UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-8497
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: Terry K. Glenn, President, 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: 05/31/04
Date of reporting period: 06/01/03 - 05/31/04
Item 1 - Report to Stockholders
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Corporate High Yield
Fund III, Inc.
Annual Report
May 31, 2004
[LOGO] Merrill Lynch Investment Managers
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.
2 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
A Letter From the President
Dear Shareholder
Fixed income markets were mixed over the most recent six-month and 12-month
reporting periods. The high yield market, as measured by the Credit Suisse First
Boston High Yield Index, had a six-month return of +3.24% and a 12-month return
of +13.25% as of May 31, 2004. Corporate bonds, represented by the Merrill Lynch
U.S. Corporate Master Index, posted returns of +.67% and -.16% for the six-month
and 12-month periods ended May 31, 2004, respectively. Treasury issues, as
measured by the Citigroup Treasury 1 - 3 Year Index, returned +.48% and +.63%
for the same six-month and 12-month periods.
By May month-end, the Federal Reserve Board appeared poised to raise the Federal
Funds target rate from its 45-year low of 1%. This anticipated shift in monetary
policy was largely prompted by better-than-expected employment reports for the
months of March, April and May, as well as by rising producer prices. The good
news on the employment front -- previously a dim spot in an otherwise bright
economic picture -- helped cause the yield on the 10-year Treasury bond to spike
75 basis points (.75%), from 3.91% on April 1 to 4.66% on May 28.
Equity markets, in the meantime, gleaned support from the improving economic
environment and provided attractive returns. Although we did experience a market
correction toward the end of the period, for the six months and 12 months ended
May 31, 2004, the Standard & Poor's 500 Index returned +6.79% and +18.33%,
respectively. Significant fiscal and monetary stimulus in 2003, including low
interest rates and tax cuts, opened the door to consumer spending, capital
spending, increases in exports and long-awaited job growth. As expected, these
developments led the way to improvements in corporate earnings -- a positive for
stock markets.
The events and efforts of the past year leave us with a much stronger economy
today. Of course, markets will always fluctuate, and there are many
uncertainties -- including the possibility of geopolitical events -- that can
translate into negative market movements. Keeping this in mind, however, we
encourage you to revisit your portfolio and your asset allocation strategy to
ensure you are well positioned to take advantage of the opportunities that lie
ahead. Importantly, your financial advisor can help you develop a strategy most
suitable for your circumstances through all types of market and economic cycles.
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/ Terry K. Glenn
Terry K. Glenn
President and Director
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Managers
Fund performance benefited during the fiscal year from favorable security
selection and our use of leverage, a strategy that enhances returns in a rising
market.
How did the Fund perform?
For the 12-month period ended May 31, 2004, the Common Stock of Corporate High
Yield Fund III, Inc. had net annualized yields of 10.60% and 11.21%, based on a
year-end per share net asset value of $8.43 and a per share market price of
$7.97, respectively, and $.893 per share income dividends. Over the same period,
the total investment return on the Fund's Common Stock was +19.33%, based on a
change in per share net asset value from $7.86 to $8.43, and assuming
reinvestment of $.895 per share ordinary income dividends.
The Fund's return for the year significantly exceeded that of the high yield
market as measured by the Credit Suisse First Boston (CSFB) High Yield Index,
which returned +13.25% for the 12 months ended May 31, 2004. The Fund also
outperformed its comparable Lipper category of High Current Yield Funds
(Leveraged), which had an average return of +19.00% for the same period. (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.)
For the six-month period ended May 31, 2004, the total investment return on the
Fund's Common Stock was +5.35%, based on a change in per share net asset value
from $8.44 to $8.43, and assuming reinvestment of $.457 per share income
dividends. The Fund outperformed the +3.24% return of the CSFB High Yield Index
and the +4.91% average return of the Lipper High Current Yield (Leveraged)
category for the same six-month period.
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
included in 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 contributed to the Fund's performance?
