MUNIHOLDINGS
CALIFORNIA
INSURED
FUND III, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
November 30, 1998
<PAGE>
MuniHoldings California Insured Fund III, Inc.
The Benefits and Risks of Leveraging
MuniHoldings California Insured Fund III, Inc. has the ability to leverage to
seek to enhance the yield and net asset value of its Common Stock. However,
these objectives cannot be achieved in all interest rate environments. To
leverage, the Fund issues Preferred Stock, which pays dividends at prevailing
short-term interest rates, and invests the proceeds in long-term municipal
bonds. The interest earned on these investments is paid to Common Stock
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 Stock.
However, in order to benefit Common Stock 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 Stock 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 Stock capitalization of
$100 million and the issuance of Preferred Stock 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
Stock 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 Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term investments,
and therefore the Common Stock shareholders are the beneficiaries of the
incremental yield. However, if short-term interest rates rise, narrowing the
differential between short-term and long-term interest rates, the incremental
yield pickup on the Common Stock will be reduced or eliminated completely. At
the same time, the market value of the fund's Common Stock (that is, its price
as listed on the New York Stock Exchange) may, as a result, decline.
Furthermore, if long-term interest rates rise, the Common Stock's net asset
value will reflect the full decline in the price of the portfolio's investments,
since the value of the fund's Preferred Stock does not fluctuate. In addition to
the decline in net asset value, the market value of the fund's Common Stock 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 California Insured Fund III, Inc., November 30, 1998
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
MuniHoldings California Insured Fund III, Inc. 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 Federal and California income taxes by investing primarily in a portfolio
of long-term, investment-grade municipal obligations.
Since inception (September 25, 1998), the Common Stock of MuniHoldings
California Insured Fund III, Inc. earned $0.147 per share income dividends,
which included earned and unpaid dividends of $0.070. This represents a net
annualized yield of 5.35%, based on a month-end per share net asset value of
$14.93. Over the same period, the total investment return on the Fund's Common
Stock was +0.05%, based on a change in per share net asset value from $15.00 to
$14.93, and assuming reinvestment of $0.077 per share income dividends.
For the period September 25, 1998 through November 30, 1998, the Fund's Auction
Market Preferred Stock had an average yield of 3.49% for Series A and 3.08% for
Series B.
The Municipal Market Environment
During the six months ended November 30, 1998, long-term bond yields declined
significantly. The near absence of any inflationary pressures in the United
States continued to support historic low interest rates. Additionally, foreign
economic factors have continued to outweigh US domestic fundamentals, as they
have for much of 1998. The economic crisis that began in Asia over a year ago
has spread both to Russia and South America. However, economic factors in these
countries have begun to negatively impact US growth. For example, employment in
the US manufacturing sector declined in recent months as a result of reduced
demand for export goods. Concern that the modest decline in US economic growth
seen thus far would spread and intensify led the Federal Reserve Board to lower
short-term interest rates in late September, in mid-October and in mid-November.
These actions were taken to offset the drag of foreign economies on future US
growth.
US Treasury bond yields continued to benefit from a strong "flight to quality"
as foreign investors were drawn to the relative safe haven of US Government
securities. Additionally, the sharp equity market correction, which began at the
end of August, triggered a further flight into US Treasury securities. Long-term
US Treasury bond yields fell over 75 basis points (0.75%) to approximately 5% by
the end of November.
By early October, worldwide investor confidence began to rise, reducing the
demand for the safety and liquidity of US Treasury securities. Investor
confidence was restored by the belief that major world governments, as well as
the International Monetary Fund, would take the necessary action to support weak
domestic economies in Asia and Latin America. Additionally, rapid recovery in US
and world equity markets caused some investors to reallocate funds from US debt
investments back to various world equity markets. US Treasury security yields
rose through mid-November to approximately 5.375%. However, the resumption of
the decline in foreign financial markets, particularly in Asia, as well as
renewed concerns of additional US economic weakness, led to a further lowering
of short-term interest rates by the Federal Reserve Board in mid-November. These
factors pushed taxable interest rates lower for the remainder of the period to
end November at 5.07%. During the six-month period ended November 30, 1998,
long-term US Treasury bond yields declined approximately 70 basis points.
