UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-08497
Name of Fund: Corporate High Yield Fund III, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Corporate High Yield Fund III, Inc., 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 05/31/06
Date of reporting period: 06/01/05 - 11/30/05
Item 1 - Report to Stockholders
Corporate High Yield
Fund III, Inc.
Semi-Annual Report
November 30, 2005
Corporate High Yield Fund III, Inc.
The Benefits and Risks of Leveraging
Corporate High Yield Fund III, Inc. utilizes leveraging through borrowings or
issuance of short-term debt securities or shares of Preferred Stock. The concept
of leveraging is based on the premise that the cost of assets to be obtained
from leverage will be based on short-term interest rates, which normally will be
lower than the income earned by the Fund on its longer-term portfolio
investments. Since the total assets of the Fund (including the assets obtained
from leverage) are invested in higher-yielding portfolio investments, the Fund's
Common Stock shareholders are the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its net asset value and market
price. If the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, the Fund's
net income will be less than if leverage had not been used, and therefore the
amount available for distribution to Common Stock shareholders will be reduced.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
2 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
A Letter From the President
Dear Shareholder
As the financial markets continued to muddle their way through 2005, the Federal
Reserve Board (the Fed) advanced its monetary tightening campaign full steam
ahead. The 13th consecutive interest rate hike since June 2004 came on December
13, bringing the target federal funds rate to 4.25%. Oil prices, after reaching
record highs on more than one occasion over the past several months, moderated
somewhat by period-end, as did inflation expectations. Against this backdrop,
most major market indexes managed to post positive results for the current
reporting period:
Total Returns as of November 30, 2005 6-month 12-month
=============================================================================================
U.S. equities (Standard & Poor's 500 Index) + 5.88% + 8.44%
---------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) +10.47 + 8.14
---------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) +11.23 +13.25
---------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.48 + 2.40
---------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.36 + 3.88
---------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) + 2.33 + 2.94
---------------------------------------------------------------------------------------------
With the kick-off of the holiday shopping season, attention turned to the
consumer, who has remained resilient even amid high energy prices and rising
interest rates. Some observers surmise that a slowdown in residential real
estate may ultimately contribute to a weakening in consumer spending. At this
juncture, the outlook remains unclear.
Equity markets moved sideways for much of 2005, notwithstanding a strong rally
in the middle of the fourth quarter. Corporate earnings have continued to
surprise on the upside and company profit margins remain high, as does
productivity. On the other hand, high energy prices, more Fed interest rate
hikes, a consumer slowdown and/or the potential for slower earnings growth pose
the greatest risks to U.S. stocks. Internationally, many markets have benefited
from strong economic statistics, trade surpluses and solid finances. Emerging
markets have had a particularly strong year, partly reflecting high economic
growth rates and positive financial reforms.
The bond market continued to be characterized by a flattening yield curve. The
difference between the two-year and 10-year Treasury yield was just seven basis
points (.07%) at period-end, compared to 40 basis points six months ago and 134
basis points 12 months ago.
Navigating the financial markets can be a challenge, particularly during
uncertain times. With that in mind, we invite you to visit our online magazine
at www.mlim.ml.com/shareholdermagazine. Shareholder is a publication designed to
provide insights on investing and timely "food for thought" for investors. We
are pleased to make the magazine available online, where we are able to expand
our reach in terms of content and readership.
As always, we thank you for trusting Merrill Lynch Investment Managers with your
investment assets, and we look forward to serving you in the months and years
ahead.
Sincerely,
/s/ Robert C. Doll
Robert C. Doll, Jr.
President and Director
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 3
A Discussion With Your Fund's Portfolio Manager
Individual security selection in various sectors, as well as our holdings
in two convertible securities, contributed to the Fund's outperformance of its
benchmark and comparable Lipper category average for the period.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended November 30, 2005, the Common Stock of Corporate
High Yield Fund III, Inc. had net annualized yields of 10.67% and 11.67%, based
on a period-end per share net asset value of $8.41 and a per share market price
of $7.69, respectively, and $.450 per share income dividends. For the same
period, the total investment return on the Fund's Common Stock was +4.28%, based
on a change in per share net asset value from $8.46 to $8.41, and assuming
reinvestment of all distributions. The high yield bond market, as measured by
the Credit Suisse First Boston (CSFB) High Yield Index, returned +2.33% for the
six-month period, while the Fund's comparable Lipper category of High Current
Yield Funds (Leveraged) had an average return of +3.46%. (Funds in this Lipper
category aim for relatively high current yield from investment in fixed income
securities, have no quality or maturity restrictions, and tend to invest in
lower-grade debt issues.)
The positive return of the high yield market over the past six months reflects a
recovery from weakness in the early spring of 2005, and a realization that
corporate earnings had remained reasonably healthy. In addition, investors
digested the effects of General Motors Corporation's entry into the high yield
market after the major credit rating agencies downgraded its debt to below
investment grade. Despite high yield's broadly favorable performance, the market
has been increasingly skittish and risk-averse. Bonds of companies that have
suffered earnings disappointments or adverse events have been severely punished.
The spreads of high yield bonds versus 10-year U.S. Treasury issues, as measured
by the CSFB High Yield Index, narrowed from 430 basis points (4.30%) at May 31,
2005 to 398 basis points at the end of the period on November 30, 2005.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or a discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What factors most influenced Fund performance?
Individual security selection benefited Fund performance during the period. Our
position in Loral Space & Communications Ltd., a U.S. satellite communications
company, performed well as the company's reorganization enabled it to emerge
successfully from bankruptcy. We believe Loral has good prospects for recovery
and earnings growth. Two of our convertible holdings -- the securities of
Cypress Semiconductor Corp. and Reliant Energy Inc. -- also enhanced Fund
returns. The securities of Cypress Semiconductor performed well as the company
achieved success in its SunPower solar energy operations. The bonds of Reliant
Energy, an electric utility, rose amid the company's steadily improving
earnings.
Our position in Calpine Corp., an independent electricity producer, detracted
from Fund performance. Calpine posted disappointing earnings for the third
quarter of 2005, leading to increased speculation that the company would default
on its debt. We believe that, while the company's fundamentals over the next 12
months should remain favorable, liquidity issues make the company's survival
considerably more precarious. Our holding in Star Gas Partners LP, a residential
oil and propane distributor, also had a negative effect on Fund performance. The
company faced a liquidity crisis as high oil prices increased its inventory
costs. However, we believe Star Gas has a viable business and asset value that
will lead to a rebound in the price of the company's bonds.
What changes were made to the portfolio during the period?
We continued to moderate the Fund's risk profile during the period. We trimmed
our weighting in CCC-rated bonds from approximately 19% of net assets to 13%. We
maintained our position in convertible securities at approximately 7%, as we
believe these issues' underlying equity values will enhance their returns. The
Fund's exposure to floating rate securities remains at 11.3% as we seek to
balance a portion of our rising borrowing costs with securities that pay
interest at rates that move with short-term interest rates.
4 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
We maintained our focus on increasing the portfolio's weightings in sectors with
strong earnings momentum, as well as those with more defensive industry
characteristics. We boosted the Fund's exposure to the growing U.S. cable sector
by adding to holdings in the growing communications satellite industry.
Favorable trends in the technology sector have led to increased exposure in that
sector through purchases of both high yield bonds and convertible securities. We
have also added to the defensive health care sector and reduced exposure to the
chemical sector.
The Fund's leverage position averaged 26.0% during the six-month period ended
November 30, 2005. That is, the Fund borrowed the equivalent of 26.0% of total
assets invested, earning incremental yield on the investments we made with the
borrowed funds. For the six months ended November 30, 2005, the average amount
borrowed was $112.4 million, and the daily weighted average interest rate was
3.86%. While leveraging will hinder the Fund's total return in a weak market,
the converse also is true. We intend to maintain our leverage position in the
mid-20% range, although that level may vary somewhat as we adjust the
portfolio's holdings. For a more complete discussion of the benefits and risks
of leveraging, see page 2 of this report to shareholders.
How would you characterize the Fund's position at the close of the period?
