MUNIHOLDINGS
INSURED
FUND III, INC.
STRATEGIC
Performance
[GRAPHIC OMITTED]
Semi-Annual Report
October 31, 1999
<PAGE>
MUNIHOLDINGS INSURED FUND III, INC.
The Benefits and Risks of Leveraging
MuniHoldings 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 on 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 such securities.
<PAGE>
MuniHoldings Insured Fund III, Inc., October 31, 1999
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
MuniHoldings Insured Fund III, Inc. In this and future shareholder reports, we
will highlight the Fund's performance and describe recent investment activities.
The Fund seeks to provide shareholders with current income exempt from Federal
income taxes by investing primarily in a portfolio of long-term,
investment-grade municipal obligations.
Since inception (May 28, 1999) through October 31, 1999, the Common Stock of
MuniHoldings Insured Fund III, Inc. earned $0.377 per share income dividends,
which included earned and unpaid dividends of $0.072. This represents a net
annualized yield of 7.00%, based on a month-end net asset value of $12.51 per
share. Over the same period, the total investment return on the Fund's Common
Stock was -14.60%, based on a change in per share net asset value from $15.00 to
$12.51, and assuming reinvestment of $0.305 per share income dividends.
For the period May 28, 1999 through October 31, 1999, the Fund's Auction Market
Preferred Stock had an average yield of 3.21%.
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 period ended October 31, 1999. Continued strong US employment
growth, particularly the decline in the US unemployment rate to 4.2% in early
June, was among the reasons the Federal Reserve Board cited for raising
short-term interest rates in late June and again in late August. US Treasury
bond yields reacted by climbing above 6.375% by late October. However, by
October 31, 1999, economic indicators were released suggesting that despite
strong economic and employment growth in the third fiscal quarter of 1999,
inflationary pressures have remained extremely well-contained. This resulted in
a significant rally in the US Treasury bond market, pushing US Treasury bond
yields downward to approximately 6.15% by October 31, 1999. During the last six
months, yields on 30-year US Treasury bonds increased more than 50 basis points
(0.50%).
Long-term tax-exempt bond yields also rose during the six months ended October
31, 1999. Until early May, 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 almost 90 basis points to 6.18% by October 31, 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. During the last six months, more than $110 billion in
long-term municipal bonds was issued, a decline of almost 20% compared to the
same period a year ago. During the past three months, $55 billion in municipal
bonds was underwritten, representing a decline of nearly 10% compared to the
corresponding period in 1998. Additionally, in June and July, investors received
more than $40 billion in coupon income and proceeds from bond maturities and
early bond redemptions. These proceeds have generated considerable retail
investor interest, which has helped absorb the recent diminished supply.
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 to taxable US Treasury securities. At October 31,
1999, long-term uninsured municipal revenue bond yields were 100% 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 Year 2000 (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
significantly. 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 municipal 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.
Y2K considerations may prohibit any further Federal Reserve Board moves through
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 affect 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 incredible growth rates 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.
Portfolio Strategy
At the Fund's inception, we had a positive investment outlook toward the
municipal bond market, and we expected that interest rates would remain stable
going forward. Therefore, we fully invested the Fund and continued this strategy
for the early part of the period. However, during the last five months, the
municipal bond market underperformed the US Treasury market. This sub-par
performance can be attributed to a lack of institutional demand and a large
increase of corporate and agency issues resulting in a wider yield spread to US
Treasury issues and certain allocations away from municipal bonds. Given the
robust economic environment early in the period, it did not seem likely that
long-term interest rates would decline. Accordingly, we maintained our strategy
of focusing on income-producing securities. We believed that coupon income could
potentially be a more significant segment of the Fund's annual total return
performance should the tax-exempt bond market perform as anticipated in the
ensuing months. Keeping shareholder income as a priority, MuniHoldings Insured
Fund III, Inc. was fully invested for most of the past several months, and we
expect to maintain this position going forward.