During much of the past 12 months, the tax-exempt bond market has contended with
significant new-issue supply pressures. Over the past year, more than $277
billion in new long-term tax-exempt bonds were underwritten, an increase of
almost 30% compared to the same period a year ago. During the most recent
six-month period, approximately $140 billion in new long-term municipal bonds
were underwritten, representing an increase of nearly 10% compared to the same
six-month period last year. This increased supply, coupled with the high returns
the US equity market generated for much of 1998, was one of the major reasons
municipal bond yields declined less than their taxable counterparts during the
period.
The continued increase in new bond issuance has required ever-lower tax-exempt
bond yields to generate the economic savings necessary for additional municipal
bond financings. Consequently, the pace of new bond issuance has slowed in
recent months. In fact, the trend may be reversing. During the three months
ended November 30, 1998, just under $60 billion in new long-term municipal bonds
were underwritten, a decline of 10% compared to the same quarter a year ago.
During the month of November, there were less than $20 billion in new municipal
bond securities issued, a decline of over 8% compared to November 1997. We will
monitor this trend closely in the coming months to determine if the supply
pressures exerted thus far in 1998 are abating and fostering a more balanced
supply/demand environment.
Throughout the six-month period ended November 30, 1998, municipal bond yields
followed a pattern that was similar to US Treasury securities, although the
yield declines were more muted. As measured by the Bond Buyer Revenue Bond
Index, long-term, uninsured tax-exempt revenue bond yields declined
approximately 30 basis points to 5.09% by early October. Municipal bond yields
then rose during the remainder of October and November and ended the period at
5.25%. Over the past six months, long-term tax-exempt bond yields declined
approximately 15 basis points.
Although municipal bond yields declined during the six-month period, recent
supply pressures and the absence of the safe-haven status enjoyed by US Treasury
bonds caused municipal bond yields to rise relative to US Treasury bond yields.
At November 30, 1998, long-term tax-exempt bond yields were attractive relative
to US Treasury securities of comparable maturities (over 100%), well in excess
of their expected range of 85%-88%. Tax-exempt bond yield ratios have rarely
exceeded 90% in the 1980s and 1990s. Historically, yield spreads have been wider
than these levels when there have been potential changes in Federal tax codes
that would have adversely affected the tax-favored status of municipal bonds.
Currently, municipal bond investors find themselves in a unique investment
environment. Previous opportunities to purchase tax-exempt bonds with yields
exceeding that of comparable US Treasury issues have been limited to relatively
brief episodes and then further limited to a few municipal credits undergoing
specific financial pressures. However, the current opportunity may quickly
disappear should tax-exempt bond supply pressures diminish or the safe-haven
status of US Treasury securities become less desirable. Under these conditions,
municipal bond ratios should quickly revert to more normal historic percentages,
certainly well below their presently attractive levels.
Portfolio Strategy
Since the Fund's inception on September 25, 1998, our portfolio strategy has
been to commit the proceeds of the Fund's initial offering to the long-term end
of the California tax-exempt marketplace. The technical position of the
California insured market was conducive to investing in current coupon
securities that satisfied our initial yield targets once leverage was introduced
through the issuance of the Fund's Preferred Stock. (For a complete explanation
of the benefits and risks of leverage, see page 1 of this report to
shareholders.) Since the Fund's inception, we have slightly restructured the
Fund's composition to better diversify the portfolio. We have not made any
significant changes to our fundamental strategy.
Looking ahead, we plan to monitor economic data for signs that interest rates
could reverse and head higher. However, the scenario for fixed-income securities
remains positive. This is especially true for California insured municipal
bonds, which are at historically attractive levels relative to taxable bonds. We
are currently underweighting the portion of the Fund's net assets invested in
uninsured paper in response to tight credit quality spreads. At November 30,
1998, 97% of the Fund's net assets were rated AAA with insurance.
