MUNIHOLDINGS
CALIFORNIA
INSURED
FUND III, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
May 31, 1999
<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., May 31, 1999
DEAR SHAREHOLDER
Since inception (September 25, 1998), the Common Stock of MuniHoldings
California Insured Fund III, Inc. earned $0.543 per share income dividends,
which included earned and unpaid dividends of $0.063. This represents a net
annualized yield of 5.54%, based on a month-end per share net asset value of
$14.35. Over the same period, the total investment return on the Fund's Common
Stock was -1.12%, based on a change in per share net asset value from $15.00 to
$14.35, and assuming reinvestment of $0.480 per share income dividends.
For the six-month period ended May 31, 1999, the total investment return on the
Fund's Common Stock was -1.16%, based on a change in per share net asset value
from $14.93 to $14.35, and assuming reinvestment of $0.403 per share income
dividends.
For the six-month period ended May 31, 1999, the Fund's Auction Market Preferred
Stock had an average yield of 2.91% for Series A and 3.13% for Series B.
The Municipal Market Environment
Long-term bond yields generally moved higher during the six-month period ended
May 31, 1999. Investor concern that increasingly strong domestic economic growth
would eventually trigger inflationary pressures gradually pushed yields higher,
despite the absence of visible increases in producer or retail prices. However,
in May the combination of an unexpectedly strong consumer price report and a
warning from the Federal Reserve Board that it was considering an eventual
increase in short-term interest rates pushed long-term bond yields appreciably
higher. By the end of May, US Treasury bond yields stood at 5.83%, an increase
of 75 basis points (0.75%) during the six-month period. Long-term municipal bond
yields followed a similar although muted pattern, as measured by the Bond Buyer
Revenue Bond Index. Through April, tax-exempt bond yields traded in a relatively
narrow range, at approximately 5.25%. During May, long-term municipal bond
yields rose to end the month at 5.41%. During the six-month period ended May 31,
1999, tax-exempt bond yields rose just over 15 basis points.
The tax-exempt bond market's strong technical position has prevented municipal
bond yields from increasing as much as their taxable counterparts in recent
months. The principal factor promoting this technical support has been the
decline of municipal bond issuance. During the six months ended May 31, 1999,
less than $120 billion in new long-term tax-exempt securities was underwritten,
a decline of over 12% compared to the same period a year ago. During the three
months ended May 31, 1999, municipalities issued less than $60 billion in
long-term tax-exempt securities, a decline of nearly 20% compared to the May 31,
1998 quarter. During May 1999, municipalities issued $15 billion in long-term
securities, a decline of nearly 40% compared to May 1998 levels. This represents
the lowest May issuance since 1995. Additionally, retail and institutional
demand remained positive, easily absorbing available issuance. Investor demand
is likely to remain positive going forward since June and July usually are
seasonally strong months. Traditionally, investors receive significant cash
inflows from bond maturities and coupon payments during these months. Generally,
$15 billion-$20 billion becomes available for reinvestment each month.
Recent outperformance by the munic-ipal bond market has come at the expense of
the very attractive yield ratios available in late 1998. At year-end 1998,
long-term municipal revenue bond yields were 102% of comparable US Treasury bond
yields. This ratio has declined as US Treasury bond yields have risen faster
than tax-exempt bond yields. At the end of May, the yield ratio was
approximately 92%, still well above the historic average of 86%-88%. This yield
ratio may rise somewhat in the coming months if issue supply were to suddenly
increase. However, yield ratios in excess of 100% are unlikely in the near
future.
Further increases in bond yields are likely to be dependent on an acceleration
in US economic growth. However, it is also likely that the increases in interest
rates seen over recent months have yet to fully impact the US economy. For
example, recent increases in mortgage rates have yet to slow home purchases or
construction. Additionally, economic indicators of future price inflation, such
as the price of gold or world commodity prices, all remain well contained. In
such an environment, any moves by the Federal Reserve Board to slow economic
growth are likely to be gradual and limited. Furthermore, any Federal Reserve
Board action is also likely to keep inflation low in the United States for the
remainder of 1999 and into 2000. This suggests that while interest rates may
have further to rise, any increases are not likely to be major but are likely to
be temporary should the US economy slow later this year.