In Conclusion
We appreciate your investment in MuniHoldings 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
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ William R. Bock
William R. Bock
Vice President and Portfolio Manager
December 2, 1999
2 & 3
<PAGE>
MuniHoldings Insured Fund III, Inc., October 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>
Alabama -- 3.3% AAA Aaa $ 6,000 Jefferson County, Alabama, Sewer Revenue Bonds, Capital
Improvement Warrants, Series A, 5% due 2/01/2033 (b) $ 5,012
- ------------------------------------------------------------------------------------------------------------------------------------
Arizona -- 0.8% A1+ P1 1,200 Pinal County, Arizona, IDA, PCR (Newmont Mining), DATES,
3.55% due 12/01/2009 (d) 1,200
- ------------------------------------------------------------------------------------------------------------------------------------
California -- 2.3% AAA Aaa 4,000 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Second Series, Issue 15B,
5% due 5/01/2024 (c) 3,490
- ------------------------------------------------------------------------------------------------------------------------------------
Colorado -- 2.7% A1+ VMIG1+ 1,500 Moffat County, Colorado, PCR, Refunding (Pacificorp Projects),
VRDN, 3.55% due 5/01/2013(a)(d) 1,500
A1+ NR* 2,600 Pitkin County, Colorado, IDR, Refunding (Aspen Skiing Company
Project), VRDN, AMT, Series B, 3.60% due 4/01/2014 (d) 2,600
- ------------------------------------------------------------------------------------------------------------------------------------
Delaware -- 2.1% AAA Aaa 3,430 Delaware State Housing Authority, S/F Mortgage Revenue
Refunding Bonds, AMT, Senior Series A-1, 5.55%
due 7/01/2019 (a) 3,171
- ------------------------------------------------------------------------------------------------------------------------------------
District of AAA Aaa 8,000 District of Columbia, GO, Refunding, Series A, 5.25%
Columbia -- 4.6% due 6/01/2027 (c) 7,011
- ------------------------------------------------------------------------------------------------------------------------------------
Illinois -- 13.4% AAA Aaa 3,370 Chicago, Illinois, Board of Education, GO (Chicago School
Reform Project), Series A, 5.25% due 12/01/2030 (a) 2,939
AAA Aaa 8,485 Chicago, Illinois, GO, Project and Refunding, Series A, 5.125%
due 1/01/2029 (b) 7,262
AAA Aaa 7,500 Illinois State, GO, 5.375% due 6/01/2024 (b) 6,785
AAA Aaa 4,000 Metropolitan Pier and Exposition Authority, Illinois, Dedicated
State Tax Revenue Refunding Bonds (McCormick Place Expansion
Project), Series A, 5.25% due 6/15/2027 (a) 3,515
- ------------------------------------------------------------------------------------------------------------------------------------
Indiana -- 2.0% AAA Aaa 3,500 Indiana Health Facilities Financing Authority, Hospital Revenue
Refunding Bonds (Sisters of Saint Francis Health), Series A,
5.375% due 11/01/2027 (c) 3,129
- ------------------------------------------------------------------------------------------------------------------------------------
Massachusetts -- 2.7% AAA Aaa 5,000 Massachusetts State Turnpike Authority, Metropolitan Highway
System, Revenue Refunding Bonds, Sub-Series A,
5% due 1/01/2039 (a) 4,152
- ------------------------------------------------------------------------------------------------------------------------------------
Michigan -- 4.5% A1+ VMIG1+ 1,200 University of Michigan, University Hospital Revenue Refunding
Bonds, VRDN, Series A, 3.50% due 12/01/2019 (d) 1,200
A1+ VMIG1+ 900 University of Michigan, University Revenue Refunding Bonds
(Medical Service Plan), VRDN, Series A-1, 3.50%
due 12/01/2021 (d) 900
AAA Aaa 5,790 Wayne Charter County, Michigan, Airport Revenue Bonds (Detroit
Metropolitan -- Wayne County Airport), AMT, Series A,
5% due 12/01/2028 (c) 4,832
- ------------------------------------------------------------------------------------------------------------------------------------
Nevada -- 3.1% AAA Aaa 3,000 Clark County, Nevada, Airport Revenue Bonds, Sub-Lien,
Series A, 6% due 7/01/2029 (c) 2,975