In Conclusion
We appreciate your investment in MuniHoldings California Insured Fund III, Inc.,
and we look forward to assisting you with your financial needs in the months and
years ahead.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
January 4, 1999
2 & 3
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
==================================================================================================================================
<S> <C> <C> <C> <C>
California--101.0% AAA Aaa $ 9,210 California Educational Facilities Authority Revenue Bonds (Stanford
University), Series N, 5.20% due 12/01/2027 $ 9,404
--------------------------------------------------------------------------------------------------------------
AAA Aaa 20,000 California HFA, Home Mortgage Revenue Bonds, AMT, Series N, 5.25% due
8/01/2029 (d) 20,088
--------------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority Revenue Bonds, Series A:
A A2 4,000 (Catholic Healthcare West), 5% due 7/01/2028 3,903
AAA Aaa 2,700 Refunding (Adventist Health Systems), VRDN, 3.25% due 9/01/2028 (a)(b) 2,700
--------------------------------------------------------------------------------------------------------------
California State Economic Development Financing Authority Revenue Bonds
(California Independent Systems Project), VRDN (a):
AA- Aa2 700 Series C, 3.75% due 4/01/2008 700
A1+ VMIG1+ 400 Series D, 3.75% due 4/01/2008 400
--------------------------------------------------------------------------------------------------------------
California State, GO, UT, Refunding Bonds:
AAA Aaa 6,500 5% due 2/01/2023 (c) 6,504
AAA Aaa 2,000 Veterans Bonds, AMT, Series BH, 5.40% due 12/01/2016 (d) 2,060
--------------------------------------------------------------------------------------------------------------
AAA Aaa 4,370 California State, Public Works Board, Lease Revenue Bonds (Various
University of California Projects), Series C, 5.125% due 9/01/2022 (f) 4,411
--------------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 California Statewide Community Development Authority, COP, RIB, 6.865%
due 12/01/2015 (d)(e) 5,477
--------------------------------------------------------------------------------------------------------------
AAA Aaa 15,000 Central Coast, California, Water Authority, Revenue Refunding Bonds
(State Water Project Regional Facilities), Series A, 5% due
10/01/2022 (f) 15,010
--------------------------------------------------------------------------------------------------------------
AAA NR* 2,750 Central Valley Financing Authority, California, Cogeneration Project
Revenue Refunding Bonds (Carson Ice--Generation Project), 5.20% due
7/01/2020 (b) 2,793
--------------------------------------------------------------------------------------------------------------
AAA Aaa 4,260 Clovis, California, Sewer Revenue Refunding Bonds, 5.20% due
8/01/2028 (b) 4,365
--------------------------------------------------------------------------------------------------------------
AAA NR* 5,000 Kern, California, Community College District, Refunding Bonds, COP, 5%
due 1/01/2025 (b) 5,004
--------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Long Beach, California, Harbor Revenue Bonds, AMT, 5.375% due
5/15/2020 (b) 10,277
--------------------------------------------------------------------------------------------------------------
Los Angeles, California, Unified School District, GO (c):
AAA Aaa 2,250 Series A, 5% due 7/01/2021 2,252
AAA Aaa 2,500 Series B, 5% due 7/01/2023 2,502
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Los Angeles County, California, Metropolitan Transportation Authority,
Sales Tax Revenue Refunding Bonds, Property C, 2nd Senior-Series A, 5%
due 7/01/2023 (f) 2,502
--------------------------------------------------------------------------------------------------------------
AAA Aaa 6,000 Los Angeles County, California, Sanitation Districts Financing Authority
Revenue Bonds (Capital Projects), Series A, 5.25% due 10/01/2019 (b) 6,117
--------------------------------------------------------------------------------------------------------------
Riverside County, California, COP, Refunding Bonds (b):
AAA Aaa 1,280 5% due 12/01/2018 1,294
AAA Aaa 3,530 5% due 12/01/2021 3,533
--------------------------------------------------------------------------------------------------------------
Sacramento, California, Cogeneration Authority, Cogeneration Project
Revenue Refunding Bonds (b):
AAA NR* 2,000 5% due 7/01/2018 2,012
AAA NR* 7,420 5.20% due 7/01/2021 7,535
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,450 Sacramento, California, Municipal Utility District, Electric Revenue
Refunding Bonds, Series L, 5.125% due 7/01/2022 (b) 5,510
--------------------------------------------------------------------------------------------------------------
AAA Aaa 13,250 Sacramento County, California, Airport System Revenue Refunding Bonds,
PFC, Sub-Series B, 5% due 7/01/2026 (c) 13,261
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,800 Salida, California, Area Public Facilities Financing Agency, Community
Facilities District Refunding Bonds (Special Tax No. 1988-1), 5.25% due
9/01/2028 (d) 5,958
--------------------------------------------------------------------------------------------------------------
AAA Aaa 7,440 San Diego, California, Convention Center Expansion Financing Authority,
Lease Revenue Bonds, Series A, 4.75% due 4/01/2028 (f) 7,222
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,950 San Diego, California, Public Facilities Financing Authority, Sewer
Revenue Bonds, Series B, 5.25% due 5/15/2027 (c) 3,029
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 San Diego County, California, Water Authority, Water Revenue Bonds, COP,
Series A, 5% due 5/01/2022 (c) 2,502
--------------------------------------------------------------------------------------------------------------
AAA A1 4,500 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, AMT, Second Series, Issue 18A, 5%
due 5/01/2019 (c) 4,515
--------------------------------------------------------------------------------------------------------------
AAA Aaa 7,620 San Joaquin Hills, California, Transportation Corridor Agency, Toll Road
Revenue Refunding Bonds, Series A, 5.25% due 1/15/2030 (b) 7,794
