond yield ratios
averaged 84%. Should the current positive technical environment in municipal
securities continue to improve, it is likely that tax-exempt bond yield ratios
will return to more historic levels.
Looking ahead, the direction and intensity of the next move in interest rates is
difficult to predict. In recent years, US bond yields tended to reach their
annual peak sometime in April and move downward for the remainder of the year.
However, such trends have been predicated on subsequent declines in US economic
activity. Currently, there appears to be little indication of significant
economic weakness going forward. On the other hand, by nearly every measure,
inflation is well contained. Future indicators of inflation, such as the prices
of gold and other commodities, are giving little evidence for any significant
inflationary increase. Additionally, inflation-adjusted real rates of return are
historically attractive to long-term investors. These factors suggest that
fixed-income bond yields may trade in a relatively narrow range, centered around
current levels, for a protracted period of time. Should the US economy weaken
later this year, it is likely that bond yields will decline as they have in
recent years.
Portfolio Strategy
Since its inception, we have focused on committing the Fund's initial proceeds
in the long-term and intermediate-term maturity range of the Florida insured
municipal market. Interest rates in the taxable arena, and to a much lesser
degree in the municipal market, have risen since the Fund commenced operations.
Therefore, we had to proceed carefully in making our initial investments in
order to seek to protect the port folio's net asset valuation. More of our
initial investments were focused in shorter maturity municipal bonds than would
otherwise be the case if the fixed-income market had been more stable. Our goal
is to have the Fund invested while tempering the impact of rising interest rates
so that Common Shareholders can begin to benefit from the higher yield that
leverage can provide. (For an explanation of the benefits and risks of
leveraging, see page 1 of this report to shareholders.)
As a result of inordinately tight credit quality spreads, we deliberately
underweighted the Fund's exposure to uninsured bonds. Our portfolio currently
reflects a balance of long-term and short-term holdings, with a high degree of
credit quality. Once interest rates have stabilized, we plan to recommit a
larger portion of Fund assets to longer-term, higher-yielding Florida bonds.
In Conclusion
We appreciate your investment in MuniHoldings Florida Insured Fund III, 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 Trustee
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Robert A. DiMella
Robert A. DiMella
Vice President and Portfolio Manager
/s/ Robert D. Sneeden
Robert D. Sneeden
Vice President and Portfolio Manager
May 10, 1999
2 & 3
<PAGE>
MuniHoldings Florida Insured Fund III, March 31, 1999
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SCHEDULE OF INVESTMENTS (in Thousands)
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<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C>
Florida--72.1% AAA Aaa $ 2,685 Broward County, Florida, Airport System Revenue
Bonds, AMT, Series G, 5.125% due 10/01/2015 (a) $ 2,707
-----------------------------------------------------------------------------------------------------------
Clay County, Florida, HFA, S/F Mortgage Revenue
Refunding Bonds (Multi-County) (b)(c):
NR* Aaa 4,000 5.45% due 4/01/2031 (h) 4,040
NR* Aaa 3,000 AMT, 5.35% due 10/01/2018 3,037
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,375 Dade County, Florida, Seaport, GO,
Refunding, 5.125% due 10/01/2026 (e) 4,400
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,125 Dade County, Florida, Water and Sewer System Revenue
Bonds, 5.25% due 10/01/2026 (d) 6,249
-----------------------------------------------------------------------------------------------------------
NR* Aaa 4,000 Escambia County, Florida, HFA, S/F Mortgage Revenue
Refunding Bonds (Multi-County Program),
AMT, Series A, 5.35% due 4/01/2031 (b)(c) 4,046
-----------------------------------------------------------------------------------------------------------
NR* Baa1 3,000 Escambia County, Florida, PCR (Champion
International Corp. Project), AMT,
6.40% due 9/01/2030 (h) 3,190
-----------------------------------------------------------------------------------------------------------
A1 VMIG1+ 700 Escambia County, Florida, PCR, Refunding (Gulf Power
Company Project), VRDN,
2.95% due 7/01/2022 (f) 700
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 Florida, HFA, Revenue Bonds (Wentworth Apartments
Project), AMT, Series I-1,
5.45% due 10/01/2037 (a) 3,539
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,340 Florida Housing Finance Corporation Revenue Bonds
(Homeowner Mortgage), AMT, Series 2,
5.35% due 1/01/2021 (e) 3,371
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Florida State Department of Children and Families,
COP (South Florida State Hospital Project),
5% due 7/01/2018 (a) 1,990