We believe that the high yield market has passed its peak performance for the
cycle and that volatility will increase, although the asset class still may
benefit from continued strength in the economy in the near term. We have
positioned the portfolio more conservatively in an effort to reduce risk in
anticipation of increasing market volatility as the new year unfolds.
At period-end, the Fund had overweights versus the benchmark CSFB High Yield
Index in more defensive sectors, including gaming, broadcasting, diversified
media and U.S. cable. We also maintained our emphasis on better quality issues
in the cyclical chemical and paper industries. The Fund had an average credit
rating of B at the end of the period, as did the CSFB High Yield Index.
Elizabeth M. Phillips
Vice President and Portfolio Manager
December 16, 2005
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 5
Portfolio Information
Percent of
As of November 30, 2005 Total Assets
====================================================================================================================================
Ten Largest Holdings
------------------------------------------------------------------------------------------------------------------------------------
The AES Corp.* AES is a worldwide power producer with operations in the United States, Europe,
Latin America and Asia. Electricity generation and sales are primarily to
wholesale customers, although the company has a direct distribution business to
end users. 1.6%
------------------------------------------------------------------------------------------------------------------------------------
Building Materials Corp. of America* Building Materials is a manufacturer of residential roofing products, with
Timberline as its major brand. 1.6
------------------------------------------------------------------------------------------------------------------------------------
Alpharma, Inc.* Alpharma manufactures specialty human pharmaceutical and animal health
products. Products include liquid and topical pharmaceuticals, specialty
antibiotics and animal health feed additives for poultry and livestock. The
company has recently announced the sale of its generic pharmaceutical business,
with the transaction to close in the first half of 2006. Proceeds are targeted,
in part, to debt reduction. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Liberty Media Corp. These bonds are an obligation of Liberty Media, but upon conversion are
exchangeable into shares of media giant Time Warner common stock. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Qwest Communications International* Qwest provides a broad range of telecommunications services, including
broadband Internet-based data, voice and image communication, local exchange
services and data, and long-distance services to residential and business
customers. The company also provides Web hosting, high-speed Internet access
and private networks. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Sierra Pacific Resources* Sierra Pacific Resources is the holding company for two utilities, Nevada Power
Company and Sierra Pacific Power Company. Both utilities primarily serve the
State of Nevada. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Adelphia Communications Corp.* Adelphia is a cable television operator, with systems in suburban areas of
large- and medium-sized cities in the United States. Our holdings are primarily
in loans to Adelphia's Century Cable subsidiary that have continued to pay
interest through the bankruptcy proceedings. 1.3
------------------------------------------------------------------------------------------------------------------------------------
Sungard Data Systems* Sungard is a top financial software firm, brought private by a group of seven
financial investors. The company provides information technology and electronic
processing for financial services companies worldwide. It also offers a high
availability infrastructure for business continuity. 1.3
------------------------------------------------------------------------------------------------------------------------------------
Intelsat* Intelsat owns and operates a global communications satellite system that offers
satellite service for voice, data, video and Internet communications to over
200 countries and territories. 1.3
------------------------------------------------------------------------------------------------------------------------------------
Time Warner Telecom* Time Warner Telecom offers local telephone service and a wide range of
telephony products to medium- and large-sized businesses in selected
metropolitan areas. The company operates a fiber optic network. 1.2
------------------------------------------------------------------------------------------------------------------------------------
* Includes combined holdings and/or affiliates.
Portfolio Profile
Percent of
Five Largest Industries Total Investments
--------------------------------------------------------------------------------
Health Care ......................................................... 7.6%
Cable -- U.S. ....................................................... 7.4
Information Technology .............................................. 6.9
Chemicals ........................................................... 5.9
Diversified Media ................................................... 5.8
--------------------------------------------------------------------------------
For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease.
--------------------------------------------------------------------------------
Percent of
Five Largest Foreign Countries* Total Investments
--------------------------------------------------------------------------------
Canada .............................................................. 6.6%
Bermuda ............................................................. 1.9
Netherlands ......................................................... 1.2
Brazil .............................................................. 1.2
South Korea ......................................................... 0.8
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
Quality Ratings by Percent of
S&P/Moody's Total Investments
--------------------------------------------------------------------------------
BBB ................................................................. 1%
BB .................................................................. 23
B ................................................................... 52
CCC ................................................................. 13
NR (Not Rated) ...................................................... 8
Other* .............................................................. 3
--------------------------------------------------------------------------------
* Includes portfolio holdings in common stocks, preferred securities,
warrants and other interests.
--------------------------------------------------------------------------------
Average Portfolio Maturity .......................................... 6.6 Years
--------------------------------------------------------------------------------
6 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Schedule of Investments (in U.S. dollars)
Face
Amount Corporate Bonds Value
===================================================================================================================
Aerospace & Defense--4.6%
$2,275,000 Alliant Techsystems, Inc., 3% due 8/15/2024 (b)(i) $ 2,656,063
1,850,000 DRS Technologies, Inc., 6.875% due 11/01/2013 1,757,500
975,000 Esterline Technologies Corp., 7.75% due 6/15/2013 1,018,875
775,000 K&F Acquisition, Inc., 7.75% due 11/15/2014 780,813
L-3 Communications Corp. (i):
1,375,000 6.375% due 10/15/2015 1,354,375
1,380,000 3% due 8/01/2035 (b) 1,342,050
1,750,000 Standard Aero Holdings, Inc., 8.25% due 9/01/2014 1,452,500
1,400,000 Transdigm, Inc., 8.375% due 7/15/2011 1,449,000
2,950,000 Vought Aircraft Industries, Inc., 8% due 7/15/2011 2,684,500
-------------
14,495,676
===================================================================================================================
Airlines--1.4%
2,250,000 American Airlines, Inc. Class C, 7.80% due 4/01/2008 2,221,191
Continental Airlines, Inc.:
1,209,126 Series 1997-4-B, 6.90% due 7/02/2018 1,032,888
163,732 Series 1998-1-C, 6.541% due 9/15/2009 154,935
1,086,080 Series 2001-1-C, 7.033% due 12/15/2012 985,459
-------------
4,394,473
===================================================================================================================
Automotive--0.6%