A1+ P1 1,700 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra
Pacific Power Company Project), AMT, VRDN,
3.60% due 12/01/2020 (d) 1,700
- ------------------------------------------------------------------------------------------------------------------------------------
New York -- 8.0% AA Aa3 5,000 New York City, New York, City Transitional Finance Authority
Revenue Bonds, Future Tax Secured, Series A, 6%
due 8/15/2029 4,972
A- A3 5,000 New York City, New York, GO, Series H, 5% due 3/15/2029 4,187
AAA Aaa 3,600 New York State Dormitory Authority, Revenue Refunding Bonds
(Consolidated City University System), Series 1,
5.125% due 7/01/2027 (c) 3,134
- ------------------------------------------------------------------------------------------------------------------------------------
North Carolina -- 2.0% A1+ NR* 3,100 Raleigh Durham, North Carolina, Airport Authority, Special
Facility Revenue Refunding Bonds (American Airlines Inc.),
VRDN, Series B, 3.55% due 11/01/2005 (d) 3,100
- ------------------------------------------------------------------------------------------------------------------------------------
Pennsylvania -- 2.8% AAA Aaa 3,830 Pittsburgh and Allegheny County, Pennsylvania, Public
Auditorium Revenue Bonds (Regional Asset District Sales Tax),
5% due 2/01/2029 (a) 3,258
A1+ NR* 1,000 Schuylkill County, Pennsylvania, IDA, Resource Recovery
Revenue Refunding Bonds (Northeastern Power Company),
VRDN, Series A, 3.50% due 12/01/2022 (d) 1,000
- ------------------------------------------------------------------------------------------------------------------------------------
Texas -- 18.1% AAA Aaa 4,205 Coastal Water Authority, Texas, Contract Revenue Refunding
Bonds (City of Houston Projects), 5% due 12/15/2025 (e) 3,594
BBB- Baa1 3,200 Dallas-Fort Worth, Texas, International Airport Facilities,
Improvement Corporation Revenue Bonds (American Airlines Inc.),
AMT, 6.375% due 5/01/2035 3,064
AAA Aaa 10,000 Houston, Texas, Airport System Revenue Refunding Bonds,
Sub Lien, Series C, 5% due 7/01/2028 (b) 8,482
AAA Aaa 8,000 Houston, Texas, Water and Sewer System Revenue Bonds,
Junior Lien, Series C, 5.375% due 12/01/2027 (b) 7,244
AAA Aaa 6,000 Matagorda County, Texas, Navigation District Number 1,
Revenue Refunding Bonds (Reliant Energy Inc.), Series A,
5.25% due 6/01/2026 (a) 5,290
- ------------------------------------------------------------------------------------------------------------------------------------
Utah -- 5.8% AAA Aaa 5,055 Salt Lake City, Utah, Metropolitan Water District, Water
Revenue Bonds, 5.375% due 7/01/2029 (a) 4,510
AAA Aaa 4,850 Utah Water Finance Agency Revenue Bonds (Pooled Loan
Financing Program), Series A, 5.50% due 10/01/2029 (a) 4,415
- ------------------------------------------------------------------------------------------------------------------------------------
Washington -- 18.4% AAA NR* 15,000 King County, Washington, GO, Refunding, RIB, Series 47,
6.655% due 1/01/2034 (c)(f) 11,162
King County, Washington, Sewer Revenue Bonds (b):
AAA Aaa 3,000 5.25% due 1/01/2026 2,651
AAA Aaa 5,970 5.25% due 1/01/2030 5,236
AAA Aaa 10,000 Washington State Health Care Facilities Authority, Revenue
Refunding Bonds (Providence Services), 5.375%
due 12/01/2019 (c) 9,102
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Portfolio Abbreviations
To simplify the listings of MuniHoldings 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)
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings Insured Fund III, Inc., October 31, 1999
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wyoming -- 3.5% AAA Aaa $ 6,000 Central Wyoming Regional Water System, Joint Powers Board
Revenue Refunding Bonds, 5.25% due 6/01/2030 (e) $ 5,364
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost -- $166,082) -- 100.1% 153,138
Liabilities in Excess of Other Assets -- (0.1%) (122)
--------
Net Assets -- 100.0% $153,016
========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) MBIA Insured.
(d) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at October 31,
1999.
(e) FSA Insured.
