MUNIHOLDINGS
INSURED
FUND III, INC.
[GRAPHIC OMITED]
STRATEGIC
Performance
Annual Report
April 30, 2000
<PAGE>
MUNIHOLDINGS INSURED FUND III, INC.
The Benefits and Risks of Leveraging
MuniHoldings Insured Fund III, Inc. utilizes leveraging 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 these securities.
<PAGE>
MuniHoldings Insured Fund III, Inc., April 30, 2000
DEAR SHAREHOLDER
Since inception (May 28, 1999) through April 30, 2000, the Common Stock of
MuniHoldings Insured Fund III, Inc. earned $0.786 per share income dividends,
which included earned and unpaid dividends of $0.069. This represents a net
annualized yield of 6.69%, based on a month-end per share net asset value of
$12.65. Over the same period, the total investment return on the Fund's Common
Stock was -10.51%, based on a change in per share net asset value from $15.00 to
$12.65, and assuming reinvestment of $0.717 per share income dividends.
For the six-month period ended April 30, 2000, the Fund's Auction Market
Preferred Stock had an average yield of 3.94%.
The Municipal Market Environment
Since October 1999 through mid-January 2000, fixed-income bond yields rose
steadily higher. US economic growth, in part intensified by Year 2000
preparations, grew at a 7.3% rate in the fourth quarter of 1999 and at a 4.2%
annual rate for all of 1999. Initial estimates for the first quarter of 2000
were reported at 5.4%. However, despite these significant growth rates, no price
measure indicator has shown any considerable signs of future price pressures at
the consumer level, despite the lowest unemployment rates since January 1970.
Given no signs of an economic slowdown, the Federal Reserve Board continued to
raise short-term interest rates in November 1999 and again in February and March
2000. In each instance, the Federal Reserve Board cited both the continued
growth of US employment and the impressive strength of the US equity markets as
reasons for attempting to moderate US economic growth before inflationary price
increases are realized. By mid-January 2000, US Treasury bond yields rose 60
basis points (0.60%) to 6.75%. Similarly, as measured by the Bond Buyer Revenue
Bond Index, long-term tax-exempt bond yields rose approximately 20 basis points
to 6.35%.
Since mid-January, fixed-income markets have largely ignored strong economic
fundamentals and concentrated on very positive technical supply factors.
Declining bond issuance, both current, and more importantly, expected future
issuance, helped push bond yields lower from mid-January to mid-April 2000. In
late January and early February 2000, the US Treasury announced its intention to
reduce the number of issues to be auctioned in the quarterly Treasury note and
bond auctions. Furthermore, budgetary surpluses would allow the US Treasury to
repurchase outstanding, higher-couponed Treasury issues, primarily in the
15-year and longer-term maturity sectors. Both these actions would result in a
significant reduction in the outstanding supply of long-term US Treasury debt.
Domestic and international investors quickly began to accumulate what was
expected to become a scarce commodity and bond prices quickly rose.
By mid-April 2000, US Treasury bond yields had declined over 100 basis points to
5.67%. However, bond yields rose somewhat during the last two weeks of the
period as economic statistics were released, indicating that the economic
strength seen in late 1999 was continuing into early 2000. The decline in
long-term US Treasury bond yields resulted in an inverted taxable yield curve as
short-term and intermediate-term interest rates have not fallen proportionately
since the Federal Reserve Board is expected to continue to raise short-term
interest rates. The current inversion has had much more to do with debt
reduction and Treasury buybacks than with investor expectations of slower
economic growth. Over the last six months, long-term US Treasury bond yields
have fallen almost 20 basis points to close the six-month period ended April 30,
2000 at 5.96%.
Tax-exempt bond yields have also declined in recent months. The decline has
largely been in response to the rally in US Treasury securities, as well as a
continued positive technical supply environment. States such as California and
Maryland have announced that their large current and anticipated future budget
surpluses will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers have also initiated tenders to repurchase
existing debt, reducing the supply of tax-exempt bonds in the secondary market
as well. Since their recent peak in January 2000, long-term municipal bond
yields declined over 25 basis points to finish the six-month period ended April
30, 2000 at 6.07%. During the last six months, municipal bond yields declined
just 10 basis points overall.