The first part of the fiscal year was characterized by the continuation of a
high yield market rally that began in mid-October 2002. The main drivers of the
upturn were investors' improved outlook on the economy, generally favorable
corporate earnings reports, a shrinking number of defaults by high yield
corporate borrowers and falling interest rates. The market also benefited from
increasing demand on the part of investors searching for yield in the low
interest rate environment. The momentum changed sharply toward the end of
January 2004, as market sentiment reversed in reaction to uncertainty regarding
interest rates. The resultant high yield market softness persisted through May
2004.
Fund performance benefited from the use of leverage and positive results from
several holdings that rebounded during the period. During the first part of the
fiscal year -- which, as mentioned earlier, was characterized by high yield
market strength -- the riskier, previously downtrodden sectors and bonds were
the market's best performers.
Toward the end of the period, amid concerns about rising interest rates and the
momentum of economic growth, high yield investors became more cautious about
assuming additional risk. Bonds in the portfolio that provided strong
performance were those with solid credit quality and good earnings prospects,
such as the convertible bonds of Tyco International Group SA, and bonds of
companies in previously downtrodden sectors that have shown sustainable
recovery, including bonds of independent power producer Mission Energy Holding
Company. On the other hand, our holdings in telecommunications bonds of Qwest
Communications and Time Warner Telecom, Inc. were hurt by earnings that did not
meet investor expectations.
What changes were made to the portfolio during the period?
We allocated approximately 5% of the Fund's net assets to convertible securities
in an effort to capture the potential upside in the equity markets. The goal
also was to diversify the portfolio amid what we believe is an increasingly
skittish and fully valued high yield market. Convertibles can be volatile,
reflecting movements in the underlying stocks;
4 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
therefore, we anticipate that our holdings will be subject to the same risks.
However, we have attempted to mitigate that risk by choosing higher-quality
issues and by purchasing bonds that are somewhat insulated from downside
volatility while benefiting from rising stock prices. Among the Fund's most
significant convertible positions are Tyco International (rated BBB-), General
Motors Corp. (BBB), Liberty Media Corporation (BBB-) and the securities of
Citizens Utilities (BB+), a telephone service provider. With the potential for
higher interest rates, we also invested modestly in floating rate securities and
bank loans.
In addition, we temporarily increased our holdings in the riskier CCC-rated
credits. The strong performance of a number of our downtrodden credits -- most
notably Mission Energy -- increased the Fund's weighting in the CCC sector, as
we did not reduce our holdings when the prices of these securities rose. Our
overweight position in this rating category also reflects our view that the
underlying credit quality of several companies with CCC-rated securities is
better than the credit quality implied by the rating. We believe the low rating
may reflect recently resolved financial difficulties (as is the case with Qwest
Communications, a telecommunications provider), or high financial leverage on
what we consider to be sound and improving fundamentals (for example, American
Tower Corporation).
The Fund's leverage position averaged 26.1% during the past six months. That is,
the Fund borrowed the equivalent of 26.1% of total assets invested, earning
incremental yield on the investments we made with the borrowed funds. As of May
31, 2004, the Fund was 25.9% leveraged after borrowing $109.6 million at a cost
of 1.04%. Over the past six months, the average amount borrowed was
approximately $112.3 million and the daily weighted average borrowing rate was
1.37%. 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.)
In May, we received approval from the Fund's Board of Directors to execute
various credit hedging strategies, such as selling uncovered call options or
buying protection under a credit default swap. However, we did not make use of
these capabilities during the period.
How would you characterize the Fund's position at the close of the period?
The low valuations found in the market during early 2003 have largely
evaporated, leaving limited potential for strong upward momentum in the high
yield market. We expect increasing market volatility in the near term, but
believe high yield securities will continue to find support from a gradually
improving economy and the resultant positive corporate earnings. We have
positioned the Fund to benefit in this environment. We believe that increasing
pressure for higher interest rates will begin to have a greater effect on the
high yield market, and we have taken steps -- for example, adding floating rate
securities for interest rate protection -- to moderate the impact on the
portfolio.