Portfolio Strategy
The portfolio experienced a slight restructuring during the six months ended May
31, 1999. The portfolio is normally aggressively invested in the long-term
maturity range of the California insured market. However, the marketplace
recently has been subject to tremendous volatility with a trend toward higher
interest rates. We employed tactics that were somewhat more defensive, including
a general shortening of maturities for some of the Fund's holdings. However, the
portfolio on average is still positioned for an eventual market recovery.
California municipal bonds have outperformed the taxable arena to a large
degree, and the overall municipal market to a lesser extent. This has provided a
cushion for the Fund's net asset valuation as interest rates have moved higher.
We are currently underweighting the portion of the Fund's net assets invested in
uninsured paper in response to tight credit quality spreads. At May 31, 1999,
96% of the Fund's net assets were insured.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ Walter C. O'Connor
Walter C. O'Connor
Vice President and Portfolio Manager
July 2, 1999
================================================================================
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on MuniHoldings California Insured Fund III, Inc.'s Board of
Directors. We are pleased to announce that Terry K. Glenn has been elected
President and Director of the Fund. Mr. Glenn has held the position of Executive
Vice President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors in wishing
him well in his retirement from Merrill Lynch and are pleased that he will
continue as a member of the Fund's Board of Directors.
================================================================================
2 & 3
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
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> <C>
California-93.1% AAA Aaa $ 8,210 California Educational Facilities Authority Revenue Bonds
(Stanford University), Series N, 5.20% due 12/01/2027 $ 8,186
------------------------------------------------------------------------------------------------------------
AAA Aaa 20,000 California HFA, Home Mortgage Revenue Bonds, AMT, Series N, 5.25%
due 8/01/2029 (d) 19,701
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 California Health Facilities Finance Authority, Revenue Refunding
Bonds (Catholic Healthcare West), Series A, 5.125% due
7/01/2024 (b) 2,453
------------------------------------------------------------------------------------------------------------
A1+ NR* 200 California Pollution Control Financing Authority, PCR, Refunding
(Pacific Gas and Electric), VRDN, Series F, 3.30% due
11/01/2026 (a) 200
------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 3,400 California State Economic Development Financing Authority Revenue
Bonds (California Independent Systems Project), VRDN, Series C,
3.40% due 4/01/2008 (a) 3,400
------------------------------------------------------------------------------------------------------------
California State, GO, Refunding:
AAA Aaa 6,500 5% due 2/01/2023 (c) 6,306
AAA Aaa 2,000 Veterans Bonds, AMT, Series BH, 5.40% due 12/01/2016 (d) 2,034
------------------------------------------------------------------------------------------------------------
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) 4,314
------------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 California Statewide Communities Development Authority, COP, RIB,
Series 24, 7.125% due 12/01/2015 (d)(e) 5,217
------------------------------------------------------------------------------------------------------------
AAA Aaa 15,000 Central Coast Water Authority, California, Revenue Refunding Bonds
(State Water Project Regional Facilities), Series A, 5% due
10/01/2022 (f) 14,557
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Central Valley Financing Authority, California, Cogeneration
Project, Revenue Refunding Bonds (Cason Ice-Generation Project),
5.20% due 7/01/2020 (b) 2,739
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,260 Clovis, California, Sewer Revenue Refunding Bonds, 5.20% due
8/01/2028 (b) 4,253
------------------------------------------------------------------------------------------------------------
BBB NR* 3,500 Contra Costa County, California, Public Financing Authority, Tax
Allocation Revenue Refunding Bonds (Pleasant Hill Bart Etc.