The relative underperformance of the municipal bond market in recent months has
been especially disappointing given the strong technical position the tax-exempt
bond market enjoyed. The issuance of long-term tax-exempt securities has
dramatically declined. Over the last year, $203 billion in new long-term
municipal securities was issued, a decline of almost 25% compared to the same
period a year earlier. For the six months ended April 30, 2000, approximately
$90 billion in new tax-exempt bonds was underwritten, a decline of more than 25%
compared to the same period in 1999. Although investors received over $30
billion in coupon payments, bond maturities, and the proceeds from early bond
redemptions, coupled with the highest municipal bond yields in three years,
overall investor demand has diminished. Long-term municipal bond 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.
Over the last four months, tax-exempt mutual funds have had net redemptions of
more than $8 billion. Also, the demand from property and casualty insurance
companies has weakened as a result of the losses and anticipated losses incurred
from a series of damaging storms across much of the eastern United States.
Additionally, many institutional investors who have in recent years been
attracted to the municipal bond market by historically attractive tax-exempt
bond yield ratios of over 90% found other asset classes even more attractive.
Even with a favorable supply position, tax-exempt municipal bond yields have
underperformed their taxable counterparts.
Any significantly lower municipal bond yields are still likely to require weaker
US employment growth and consumer spending. The actions taken in recent months
by the Federal Reserve Board should eventually slow US economic growth. The
recent declines in US home sales are perhaps the first sign that consumer
spending is being slowed by higher interest rates. Until further signs develop,
it is likely that the municipal bond market's current favorable technical
position will dampen significant tax-exempt interest rate volatility and provide
a stable environment for eventual improvement in municipal bond prices.
Portfolio Strategy
During the six-month period ended April 30, 2000, we continued our investment
strategy of seeking to enhance the level of tax-exempt income and to decrease
the price volatility of the Fund. We focused on purchasing premium couponed
issues in the 11-year-20-year maturity range and the sale of long duration
bonds. Because of the steepness in the municipal bond market yield curve, these
issues represented 90%-95% of the yield available on the long end of the curve.
This maturity sector also provided for greater protection from any volatility
the market has experienced recently. We were prevented from fully reducing the
Fund's duration because of a scarcity of new issues coming to market that could
be defensively structured.
The Fund's cost of borrowing increased somewhat in recent months as short-term
tax-exempt interest rates rose along with the adjustment evident in the taxable
market. Long-term tax-exempt interest rates have actually declined modestly,
causing the municipal yield curve to flatten. While this flattening has reduced
the incremental yield enhancement resulting from leveraging the Fund's Common
Stock, it is important to note that in contrast to the inverted shape of the US
Treasury yield curve, the municipal yield curve remained positively sloped. (For
a complete explanation of the benefits and risks of leveraging, see page 1 of
this report to shareholders.)
Looking ahead, we expect to maintain our fully invested position in order to
seek to enhance shareholder income. Because tax-exempt bond yields are expected
to remain in a narrow range, we do not anticipate making any consequential
changes to the Fund, and we expect to continue to maintain our present
investment strategy. If either the US economy or equity markets display any
major weakness, we may adopt a more positive stance in order to enhance
portfolio appreciation.