Within this broad picture, we believe certain industries, such as the utility
and independent power producer sector and the chemicals sector, represent good
relative value. As of May 31, 2004, the Fund's largest industry allocations were
in utilities, at 11.3% of total market value, and chemicals, at 7.8%. In our
opinion, the utility sector has exhibited favorable fundamentals, and the
independent power producer subsector offers attractive valuations. Within the
chemical sector, we have found what we believe to be good relative value in the
specialty chemical business, which has been hurt by high energy prices but
avoids dramatically volatile end markets.
The Fund is underweight in the leisure sector, based on our belief that these
securities already have priced in the upside potential. We maintain an
underweight position in information technology, given our perception of high
valuations, unstable earnings and potentially limited recovery value if earnings
decline in the sector. We have limited exposure to the retail, food and drug,
and finance sectors based on what we believe is inadequate and uncertain asset
protection in these areas of the market. Similar to the CSFB High Yield Index,
the Fund had an average credit rating of B at the close of the period.
B. Daniel Evans
Vice President and Portfolio Manager
Elizabeth M. Phillips
Vice President and Portfolio Manager
June 8, 2004
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds Value
===================================================================================================================================
Aerospace & B B2 $2,275,000 Alliant Techsystems Inc., 2.75% due 2/15/2024
Defense--1.9% (Convertible) (e) $ 2,329,031
B+ B1 975,000 Esterline Technologies Corporation, 7.75% due 6/15/2013 989,625
K & F Industries, Inc.:
B B3 350,000 9.25% due 10/15/2007 357,000
B B3 350,000 9.625% due 12/15/2010 383,250
B- B3 750,000 TD Funding Corp., 8.375% due 7/15/2011 750,000
B B2 1,000,000 Titan Corporation, 8% due 5/15/2011 (e) 1,095,000
------------
5,903,906
===================================================================================================================================
Airlines--1.5% BB B1 1,300,000 American Airlines, Inc., 7.80% due 10/01/2006 1,193,209
Continental Airlines, Inc.:
CCC+ Caa2 950,000 8% due 12/15/2005 836,000
B+ B2 552,557 6.541% due 9/15/2008 495,669
BB- B2 1,401,614 7.033% due 6/15/2011 1,153,837
BB+ Ba2 1,328,933 6.90% due 1/02/2017 1,070,641
------------
4,749,356
===================================================================================================================================
Automotive--2.4% B B3 1,225,000 Asbury Automotive Group, Inc., 8% due 3/15/2014 1,133,125
B- B3 1,900,000 Autocam Corporation, 10.875% due 6/15/2014 (e) 1,866,750
B- B2 950,000 Collins & Aikman Products Co., 10.75% due 12/31/2011 945,250
Metaldyne Corporation:
B Caa1 2,625,000 11% due 6/15/2012 2,178,750
B B3 1,190,000 10% due 11/01/2013 (e) 1,148,350
B B3 250,000 United Auto Group, Inc., 9.625% due 3/15/2012 267,500
------------
7,539,725
===================================================================================================================================
Broadcasting--4.2% CCC B3 2,300,000 Granite Broadcasting Corporation, 9.75% due 12/01/2010 (e) 2,190,750
B B1 1,750,000 LIN Television Corporation, 6.50% due 5/15/2013 1,701,875
B- B3 1,375,000 NextMedia Operating, Inc., 10.75% due 7/01/2011 1,540,000
CCC+ Caa1 2,125,000 Paxson Communications Corporation, 10.75% due 7/15/2008 2,178,125
Salem Communications Holding Corporation:
B- B3 1,175,000 7.75% due 12/15/2010 1,189,688
B- B3 2,100,000 9% due 7/01/2011 2,268,000
