MUNIHOLDINGS
CALIFORNIA
INSURED
FUND III, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
November 30, 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., November 30, 1999
DEAR SHAREHOLDER
For the six months ended November 30, 1999, MuniHoldings California Insured Fund
III, Inc. earned $0.405 per share income dividends, which included earned and
unpaid dividends of $0.067. This represents a net annualized yield of 6.55%,
based on a month-end net asset value of $12.32 per share. Over the same period,
the Fund's total investment return was -11.36%, based on a change in per share
net asset value from $14.35 to $12.32, and assuming reinvestment of $0.401 per
share income dividends.
For the six-month period ended November 30, 1999, the Fund's Auction Market
Preferred Stock had an average yield of 2.71% for Series A and 2.95% for Series
B.
The Municipal Market Environment
The combination of steady strong domestic economic growth, improvement in
foreign economies (most notably in Japan) and increasing investor concerns
regarding potential increases in US inflation put upward pressure on bond yields
throughout the six-month period ended November 30, 1999. Continued strong US
employment growth and consumer spending were among the reasons the Federal
Reserve Board cited for raising short-term interest rates in late June, August
and November. US Treasury bond yields reacted by climbing above 6.375% by late
October and into November. During the period, yields on 30-year US Treasury
bonds increased over 45 basis points (0.45%).
Long-term tax-exempt bond yields also rose during the six months ended November
30, 1999. For much of the first half of 1999, the municipal bond market was able
to withstand much of the upward pressure on bond yields. However, investor
concerns of additional moves by the Federal Reserve Board to moderate US
economic growth and, more importantly, the loss of the strong technical support
that the tax-exempt market enjoyed in early 1999 helped push municipal bond
yields significantly higher for the remainder of the period. The yields on
long-term tax-exempt revenue bonds rose over 70 basis points to 6.14% by
November 30, 1999, as measured by the Bond Buyer Revenue Bond Index.
In recent months, the significant decline in new tax-exempt bond issuance has
remained a positive factor within the municipal bond market, as it had been for
much of the past year. Over the last year, more than $230 billion in long-term
municipal bonds was issued, a decline of nearly 20% compared to the same period
a year ago. During the past six months, over $115 billion in long-term
tax-exempt bonds was underwritten, representing a decline of nearly 15% compared
to the corresponding period in 1998. Over the past three months, approximately
$55 billion in securities was issued by municipalities nationally. This
quarterly issuance represented a decline of over 5% when compared to the same
period in 1998. It is likely that many tax-exempt issuers have accelerated their
financings in recent months to avoid any potential Year 2000 (Y2K)-related
disruptions at year-end. It is likely that this increased new-issue volume in
October and November is at the expense of future bond issuance, particularly in
early 2000. Consequently, the municipal market's positive technical position is
likely to continue into early next year.
Although tax-exempt bond yields are at their highest level in over two years and
have attracted significant retail investor interest, institutional demand has
declined sharply. Long-term municipal mutual funds have seen consistent outflows
in recent months as the yields of individual securities have risen faster than
those of larger, more diverse mutual funds. In addition, the demand from
property/casualty insurance companies has weakened as a result of the losses,
and anticipated losses, incurred as a result of the series of damaging storms
across much of the eastern United States. Additionally, many institutional
investors who were attracted to the municipal bond market in recent years by
historically attractive tax-exempt bond yield ratios of over 90% have found
other asset classes even more attractive. Even with a reduced supply position,
tax-exempt issuers have been forced to repeatedly raise municipal bond yields in
the attempt to attract adequate demand.
The recent relative underperformance of the municipal bond market has resulted
in an opportunity for long-term investors to purchase tax-exempt issues whose
yields are nearly identical with taxable US Treasury securities. At November 30,
1999, long-term uninsured municipal revenue bond yields were almost 98% of
comparable US Treasury securities. In recent months, many taxable asset classes,
such as corporate bonds, mortgage-backed securities and US agency debt, have all
accelerated debt issuance. This acceleration was initiated largely to avoid
issuing securities at year-end and to minimize any associated Y2K problems that
may develop. However, this increased issuance has also resulted in higher yield
levels in the various asset classes as lower bond prices became necessary to
attract sufficient investor demand. Going forward, it is believed that the pace
of non-US Government debt issuance is likely to slow signi-ficantly. As the
supply of this debt declines, we would expect many institutional investors to
return to the municipal bond market and the attractive yield ratios available.