(f) 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 October 31, 1999.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
Quality Profile
The quality ratings of securities in the Fund as of October 31, 1999 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa .............................................................. 83.5%
AA/Aa ................................................................ 3.3
A/A .................................................................. 2.7
BBB/Baa .............................................................. 2.0
Other+ ............................................................... 8.6
- --------------------------------------------------------------------------------
+ Temporary investments in short-term municipal securities.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $166,082,317) (Note 1a) ....... $153,137,712
Cash .................................................................... 14,801
Receivables:
Securities sold ....................................................... $ 3,528,876
Interest .............................................................. 3,153,431 6,682,307
----------- ------------
Total assets ............................................................ 159,834,820
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased .................................................. 6,418,106
Dividends to shareholders (Note 1f) ................................... 181,457
Offering costs (Note 1e) .............................................. 154,899
Investment adviser (Note 2) ........................................... 15,503 6,769,965
-----------
Accrued expenses and other liabilities .................................. 48,909
------------
Total liabilities ....................................................... 6,818,874
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets .............................................................. $153,015,946
============
- ------------------------------------------------------------------------------------------------------------------------------------
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (2,714 shares of AMPS* issued
and outstanding at $25,000 per share liquidation preference) .......... $ 67,850,000
Common Stock, par value $.10 per share (6,806,667 shares issued and
outstanding) .......................................................... $ 680,667
Paid-in capital in excess of par ........................................ 100,535,260
Undistributed investment income -- net .................................. 630,935
Accumulated realized capital losses on investments -- net ............... (3,736,311)
Unrealized depreciation on investments -- net ........................... (12,944,605)
------------
Total -- Equivalent to $12.51 net asset value per share of Common Stock
(market price -- $12.00) ................................................ 85,165,946
------------
Total capital ........................................................... $153,015,946
============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings Insured Fund III, Inc., October 31, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period May 28, 1999+ to October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ............... $ 3,661,947
Income (Note 1d):
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ...................................... $ 360,701
Commission fees (Note 4) ............................................... 63,848
Accounting services (Note 2) ........................................... 25,079
Professional fees ...................................................... 17,455
Directors' fees and expenses ........................................... 10,921
Transfer agent fees .................................................... 10,567
Listing fees ........................................................... 6,230
Printing and shareholder reports ....................................... 4,542
Custodian fees ......................................................... 4,500
Pricing fees ........................................................... 2,617
Other .................................................................. 2,809
-----------
Total expenses before reimbursement .................................... 509,269
Reimbursement of expenses (Note 2) ..................................... (371,595)
-----------
Total expenses after reimbursement ..................................... 137,674
------------
Investment income -- net ............................................... 3,524,273
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Realized & Realized loss on investments -- net .................................... (3,736,311)
Unrealized Loss on Unrealized depreciation on investments -- net .......................... (12,944,605)
Investments -- Net ------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations ................... $(13,156,643)
============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
May 28, 1999+ to
Increase (Decrease) in Net Assets: October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations: Investment income -- net .............................................................. $ 3,524,273
Realized loss on investments -- net ................................................... (3,736,311)
Unrealized depreciation on investments -- net ......................................... (12,944,605)
------------
Net decrease in net assets resulting from operations .................................. (13,156,643)
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends to Investment income -- net:
Shareholders Common Stock ........................................................................ (2,075,094)
(Note 1f): Preferred Stock ..................................................................... (818,244)
------------
Net decrease in net assets resulting from dividends to shareholders ................... (2,893,338)
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Stock Proceeds from issuance of Common Stock ................................................ 102,000,000
Transactions Proceeds from issuance of Preferred Stock ............................................. 67,850,000
(Notes 1e & 4): Offering costs resulting from the issuance of Common Stock ............................ (219,940)
Offering and underwriting costs resulting from the issuance of Preferred Stock ........ (664,138)
------------
Net increase in net assets derived from capital stock transactions .................... 168,965,922
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets .......................................................... 152,915,941
Beginning of period ................................................................... 100,005
------------
End of period* ........................................................................ $153,015,946
============
- ------------------------------------------------------------------------------------------------------------------------------------
*Undistributed investment income -- net ................................................ $ 630,935
============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings Insured Fund III, Inc., October 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
May 28, 1999+ to
Increase (Decrease) in Net Asset Value: October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Net asset value, beginning of period ................................................ $ 15.00
Operating -----------
Performance: Investment income -- net ............................................................ .51