--------------------------------------------------------------------------------------------------------------
San Jose, California, Unified School District, Santa Clara County,
Capital Appreciation, GO, UT, Series B (c):
AAA Aaa 4,810 5.15%** due 8/01/2022 1,420
AAA Aaa 4,930 5.15%** due 8/01/2023 1,383
--------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Santa Clara, California, Electric Revenue Refunding Bonds, Sub-Series A,
5% due 7/01/2027 (f) 3,002
--------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Turlock, California, Irrigation District Revenue Refunding Bonds,
Series A, 5% due 1/01/2026 (b) 2,002
--------------------------------------------------------------------------------------------------------------
AAA Aaa 4,200 University of California, Revenue Refunding Bonds (Multiple Purpose
Projects), Series E, 5.125% due 9/01/2020 (b) 4,250
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 West Sacramento, California, Tax Allocation Revenue Bonds (West
Sacramento Redevelopment Project), 5% due 9/01/2029 (b) 5,004
==================================================================================================================================
Total Investments (Cost--$187,259)--101.0% 187,695
Liabilities in Excess of Other Assets--(1.0%) (1,770)
--------
Net Assets--100.0% $185,925
========
==================================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at November 30, 1998.
(b) MBIA Insured.
(c) FGIC Insured.
(d) FSA Insured.
(e) 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 November 30, 1998.
(f) AMBAC Insured.
* Not Rated.
** Represents a zero coupon bond; the interest rate shown is the
effective yield at the time of purchase by the Fund.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
Portfolio Abbreviations
To simplify the listings of MuniHoldings California Insured Fund III, Inc.'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
RIB Residual Interest Bonds
UT Unlimited Tax
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of November 30, 1998
=============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$187,259,453) (Note 1a) ........ $187,695,455
Cash ................................................................... 55,841
Receivables:
Interest ............................................................. $ 2,528,507
Investment adviser (Note 2) .......................................... 17,812 2,546,319
------------
Deferred organization expenses (Note 1f) ............................... 11,000
------------
Total assets ........................................................... 190,308,615
------------
=============================================================================================================================
Liabilities: Payables:
Securities purchased ................................................. 3,868,257
Offering costs (Note 1f) ............................................. 160,030
Dividends to shareholders (Note 1e) .................................. 46,179 4,074,466
------------
Accrued expenses and other liabilities ................................. 308,688
------------
Total liabilities ...................................................... 4,383,154
------------
=============================================================================================================================
Net Assets: Net assets ............................................................. $185,925,461
============
=============================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,960 shares of AMPS**
issued and outstanding at $25,000 per share liquidation preference) .. $ 74,000,000
Common Stock, par value $.10 per share (7,496,989 shares issued and
outstanding) ......................................................... $ 749,699
Paid-in capital in excess of par ....................................... 110,706,071
Undistributed investment income--net ................................... 542,825
Accumulated realized capital losses on investments--net ................ (509,136)
Unrealized appreciation on investments--net ............................ 436,002
------------
Total--Equivalent to $14.93 net asset value per Common Stock (market
price--$15.625) 111,925,461
------------
Total capital .......................................................... $185,925,461
============
=============================================================================================================================
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period September 25, 1998+ to November 30, 1998
=============================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ............... $ 1,425,547
Income (Note 1d):
=============================================================================================================================
Expenses: Investment advisory fees (Note 2) ...................................... $ 149,161
Commission fees (Note 4) ............................................... 25,925
Professional fees ...................................................... 6,202
Accounting services (Note 2) ........................................... 5,553
Directors' fees and expenses ........................................... 4,020
Transfer agent fees .................................................... 2,829
Listing fees ........................................................... 2,388
Custodian fees ......................................................... 1,979
Printing and shareholder reports ....................................... 1,550
Pricing fees ........................................................... 1,044
Amortization of organization expenses (Note 1f) ........................ 45
Other .................................................................. 3,207
------------
Total expenses before reimbursement .................................... 203,903
Reimbursement of expenses (Note 2) ..................................... (166,973)
------------
Total expenses ......................................................... 36,930
------------
Investment income--net ................................................. 1,388,617
------------
=============================================================================================================================
Realized & Unrealized Realized loss on investments--net .................. (509,136)