-----------------------------------------------------------------------------------------------------------
Florida State Turnpike Authority, Turnpike
Revenue Bonds:
AAA NR* 2,430 (Department of Transportation) Series B, 5% due 7/01/2018 (e) 2,434
AAA Aaa 4,010 Series A, 5% due 7/01/2017 (g) 4,024
-----------------------------------------------------------------------------------------------------------
A- Baa1 5,000 Highlands County, Florida, Health Facilities Authority
Revenue Bonds (Adventist Health Systems),
5.25% due 11/15/2028 4,825
-----------------------------------------------------------------------------------------------------------
AAA NR* 12,990 Jacksonville, Florida, Health Facilities Authority,
Hospital Revenue Refunding Bonds, RIB,
Series 49, 6.864% due 8/15/2027 (e)(i) 12,892
-----------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 Miami-Dade County, Florida, Public Service Tax
Revenue Bonds (UMSA Public Improvements),
5% due 10/01/2023 (g) 4,965
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Orange County, Florida, Tourist Development, Tax
Revenue Refunding Bonds (e):
AAA Aaa 3,500 5% due 10/01/2018 3,505
AAA Aaa 5,160 5% due 10/01/2019 5,160
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AAA Aaa 2,500 Orlando and Orange County Expressway Authority,
Florida, Expressway Revenue Bonds,
Junior Lien, 5% due 7/01/2017 (d) 2,504
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,100 Orlando and Orange County Expressway Authority, Florida,
Expressway Revenue Refunding Bonds,
Junior Lien, 5% due 7/01/2028 (d) 3,067
-----------------------------------------------------------------------------------------------------------
Pinellas County, Florida, HFA, S/F Mortgage Revenue
Bonds (Multi-County Program), AMT, Series C
(b)(c):
NR* Aaa 1,735 5.70% due 9/01/2018 1,785
NR* Aaa 1,990 5.80% due 3/01/2029 2,051
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AAA Aaa 5,000 Pinellas County, Florida, Sewer Revenue
Refunding Bonds, 5% due 10/01/2024 (d) 4,964
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,700 Polk County, Florida, School Board, COP,
Series A, 5% due 1/01/2018 (g) 3,706
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Port St. Lucie, Florida, Special Assessment
Revenue Bonds, Utility Service Area Numbers 3 & 4,
Series A, 5% due 10/01/2018 (e) 2,003
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,135 St. John's County, Florida, Sales Tax Revenue
Refunding Bonds, 5% due 10/01/2019 (d) 4,135
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A1+ VMIG1+ 3,000 St. Lucie County, Florida, PCR, Refunding
(Florida Power and Light Company Project), VRDN,
3% due 1/01/2026 (f) 3,000
-----------------------------------------------------------------------------------------------------------
NR* Aaa 2,130 Village Center Community Development District,
Florida, Utility Revenue Refunding Bonds,
Series A, 5% due 10/01/2023 (e) 2,115
====================================================================================================================================
Illinois--9.8% AAA Aaa 2,500 Chicago, Illinois, Board of Education,
GO (Chicago Reform School), Series A,
5.25% due 12/01/2030 (a) 2,506
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AAA Aaa 2,500 Chicago, Illinois, Sales Tax Revenue Refunding
Bonds, 5.25% due 1/01/2028 (d) 2,510
-----------------------------------------------------------------------------------------------------------
AAA Aaa 9,200 Metropolitan Pier and Exposition Authority, Illinois,
Dedicated State Tax Revenue Refunding
Bonds (McCormick Place Expansion Project),
Series A, 5.25% due 6/15/2027 (a) 9,233
====================================================================================================================================
Massachusetts--4.2% AAA Aaa 6,000 Massachusetts State Turnpike Authority, Metropolitan
Highway System, Revenue Refunding Bonds,
Sub-Series A, 5.25% due 1/01/2029 (a) 6,073
====================================================================================================================================
</TABLE>
Portfolio Abbreviations
To simplify the listings of MuniHoldings Florida Insured Fund III's portfolio
holdings in the Schedule of Investments, we have abbreviated the names of many
of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings Florida Insured Fund III, March 31, 1999
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SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
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<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C>
Texas--7.1% A1+ NR* $ 400 Harris County, Texas, Health Facilities Development
Corporation, Hospital Revenue Refunding
Bonds (Methodist Hospital), VRDN, 2.90% due 12/01/2025 (f) $ 400
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Houston, Texas, Water and Sewer System, Revenue
Refunding Bonds, Junior Lien, Series A,
5.25% due 12/01/2025 (d) 6,049
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,725 Texas State Turnpike Authority, Dallas North
Thruway Revenue Bonds (President George Bush