Redevelopment), 5.25% due 8/01/2028 3,354
------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Long Beach, California, Harbor Revenue Bonds, AMT, 5.375% due
5/15/2020 (b) 10,067
------------------------------------------------------------------------------------------------------------
Los Angeles, California, Unified School District, GO (c):
AAA Aaa 2,250 Series A, 5% due 7/01/2021 2,185
AAA Aaa 2,500 Series B, 5% due 7/01/2023 2,425
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 Los Angeles, California, Wastewater System Revenue Bonds, Series
A, 5% due 6/01/2028 (c) 3,370
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Refunding Bonds, Proposition C, 2nd
Senior-Series A, 5% due 7/01/2023 (f) 2,425
------------------------------------------------------------------------------------------------------------
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) 6,028
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Monterey County, California, COP (Natividad Medical Center
Improvement), Series E, 4.75% due 8/01/2027 (b) 2,780
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,530 Riverside County, California, COP, Refunding Bonds, 5% due
12/01/2021 (b) 3,428
------------------------------------------------------------------------------------------------------------
AAA NR* 7,420 Sacramento, California, Cogeneration Authority, Cogeneration
Project, Revenue Refunding Bonds, 5.20% due 7/01/2021 (b) 7,391
------------------------------------------------------------------------------------------------------------
Sacramento, California, Municipal Utility District, Electric
Revenue Refunding Bonds, Series L (b):
AAA Aaa 2,750 5.20% due 7/01/2017 2,773
AAA Aaa 5,450 5.125% due 7/01/2022 5,381
------------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 Sacramento County, California, Airport System Revenue Refunding
Bonds, Sub-Series B, 5% due 7/01/2026 (c) 9,640
------------------------------------------------------------------------------------------------------------
AAA Aaa 5,800 Salida, California, Area Public Facilities Financing Agency,
Community Facilities District Special Tax Refunding Bonds (No.
1988-1), 5.25% due 9/01/2028 (d) 5,818
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Diego, California, Convention Center Expansion Financing
Authority, Lease Revenue Bonds, Series A, 4.75% due 4/01/2028 (f) 1,852
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,950 San Diego, California, Public Facilities Financing Authority,
Sewer Revenue Bonds, Series B, 5.25% due 5/15/2027 (c) 2,959
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 San Diego County, California, Water Authority, Water Revenue
Bonds, COP, Series A, 5% due 5/01/2022 (c) 2,427
------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 San Francisco, California, City and County, GO, Refunding,
Series 1, 5.125% due 6/15/2014 (c) 5,112
------------------------------------------------------------------------------------------------------------
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) 7,625
------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Santa Clara County, California, East Side Union High School
District, GO, Series E, 5% due 9/01/2022 (c) 2,922
------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Turlock, California, Irrigation District Revenue Refunding Bonds,
Series A, 5% due 1/01/2026 (b) 1,929
------------------------------------------------------------------------------------------------------------
AAA Aaa 4,200 University of California, Revenue Refunding Bonds (Multiple
Purpose Projects), Series E, 5.125% due 9/01/2020 (b) 4,165
==================================================================================================================================
Puerto Rico-3.8% AAA Aaa 6,760 Puerto Rico Commonwealth Infrastructure Financing Authority,
Special Revenue Bonds, Series A, 5% due 7/01/2013 (f) 6,837
==================================================================================================================================
Total Investments (Cost-$180,229)-96.9% 176,253
Other Assets Less Liabilities-3.1% 5,675
--------
Net Assets-100.0% $181,928
========
==================================================================================================================================
</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 May 31, 1999.
(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 May 31, 1999.
(f) AMBAC Insured.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young LLP.
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
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of May 31, 1999
==============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$180,229,369) (Note 1a) ........ $176,253,489
Cash ................................................................... 179,012
Receivables:
Securities sold ...................................................... $ 5,801,255
Interest ............................................................. 3,068,718 8,869,973
------------
Deferred organization expenses (Note 1f) ............................... 10,796
Prepaid expenses and other assets ...................................... 4,701
------------
Total assets ........................................................... 185,317,971
------------
==============================================================================================================================
Liabilities: Payables:
Securities purchased ................................................. 2,977,077
Dividends to shareholders (Note 1e) .................................. 163,102
Investment adviser (Note 2) .......................................... 56,452
Offering costs (Note 1f) ............................................. 54,000 3,250,631
------------
Accrued expenses and other liabilities ................................. 139,747
------------
Total liabilities ...................................................... 3,390,378
------------
==============================================================================================================================
Net Assets: Net assets ............................................................. $181,927,593
============
==============================================================================================================================
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 (7,521,774 shares issued and
outstanding) ......................................................... $ 752,177
Paid-in capital in excess of par ....................................... 111,148,366
Undistributed investment income--net ................................... 598,819
Accumulated realized capital losses on investments--net (Note 5) ....... (595,889)
Unrealized depreciation on investments--net ............................ (3,975,880)
------------
Total--Equivalent to $14.35 net asset value per share of Common Stock
(market price--$13.25) ................................................. 107,927,593
------------
Total capital .......................................................... $181,927,593
============
==============================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period September 25, 1998+ to May 31, 1999
==============================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ............... $ 6,046,430
Income (Note 1d):
==============================================================================================================================
Expenses: Investment advisory fees (Note 2) ...................................... $ 656,536
Commission fees (Note 4) ............................................... 111,918
Accounting services (Note 2) ........................................... 36,101
Professional fees ...................................................... 34,130
Transfer agent fees .................................................... 25,350
Directors' fees and expenses ........................................... 17,332
Listing fees ........................................................... 11,135