800,000 General Motors Acceptance Corp., 7.25% due 3/02/2011 738,835
1,165,000 Metaldyne Corp., 11% due 11/01/2013 (i) 1,042,675
-------------
1,781,510
===================================================================================================================
Broadcasting--6.1%
2,150,000 Emmis Communications Corp., 9.745% due 6/15/2012 (d) 2,152,687
1,150,000 Granite Broadcasting Corp., 9.75% due 12/01/2010 1,069,500
500,000 LIN Television Corp., 6.50% due 5/15/2013 (i) 478,750
1,200,000 Nexstar Finance, Inc., 7% due 1/15/2014 1,074,000
Paxson Communications Corp.:
2,125,000 10.75% due 7/15/2008 2,172,812
550,000 12.121%** due 1/15/2009 565,813
1,700,000 Radio One, Inc., 6.375% due 2/15/2013 1,640,500
1,175,000 Salem Communications Corp., 7.75% due 12/15/2010 1,211,719
1,364,000 Salem Communications Holding Corp. Series B, 9% due 7/01/2011 1,439,020
Sinclair Broadcast Group, Inc.:
200,000 6% due 9/15/2012 (b) 175,000
400,000 8% due 3/15/2012 412,000
3,005,000 Class A, 4.875% due 7/15/2018 (b) 2,734,550
1,950,000 Sirius Satellite Radio, Inc., 9.625% due 8/01/2013 (i) 1,906,125
2,300,000 Young Broadcasting, Inc., 8.75% due 1/15/2014 2,018,250
-------------
19,050,726
===================================================================================================================
Cable--International--0.6%
New Skies Satellites NV:
750,000 9.573% due 11/01/2011 (d)(i) 770,625
1,000,000 9.125% due 11/01/2012 1,027,500
-------------
1,798,125
===================================================================================================================
Cable--U.S.--8.7%
750,000 Adelphia Communications Corp., 6% due 2/15/2006 (b)(e) 16,875
2,275,000 CSC Holdings, Inc. Series B, 7.625% due 4/01/2011 2,263,625
1,900,000 Century Communications Series B, 9.05%** due 1/15/2008 (e) 1,083,000
Charter Communications Holdings LLC:
2,650,000 8.625% due 4/01/2009 2,120,000
2,000,000 9.625% due 11/15/2009 1,610,000
745,000 Charter Communications, Inc., 5.875% due 11/16/2009 (b)(i) 550,369
Intelsat Bermuda Ltd. (i):
2,675,000 8.695% due 1/15/2012 (d) 2,715,125
2,775,000 8.625% due 1/15/2015 2,781,937
4,019,000 Loral Cyberstar, Inc., 10% due 7/15/2006 (e) 3,808,003
3,775,000 Mediacom Broadband LLC, 11% due 7/15/2013 4,058,125
450,000 Mediacom LLC, 9.50% due 1/15/2013 442,125
1,200,000 PanAmSat Corp., 9% due 8/15/2014 1,260,000
1,775,000 Quebecor Media, Inc., 10.811%** due 7/15/2011 1,812,719
1,900,000 Rainbow National Services LLC, 10.375% due 9/01/2014 (i) 2,071,000
596,000 Skynet Senior Secured Note, 14% due 12/01/2015 697,320
-------------
27,290,223
===================================================================================================================
Chemicals--7.1%
1,519,000 BCP Caylux Holdings Luxembourg SCA, 9.625% due 6/15/2014 1,684,191
1,525,000 Huntsman International, LLC, 10.125% due 7/01/2009 1,570,750
1,025,000 ISP Chemco, Inc. Series B,10.25% due 7/01/2011 1,091,625
1,075,000 ISP Holdings, Inc. Series B,10.625% due 12/15/2009 1,126,063
1,950,000 Innophos, Inc., 9.625% due 8/15/2014 (i) 1,959,750
Millennium America, Inc.:
2,300,000 7% due 11/15/2006 2,334,500
975,000 9.25% due 6/15/2008 1,053,000
Nalco Co.:
450,000 7.75% due 11/15/2011 462,375
1,125,000 8.875% due 11/15/2013 1,167,187
1,124,000 Nalco Finance Holdings, Inc., 9.116%** due 2/01/2014 834,570
1,125,000 Nova Chemical Corp., 7.561% due 11/15/2013 (d)(i) 1,147,500
2,300,000 Omnova Solutions, Inc., 11.25% due 6/01/2010 2,426,500
725,000 PCI Chemicals Canada, Inc., 10% due 12/31/2008 760,344
2,500,000 PolyOne Corp., 10.625% due 5/15/2010 2,575,000
1,950,000 Tronox Worldwide LLC, 9.50% due 12/01/2012 (i) 2,008,500
-------------
22,201,855
===================================================================================================================
Consumer--Durables--0.9%
1,350,000 Sealy Mattress Co., 8.25% due 6/15/2014 1,377,000
600,000 Simmons Bedding Co., 7.875% due 1/15/2014 543,000
785,000 Tempur-Pedic, Inc., 10.25% due 8/15/2010 844,856
-------------
2,764,856
===================================================================================================================
Consumer--Non-Durables--3.0%
Chattem, Inc.:
1,775,000 7.41% due 3/01/2010 (d) 1,788,313
600,000 7% due 3/01/2014 606,750
1,175,000 Church & Dwight Co., Inc., 6% due 12/15/2012 1,157,375
3,525,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 3,454,500
2,200,000 Samsonite Corp., 8.875% due 6/01/2011 2,249,500
-------------
9,256,438
===================================================================================================================
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 7
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
===================================================================================================================
Diversified Media--7.8%
$2,550,000 CBD Media, Inc., 8.625% due 6/01/2011 $ 2,601,000
2,275,000 CanWest Media, Inc., 8% due 9/15/2012 2,331,875
1,367,000 Dex Media West LLC, 9.875% due 8/15/2013 1,512,244
Houghton Mifflin Co.:
2,650,000 8.25% due 2/01/2011 2,746,062
1,775,000 10.378%** due 10/15/2013 (i) 1,360,094
5,600,000 Liberty Media Corp., 0.75% due 3/30/2023 (b) 6,125,000
625,000 Primedia, Inc., 8.875% due 5/15/2011 598,437
775,000 Six Flags, Inc., 9.625% due 6/01/2014 761,437
Universal City Florida Holding Co. I:
1,375,000 8.375% due 5/01/2010 1,354,375
1,700,000 9% due 5/01/2010 (d) 1,721,250
3,302,000 Yell Finance BV, 12.52%** due 8/01/2011 3,384,550
-------------
24,496,324
===================================================================================================================
Energy--Exploration & Production--2.5%
1,575,000 Belden & Blake Corp., 8.75% due 7/15/2012 1,614,375
1,550,000 Chaparral Energy, Inc., 8.50% due 12/01/2015 (i) 1,573,250
1,950,000 Compton Petroleum Corp., 7.625% due 12/01/2013 (i) 1,979,250
2,525,000 Plains Exploration & Production Co. Series B, 8.75% due 7/01/2012 2,708,063
-------------
7,874,938
===================================================================================================================
Energy--Other--2.5%
1,875,000 Dresser, Inc., 9.375% due 4/15/2011 1,973,437
150,000 Ferrellgas Escrow LLC, 6.75% due 5/01/2014 141,375
2,350,000 SemGroup LP, 8.75% due 11/15/2015 (i) 2,373,500
1,775,000 Star Gas Partners LP, 10.25% due 2/15/2013 1,446,625
1,975,000 Suburban Propane Partners, LP, 6.875% due 12/15/2013 1,821,937
-------------
7,756,874
===================================================================================================================
Financial--0.4%
1,350,000 E*Trade Financial Corp., 7.375% due 9/15/2013 (i) 1,339,875
===================================================================================================================
Food & Tobacco--4.2%
800,000 AmeriQual Group LLC, 9% due 4/01/2012 (i) 828,000
Commonwealth Brands, Inc. (i):
1,975,000 9.75% due 4/15/2008 2,184,844
1,525,000 10.625% due 9/01/2008 1,740,406
2,925,000 Cott Beverages USA, Inc., 8% due 12/15/2011 2,998,125
Del Monte Corp.:
1,250,000 8.625% due 12/15/2012 1,312,500
475,000 6.75% due 2/15/2015 (i) 453,625
975,000 Merisant Co., 9.50% due 7/15/2013 633,750
1,250,000 Merisant Worldwide, Inc., 12.214%** due 5/15/2014 196,875
400,000 Michael Foods, Inc., 8% due 11/15/2013 410,500
1,950,000 New World Pasta Co., 9.25% due 2/15/2009 (e) 117,000
2,100,000 Smithfield Foods, Inc. Series B, 8% due 10/15/2009 2,220,750
-------------
13,096,375
===================================================================================================================
Gaming--7.6%
3,225,000 Boyd Gaming Corp., 8.75% due 4/15/2012 3,458,812
900,000 CCM Merger, Inc., 8% due 8/01/2013 (i) 870,750
1,350,000 Caesars Entertainment, Inc., 7.875% due 3/15/2010 1,449,563
1,375,000 Greektown Holdings, 10.75% due 12/01/2013 (i) 1,383,594
1,725,000 Inn of the Mountain Gods Resort & Casino, 12% due 11/15/2010 1,794,000
1,000,000 Las Vegas Sands Corp., 6.375% due 2/15/2015 962,500
1,550,000 MGM Mirage, 8.50% due 9/15/2010 1,677,875
3,325,000 Majestic Star Casino LLC, 9.50% due 10/15/2010 3,262,656
729,000 Pinnacle Entertainment, Inc., 8.25% due 3/15/2012 743,580
2,575,000 Poster Financial Group, Inc., 8.75% due 12/01/2011 2,652,250
2,675,000 Resorts International Hotel and Casino, Inc., 11.50% due 3/15/2009 2,962,562
975,000 San Pasqual Casino, 8% due 9/15/2013 (i) 966,469
1,800,000 Tunica-Biloxi Gaming Authority, 9% due 11/15/2015 (i) 1,800,000
-------------
23,984,611
===================================================================================================================
Health Care--9.0%
Alpharma, Inc.:
2,950,000 3% due 6/01/2006 (b) 3,897,688
2,175,000 8.625% due 5/01/2011 2,327,250