In Conclusion
We appreciate your ongoing interest in MuniHoldings Insured Fund III, Inc., and
we look forward to serving your investment needs in the months and years to
come.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ William R. Bock
William R. Bock
Vice President and Portfolio Manager
May 25, 2000
2 & 3
<PAGE>
MuniHoldings Insured Fund III, Inc., April 30, 2000
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Alaska--2.0% AAA Aaa $ 2,995 Alaska, Energy Authority, Power Revenue
Refunding Bonds (Bradley Lake), 4th Series,
6% due 7/01/2020 (c) $3,087
====================================================================================================================================
Arizona--0.7% Coconino County, Arizona, Pollution Control
Corporation Revenue Bonds, VRDN, AMT,
Series A (e):
A1 P1 400 (Arizona Public Service Co.--Navajo Project), 5.05%
due 10/01/2029 400
A1+ P1 600 (Arizona Public Service Co.), 6.10% due 12/01/2031 600
====================================================================================================================================
California--10.3% AA- Aa3 1,500 California State, GO, Refunding, 5.50% due 3/01/2018 1,475
A+ Aa3 4,000 Los Angeles, California, Department of Water and Power,
Electric Plant Revenue Refunding Bonds, 6% due 2/15/2028 4,005
AAA Aaa 3,000 Port Oakland, California, Revenue Bonds, AMT, Series K, 5.75%
due 11/01/2021 (b) 2,964
AAA NR* 4,000 San Bernardino County, California, COP, Refunding (Medical
Center Financing Project), 5.50% due 8/01/2019 (d) 3,862
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 (d) 3,508
====================================================================================================================================
Colorado--3.8% NR* Aa2 3,000 Colorado HFA, Revenue Refunding Bonds (S/F Program), AMT,
Senior Series A-2, 7.50% due 4/01/2031 3,323
NR* Aaa 2,000 Colorado Health Facilities Authority, Hospital Revenue Refunding
Bonds (Poudre Valley Health Care), Series A, 5.75% due
12/01/2023 (c) 1,952
A1 NR* 600 Pitkin County, Colorado, IDR, Refunding (Aspen Skiing Company
Project), VRDN, AMT, Series B, 5.95% due 4/01/2014 (e) 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) 3,234
====================================================================================================================================
District of Columbia-- AAA Aaa 8,000 District of Columbia, GO, Refunding, Series A, 5.25% due
4.6% 6/01/2027 (d) 7,081
====================================================================================================================================
Florida--2.1% AAA Aaa 3,000 Miami-Dade County, Florida, Expressway Authority, Toll System
Revenue Bonds, 6.375% due 7/01/2029 (b) 3,168
====================================================================================================================================
Illinois--14.4% AAA Aaa 8,485 Chicago, Illinois, GO, Project and Refunding, Series A, 5.125%
due 1/01/2029 (b) 7,330
AAA Aaa 4,000 Chicago, Illinois, GO, Refunding, Series A-2, 6.25% due
1/01/2014 (a) 4,277
AAA Aaa 7,500 Illinois State, GO, 5.375% due 6/01/2024 (b) 6,978
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) 3,564
====================================================================================================================================
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 (d) 3,128
====================================================================================================================================
Michigan--1.4% A1+ VMIG1+ 2,200 University of Michigan, University Revenue Bonds (Medical Service
Plan), VRDN, Series A, 5.85% due 12/01/2027 (e) 2,200
====================================================================================================================================
Minnesota--5.3% AAA Aaa 4,250 Minneapolis, Minnesota, Special School District Number 001, COP,
Series A, 5.90% due 2/01/2017 (d) 4,294
A A2 4,000 Minnesota Agriculture and Economic Development Board Revenue
Bonds (Fairview Health Care System), Series A, 6.375%
due 11/15/2022 3,884
====================================================================================================================================
Nevada--2.7% AAA Aaa 3,000 Clark County, Nevada, Airport Revenue Bonds, Sub-Lien, Series A,
6% due 7/01/2029 (d) 3,012
A1+ P1 1,200 Washoe County, Nevada, Water Facility Revenue Bonds (Sierra
Pacific Power Company Project), VRDN, AMT, 6.30%
due 12/01/2020 (e) 1,200
====================================================================================================================================
New Jersey--0.6% NR* Aaa 1,000 Lafayette Yard, New Jersey, Community Development Revenue Bonds
(Hotel/Conference Center Project--Trenton), 5.625%
due 4/01/2021 (d) 977
====================================================================================================================================
New York--14.5% AAA Aaa 2,000 Metropolitan Transportation Authority, New York,
Commuter Facilities Revenue Bonds, Series A, 6% due 7/01/2016 (b) 2,050
AAA Aaa 10,000 Metropolitan Transportation Authority, New York, Dedicated Tax
Fund Revenue Bonds, Series A, 5% due 4/01/2029 (c) 8,573
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 5,024
New York State Dormitory Authority, Revenue Refunding Bonds:
AAA Aaa 2,000 (City University), Third Generation Resources, Series 2, 5%
due 7/01/2023 (a) 1,740
AAA Aaa 5,000 (State University Educational Facilities), 5.75% due
5/15/2024 (b) 4,910
====================================================================================================================================
Texas--15.3% AAA Aaa 4,205 Coastal Water Authority, Texas, Contract Revenue Refunding Bonds
(City of Houston Projects), 5% due 12/15/2025 (c) 3,628
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 3,040
AAA Aaa 8,000 Houston, Texas, Water and Sewer System Revenue Bonds, Junior
Lien, Series C, 5.375% due 12/01/2027 (b) 7,310
AAA Aaa 5,000 Keller, Texas, Independent School District, GO, Refunding, 5%
due 8/15/2030 4,256
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) 5,374
====================================================================================================================================
Utah--3.0% AAA Aaa 4,850 Utah Water Finance Agency Revenue Bonds (Pooled Loan Financing
Program), Series A, 5.50% due 10/01/2029 (a) 4,523
====================================================================================================================================