Turnpike), 5.25% due 1/01/2023 (d) 3,753
====================================================================================================================================
Total Investments (Cost--$135,465)--93.2% 134,928
Variation Margin on Financial Futures Contracts**--0.1% 119
Other Assets Less Liabilities--6.7% 9,773
--------
Net Assets--100.0% $144,820
========
====================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) FNMA Collateralized.
(c) GNMA Collateralized.
(d) FGIC Insured.
(e) MBIA Insured.
(f) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at March 31,
1999.
(g) FSA Insured.
(h) All or a portion of security held as collateral in connection with open
financial futures contracts.
(i) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at March 31, 1999.
*Not Rated.
**Financial futures contracts sold as of March 31, 1999 were as follows:
See Notes to Financial Statements.
(in Thousands)
- --------------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1b)
- --------------------------------------------------------------------------------
225 US Treasury Bonds BZW June 1999 $27,127
- --------------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$27,186) $27,127
=======
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+Highest short-term rating by Moody's Investors Service, Inc.
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QUALITY PROFILE
- --------------------------------------------------------------------------------
The quality ratings of securities in the Fund as of March 31, 1999 were as
follows:
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Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa................................................................ 84.8%
A/A.................................................................... 3.4
BBB/Baa................................................................ 2.2
Other+................................................................. 2.8
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+Temporary investments in short-term municipal securities.
6
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of March 31, 1999
====================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$135,465,203) (Note 1a) ........... $134,927,582
Cash ...................................................................... 71,073
Receivables:
Securities sold ......................................................... $ 7,605,036
Interest ................................................................ 2,382,548
Variation margin (Note 1b) .............................................. 119,531 10,107,115
-------------
Deferred organization expenses (Note 1e) .................................. 13,500
------------
Total assets .............................................................. 145,119,270
===========
====================================================================================================================================
Liabilities: Payables:
Offering costs (Note 1e) ................................................ 225,812
Investment adviser (Note 2) ............................................. 32,858
Dividends to shareholders (Note 1f) ..................................... 16,513 275,183
-------------
Accrued expenses and other liabilities .................................... 23,596
------------
Total liabilities ......................................................... 298,779
------------
====================================================================================================================================
Net Assets: Net assets ................................................................ $144,820,491
============
====================================================================================================================================
Capital: Capital Shares (unlimited number of shares of beneficial interest
authorized) (Note 4):
Preferred Shares, par value $.10 per share (2,160 shares of
AMPS* issued and outstanding at $25,000 per share liquidation
preference) ............................................................. $ 54,000,000
Common Shares, par value $.10 per share (6,181,830 shares
issued and outstanding)........ ......................................... $ 618,183
Paid-in capital in excess of par........................................... 91,277,757
Undistributed investment income--net....................................... 447,007
Accumulated realized capital losses on investments--net.................... (1,043,898)
Unrealized depreciation on investments--net................................ (478,558)
--------
Total--Equivalent to $14.69 net asset value per Common Share
(market price--$14.375) ................................................. 90,820,491
------------
Total capital.............................................................. $144,820,491
============
====================================================================================================================================
</TABLE>
*Auction Market Preferred Shares.