800,000 Athena Neurosciences Finance LLC, 7.25% due 2/21/2008 778,000
2,700,000 DaVita, Inc., 7.25% due 3/15/2015 2,757,375
1,575,000 Elan Finance Plc, 8.34% due 11/15/2011 (d) 1,464,750
2,950,000 HCA, Inc., 5.50% due 12/01/2009 2,862,220
2,350,000 HealthSouth Corp., 8.375% due 10/01/2011 2,214,875
Mylan Laboratories, Inc. (i):
1,175,000 5.75% due 8/15/2010 1,164,719
575,000 6.375% due 8/15/2015 569,969
Select Medical Corp.:
1,450,000 7.625% due 2/01/2015 1,377,500
1,950,000 9.933% due 9/15/2015 (d)(i) 1,945,125
1,000,000 Tenet Healthcare Corp., 9.875% due 7/01/2014 1,002,500
2,675,000 US Oncology, Inc., 9% due 8/15/2012 2,855,563
1,000,000 Vanguard Health Holding Co. II LLC, 9% due 10/01/2014 1,055,000
1,950,000 Ventas Realty LP, 6.75% due 6/01/2010 1,979,250
-------------
28,251,784
===================================================================================================================
Housing--3.4%
Building Materials Corp. of America:
1,050,000 8% due 10/15/2007 1,060,500
5,850,000 8% due 12/01/2008 5,908,500
775,000 Forest City Enterprises, Inc., 7.625% due 6/01/2015 813,750
Goodman Global Holding Co., Inc. (i):
450,000 6.41% due 6/15/2012 (d) 445,500
950,000 7.875% due 12/15/2012 893,000
800,000 Standard-Pacific Corp., 6.50% due 8/15/2010 764,000
725,000 Texas Industries, Inc., 7.25% due 7/15/2013 (i) 750,375
-------------
10,635,625
===================================================================================================================
Information Technology--9.2%
1,000,000 Activant Solutions, Inc., 10.054% due 4/01/2010 (d)(i) 1,025,000
3,600,000 Advanced Micro Devices, Inc., 7.75% due 11/01/2012 3,627,000
Amkor Technology, Inc.:
775,000 9.25% due 2/15/2008 747,875
1,375,000 7.125% due 3/15/2011 1,203,125
3,015,000 Cypress Semiconductor Corp., 1.25% due 6/15/2008 (b) 3,520,013
1,925,000 Freescale Semiconductor, Inc., 6.90% due 7/15/2009 (d) 1,973,125
MagnaChip Semiconductor SA:
300,000 6.875% due 12/15/2011 289,500
1,650,000 7.12% due 12/15/2011 (d) 1,666,500
1,775,000 8% due 12/15/2014 1,641,875
===================================================================================================================
8 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
===================================================================================================================
Information Technology (concluded)
$1,835,000 Quantum Corp., 4.375% due 8/01/2010 (b) $ 1,740,956
Sungard Data Systems, Inc. (i):
1,625,000 8.525% due 8/15/2013 (d) 1,683,906
2,450,000 9.125% due 8/15/2013 2,535,750
1,375,000 10.25% due 8/15/2015 1,388,750
775,000 Telcordia Technologies Inc., 10% due 3/15/2013 (i) 674,250
1,150,000 UGS Corp., 10% due 6/01/2012 1,253,500
1,000,000 Unisys Corp., 8% due 10/15/2012 905,000
3,400,000 Viasystems, Inc., 10.50% due 1/15/2011 3,145,000
-------------
29,021,125
===================================================================================================================
Leisure--1.6%
Felcor Lodging LP:
1,550,000 8.50% due 6/01/2011 1,697,250
2,850,000 8.83% due 6/01/2011 (d) 2,964,000
575,000 True Temper Sports, Inc., 8.375% due 9/15/2011 517,500
-------------
5,178,750
===================================================================================================================
Manufacturing--5.6%
2,175,000 CPI Holdco, Inc., 9.672% due 2/01/2015 (d)(i) 2,118,520
800,000 Case New Holland, Inc., 9.25% due 8/01/2011 848,000
1,350,000 Caue Finance Ltd., 8.875% due 8/01/2015 (i) 1,431,000
875,000 Chart Industries, Inc., 9.125% due 10/15/2015 (i) 883,750
3,725,000 EaglePicher Inc., 9.75% due 9/01/2013 (e) 2,886,875
2,300,000 Invensys Plc, 9.875% due 3/15/2011 (i) 2,254,000
1,335,000 Medis Technologies Ltd., 6% due 7/15/2010 (b)(i) 1,201,500
975,000 Mueller Group, Inc., 10% due 5/01/2012 1,028,625
775,000 Rexnord Corp., 10.125% due 12/15/2012 837,000
1,000,000 Superior Essex Communications LLC, 9% due 4/15/2012 985,000
3,725,000 Trimas Corp., 9.875% due 6/15/2012 3,054,500
-------------
17,528,770
===================================================================================================================
Metal--Other--2.0%
1,150,000 Foundation PA Coal Co., 7.25% due 8/01/2014 1,173,000
2,925,000 Luscar Coal Ltd., 9.75% due 10/15/2011 3,151,688
2,150,000 Novelis, Inc., 7.25% due 2/15/2015 2,010,250
-------------
6,334,938
===================================================================================================================
Packaging--2.2%
1,350,000 Graham Packing Co., Inc., 9.875% due 10/15/2014 1,306,125
Owens-Brockway:
3,000,000 8.875% due 2/15/2009 3,150,000
400,000 8.25% due 5/15/2013 413,000
475,000 Pliant Corp., 13% due 6/01/2010 (e) 90,250
2,025,000 US Can Corp., 12.375% due 10/01/2010 1,913,625
-------------
6,873,000
===================================================================================================================
Paper--5.6%
3,025,000 Abitibi-Consolidated, Inc., 7.37% due 6/15/2011 (d) 2,904,000
975,000 Boise Cascade LLC, 7.025% due 10/15/2012 (d) 945,750
3,325,000 Bowater, Inc., 6.87% due 3/15/2010 (d) 3,258,500
2,025,000 Domtar, Inc., 7.125% due 8/15/2015 1,792,125
Graphic Packaging International Corp.:
825,000 8.50% due 8/15/2011 820,875
950,000 9.50% due 8/15/2013 897,750
925,000 JSG Funding Plc, 9.625% due 10/01/2012 915,750
NewPage Corp.:
1,450,000 10.50% due 5/01/2012 (d) 1,435,500
1,450,000 12% due 5/01/2013 1,305,000
2,325,000 Norske Skog Canada Ltd. Series D, 8.625% due 6/15/2011 2,272,687
1,003,000 Western Forest Products, Inc., 15% due 7/28/2009 (g)(i) 1,090,490
-------------
17,638,427
===================================================================================================================
Retail--1.9%
600,000 General Nutrition Centers, Inc., 8.625% due 1/15/2011 582,000
2,550,000 Jean Coutu Group, Inc., 8.50% due 8/01/2014 2,365,125
Neiman-Marcus Group, Inc. (i):
1,375,000 9% due 10/15/2015 1,399,062
1,575,000 10.375% due 10/15/2015 1,592,719
-------------
5,938,906
===================================================================================================================
Service--5.6%
2,625,000 Allied Waste North America, Inc. Series B, 8.875% due 4/01/2008 2,762,812
2,725,000 Corrections Corp. of America, 7.50% due 5/01/2011 2,834,000
1,750,000 Dycom Industries, Inc., 8.125% due 10/15/2015 (i) 1,750,000
1,150,000 MSW Energy Holdings LLC, 8.50% due 9/01/2010 1,219,000
375,000 MSW Energy Holdings II LLC, 7.375% due 9/01/2010 383,437
1,300,000 Mac-Gray Corp., 7.625% due 8/15/2015 1,322,750
1,175,000 Service Corp. International, 7% due 6/15/2017 (i) 1,161,781
3,325,000 United Rentals North America, Inc., 7.75% due 11/15/2013 (i) 3,200,313
3,100,000 Waste Services, Inc., 9.50% due 4/15/2014 3,100,000
-------------
17,734,093
===================================================================================================================
Steel--1.1%
1,950,000 Chaparral Steel Co., 10% due 7/15/2013 2,071,875
1,200,000 Ucar Finance, Inc., 10.25% due 2/15/2012 1,266,000
-------------
3,337,875
===================================================================================================================
Telecommunications--5.1%
ADC Telecommunications, Inc. (b):
2,200,000 1% due 6/15/2008 2,120,250
750,000 3.996% due 6/15/2013 (d) 750,000
850,000 Alaska Communications Systems Holdings, Inc., 9.875% due 8/15/2011 921,187
350,000 Cincinnati Bell, Inc., 8.375% due 1/15/2014 343,000
3,225,000 LCI International, Inc., 7.25% due 6/15/2007 3,216,938
350,000 Qwest Communications International, Inc., 7.50% due 2/15/2014 (i) 353,500
Qwest Corp. (i):
1,550,000 7.12% due 6/15/2013 (d) 1,670,125
525,000 7.625% due 6/15/2015 558,469
1,000,000 Terremark Worldwide, Inc., 9% due 6/15/2009 (b)(i) 835,000
850,000 Time Warner Telecom Holdings, Inc., 8.34% due 2/15/2011 (d) 869,125
Time Warner Telecom, Inc.:
250,000 9.75% due 7/15/2008 254,688
3,875,000 10.125% due 2/01/2011 4,049,375
-------------
15,941,657
===================================================================================================================
Transportation--0.8%
2,325,000 Teekay Shipping Corp., 8.875% due 7/15/2011 2,624,344
===================================================================================================================
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 9
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
===================================================================================================================
Utility--9.8%
The AES Corp.:
$4,458,000 9.375% due 9/15/2010 $ 4,848,075
2,100,000 8.75% due 5/15/2013 (i) 2,283,750
1,975,000 Aquila, Inc., 7.625% due 11/15/2009 2,014,500