Gain (Loss) on Unrealized appreciation on investments--net ........ 436,002
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 1,315,483
============
=============================================================================================================================
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Sept. 25, 1998+ to
Increase (Decrease) in Net Assets: Nov. 30, 1998
=============================================================================================================================
<S> <C> <C>
Operations: Investment income--net ........................................................... $ 1,388,617
Realized loss on investments--net ................................................ (509,136)
Unrealized appreciation on investments--net ...................................... 436,002
------------
Net increase in net assets resulting from operations ............................. 1,315,483
------------
=============================================================================================================================
Dividends to Investment income--net:
Shareholders Common Stock ................................................................... (572,998)
(Note 1e): Preferred Stock ................................................................ (272,794)
------------
Net decrease in net assets resulting from dividends to shareholders .............. (845,792)
------------
=============================================================================================================================
Capital Stock Proceeds from issuance of Preferred Stock ........................................ 74,000,000
Transactions Proceeds from issuance of Common Stock ........................................... 112,352,685
(Notes 1f & 4): Offering and underwriting costs resulting from the issuance of Preferred Stock ... (715,030)
Offering costs resulting from the issuance of Common Stock ....................... (281,890)
------------
Net increase in net assets derived from capital stock transactions ............... 185,355,765
------------
=============================================================================================================================
Net Assets: Total increase in net assets ..................................................... 185,825,456
Beginning of period .............................................................. 100,005
------------
End of period* ................................................................... $185,925,461
============
=============================================================================================================================
*Undistributed investment income--net ............................................. $ 542,825
============
=============================================================================================================================
</TABLE>
** Auction Market Preferred Stock.
+ Commencement of operations.
See Notes to Financial Statements.
6 & 7
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Sept. 25, 1998+ to
Increase (Decrease) in Net Asset Value: Nov. 30, 1998
=============================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period ......................................... $ 15.00
Operating ------------
Performance: Investment income--net ....................................................... .19
Realized and unrealized gain on investments--net ............................. --++++
------------
Total from investment operations ............................................. .19
------------
Less dividends to Common Stock shareholders:
Investment income--net ..................................................... (.08)
------------
Capital charge resulting from issuance of Common Stock ....................... (.04)
------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income--net ................................................... (.04)
Capital charge resulting from issuance of Preferred Stock ................ (.10)
------------
Total effect of Preferred Stock activity ..................................... (.14)
------------
Net asset value, end of period ............................................... $ 14.93
============
Market price per share, end of period ........................................ $ 15.625
============
=============================================================================================================================
Total Investment Based on market price per share .............................................. 4.70%+++
Return:** ============
Based on net asset value per share ........................................... .05%+++
============
=============================================================================================================================
Ratios to Average Expenses, net of reimbursement ............................................... .14%*
Net Assets:*** ============
Expenses ..................................................................... .75%*
============
Investment income--net ....................................................... 5.12%*
============
=============================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) ............. $ 111,925
============
Preferred Stock outstanding, end of period (in thousands) .................... $ 74,000
============
Portfolio turnover ........................................................... 28.69%
============
=============================================================================================================================
Leverage: Asset coverage per $1,000 .................................................... $ 2,513
============
=============================================================================================================================
Dividends Per Series A--Investment income--net ............................................. $ 98
Share on Preferred ============
Stock Outstanding: Series B--Investment income--net ............................................. $ 86
============
=============================================================================================================================
</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 Stock
shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on October 19, 1998.