See Notes to Financial Statements.
7
<PAGE>
MuniHoldings Florida Insured Fund III, March 31, 1999
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period October 1, 1998+ to March 31, 1999
====================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned....................... $ 3,440,984
Income (Note 1d):
====================================================================================================================================
Expenses: Investment advisory fees (Note 2).............................................. $ 367,860
Commission fees (Note 4)....................................................... 55,967
Accounting services (Note 2)................................................... 38,795
Professional fees.............................................................. 21,350
Transfer agent fees............................................................ 15,259
Trustees' fees and expenses.................................................... 10,134
Listing fees................................................................... 7,148
Custodian fees................................................................. 4,054
Pricing fees................................................................... 3,186
Printing and shareholder reports............................................... 3,098
Amortization of organization expenses (Note 1e)................................ 1,283
Other.......................................................................... 3,697
--------
Total expenses before reimbursement............................................ 531,831
Reimbursement of expenses (Note 2)............................................. (295,183)
--------
Total expenses after reimbursement............................................. 236,648
------------
Investment income--net......................................................... 3,204,336
------------
====================================================================================================================================
Realized & Unrealized Realized loss on investments--net.............................................. (1,043,898)
Loss on Investments Unrealized depreciation on investments--net.................................... (478,558)
- -- Net (Notes ------------
1b, 1d & 3): Net Increase in Net Assets Resulting from Operations........................... $ 1,681,880
============
====================================================================================================================================
</TABLE>
+Commencement of operations.
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
Oct. 1, 1998+ to
Increase (Decrease) in Net Assets: March 31, 1999
======================================================================================================================
<S> <C> <C>
Operations: Investment income--net ........................................................ $ 3,204,336
Realized loss on investments--net ............................................. (1,043,898)
Unrealized depreciation on investments--net ................................... (478,558)
-------------
Net increase in net assets resulting from operations .......................... 1,681,880
-------------
======================================================================================================================
Dividends to Investment income--net:
Shareholders Common Shares ............................................................... (2,037,001)
(Note 1f): Preferred Shares ............................................................ (720,328)
-------------
Net decrease in net assets resulting from dividends to shareholders ........... (2,757,329)
-------------
======================================================================================================================
Beneficial Interest Proceeds from issuance of Common Shares ....................................... 92,250,000
Transactions Proceeds from issuance of Preferred Shares .................................... 54,000,000
(Notes 1e & 4): Value of shares issued to Common Shareholders in reinvestment of dividends .... 370,420
Offering costs resulting from the issuance of Common Shares ................... (271,355)
Offering and underwriting costs resulting from the issuance of Preferred Shares (553,130)
-------------
Net increase in net assets derived from beneficial interest transactions ...... 145,795,935
-------------
======================================================================================================================
Net Assets: Total increase in net assets .................................................. 144,720,486
Beginning of period ........................................................... 100,005
-------------
End of period* ................................................................ $ 144,820,491
=============
======================================================================================================================
*Undistributed investment income--net .......................................... $ 447,007
=============
======================================================================================================================
</TABLE>
+Commencement of operations.
See Notes to Financial Statements.