4,875,000 Calpine Canada Energy Finance Ulc, 8.50% due 5/01/2008 1,365,000
750,000 Calpine Corp., 8.75% due 7/15/2007 232,500
1,966,000 Centerpoint Energy, Inc. Series B, 3.75% due 5/15/2023 (b) 2,364,115
1,979,000 ESI Tractebel Acquisition Corp. Series B, 7.99% due 12/30/2011 2,074,439
1,900,000 Edison Mission Energy, 9.875% due 4/15/2011 2,211,125
Nevada Power Co.:
390,000 9% due 8/15/2013 429,623
2,145,000 Series E, 10.875% due 10/15/2009 2,348,775
2,550,000 Reliant Energy, Inc., 6.75% due 12/15/2014 2,231,250
1,650,000 Sierra Pacific Power Co. Series A, 8% due 6/01/2008 1,728,375
1,200,000 Sierra Pacific Resources, 8.625% due 3/15/2014 1,311,000
925,000 Southern Natural Gas Co., 8.875% due 3/15/2010 989,158
2,142,782 Tenaska Alabama Partners LP, 7% due 6/30/2021 (i) 2,166,162
2,000,000 Texas Genco LLC, 6.875% due 12/15/2014 (i) 2,140,000
-------------
30,737,847
===================================================================================================================
Wireless Communications--5.1%
825,000 American Tower Escrow Corp., 14.887%** due 8/01/2008 637,313
2,000,000 Centennial Cellular Operating Co. LLC, 10.125% due 6/15/2013 2,230,000
2,350,000 Digicel Ltd., 9.25% due 9/01/2012 (i) 2,420,500
1,000,000 Dobson Cellular Systems, 9% due 11/01/2011 (d) 1,037,500
875,000 Dobson Communications Corp., 8.40% due 10/15/2012 (d)(i) 861,875
1,750,000 IWO Holdings, Inc., 7.90% due 1/15/2012 (d) 1,811,250
Rogers Wireless Communications, Inc.:
650,000 6.995% due 12/15/2010 (d) 671,125
250,000 8% due 12/15/2012 264,687
3,400,000 6.375% due 3/01/2014 3,378,750
625,000 Rural Cellular Corp., 8.37% due 3/15/2010 (d) 642,187
894,000 SBA Communications Corp., 8.50% due 12/01/2012 992,340
1,255,000 SBA Telecommunications, Inc., 7.415%** due 12/15/2011 1,148,325
-------------
16,095,852
===================================================================================================================
Total Corporate Bonds (Cost--$397,428,115)--126.0% 395,455,872
===================================================================================================================
Floating Rate Loan Interests (a) Value
===================================================================================================================
Cable--U.S.--1.5%
4,850,000 Century Cable Holdings LLC Discretionary Term Loan, 9% due 12/31/2009 4,769,975
===================================================================================================================
Chemicals--0.9%
2,830,000 Wellman, Inc. Second Lien Term Loan, 11% due 2/10/2010 2,881,882
===================================================================================================================
Consumer--Durables--0.5%
1,375,000 Simmons Co. Term Loan, 7% due 6/19/2012 1,391,759
===================================================================================================================
Manufacturing--0.3%
997,462 EaglePicher Holdings, Inc. Tranche B Term Loan, 10.50% due 8/07/2009 993,543
-------------------------------------------------------------------------------------------------------------------
Total Floating Rate Loan Interests (Cost--$9,725,805)--3.2% 10,037,159
===================================================================================================================
Foreign Government Obligations Value
===================================================================================================================
Brazilian Government International Bond:
1,900,000 8.75% due 2/04/2025 1,979,800
1,900,000 8.25% due 1/20/2034 1,894,300
1,200,000 Philippine Government International Bond, 8.375% due 2/15/2011 1,273,500
800,000 Turkey Government International Bond, 8% due 2/14/2034 848,000
400,000 Venezuela Government International Bond, 7.65% due 4/21/2025 392,600
-------------------------------------------------------------------------------------------------------------------
Total Foreign Government Obligations (Cost--$6,292,695)--2.0% 6,388,200
===================================================================================================================
Shares
Held Common Stocks
===================================================================================================================
Airlines--0.2%
81,243 ABX Air, Inc. (c) 609,323
===================================================================================================================
Energy--Other--0.6%
72,599 Trico Marine Services, Inc. (c) 1,808,441
===================================================================================================================
Paper--0.1%
203,785 Western Forest Products, Inc. (c) 409,819
-------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost--$4,438,083)--0.9% 2,827,583
===================================================================================================================
===================================================================================================================
Preferred Securities
-------------------------------------------------------------------------------------------------------------------
Preferred Stocks
===================================================================================================================
Automotive--0.7%
128,000 General Motors Corp. Series C, 6.25% (b) 2,112,000
-------------------------------------------------------------------------------------------------------------------
Total Preferred Stocks (Cost--$3,199,472)--0.7% 2,112,000
-------------------------------------------------------------------------------------------------------------------
Face
Amount Capital Trusts
===================================================================================================================
Health Care--1.3%
$3,750,000 Fresenius Medical Care Capital Trust II, 7.875% due 2/01/2008 3,946,875
-------------------------------------------------------------------------------------------------------------------
Total Capital Trusts (Cost--$3,683,402)--1.3% 3,946,875
===================================================================================================================
Total Preferred Securities (Cost--$6,882,874)--2.0% 6,058,875
===================================================================================================================
10 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Shares
Held Warrants (h) Value
===================================================================================================================
Health Care--0.0%
32,042 HealthSouth Corp. (expires 1/16/2014) $ 80,105
===================================================================================================================
Packaging--0.0%
4,000 Pliant Corp. (expires 6/01/2010) 40
===================================================================================================================
Paper--0.0%
700 MDP Acquisitions Plc (expires 10/01/2013) 3,500
===================================================================================================================
Wireless Communications--0.1%
825 American Tower Corp. (expires 8/01/2008) 316,182
-------------------------------------------------------------------------------------------------------------------
Total Warrants (Cost--$53,674)--0.1% 399,827
-------------------------------------------------------------------------------------------------------------------
Beneficial
Interest Other Interests (f) Value
-------------------------------------------------------------------------------------------------------------------
Airlines--0.5%
$3,780,240 US Airways Group, Inc.--Certificate of Beneficial Interest $ 1,587,701
===================================================================================================================
Total Other Interests (Cost--$1,020,665)--0.5% 1,587,701
===================================================================================================================
Total Investments (Cost--$425,841,911*)--134.7% 422,755,217
Liabilities in Excess of Other Assets--(34.7%) (108,795,368)
-------------
Net Assets--100.0% $ 313,959,849
=============
* The cost and unrealized appreciation (depreciation) of investments as of
November 30, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ................................... $ 426,130,988
=============
Gross unrealized appreciation .................... $ 15,653,210
Gross unrealized depreciation .................... (19,028,981)
-------------
Net unrealized depreciation ...................... $ (3,375,771)
=============
** Represents zero coupon or step bond; the interest rate shown reflects the
effective yield at the time of purchase.