Looking ahead, it appears to us that long-term tax-exempt bond yields will
remain under pressure, trading in a broad range centered near current levels.
Investors are likely to remain concerned about future action by the Federal
Reserve Board. We believe Y2K considerations have prohibited any further Federal
Reserve Board moves from the end of the year and the beginning of 2000. Any
improvement in bond prices will probably be contingent upon weakening in both US
employment growth and consumer spending. The 100 basis point rise in US Treasury
bond yields seen thus far this year may negatively impact US economic growth.
The US housing market will be among the first sectors likely to be affected, as
some declines have already been evidenced in response to higher mortgage rates.
We believe that it is also unrealistic to expect double-digit returns in US
equity markets to continue indefinitely. Much of the US consumer's wealth is
tied to recent stock market appreciation. Any slowing in these returns is likely
to reduce consumer spending. We believe that these factors suggest that the
worst of the recent increase in bond yields has passed and stable, if not
slightly improving, bond prices may be expected.
In Conclusion
On September 9, 1999, MuniHoldings California Insured Fund III, Inc.'s Board of
Directors approved a plan of reorganization, subject to shareholder approval and
certain other conditions, whereby MuniHoldings California Insured Fund II, Inc.
would acquire substantially all of the assets and liabilities of the Fund,
MuniHoldings California Insured Fund, Inc. and MuniHoldings California Insured
Fund IV, Inc. in exchange for newly issued shares of MuniHoldings California
Insured Fund II, Inc. These Funds are registered, non-diversified, closed-end
management investment companies. All four entities have similar investment
objectives and are managed by Fund Asset Management, L.P.
We appreciate your investment in MuniHoldings California Insured Fund III, Inc.
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
December 28, 1999
2 & 3
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1999
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California -- 97.9% AAA Aaa $ 1,000 ABAG Finance Authority for Nonprofit Corporations, California,
COP (Children's Hospital Medical Center), 6% due 12/01/2029 (f)(h) $ 1,002
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,945 ABAG Finance Authority for Nonprofit Corporations, California,
M/F Revenue Bonds
(Housing, Civic Center Drive Apartments), AMT, Series A, 5.875%
due 3/01/2032 (d) 1,875
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Alameda County, California, COP (Alameda County Medical Center
Project), 5.30% due 6/01/2026 (b) 2,270
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California Educational Facilities Authority Revenue Bonds
(Stanford University), Series N, 5.20% due 12/01/2027 1,804
---------------------------------------------------------------------------------------------------------------
NR* Aa2 2,500 California Educational Facilities Authority, Revenue Refunding
Bonds, RIB, Series 147, 7.05% due 10/01/2027 (e) 2,221
---------------------------------------------------------------------------------------------------------------
AAA Aaa 15,625 California HFA, Home Mortgage Revenue Bonds, AMT, Series N,
5.25% due 8/01/2029 (d) 13,774
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 California Health Facilities Finance Authority Revenue Bonds
(Sutter Health), Series A, 5.375% due 8/15/2030 (b) 1,841
---------------------------------------------------------------------------------------------------------------
California Health Facilities Finance Authority, Revenue Refunding Bonds:
A1+ VMIG1+ 300 (Adventist Hospital), VRDN, Series C, 3.65% due 9/01/2015(a)(b) 300
AAA Aaa 2,500 (Catholic Healthcare West), Series A, 6% due 7/01/2025 (b) 2,510
A1+ VMIG1+ 200 (Sutter/Catholic Healthcare System), VRDN, Series B, 3.55%
due 7/01/2012 (a)(f) 200
---------------------------------------------------------------------------------------------------------------
California Pollution Control Financing Authority, PCR,
Refunding (Pacific Gas and Electric), VRDN (a):
A1+ NR* 100 Series A, 3.65% due 12/01/2018 100
A1+ NR* 500 Series C, 3.65% due 11/01/2026 500
A1+ NR* 700 Series D, 3.65% due 11/01/2026 700