9
<PAGE>
MuniHoldings Florida Insured Fund III, March 31, 1999
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. Oct. 1, 1998+ to
Increase (Decrease) in Net Asset Value: March 31, 1999
====================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period ............................ $ 15.00
Operating -----------
Performance: Investment income--net .......................................... .52
Realized and unrealized loss on investments--net ................ (.23)
-----------
Total from investment operations ................................ .29
-----------
Less dividends to Common Shareholders from investment income--net (.33)
-----------
Capital charge resulting from issuance of Common Shares ......... (.05)
-----------
Effect of Preferred Share activity:++
Dividends to Preferred Shareholders:
Investment income--net ....................................... (.12)
Capital charge resulting from issuance of Preferred Shares .... (.10)
-----------
Total effect of Preferred Share activity ........................ (.22)
-----------
Net asset value, end of period .................................. $ 14.69
===========
Market price per share, end of period ........................... $ 14.375
===========
====================================================================================================
Total Investment Based on market price per share ................................. (1.99%)++
Return:** ===========
Based on net asset value per share .............................. .16%++
===========
====================================================================================================
Ratios to Average Expenses, net of reimbursement .................................. .35%*
Net Assets:*** ===========
Expenses ........................................................ .80%*
===========
Investment income--net .......................................... 4.79%*
===========
====================================================================================================
Supplemental Net assets, net of Preferred Shares, end of period (in thousands) $ 90,820
Data: ===========
Preferred Shares outstanding, end of period (in thousands) ...... $ 54,000
===========
Portfolio turnover .............................................. 123.02%
===========
====================================================================================================
Leverage: Asset coverage per $1,000 ....................................... $ 2,682
===========
====================================================================================================
Dividends Per Series A--Investment income--net ................................ $ 329
Share on Preferred ===========
Shares Outstanding: Series B--Investment income--net ................................ $ 338
===========
====================================================================================================
</TABLE>
*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.
***Do not reflect the effect of dividends to Preferred Shareholders.
+Commencement of operations.
++The Fund's Preferred Shares were issued on October 22, 1998.
++Aggregate total investment return.
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies:
MuniHoldings Florida Insured Fund III (the "Fund") is registered under the
Investment Company Act of 1940 as a non-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. These unaudited financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. Prior to commencement of operations on October
1, 1998, the Fund had no operations other than those relating to organizational
matters and the sale of 6,667 shares of Common Shares on September 18, 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 Shares on a
weekly basis. The Fund's Common Shares are listed on the New York Stock Exchange
under the symbol MFD. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Municipal bonds are traded primarily in the
over-the-counter markets and are valued at the most recent bid price or yield
equivalent as obtained by the Fund's pricing service from dealers that make
markets in such securities. Financial futures contracts and options thereon,
which are traded on exchanges, are valued at their closing prices as of the
close of such exchanges. 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). Securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund, including valuations
furnished by a pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its valuations
are reviewed by the officers of the Fund under the general supervision of the
Board of Trustees.
(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 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 Options--The Fund is authorized to write covered call options 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
11
<PAGE>
MuniHoldings Florida Insured Fund III, March 31, 1999
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (concluded)
- --------------------------------------------------------------------------------
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.
(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).
Interest income is recognized on the accrual basis. Discounts and market
premiums are amortized into interest income. 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 the first day of the next fiscal year beginning
after December 15, 1998. 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 and Preferred Shares 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 port folio 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 0.55% of the Fund's average weekly net assets including
proceeds from the issuance of Preferred Shares. For the period October 1, 1998
to March 31, 1999, FAM earned fees of $367,860, of which $265,394 was
volun-tarily waived. FAM also reimbursed the Fund for additional expenses of
$29,789.
During the period October 1, 1998 to March 31, 1999, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, received
underwriting fees of $405,000 in connection with the issuance of the Fund's
Preferred Shares.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or trustees 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 October 1, 1998 to March 31, 1999 were $290,348,680 and $157,770,053,
respectively.