(a) Floating rate loan interests in which the Fund invests generally pay
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. The base lending rates are generally (i)
the lending rate offered by one or more major European banks, such as
LIBOR (London InterBank Offered Rate), (ii) the prime rate offered by one
or more U.S. banks or (iii) the certificate of deposit rate.
(b) Convertible security.
(c) Non-income producing security.
(d) Floating rate note.
(e) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(f) Other interests represent beneficial interest in liquidation trusts and
other reorganization entities.
(g) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(h) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(i) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(79,564) $ 4,339
--------------------------------------------------------------------------
o Swaps outstanding as of November 30, 2005 were as follows:
Unrealized
Notional Appreciation
Amount (Depreciation)
--------------------------------------------------------------------------------
Sold credit default protection on General Motors
Corp. and receive 4.40%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2007 $ 400,000 $ (48,008)
Sold credit default protection on General Motors
Corp. and receive 8.00%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2007 $ 400,000 (29,919)
Sold credit default protection on Russian
Federation and receive 0.73%
Broker, UBS Warburg
Expires October 2010 $2,000,000 4,808
Sold credit default protection on Federative
Republic of Brazil and receive 3.44%
Broker, Morgan Stanley Capital Services, Inc.
Expires October 2010 $1,000,000 39,463
Bought credit default protection on Chemtura
Corp. and pay 1.35%
Broker, Deutsche Bank AG
Expires December 2010 $ 600,000 6,455
Bought credit default protection on Chemtura
Corp. and pay 1.4286%
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2010 $1,375,000 10,122
Bought credit default protection on Ford Motor
Credit Co. and pay 4.37%
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2010 $ 800,000 21,640
Sold credit default protection on Dow Jones CDX
Emerging Markets Index Series 4 and receive 1.80%
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2010 $1,000,000 17,621
Sold credit default protection on Dow Jones CDX
Emerging Markets Index Series 4 and receive 1.80%
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2010 $2,950,000 90,332
--------------------------------------------------------------------------------
Total $ 112,514
==========
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 11
Statement of Assets, Liabilities and Capital
As of November 30, 2005
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$425,841,911) ....................................... $ 422,755,217
Cash .................................................................... 52,808
Unrealized appreciation on swaps ........................................ 112,514
Receivables:
Interest ............................................................. $ 8,467,372
Securities sold ...................................................... 6,601,939
Swaps ................................................................ 18,222 15,087,533
-------------
Prepaid expenses and other assets ....................................... 40,300
-------------
Total assets ............................................................ 438,048,372
-------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Loans ................................................................... 120,500,000
Swap premiums received .................................................. 60,521
Payables:
Securities purchased ................................................. 3,049,360
Dividends to shareholders ............................................ 174,874
Investment adviser ................................................... 169,144
Interest on loans .................................................... 84,289
Other affiliates ..................................................... 2,835 3,480,502
-------------
Accrued expenses ........................................................ 47,500
-------------
Total liabilities ....................................................... 124,088,523
-------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets .............................................................. $ 313,959,849
=============
===================================================================================================================================
Capital
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 200,000,000 shares authorized ............. $ 3,731,014
Paid-in capital in excess of par ........................................ 540,741,636
Undistributed investment income--net .................................... $ 2,418,038
Accumulated realized capital losses--net ................................ (229,956,659)
Unrealized depreciation--net ............................................ (2,974,180)
-------------
Total accumulated losses--net ........................................... (230,512,801)
-------------
Total--Equivalent to $8.41 per share based on 37,310,139 shares
of capital stock outstanding (market price--$7.69) .................... $ 313,959,849
=============
See Notes to Financial Statements.
12 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Statement of Operations
For the Six Months Ended November 30, 2005
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest (including $4,339 from affiliates) ............................. $ 17,320,296
Dividends ............................................................... 100,000
Other ................................................................... 275,747
-------------
Total income ............................................................ 17,696,043
-------------
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Loan interest expense ................................................... $ 2,177,624
Investment advisory fees ................................................ 1,300,645
Borrowing costs ......................................................... 83,880
Accounting services ..................................................... 59,723
Professional fees ....................................................... 45,613
Transfer agent fees ..................................................... 34,641
Printing and shareholder reports ........................................ 22,523
Pricing services ........................................................ 14,894
Listing fees ............................................................ 14,548
Custodian fees .......................................................... 12,350
Directors' fees and expenses ............................................ 10,664
Other ................................................................... 14,276
-------------
Total expenses .......................................................... 3,791,381
-------------
Investment income--net .................................................. 13,904,662
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain on:
Investments--net ..................................................... 44,628
Futures contracts and swaps--net ..................................... 22,311 66,939
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ..................................................... (968,473)
Futures contracts and swaps--net ..................................... 105,856 (862,617)
------------------------------
Total realized and unrealized loss--net ................................. (795,678)
-------------
Net Increase in Net Assets Resulting from Operations .................... $ 13,108,984
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 13
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
November 30, May 31,
Increase (Decrease) in Net Assets: 2005 2005
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .................................................. $ 13,904,662 $ 31,712,812
Realized gain--net ...................................................... 66,939 6,925,406
Change in unrealized appreciation/depreciation--net ..................... (862,617) (4,257,822)
------------------------------
Net increase in net assets resulting from operations .................... 13,108,984 34,380,396
------------------------------
===================================================================================================================================
Dividends to Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income--net ................... (14,774,815) (33,146,162)
------------------------------
===================================================================================================================================
Capital Stock Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in reinvestment
of dividends ........................................................... -- 808,256
------------------------------
Net increase in net assets resulting from capital stock transactions .... -- 808,256
------------------------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ................................. (1,665,831) 2,042,490
Beginning of period ..................................................... 315,625,680 313,583,190
------------------------------
End of period* .......................................................... $ 313,959,849 $ 315,625,680
==============================
* Undistributed investment income--net .............................. $ 2,418,038 $ 3,288,191
==============================
See Notes to Financial Statements.