</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)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings Insured Fund III, Inc., April 30, 2000
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>
Washington--11.4% AAA NR* $ 7,500 King County, Washington, GO, Refunding, RIB, Series 47, 5.065%
due 1/01/2034 (d)(f) $5,801
King County, Washington, Sewer Revenue Bonds (b):
AAA Aaa 2,000 5.25% due 1/01/2026 1,790
AAA Aaa 5,970 5.25% due 1/01/2030 5,300
AAA Aaa 5,000 Washington State Health Care Facilities Authority, Revenue Refunding
Bonds (Providence Services), 5.375% due 12/01/2019 (d) 4,610
====================================================================================================================================
Wyoming--2.0% AAA Aaa 3,500 Central Wyoming Regional Water System, Joint Powers Board Revenue
Refunding Bonds, 5.25% due 6/01/2030 (c) 3,114
====================================================================================================================================
Total Investments (Cost--$156,212)--98.2% 151,146
Other Assets Less Liabilities--1.8% 2,834
--------
Net Assets--100.0% $153,980
========
====================================================================================================================================
</TABLE>
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at April 30,
2000.
(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 April 30, 2000.
* Not Rated.
+ Highest short-term rating by Moody's Investors Service, Inc. Ratings of
issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
Quality Profile
The quality ratings of securities in the Fund as of April 30, 2000 were as
follows:
--------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
--------------------------------------------------------------------------------
AAA/Aaa ................................................ 81.4%
AA/Aa .................................................. 9.0
A/A .................................................... 2.5
BBB/Baa ................................................ 2.0
Other* ................................................. 3.3
--------------------------------------------------------------------------------
* Temporary investments in short-term municipal securities.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of April 30, 2000
==================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$156,212,093) ....................... $ 151,145,565
Cash ........................................................................ 65,859
Receivables:
Securities sold ........................................................ $ 4,063,797
Interest ............................................................... 2,904,591 6,968,388
-------------
Prepaid expenses ............................................................ 10,780
-------------
Total assets ................................................................ 158,190,592
-------------
==================================================================================================================================
Liabilities: Payables:
Securities purchased ................................................... 3,872,440
Dividends to shareholders .............................................. 132,201
Offering costs ......................................................... 58,172
Investment adviser ..................................................... 39,512 4,102,325
-------------
Accrued expenses ............................................................ 108,307
-------------
Total liabilities ........................................................... 4,210,632
-------------
==================================================================================================================================
Net Assets: Net assets .................................................................. $ 153,979,960
=============
==================================================================================================================================
Capital: Capital Stock (200,000,000 shares authorized):
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 ........................................ 554,586
Accumulated realized capital losses on investments--net ..................... (10,574,025)
Unrealized depreciation on investments--net ................................. (5,066,528)
-------------
Total--Equivalent to $12.65 net asset value per share of Common Stock
(market price--$11.50) ...................................................... 86,129,960
-------------
Total capital ............................................................... $ 153,979,960
=============
==================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings Insured Fund III, Inc., April 30, 2000
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period May 28, 1999+ to April 30, 2000
===================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned .................... $ 8,137,732
Income:
===================================================================================================================================
Expenses: Investment advisory fees .................................................... $ 778,334
Commission fees ............................................................. 148,999
Accounting services ......................................................... 75,868
Professional fees ........................................................... 37,354
Directors' fees and expenses ................................................ 25,486
Transfer agent fees ......................................................... 22,362
Listing fees ................................................................ 14,561
Printing and shareholder reports ............................................ 10,392
Custodian fees .............................................................. 9,702
Pricing fees ................................................................ 4,546
Other ....................................................................... 7,091
-------------
Total expenses before reimbursement ......................................... 1,134,695
Reimbursement of expenses ................................................... (582,523)
-------------
Total expenses after reimbursement .......................................... 552,172
-------------
Investment income--net ...................................................... 7,585,560
-------------
===================================================================================================================================