A1+ VMIG1+ 1,800 Series E, 3.90% due 11/01/2026 1,800
A1+ NR* 500 Series F, 3.65% due 11/01/2026 500
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 California State, GO, Refunding, 4.25% due 10/01/2026 (b) 1,917
---------------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds:
AAA Aaa 2,500 (Department of Justice Building), Series A, 5.80%
due 5/01/2005 (d)(g) 2,674
AAA Aaa 4,370 (Various University of California Projects), Series C,
5.125% due 9/01/2022 (f) 3,933
---------------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 California State Public Works Board, Lease Revenue Refunding
Bonds (Department of Corrections), Series B, 5.625% due 11/01/2019 (b) 7,346
---------------------------------------------------------------------------------------------------------------
NR* Aaa 5,000 California Statewide Communities Development Authority, COP,
RIB, Series 24, 6.625% due 12/01/2015 (d)(e) 4,690
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,735 Calleguas -- Las Virgines, California, Public Financing Authority,
Installment Purchase Revenue Refunding Bonds (Las Virgenes Municipal
Water District), 5% due 11/01/2023 (d) 2,412
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,725 Carmichael, California, Water District, Water Revenue Bonds,
COP, 5.125% due 9/01/2029 (b) 1,523
---------------------------------------------------------------------------------------------------------------
AAA Aaa 4,705 Castaic Lake, California, Water Agency Revenue Bonds, COP
(Water System Improvement Project), 5.50% due 8/01/2023 (f) 4,478
---------------------------------------------------------------------------------------------------------------
AAA Aaa 12,000 Central Coast Water Authority, California, Revenue Refunding
Bonds (State Water Project Regional Facilities), Series A, 5%
due 10/01/2022 (f) 10,626
---------------------------------------------------------------------------------------------------------------
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) 2,520
---------------------------------------------------------------------------------------------------------------
AAA Aaa 4,260 Clovis, California, Sewer Revenue Refunding Bonds, 5.20% due
8/01/2028 (b) 3,832
---------------------------------------------------------------------------------------------------------------
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 2,998
---------------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 Contra Costa County, California, Public Financing, Lease
Revenue Refunding Bonds (Various Capital Facilities),
Series 1999A, 5% due 6/01/2028 (b) 3,481
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 East Side Union High School District, Santa Clara County,
Series E, 5% due 9/01/2022 (c) 2,654
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Fontana, California, Redevelopment Agency Tax Allocation
Refunding Bonds (Southwest Industrial Park Project),
5% due 9/01/2022 (b) 2,211
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,750 Long Beach, California, Bond Finance Authority, Lease Revenue
Bonds (Rainbow Harbor Refinancing Project), Series A, 5.125%
due 5/01/2020 (f) 2,490
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,740 Long Beach, California, Harbor Revenue Bonds, AMT,
5.375% due 5/15/2020 (b) 3,454
---------------------------------------------------------------------------------------------------------------
Los Angeles, California, Unified School District, GO (c):
AAA Aaa 2,250 Series A, 5% due 7/01/2021 1,999
AAA Aaa 2,000 Series B, 5% due 7/01/2023 1,765
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Los Angeles, California, Wastewater System Revenue Bonds,
Series A, 5% due 6/01/2028 (c) 2,607
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,500 Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Refunding Bonds, Proposition A --
First Tier, Senior Series C, 5% due 7/01/2026 (f) 2,185
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Monterey County, California, COP, Refunding (Natividad Medical
Center Improvement), Series E, 4.75% due 8/01/2027 (b) 2,462
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,450 Northern California Power Agency, Public Power Revenue Refunding
Bonds (Hydroelectric Project Number One), Series A, 5.125%
due 7/01/2023 (b) 4,884
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Port Oakland, California, Port Revenue Refunding Bonds, Series