14 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Statement of Cash Flows
For the Six Months Ended November 30, 2005
===================================================================================================================================
Cash Provided by Operating Activities
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ...................................... $ 13,108,984
Adjustments to reconcile net increase in net assets resulting from operations to
net cash provided by operating activities:
Decrease in receivables ................................................................ 326,767
Decrease in prepaid expenses and other assets .......................................... 43,315
Decrease in other liabilities .......................................................... (143,608)
Realized and unrealized loss--net ...................................................... 795,678
Realized gain on futures contracts and swaps--net ...................................... 22,311
Unrealized gain on futures contracts--net .............................................. 35,942
Amortization of discount ............................................................... (887,948)
Proceeds from sales and paydowns of long-term investments ................................. 88,702,480
Proceeds on other investment-related transactions ......................................... 24,797
Purchases of long-term investments ........................................................ (99,580,431)
Proceeds from sales of short-term investments--net ....................................... 79,564
-------------
Net cash provided by operating activities ................................................. 2,527,851
-------------
===================================================================================================================================
Cash Used for Financing Activities
-----------------------------------------------------------------------------------------------------------------------------------
Cash receipts from borrowings ............................................................. 81,900,000
Cash payments on borrowings ............................................................... (69,200,000)
Dividends paid to shareholders ............................................................ (14,811,505)
Decrease in custodian bank payable ........................................................ (463,538)
-------------
Net cash used for financing activities .................................................... (2,575,043)
-------------
===================================================================================================================================
Cash
-----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash ...................................................................... (47,192)
Cash at beginning of period ............................................................... 100,000
-------------
Cash at end of period ..................................................................... $ 52,808
=============
===================================================================================================================================
Cash Flow Information
-----------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest .................................................................... $ 2,162,257
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 15
Financial Highlights
For the Six
Months Ended For the Year Ended May 31,
The following per share data and ratios have been derived November 30, ------------------------------------------
from information provided in the financial statements. 2005 2005 2004 2003 2002
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ............. $ 8.46 $ 8.43 $ 7.86 $ 7.68 $ 9.11
-------------------------------------------------------
Investment income--net** ........................ .37 .85 .88 .92 1.15
Realized and unrealized gain (loss)--net ........ (.02) .07 .58 .17 (1.47)
-------------------------------------------------------
Total from investment operations ................. .35 .92 1.46 1.09 (.32)
Less dividends from investment income--net ...... (.40) (.89) (.89) (.91) (1.11)
Recovery of previously expensed offering costs
resulting from issuance of Common Stock ......... -- -- --+ -- --
-------------------------------------------------------
Net asset value, end of period ................... $ 8.41 $ 8.46 $ 8.43 $ 7.86 $ 7.68
=======================================================
Market price per share, end of period ............ $ 7.69 $ 8.38 $ 7.97 $ 8.36 $ 8.22
=======================================================
==================================================================================================================================
Total Investment Return***
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ............... 4.28%@ 11.24% 19.33% 16.46% (3.13%)
=======================================================
Based on market price per share .................. (3.73%)@ 16.55% 6.07% 15.73% .59%
=======================================================
==================================================================================================================================
Ratios to Average Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense ............. 1.01%* .99% 1.01% 1.04% 1.10%
=======================================================
Expenses ......................................... 2.36%* 1.81% 1.51% 1.59% 2.14%
=======================================================
Investment income--net .......................... 8.67%* 9.71% 10.48% 13.35% 14.37%
=======================================================
==================================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings outstanding, end of period
(in thousands) .................................. $120,500 $107,800 $109,600 $ 98,800 $ 84,900
=======================================================
Average amount of borrowings outstanding during
the period (in thousands) ....................... $112,438 $112,501 $112,297 $ 75,558 $ 98,924
=======================================================
Average amount of borrowings outstanding per share
during the period** ............................. $ 3.01 $ 3.02 $ 3.03 $ 2.07 $ 2.75
=======================================================
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ......... $313,960 $315,626 $313,583 $289,820 $279,372
=======================================================
Portfolio turnover ............................... 22.20% 54.64% 82.54% 76.61% 65.44%
=======================================================
* Annualized.
** Based on average shares outstanding.
*** 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.
+ Amount is less than $.01 per share.
@ Aggregate total investment return.
See Notes to Financial Statements.
16 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Notes to Financial Statements
1. Significant Accounting Policies:
Corporate High Yield Fund III, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may require
the use of management accruals and estimates. Actual results may differ from
these estimates. These unaudited financial statements reflect all adjustments,
which are, in the opinion of management, necessary to present a fair statement
of the results for the interim period. All such adjustments are of a normal,
recurring nature. The Fund determines and makes available for publication the
net asset value of its Common Stock on a daily basis. The Fund's Common Stock
shares are listed on the New York Stock Exchange ("NYSE") under the symbol CYE.
The following is a summary of significant accounting policies followed by the
Fund.
(a) Valuation of investments -- Debt securities are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values obtained by a pricing service.
Floating rate loan interests are valued at the mean between the last available
bid and asked prices from one or more brokers or dealers as obtained by a
pricing service. Pricing services use valuation matrixes that incorporate both
dealer-supplied valuations and valuation models. The procedures of the pricing
service and its valuations are reviewed by the officers of the Fund under the
general direction of the Board of Directors. Such valuations and procedures will
be reviewed periodically by the Board of Directors of the Fund. 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 OTC market, valuation is the last
asked price (options written) or the last bid price (options purchased). Swap
agreements are valued based upon quoted fair valuations received daily by the
Fund from a pricing service or counterparty. Short-term investments with a
remaining maturity of 60 days or less are valued at amortized cost, which
approximates market value, under which method the investment is valued at cost
and any premium or discount is amortized on a straight line basis to maturity.
Repurchase agreements are valued at cost plus accrued interest. Investments in
open-end investment companies are valued at their net asset value each business
day. Securities and other 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.
Equity securities that are held by the Fund, which are traded on stock exchanges
or the Nasdaq National Market, are valued at the last sale price or official
close price on the exchange, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available asked price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Fund. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price obtained from one or more dealers or
pricing services approved by the Board of Directors of the Fund. Short positions
traded in the OTC market are valued at the last available asked price. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the Fund's net asset value.
If events (for example, a company announcement, market volatility or a natural
disaster) occur during such periods that are expected to materially affect the
value of such securities, those securities may be valued at their fair value as
determined in good faith by the Fund's Board of Directors or by the Investment
Adviser using a pricing service and/or procedures approved by the Fund's Board
of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Options -- The Fund may write 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 secu-
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 17
Notes to Financial Statements (continued)
rity 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.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. 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 Swaps -- The Fund may enter into swap agreements, which are OTC contracts
in which the Fund and a counterparty agree to make periodic net payments
on a specified notional amount. The net payments can be made for a set
period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate;
the change in market value of a specified security, basket of securities,
or index; or the return generated by a security. These periodic payments
received or made by the Fund are recorded in the accompanying Statement of
Operations as realized gains or losses, respectively. Gains or losses are
also realized upon termination of the swap agreements. Swaps are
marked-to-market daily and changes in value are recorded as unrealized
appreciation (depreciation). Risks include changes in the returns of the
underlying instruments, failure of the counterparties to perform under the
contracts' terms and the possible lack of liquidity with respect to the
swap agreements.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies to U.S. dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments. The
Fund invests in foreign securities, which may involve a number of risk factors
and special considerations not present with investments in securities of U.S.
corporations.
(d) 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.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(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.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower
18 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Notes to Financial Statements (concluded)
default or in the event of losses on investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .60% of the Fund's average weekly net assets plus the proceeds
of any outstanding principal borrowed. FAM has entered into a Sub-Advisory
Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
affiliate of FAM, pursuant to which MLAM U.K. provides investment advisory
services to FAM with respect to the Fund. There is no increase in the aggregate
fees paid by the Fund for these services.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by FAM
or its affiliates.
In addition, MLPF&S received $11,290 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended November
30, 2005.
For the six months ended November 30, 2005, the Fund reimbursed FAM $3,386 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, MLAM U.K., ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended November 30, 2005 were $100,454,764 and
$94,531,652, respectively.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued shares
of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding during the six months ended November 30, 2005
remained constant and during the year ended May 31, 2005 increased by 90,900 as
a result of dividend reinvestment.
5. Short-Term Borrowings:
On May 24, 2005, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citicorp North
America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The agreement
was renewed for one year and has a maximum limit of $160,000,000. Under the
Citicorp program, the conduits will fund advances to the Fund through the
issuance of highly rated commercial paper. As security for its obligations to
the Lenders under the revolving securitization facility, the Fund has granted a
security interest in substantially all of its assets to and in favor of the
Lenders. The interest rate on the Fund's borrowings is based on the interest
rate carried by the commercial paper plus a program fee. The Fund pays
additional borrowing costs including a backstop commitment fee.
For the six months ended November 30, 2005, the average amount borrowed was
approximately $112,438,000 and the daily weighted average interest rate was
3.86%.
6. Capital Loss Carryforward:
On May 31, 2005, the Fund had a net capital loss carryforward of $229,863,075,
of which $21,292,692 expires in 2008, $34,200,029 expires in 2009, $52,918,036
expires in 2010, $119,513,437 expires in 2011 and $1,938,881 expires in 2012.
This amount will be available to offset like amounts of any future taxable
gains.