Realized & Realized loss on investments--net ........................................... (10,574,025)
Unrealized Loss Unrealized depreciation on investments--net ................................. (5,066,528)
On Investments--Net: -------------
Net Decrease in Net Assets Resulting from Operations ........................ $ (8,054,993)
=============
===================================================================================================================================
</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: April 30, 2000
===================================================================================================================================
<S> <C> <C>
Operations: Investment income--net ...................................................... $ 7,585,560
Realized loss on investments--net ........................................... (10,574,025)
Unrealized depreciation on investments--net ................................. (5,066,528)
-------------
Net decrease in net assets resulting from operations ........................ (8,054,993)
-------------
===================================================================================================================================
Dividends to Investment income--net:
Shareholders: Common Stock ........................................................... (4,880,509)
Preferred Stock ........................................................ (2,150,465)
-------------
Net decrease in net assets resulting from dividends to shareholders ......... (7,030,974)
-------------
===================================================================================================================================
Capital Stock Proceeds from issuance of Common Stock....................................... 102,000,000
Transactions: Proceeds from issuance of Preferred Stock.................................... 67,850,000
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 ............................................... 153,879,955
Beginning of period ........................................................ 100,005
-------------
End of period* ............................................................. $ 153,979,960
=============
===================================================================================================================================
*Undistributed investment income--net ...................................... $ 554,586
=============
===================================================================================================================================
</TABLE>
+ Commencement of operations
See Notes to Financial Statements.
8 & 9
<PAGE>
MuniHoldings Insured Fund III, Inc., April 30, 2000
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: April 30, 2000
==================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period .................................. $ 15.00
Operating ----------
Performance: Investment income--net ................................................ 1.12
Realized and unrealized loss on investments--net ...................... (2.30)
----------
Total from investment operations ...................................... (1.18)
----------
Less dividends to Common Stock shareholders from investment income--net (.72)
----------
Capital charge resulting from issuance of Common Stock ................ (.03)
----------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income--net ......................................... (.32)
Capital charge resulting from issuance of Preferred Stock ........ (.10)
----------
Total effect of Preferred Stock activity .............................. (.42)
----------
Net asset value, end of period ........................................ $ 12.65
==========
Market price per share, end of period ................................. $ 11.50
==========
==================================================================================================================
Total Investment Based on market price per share ....................................... (10.51%)+
Return:** ==========
Based on net asset value per share .................................... (18.64%)+
==========
==================================================================================================================
Ratios Based on Total expenses, net of reimbursement*** ............................... .67%*
Average Net Assets ==========
Of Common Stock: Total expenses*** ..................................................... 1.37%*
==========
Total investment income--net*** ....................................... 9.18%*
==========
Amount of dividends to Preferred Stock shareholders ................... 2.60%*
==========
Investment income--net, to Common Stock shareholders .................. 6.58%*
==========
==================================================================================================================
Ratios Based on Total expenses, net of reimbursement .................................. .39%*
Total Average ==========
Net Assets:***+++ Total expenses ........................................................ .80%*
==========
Total investment income--net .......................................... 5.35%*
==========
==================================================================================================================
Ratios Based on Dividends to Preferred Stock shareholders ............................. 3.63%*
Average Net Assets ==========
Of Preferred Stock:
====================================================================================================================
Supplemental Data:
Net assets, net of Preferred Stock, end of period (in thousands) ...... $ 86,130
==========
Preferred Stock outstanding, end of period (in thousands) ............. $ 67,850
==========
Portfolio turnover .................................................... 94.18%
==========
==================================================================================================================
Leverage: Asset coverage per $1,000 ............................................. $ 2,269
==========
==================================================================================================================
Dividends Per Investment income--net ................................................ $ 792
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. The Fund's Investment Adviser voluntarily waived a portion of its
management fee. Without such waiver, the Fund's performance would have
been lower.