I, 5.40% due 11/01/2017 (b) 4,849
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Riverside County, California, COP, Refunding, 5% due 12/01/2021 (b) 1,771
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Roseville, California, Electric System Revenue Bonds, COP,
5.50% due 2/01/2024 (d) 1,898
---------------------------------------------------------------------------------------------------------------
AAA NR* 7,420 Sacramento, California, Cogeneration Authority, Cogeneration
Project Revenue Refunding Bonds, 5.20% due 7/01/2021 (b) 6,780
--------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Sacramento, California, Municipal Utility District, Electric
Revenue Refunding Bonds, Series L, 5.125% due 7/01/2022 (b) 4,502
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Salida, California, Area Public Facilities Financing Agency,
Community Facilities District Special Tax Refunding Bonds
(No. 1998-1), 5.25% due 9/01/2028 (d) 2,724
---------------------------------------------------------------------------------------------------------------
</TABLE>
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
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
4&5
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California AAA Aaa $ 2,000 San Diego, California, Convention Center Expansion Financing
(concluded) Authority, Lease Revenue Bonds, Series A, 4.75% due 4/01/2028 (f) $ 1,659
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 San Diego, California, Public Facilities Financing Authority,
Sewer Revenue Bonds, 5% due 5/15/2020 (c) 2,672
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,500 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Second Series, Issue 15B,
5% due 5/01/2024 (b) 4,838
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,500 San Francisco, California, State Building Authority, Lease
Revenue Bonds (San Francisco Civic Center Complex), Series A,
5.25% due 12/01/2021 (f) 3,226
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,045 San Francisco, California, Unified School District, COP, 4.75%
due 8/01/2024 (f) 876
---------------------------------------------------------------------------------------------------------------
AAA Aaa 3,370 San Joaquin Hills, California, Transportation Corridor Agency,
Toll Road Revenue Refunding Bonds, Series A, 5.25% due 1/15/2030 (b) 3,045
---------------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 San Jose, California, Redevelopment Agency Tax Allocation
Bonds (Merged Area Redevelopment Project), 4.75% due 8/01/2030 (f) 1,649
---------------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Santa Clara County, California, Financing Authority, Lease
Revenue Refunding Bonds, Series A, 5% due 11/15/2022 (f) 4,421
---------------------------------------------------------------------------------------------------------------
A1+ VMIG1+ 700 Southern California Public Power Authority, Power Project
Revenue Refunding Bonds (Palo Verde Project), VRDN, Series C,
3.50% due 7/01/2017 (a)(f) 700
---------------------------------------------------------------------------------------------------------------
AAA Aaa 1,750 Turlock, California, Irrigation District Revenue Refunding
Bonds, Series A, 5% due 1/01/2026 (b) 1,531
---------------------------------------------------------------------------------------------------------------
University of California, Revenue Refunding Bonds:
AAA Aaa 4,200 (Multiple Purpose Projects), Series E, 5.125% due 9/01/2020 (b) 3,808
AAA Aaa 2,000 (Research Facilities), Series C, 5% due 9/01/2021 (d) 1,776
====================================================================================================================================
Total Investments (Cost -- $175,293) -- 97.9% 163,263
Variation Margin on Financial Futures Contracts** -- (0.0%) (52)
Other Assets Less Liabilities -- 2.1% 3,494
--------
Net Assets -- 100.0% $166,705
========
====================================================================================================================================
</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, 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 November 30, 1999.
(f) AMBAC Insured.
(g) Prerefunded.
(h) All or a portion of security held as collateral in connection with open
financial futures contracts.
* Not Rated.