7. Subsequent Event:
The Fund paid an ordinary income dividend in the amount of $.060000 per share on
December 21, 2005 to shareholders of record on December 12, 2005.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 19
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Fund Asset Management, L.P. (the "Investment Adviser") or
other Merrill Lynch affiliates is as a director of the Fund and certain other
funds advised by the Investment Adviser or its affiliates. The Co-chairmen of
the Board are also independent directors. New director nominees are chosen as
nominees by a Nominating Committee comprised of independent directors. All
independent directors also are members of the Board's Audit Committee and the
independent directors meet in executive session at each in-person Board meeting.
The Board and the Audit Committee meet in person for at least two days each
quarter and conduct other in-person and telephone meetings throughout the year,
some of which are formal board meetings, and some of which are informational
meetings. The independent counsel to the independent directors attends all
in-person Board and Audit Committee meetings and other meetings at the
independent directors' request.
Investment Advisory Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board also annually
considers approval of the sub-advisory agreement on behalf of the Fund between
the Investment Adviser and an affiliate. The Board assesses the nature, scope
and quality of the services provided to the Fund by the personnel of the
Investment Adviser, the sub-adviser and their affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory requirements.
The Board also receives and assesses information regarding the services provided
to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates, including the sub-adviser. Among the
matters considered are: (a) fees (in addition to management fees) paid to the
Investment Adviser and its affiliates by the Fund; (b) Fund operating expenses
paid to third parties; (c) the resources devoted to and compliance reports
relating to the Fund's investment objective, policies and restrictions, and its
compliance with its Code of Ethics and the Investment Adviser's compliance
policies and procedures; and (d) the nature, cost and character of
non-investment management services provided by the Investment Adviser and its
affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by the
Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial firms.
The Board works closely with the Investment Adviser in overseeing the Investment
Adviser's efforts to achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is not
satisfactory, discusses with the Investment Adviser taking steps such as
changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement and the sub-advisory agreement, the Board requests and
receives materials specifically relating to the Fund's Investment Advisory
Agreement and/or the sub-advisory agreement. These materials include (a)
information compiled by Lipper Inc. ("Lipper") on the fees and expenses and the
investment performance of the Fund as compared to a comparable group of funds as
classified by Lipper; (b) information comparing the Fund's market price with its
net asset value per share; (c) a discussion by the Fund's portfolio management
team of investment strategies used by the Fund during its most recent fiscal
year; and (d) information on the profitability to the Investment Adviser and its
affiliates of the Investment Advisory Agreement, the sub-advisory agreement and
other relationships with the Fund. Since the sub-advisory services are provided
by Merrill Lynch Asset Management U.K. Limited, an affiliate of the Investment
Adviser, and no additional fee is paid for these services, the Board considered
the sub-advisory agreement and Investment Advisory Agreement together. The Board
also considers other matters it deems important to the approval process such as
services related to the valuation and pricing of Fund portfolio holdings,
allocation of Fund portfolio transactions, the Fund's portfolio turnover
statistics, and direct and indirect benefits to the Investment Adviser and the
sub-adviser and their affiliates from their relationship with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement and the sub-advisory agree-
20 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
ment which occurred in November 2005, the independent directors' and Board's
review included the following:
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser and
sub-adviser, including the investment advisory services and the resulting
performance of the Fund. The Board focused primarily on the Investment Adviser's
investment advisory services and the Fund's investment performance, having
concluded that the other services provided to the Fund by the Investment Adviser
were satisfactory. The Board compared Fund performance -- both including and
excluding the effects of the Fund's fees and expenses -- to the performance of a
comparable group of funds, and the performance of a relevant index or
combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the Board
attaches more importance to performance over relatively long periods of time,
typically three to five years. For the periods ended August 31, 2005, the Fund's
performance after fees and expenses ranked in the fifth quintile for the
one-year period, in the first quintile for the three-year period, and in the
second quintile for the five- year period. Considering these factors, the Board
concluded that the nature and quality of these services supported the
continuation of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process -- The Board reviews
at least annually the Fund's investment objectives and strategies. The Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
taxable fixed income investing group the strategies being used to achieve the
stated objectives. Among other things, the Board considers the size, education
and experience of the Investment Adviser's investment staff, its use of
technology, and the Investment Adviser's approach to training and retaining
portfolio managers and other research, advisory and management personnel. The
Board also reviews the Investment Adviser's compensation policies and practices
with respect to the Fund's portfolio manager. The Board also considered the
experience of the Fund's portfolio manager and noted that Ms. Phillips has more
than ten years of experience in portfolio management. The Investment Adviser and
its investment staff have extensive experience in analyzing and managing the
types of investments used by the Fund. The Board concluded that the Fund
benefits from that expertise.
Management Fees and Other Expenses -- The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. The Fund's contractual and actual
management fee rates and total expenses were below the median fees and expenses
charged by comparable funds, as determined by Lipper. The Board has concluded
that the Fund's management fee and fee rate and overall expense ratio are
acceptable compared to those of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its affiliates'
profits relating to the management and distribution of the Fund and the
MLIM/FAM-advised funds. As part of its analysis, the Board reviewed the
Investment Adviser's methodology in allocating its costs to the management of
the Fund and concluded that there was a reasonable basis for the allocation. The
Board also considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. The Board believes the Investment Adviser's profits are reasonable in
relation to the nature and quality of services provided.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. The Board considered economies
of scale to the extent applicable to the Fund's closed-end structure and
determined that the Fund appropriately benefits from any economies of scale and
no changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement and sub-advisory agreement, concluding
that the advisory fee was reasonable in relation to the services provided and
that a contract renewal was in the best interests of the shareholders.
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 21
Proxy Results
During the six-month period ended November 30, 2005, Corporate High Yield Fund
III, Inc.'s shareholders voted on the following proposal. The proposal was
approved at a shareholders' meeting on August 23, 2005. A description of the
proposal and number of shares voted were as follows:
------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
------------------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors: Robert C. Doll, Jr. 32,396,601 1,122,327
James H. Bodurtha 32,390,426 1,128,502
Kenneth A. Froot 32,407,122 1,111,806
Joe Grills 32,386,526 1,132,402
Herbert I. London 32,367,580 1,151,348
Roberta Cooper Ramo 32,370,987 1,147,941
Robert S. Salomon, Jr. 32,359,242 1,159,686
Stephen B. Swensrud 32,386,255 1,132,673
------------------------------------------------------------------------------------------------------------
22 CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005
Officers and Directors
Robert C. Doll, Jr., President and Director
James H. Bodurtha, Director
Kenneth A. Froot, Director
Joe Grills, Director
Herbert I. London, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Donald C. Burke, Vice President and Treasurer
Elizabeth M. Phillips, Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
EquiServe Trust Company N.A.
(c/o Computershare Investor Services)
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
NYSE Symbol
CYE
--------------------------------------------------------------------------------
Effective January 1, 2006, Stephen B. Swensrud will retire as Director of
Corporate High Yield Fund III, Inc. The Fund's Board of Directors wishes Mr.
Swensrud well in his retirement.
--------------------------------------------------------------------------------
CORPORATE HIGH YIELD FUND III, INC. NOVEMBER 30, 2005 23
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Corporate High Yield Fund III, Inc. seeks to provide shareholders with current
income by investing primarily in a diversified portfolio of fixed income
securities that are rated in the lower rating categories of the established
rating services (Ba or lower by Moody's Investors Service, Inc. or BB or lower
by Standard & Poor's Corporation) or are unrated securities of comparable
quality.
This report, including the financial information herein, is transmitted to
shareholders of Corporate High Yield Fund III, Inc. for their information. It is
not a prospectus. The Fund has leveraged its Common Stock to provide Common
Stock shareholders with a potentially higher rate of return. Leverage creates
risk for Common Stock shareholders, including the likelihood of greater
volatility of net asset value and market price of Common Stock shares, and the
risk that fluctuations in short-term interest rates may reduce the Common
Stock's yield. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Corporate High Yield Fund III, Inc.
Box 9011
Princeton, NJ 08543-9011
#COYIII -- 11/05
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Corporate High Yield Fund III, Inc.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Corporate High Yield Fund III, Inc.
Date: January 25, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Corporate High Yield Fund III, Inc.
Date: January 25, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Corporate High Yield Fund III, Inc.
Date: January 25, 2006