Net realized gains (losses) for the period October 1, 1998 to March 31, 1999 and
net unrealized gains (losses) as of March 31, 1999 were as follows:
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .................... $(1,244,838) $ (537,621)
Financial futures contracts .............. 200,940 59,063
----------- -----------
Total .................................... $(1,043,898) $ (478,558)
=========== ===========
- --------------------------------------------------------------------------------
As of March 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $537,621, of which $162,716 related to appreciated
securities and $700,337 related to depreciated securities. The aggregate cost of
investments at March 31, 1999 for Federal income tax purposes was $135,465,203.
4. Beneficial Interest Transactions:
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, including Preferred Shares, par value $.10 per share, all of which
were initially classified as Common Shares. The Board of Trustees is authorized,
however, to reclassify any unissued shares of capital without approval of
holders of Common Shares.
Common Shares
Shares issued and outstanding for the period October 1, 1998 to March 31, 1999,
increased by 6,150,000 from shares sold and by 25,163 as a result of dividend
reinvestment.
Preferred Shares
Auction Market Preferred Shares ("AMPS") are Preferred Shares of the Fund, with
a par value of $.10 per share and a liquidation preference of $25,000 per share,
that entitle their holders to receive cash dividends at an annual rate that may
vary for the successive dividend periods. The yields in effect at March 31, 1999
were for Series A, 3.20% and Series B, 3.19%.
In connection with the offering of AMPS, the Board of Trustees reclassified
2,160 shares of unissued beneficial interest as AMPS. Shares issued and
outstanding during the period October 1, 1998 to March 31, 1999 increased by
2,160 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from 0.25% to 0.375%, calculated on the proceeds of
each auction. For the period October 1, 1998 to March 31, 1999, MLPF&S earned
$50,877 as commissions.
5. Subsequent Event:
On April 8, 1999, the Fund's Board of Trustees declared an ordinary income
dividend to Common Shareholders in the amount of $.067979 per share, payable on
April 29, 1999 to shareholders of record as of April 22, 1999.
12 & 13
<PAGE>
MuniHoldings Florida Insured Fund III, March 31, 1999
- --------------------------------------------------------------------------------
MANAGED DIVIDEND POLICY
- --------------------------------------------------------------------------------
The Fund's dividend policy is to distribute substantially all of its net
investment income to its shareholders on a monthly basis. However, in order to
provide shareholders with a more consistent yield to the current trading price
of the Fund's Common Shares, the Fund may at times pay out less than the entire
amount of net investment income earned in any particular month and may at times
in any particular month pay out such accumulated but undistributed income in
addition to net investment income earned in that month. As a result, the
dividends paid by the Fund for any particular month may be more or less than the
amount of net investment income earned by the Fund during such month. The Fund's
current accumulated but undistributed net investment income, if any, is
disclosed in the Statement of Assets, Liabilities and Capital, which comprises
part of the financial information included in this report.
14
<PAGE>
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OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Arthur Zeikel, Trustee
Vincent R. Giordano, Senior Vice President
Kenneth A. Jacob, Vice President
Robert A. DiMella, Vice President
Robert D. Sneeden, Vice President
Donald C. Burke, Vice President and Treasurer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Transfer Agents:
Common Shares:
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Preferred Shares:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MFD
15
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of MuniHoldings Florida Insured Fund III 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 the ability to leverage its
Common Shares by issuing Preferred Shares to provide the Common Share holders
with a potentially higher rate of return. Leverage creates risks for Common
Shareholders, including the likelihood of greater vola tility of net asset value
and market price of shares of the Common Shares, and the risk that fluc tuations
in the short-term dividend rates of the Preferred Shares may affect the yield to
Common Shareholders. Statements and other information herein are as dated and
are subject to change.
MuniHoldings Florida
Insured Fund III
Box 9011
Princeton, NJ
08543-9011
#HOLDFL3--3/99
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