** Financial futures contracts sold as of November 30, 1999 were as follows:
(in Thousands)
--------------------------------------------------------------
Number of Expiration
Contracts Issue Date Value
--------------------------------------------------------------
150 US Treasury Bonds March 2000 $13,959
--------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price -- $14,139) $13,959
==============================================================
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of November 30, 1999
====================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $175,292,584) .......................... $163,262,943
Cash ............................................................................. 3,448
Receivables:
Securities sold ................................................................ $ 4,378,552
Interest ....................................................................... 2,669,708 7,048,260
-----------
Prepaid expenses ................................................................. 4,701
------------
Total assets ..................................................................... 170,319,352
------------
====================================================================================================================================
Liabilities: Payables:
Securities purchased ........................................................... 3,222,736
Dividends to shareholders ...................................................... 188,412
Variation margin ............................................................... 51,562
Offering costs ................................................................. 49,279
Investment adviser ............................................................. 3,762 3,515,751
-----------
Accrued expenses and other liabilities ........................................... 98,389
------------
Total liabilities ................................................................ 3,614,140
------------
====================================================================================================================================
Net Assets: Net assets ....................................................................... $166,705,212
============
====================================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized):
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 ........................................... 583,894
Accumulated realized capital losses on investments -- net ........................ (7,928,881)
Unrealized depreciation on investments -- net .................................... (11,850,344)
-----------
Total -- Equivalent to $12.32 net asset value per Share of Common Stock
(market price -- $12.00) ......................................................... 92,705,212
------------
Total capital .................................................................... $166,705,212
============
====================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended November 30, 1999
====================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ..................................... $ 4,623,359
Income:
====================================================================================================================================
Expenses: Investment advisory fees ..................................................... $ 476,835
Commission fees .............................................................. 94,426
Professional fees ............................................................ 33,712
Transfer agent fees .......................................................... 21,423
Organization expenses ........................................................ 10,796
Listing fees ................................................................. 9,774
Directors' fees and expenses ................................................. 9,723
Printing and shareholder reports ............................................. 9,455
Accounting services .......................................................... 6,687
Custodian fees ............................................................... 6,490
Pricing fees ................................................................. 2,554
Other ........................................................................ 8,898
----------
Total expenses before reimbursement .......................................... 690,773
Reimbursement of expenses .................................................... (118,417)
----------
Total expenses ............................................................... 572,356
------------
Investment income -- net ..................................................... 4,051,003
------------
====================================================================================================================================
Realized & Realized loss on investments -- net .......................................... (7,332,992)
Unrealized Loss on Change in unrealized appreciation/depreciation on investments -- net ......... (7,874,464)
Investments -- Net: ------------
Net Decrease in Net Assets Resulting from Operations ......................... $(11,156,453)
============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the Period
Months Ended Sept. 25, 1998+
Increase (Decrease) in Net Assets: Nov. 30, 1999 to May 31, 1999
====================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income -- net .................................................. $ 4,051,003 $ 5,585,215
Realized loss on investments -- net ....................................... (7,332,992) (595,889)
Change in unrealized appreciation/depreciation on investments -- net ...... (7,874,464) (3,975,880)
------------ ------------
Net increase (decrease) in net assets resulting from operations ........... (11,156,453) 1,013,446
------------ ------------
====================================================================================================================================
Dividends to Investment income -- net:
Shareholders: Common Stock ............................................................ (3,016,608) (3,600,287)
Preferred Stock ......................................................... (1,049,320) (1,386,109)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders ....... (4,065,928) (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
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 (decrease) in net assets ................................... (15,222,381) 181,827,588
Beginning of period ....................................................... 181,927,593 100,005
------------ ------------
End of period* ............................................................ $166,705,212 $181,927,593
============ ============
====================================================================================================================================
*Undistributed investment income -- net .................................... $ 583,894 $ 598,819
============ ============
====================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Six For the Period
Months Ended Sept. 25, 1998+
Increase (Decrease) in Net Asset Value: Nov. 30, 1999 to May 31, 1999
=================================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period ..................................... $ 14.35 $ 15.00
Operating -------- --------
Performance: Investment income -- net ................................................. .54 .74
Realized and unrealized loss on investments -- net ....................... (2.03) (.61)
-------- --------
Total from investment operations ......................................... (1.49) .13
-------- --------
Less dividends to Common Stock shareholders:
Investment income -- net ............................................... (.40) (.48)
-------- --------