Printing and shareholder reports ....................................... 10,926
Custodian fees ......................................................... 7,959
Amortization of organization expenses (Note 1f) ........................ 2,453
Pricing fees ........................................................... 762
Other .................................................................. 3,601
------------
Total expenses before reimbursement .................................... 918,203
Reimbursement of expenses (Note 2) ..................................... (456,988)
------------
Total expenses ......................................................... 461,215
------------
Investment income--net ................................................. 5,585,215
------------
==============================================================================================================================
Realized & Realized loss on investments--net ...................................... (595,889)
Unrealized Loss Unrealized depreciation on investments--net ............................ (3,975,880)
On Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ................... $ 1,013,446
============
==============================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Sept. 25, 1998+
Increase (Decrease) in Net Assets: to May 31, 1999
=========================================================================================================================
<S> <C> <C>
Operations: Investment income--net ............................................................ $ 5,585,215
Realized loss on investments--net ................................................. (595,889)
Unrealized depreciation on investments--net ....................................... (3,975,880)
------------
Net increase in net assets resulting from operations .............................. 1,013,446
------------
=========================================================================================================================
Dividends to Investment income--net:
Shareholders Common Stock .................................................................... (3,600,287)
(Note 1e): Preferred Stock ................................................................. (1,386,109)
------------
Net decrease in net assets resulting from dividends to shareholders ............... (4,986,396)
------------
=========================================================================================================================
Capital Stock Proceeds from issuance of Preferred Stock ......................................... 74,000,000
Transactions Net proceeds from issuance of Common Stock ........................................ 112,125,000
(Notes 1f & 4): Offering and underwriting costs resulting from the issuance of Preferred Stock .... (706,249)
Offering costs resulting from the issuance of Common Stock ........................ (211,402)
Value of shares issued to Common Stock shareholders in reinvestment of dividends .. 593,189
------------
Net increase in net assets derived from capital stock transactions ................ 185,800,538
------------
=========================================================================================================================
Net Assets: Total increase in net assets ...................................................... 181,827,588
Beginning of period ............................................................... 100,005
------------
End of period* .................................................................... $181,927,593
============
=========================================================================================================================
*Undistributed investment income--net .............................................. $ 598,819
============
=========================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
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+
Increase (Decrease) in Net Asset Value: to May 31, 1999
=========================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period .............................................. $ 15.00
Operating ------------
Performance: Investment income--net ............................................................ .74
Realized and unrealized loss on investments--net .................................. (.61)
------------
Total from investment operations .................................................. .13
------------
Less dividends to Common Stock shareholders:
Investment income--net .......................................................... (.48)
------------
Capital charge resulting from issuance of Common Stock ............................ (.03)
------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income--net ........................................................ (.18)
Capital charge resulting from issuance of Preferred Stock ..................... (.09)
------------
Total effect of Preferred Stock activity .......................................... (.27)
------------
Net asset value, end of period .................................................... $ 14.35
============
Market price per share, end of period ............................................. $ 13.25
============
=========================================================================================================================
Total Investment Based on market price per share ................................................... (8.70%)++++
Return:** ============
Based on net asset value per share ................................................ (1.12%)++++
============
=========================================================================================================================
Ratios Based on Expenses, net of reimbursement*** ................................................. .62%*
Average Net Assets ============
Of Common Stock: Total expenses*** ................................................................. 1.24%*
============
Total investment income--net*** ................................................... 7.53%*
============
Amount of dividends to Preferred Stock shareholders ............................... 1.87%*
============
Investment income--net, to Common Stock shareholders .............................. 5.66%*
============
=========================================================================================================================
Ratios Based on Expenses, net of reimbursement .................................................... .39%*
Total Average Net ============
Assets:+++*** Total expenses .................................................................... .77%*
============
Total investment income--net ...................................................... 4.68%*
============
=========================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ......................................... 3.07%*
Average Net Assets ============
Of Preferred Stock:
=========================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) .................. $ 107,928
============
Preferred Stock outstanding, end of period (in thousands) ......................... $ 74,000
============
Portfolio turnover ................................................................ 60.32%
============
=========================================================================================================================
Leverage: Asset coverage per $1,000 ......................................................... $ 2,458
============
=========================================================================================================================
Dividends Per Series A--Investment income--net .................................................. $ 460
Share on Preferred ============
Stock Outstanding: Series B--Investment income--net .................................................. $ 477
============
=========================================================================================================================
</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.