+++ Aggregate total investment return.
++++ Amount is less than $.01 per share.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings California Insured Fund III, Inc. (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
September 25, 1998, the Fund had no operations other than those relating to
organizational matters and the sale of 6,667 shares of Common Stock on September
17, 1998 to Fund Asset Management, L.P. ("FAM") for $100,005. The Fund's Common
Stock is listed on the New York Stock Exchange under the symbol MCF. 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 Directors 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 Directors.
(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 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
8 & 9
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
(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) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) 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 change 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 Stock were charged to capital at the time of
issuance of the shares.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.55% of the Fund's average weekly net assets, including
proceeds from the issuance of Preferred Stock. For the period September 25, 1998
to November 30, 1998, FAM earned fees of $149,161, all of which was voluntarily
waived. FAM also reimbursed the Fund additional expenses of $17,812.
During the period September 25, 1998 to November 30, 1998, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S") received underwriting fees of $555,000 in
connection with the issuance of the Fund's Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period September 25, 1998 to November 30, 1998 were $223,961,468 and
$40,000,445, respectively.
Net realized losses for the period September 25, 1998 to November 30, 1998 and
net unrealized gains as of November 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Gains
- --------------------------------------------------------------------------------
Long-term investments ............................ $(509,136) $436,002
--------- --------
Total ............................................ $(509,136) $436,002
========= ========
- --------------------------------------------------------------------------------
As of November 30, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $436,002, all of which is related to appreciated securities.
The aggregate cost of investments at November 30, 1998 for Federal income tax
purposes was $187,259,453.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of capital stock without approval of holders of
Common Stock.
Common Stock
Shares issued and outstanding during the period September 25, 1998 to November
30, 1998 increased by 7,490,322 from shares sold. Prior to September 25, 1998
(commencement of operations), the Fund issued 6,667 shares to FAM for $100,005.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock 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
November 30, 1998 were as follows: Series A, 3.25% and Series B, 2.85%.
Shares issued and outstanding during the period September 25, 1998 to November
30, 1998 increased by 2,960 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 September 25, 1998 to November 30, 1998, MLPF&S, an
affiliate of FAM, earned $16,448 as commissions.
5. Subsequent Event:
On December 7, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.070134 per share,
payable on December 30, 1998 to shareholders of record as of December 23, 1998.
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 shares of Common Stock of the Fund, 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.
QUALITY PROFILE
The quality ratings of securities in the Fund as of November 30, 1998 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ........................................................... 96.8%
AA/Aa ............................................................. 2.1
Other+ ............................................................ 2.1
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
10 & 11
<PAGE>
Officers and Directors
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Gerald M. Richard, Treasurer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Transfer Agents
Common Stock:
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MCF
This report, including the financial information herein, is transmitted to the
shareholders of MuniHoldings California Insured 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 the ability to leverage its
Common Stock by issuing Preferred Stock to provide the Common Stock shareholders
with a potentially higher rate of return. Leverage creates risks for Common
Stock shareholders, including the likelihood of greater volatility of net asset
value and market price of shares of the Common Stock, and the risk that
fluctuations in the short-term dividend rates of the Preferred Stock may affect
the yield to Common Stock shareholders. Statements and other information herein
are as dated and are subject to change.
MuniHoldings California
Insured Fund III, Inc.
Box 9011
Princeton, NJ
08543-9011 #HOLDCA III--11/98
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