Capital charge resulting from issuance of Common Stock ................... -- (.03)
-------- --------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net .............................................. (.14) (.18)
Capital charge resulting from issuance of Preferred Stock ............. -- (.09)
-------- --------
Total effect of Preferred Stock activity ................................. (.14) (.27)
-------- --------
Net asset value, end of period ........................................... $ 12.32 $ 14.35
======== ========
Market price per share, end of period .................................... $ 12.00 $ 13.25
======== ========
=================================================================================================================================
Total Investment Based on market price per share .......................................... (6.49%)@ (8.70%)@
Return:** ======== ========
Based on net asset value per share ....................................... (11.36%)@ (1.12%)@
======== ========
=================================================================================================================================
Ratios Based on Total expenses, net of reimbursement*** .................................. 1.15%* .62%*
Average Net Assets ======== ========
of Common Stock: Total expenses*** ........................................................ 1.39%* 1.24%*
======== ========
Total investment income -- net*** ........................................ 8.17%* 7.53%*
======== ========
Amount of dividends to Preferred Stock shareholders ...................... 2.12%* 1.87%*
======== ========
Investment income -- net, to Common Stock shareholders ................... 6.05%* 5.66%*
======== ========
=================================================================================================================================
Ratios Based on Total expenses, net of reimbursement ..................................... .66%* .39%*
Total Average Net ======== ========
Assets:+++*** Total expenses ........................................................... .80%* .77%*
======== ========
Total investment income -- net ........................................... 4.67%* 4.68%*
======== ========
=================================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ................................ 2.83%* 3.07%*
Average Net Assets ======== ========
Of Preferred Stock:
=================================================================================================================================
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) ......... $ 92,705 $107,928
======== ========
Preferred Stock outstanding, end of period (in thousands) ................ $ 74,000 $ 74,000
======== ========
Portfolio turnover ....................................................... 74.04% 60.32%
======== ========
=================================================================================================================================
Leverage: Asset coverage per $1,000 ................................................ $ 2,253 $ 2,458
======== ========
=================================================================================================================================
Dividends Per Series A -- Investment income -- net ..................................... $ 339 $ 460
Share on Preferred ======== ========
Stock Outstanding: Series B -- Investment income -- net ..................................... $ 370 $ 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
charges.
*** 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.
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. 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,
10 & 11
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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) Organization and offering expenses -- In accordance with Statement of
Position 98-5, unamortized organization expenses of $10,796 were expensed during
the six months ended November 30, 1999. This is considered to be a change in
accounting principle and had no 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 Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .55% of the Fund's average weekly net assets, including
issuance of Preferred Stock. For the six months ended November 30, 1999, FAM
earned fees of $476,835, of which $79,649 was voluntarily waived. FAM also
reimbursed the Fund additional expenses of $38,768.
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 six
months ended November 30, 1999 were $121,645,147 and $119,972,318, respectively.
Net realized gains (losses) for the six months ended November 30, 1999 and net
unrealized gains (losses) as of November 30, 1999 were as follows:
- ------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- ------------------------------------------------------------------
Long-term investments ............. $(7,788,278) $(12,029,641)
Financial futures contracts ....... 455,286 179,297
----------- ------------
Total ............................. $(7,332,992) $(11,850,344)
=========== ============
- ------------------------------------------------------------------
As of November 30, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $12,029,641, of which $198,282 is related to appreciated
securities and $12,227,923 is related to depreciated securities. The aggregate
cost of investments at November 30, 1999 for Federal income tax purposes was
$175,292,584.
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 six months ended November 30, 1999
remained constant and for 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
November 30, 1999 were as follows: Series A, 2.75% and Series B, 2.75%.
Shares issued and outstanding during the six months ended November 30, 1999
remained constant and for 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 .25% to .375%, calculated on the proceeds of each
auction. For the six months ended November 30, 1999, MLPF&S, an affiliate of
FAM, earned $51,465 as commissions.
5. Reorganization Plan:
On September 9, 1999, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby Muni- Holdings California Insured Fund II, Inc. would acquire
substantially all of the assets and liabilities of the Fund, MuniHoldings
California Insured Fund, Inc. and MuniHoldings California Insured Fund IV, Inc.
in exchange for newly issued shares of MuniHoldings California Insured Fund II,
Inc. These Funds are registered, non-diversified, closed-end management
investment companies. All four entities have a similar investment objective and
are managed by FAM.
6. Subsequent Event:
On December 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.066556 per share,
payable on December 30, 1999 to shareholders of record as of December 23, 1999.
12 & 13
<PAGE>
MuniHoldings California Insured Fund III, Inc., November 30, 1999
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its net
investment income to its shareholders on a monthly basis. 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, 1999 were as
follows:
- --------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------
AAA/Aaa ............................... 91.9%
AA/Aa ................................. 1.3
BBB/Baa ............................... 1.8
Other+ ................................ 2.9
- --------------------------------------------------
+ Temporary investments in short-term municipal securities.
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
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:
The Bank of New York
100 Church Street
New York, NY 10286
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.
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.
Past performance results shown in this report should not be considered a
representation of future performance. 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 -- 11/99
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