*** 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 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 accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. 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
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. 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
10 & 11
<PAGE>
MuniHoldings Insured Fund III, Inc., April 30, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
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
April 30, 2000, FAM earned fees of $778,334, of which $549,421 was voluntarily
waived. In addition, FAM also reimbursed the Fund $33,102 in additional
expenses.
During the period May 28, 1999 to April 30, 2000, 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 April 30, 2000 were $292,334,078 and $131,117,639,
respectively.
Net realized losses for the period May 28, 1999 to April 30, 2000
and net unrealized losses as of April 30, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
--------------------------------------------------------------------------------
Long-term investments .................. $(10,045,292) $ (5,066,528)
Financial futures contracts ............ (528,733) --
------------ ------------
Total .................................. $(10,574,025) $ (5,066,528)
============ ============
--------------------------------------------------------------------------------
As of April 30, 2000, net unrealized depreciation for Federal income tax
purposes aggregated $5,066,528, of which $1,073,432 related to appreciated
securities and $6,139,960 related to depreciated securities. The aggregate cost
of investments at April 30, 2000 for Federal income tax purposes was
$156,212,093.
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 April 30, 2000
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
April 30, 2000 was 4.55%.
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 April 30, 2000 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. During the period May 28, 1999 to April 30, 2000, MLPF&S, an affiliate
of FAM, earned $119,116 as commissions.
5. Capital Loss Carryforward:
At April 30, 2000, the Fund had a net capital loss carryforward of approximately
$3,736,000, all of which expires in 2008. This amount will be available to
offset like amounts of any future taxable gains.
6. Reorganization Plan:
On April 12, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby MuniHoldings Insured Fund II, Inc. would acquire substantially all of
the assets and liabilities of the Fund and MuniHoldings Insured Fund IV, Inc. in
exchange for newly issued shares of MuniHoldings Insured Fund II, Inc. These
Funds are registered, non-diversified, closed-end management investment
companies. All three entities have a similar investment objective and are
managed by FAM.
7. Subsequent Event:
On May 5, 2000, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.068909 per share,
payable on May 30, 2000 to shareholders of record as of May 16, 2000.
12 & 13
<PAGE>
MuniHoldings Insured Fund III, Inc., April 30, 2000
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, MuniHoldings Insured Fund III, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniHoldings Insured Fund III, Inc. as
of April 30, 2000, the related statements of operations and changes in net
assets, and the financial highlights for the period May 28, 1999 (commencement
of operations) to April 30, 2000. These financial statements and the financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at April 30, 2000 by correspondence with the custodian and
broker. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniHoldings Insured
Fund III, Inc. as of April 30, 2000, the results of its operations, the changes
in its net assets, and the financial highlights for the period May 28, 1999
(commencement of operations) to April 30, 2000 in accordance with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
May 31, 2000
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings Insured Fund
III, Inc. during its taxable year ended April 30, 2000 qualify as tax-exempt
interest dividends for Federal income tax.
Please retain this information for your records.
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.
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>
MuniHoldings Insured Fund III, Inc. 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 the interest on which, in the
opinion of bond counsel to the issuer, is exempt from Federal income taxes.
This report, including the financial information herein, is transmitted to
shareholders of MuniHoldings Insured Fund III, Inc. for their information. It is
not a prospectus. 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--4/00
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