Realized and unrealized loss on investments -- net .................................. (2.45)
------------
Total from investment operations .................................................... (1.94)
------------
Less dividends to Common Stock shareholders from investment income -- net ........... (.30)
------------
Capital charge resulting from issuance of Common Stock .............................. (.03)
------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net ........................................................ (.12)
Capital charge resulting from issuance of Preferred Stock ......................... (.10)
------------
Total effect of Preferred Stock activity ............................................ (.22)
------------
Net asset value, end of period ...................................................... $ 12.51
============
Market price per share, end of period ............................................... $ 12.00
============
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on market price per share ..................................................... (18.08%)@
Return:** ============
Based on net asset value per share .................................................. (14.60%)@
============
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios Based on Total expenses, net of reimbursement*** ............................................. .34%*
Average Net Assets ============
of Common Stock: Total expenses*** ................................................................... 1.27%*
============
Total investment income -- net*** ................................................... 8.79%*
============
Amount of dividends to Preferred Stock shareholders ................................. 2.04%*
============
Investment income -- net, to Common Stock shareholders .............................. 6.75%*
============
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios Based on Total expenses, net of reimbursement ................................................ .21%*
Total Average ============
Net Assets:+++*** Total expenses ...................................................................... .78%*
============
Total investment income -- net ...................................................... 5.37%*
============
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios Based on Dividends to Preferred Stock shareholders ........................................... 3.21%*
Average Net Assets ============
Of Preferred Stock:
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Data: Net assets, net of Preferred Stock, end of period (in thousands) .................... $ 85,166
============
Preferred Stock outstanding, end of period (in thousands) ........................... $ 67,850
============
Portfolio turnover .................................................................. 42.13%
============
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage: Asset coverage per $1,000 ........................................................... $ 2,255
============
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends Per Investment income -- net ............................................................ $ 301
Share on Preferred ============
Stock Outstanding:
- ------------------------------------------------------------------------------------------------------------------------------------
</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 June 17, 1999.
+++ 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 Insured Fund III, Inc. (the "Fund") is reg-istered under the
Investment Company Act of 1940 as a non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. Prior to commencement of operations on May 28,
1999, the Fund had no operations other than those relating to organizational
matters and the sale of 6,667 shares of Common Stock on May 20, 1999 to Fund
Asset Management, L.P. ("FAM") for $100,005. The Fund determines and makes
available for publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the New York Stock Exchange under
the symbol MSR. 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
10 & 11
<PAGE>
MuniHoldings Insured Fund III, Inc., October 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
existing securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific future date and
at a specific price or yield. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options -- The Fund is authorized to write covered call options and purchase
call and put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an 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) Offering expenses -- 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.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's 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
proceeds from the issuance of Preferred Stock. For the period May 28, 1999 to
October 31, 1999, FAM earned fees of $360,701, of which $339,031 was voluntarily
waived. In addition, FAM also reimbursed the Fund $32,564 in additional
expenses.
During the period May 28, 1999 to October 31, 1999, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, received
underwriting fees of $508,875 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 May 28, 1999 to October 31, 1999 were $213,328,152 and $56,489,132,
respectively.
Net realized gains (losses) for the period May 28, 1999 to October 31, 1999 and
net unrealized losses as of October 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments .................. $ (3,980,031) $(12,944,605)
Financial futures contracts ............ 243,720 --
------------ ------------
Total .................................. $ (3,736,311) $(12,944,605)
============ ============
- --------------------------------------------------------------------------------
As of October 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $12,944,605, of which $13,008,451 related to appreciated
securities and $63,846 related to depreciated securities. The aggregate cost of
investments at October 31, 1999 for Federal income tax purposes was
$166,082,317.
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 May 28, 1999 to October 31, 1999
increased by 6,800,000 from shares sold.
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 yield in effect at
October 31, 1999 was 3.34%.
In connection with the offering of AMPS, the Board of Directors reclassified
2,714 shares of unissued capital stock as AMPS. Shares issued and outstanding
during the period May 28, 1999 to October 31, 1999 increased by 2,714 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 period May 28, 1999 to October 31, 1999, MLPF&S, an affiliate
of FAM, earned $51,572 as commissions.
5. Subsequent Event:
On November 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.072000 per share,
payable on November 29, 1999 to shareholders of record as of November 22, 1999.
12 & 13
<PAGE>
MuniHoldings Insured Fund III, Inc., October 31, 1999
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute substantially all of its net
investment income to its shareholders on a monthly basis. However, in order to
provide shareholders with a more consistent yield to the current trading price
of 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.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon, Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
William R. Bock, Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MSR
14 & 15
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of MuniHoldings 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 Insured Fund III, Inc.
Box 9011
Princeton, NJ
08543-9011 #MHINS3--10/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