+++ Includes Common and Preferred Stock average net assets.
++++ Aggregate total investment return.
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
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. 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 (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 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 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
issuance of Preferred Stock. For the period September 25, 1998 to May 31, 1999,
FAM earned fees of $656,536, of which $439,176 was voluntarily waived. FAM also
reimbursed the Fund additional expenses of $17,812.
During the period September 25, 1998 to May 31, 1999, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("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 May 31, 1999 were $270,827,810 and $93,185,580,
respectively.
Net realized gains (losses) for the period September 25, 1998 to May 31, 1999
and net unrealized losses as of May 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments .................... $ (985,630) $(3,975,880)
Financial futures contracts .............. 389,741 --
----------- -----------
Total .................................... $ (595,889) $(3,975,880)
=========== ===========
- --------------------------------------------------------------------------------
As of May 31, 1999, net unrealized depreciation for Federal income tax purposes
aggregated $3,975,880, all of which is related to depreciated securities. The
aggregate cost of investments at May 31, 1999 for Federal income tax purposes
was $180,229,369.
10 & 11
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 May 31,
1999 increased by 7,475,000 and 40,107 from shares sold and dividend
reinvestment, respectively.
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
May 31, 1999 were as follows: Series A, 2.90% and Series B, 3.13%.
Shares issued and outstanding during the period September 25, 1998 to May 31,
1999 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 May 31, 1999, MLPF&S, an
affiliate of FAM, earned $90,877 as commissions.
5. Capital Loss Carryforward:
At May 31, 1999, the Fund had a net capital loss carryforward of approximately
$395,000, all of which expires in 2007. This amount will be available to offset
like amounts of any future taxable gains.
6. Subsequent Event:
On June 9, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.063000 per share,
payable on June 29, 1999 to shareholders of record as of June 23, 1999.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings California Insured Fund III, Inc.
We have audited the accompanying statement of assets, liabilities and capital of
MuniHoldings California Insured Fund III, Inc., including the schedule of
investments, as of May 31, 1999, and the related statements of operations and
changes in net assets, and financial highlights for the period from September
25, 1998 (commencement of operations) to May 31, 1999. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of May 31, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MuniHoldings California Insured Fund III, Inc. at May 31, 1999 and the results
of its operations, the changes in its net assets and the financial highlights
for the period from September 25, 1998 to May 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Princeton, New Jersey
June 24, 1999
12 & 13
<PAGE>
MuniHoldings California Insured Fund III, Inc., May 31, 1999
MANAGED DIVIDEND POLICY (unaudited)
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 (unaudited)
The quality ratings of securities in the Fund as of May 31, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ..................................................... 93.1%
BBB/Baa ..................................................... 1.8
Other+ ...................................................... 2.0
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings California
Insured Fund III, Inc. during its taxable year ended May 31, 1999 qualify as
tax-exempt interest dividends for Federal income tax purposes. Additionally,
there were no capital gains distributed by the Fund during the year.
Please retain this information for your records.
YEAR 2000 ISSUES (unaudited)
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the securities in which
the Fund invests and this could hurt the Fund's investment returns.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Donald C. Burke, Vice President and Treasurer
William E. Zitelli, Secretary
- --------------------------------------------------------------------------------
Gerald M. Richard, Treasurer of MuniHoldings California Insured Fund III, Inc.
has recently retired. His colleagues at Merrill Lynch Asset Management, L.P.
join the Fund's Board of Directors in wishing Mr. Richard well in his
retirement.
- --------------------------------------------------------------------------------
Custodian
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 Whitehall Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MCF
14 & 15
<PAGE>
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--5/99
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