CCC+ Caa1 2,300,000 Young Broadcasting Inc., 8.75% due 1/15/2014 (e) 2,242,500
------------
13,310,938
===================================================================================================================================
Cable-- NTL Cable PLC (e):
International--1.7% B- B3 2,125,000 6.14% due 10/15/2012 (d) 2,199,375
B- B3 325,000 8.75% due 4/15/2014 333,125
D Ca 5,250,000 Telewest Communications PLC, 11% due 10/01/2007 (c) 2,953,125
------------
5,485,625
===================================================================================================================================
Cable--U.S.--7.8% NR* NR* 750,000 Adelphia Communications Corporation, 6% due 2/15/2006
(Convertible) (c) 330,000
CCC- Caa1 236,329 Avalon Cable LLC, 11.875% due 12/01/2008 249,918
BB- B1 2,600,000 CSC Holdings, Inc., 7.625% due 4/01/2011 2,632,500
D Caa1 4,850,000 Century Cable Holdings LLC, Term, due 12/31/2009 (a) 4,705,713
Charter Communications Holdings, LLC:
CCC- Ca 3,500,000 8.625% due 4/01/2009 2,870,000
CCC- Ca 2,000,000 9.625% due 11/15/2009 1,670,000
B- Caa2 3,025,000 Insight Communications Company, Inc., 12.25%**
due 2/15/2011 2,662,000
Insight Midwest, LP:
B+ B2 1,025,000 9.75% due 10/01/2009 1,078,812
B+ B2 1,400,000 10.50% due 11/01/2010 1,519,000
NR* Caa1 3,069,000 Loral Cyberstar, Inc., 10% due 7/15/2006 (c) 2,071,575
NR* Ca 1,875,000 Loral Space & Communications Ltd., 9.50% due 1/15/2006 (c) 403,125
B+ B2 3,975,000 Mediacom Broadband LLC, 11% due 7/15/2013 4,203,562
------------
24,396,205
=========================================================================================================
6 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds Value
===================================================================================================================================
Chemicals--10.4% BB- B3 $1,575,000 Geon Company, 6.875% due 12/15/2005 $ 1,598,625
CCC+ NR* 2,200,000 HMP Equity Holdings Corporation, 14.909%**
due 5/15/2008 (e) 1,265,000
CCC+ Caa2 2,025,000 Huntsman International Holdings LLC, 13.898%**
due 12/31/2009 992,250
Huntsman International LLC:
B- B3 525,000 9.875% due 3/01/2009 567,000
CCC+ Caa1 2,500,000 10.125% due 7/01/2009 2,562,500
BB- B1 2,025,000 ISP Chemco Inc., 10.25% due 7/01/2011 2,247,750
B+ B2 2,000,000 ISP Holdings, Inc., 10.625% due 12/15/2009 2,180,000
BB- B1 3,025,000 Millennium America Inc., 7% due 11/15/2006 3,093,063
Nalco Company (e):
B- B2 450,000 7.75% due 11/15/2011 470,250
B- Caa1 1,125,000 8.875% due 11/15/2013 1,175,625
B- Caa2 3,500,000 Nalco Finance Holdings Inc., 9.037%** due 2/01/2014 (e) 2,310,000
BB- B2 3,125,000 Omnova Solutions Inc., 11.25% due 6/01/2010 3,343,750
BB- B3 3,125,000 PolyOne Corporation, 10.625% due 5/15/2010 3,171,875
CCC+ Caa1 2,075,000 Rhodia SA, 8.875% due 6/01/2011 (e) 1,587,375
B- B3 1,825,000 Rockwood Specialties Group, Inc., 10.625% due 5/15/2011 1,916,250
B- Caa1 3,025,000 Terra Capital, Inc., 11.50% due 6/01/2010 3,267,000
B- B1 950,000 Wellman, Inc., First Lien Term, due 2/04/2009 (a) 931,791
------------
32,680,104
===================================================================================================================================
Consumer B- Caa1 2,050,000 Sealy Mattress Company, 8.25% due 6/15/2014 (e) 1,998,750
Durables--0.9% B B2 785,000 Tempur-Pedic, Inc., 10.25% due 8/15/2010 887,050
------------
2,885,800
===================================================================================================================================
Consumer B- B3 400,000 Amscan Holdings, Inc., 8.75% due 5/01/2014 (e) 400,000
Non-Durables--3.5% Chattem, Inc.:
B+ Ba3 650,000 4.31% due 3/01/2010 (d) 656,500
B- B2 600,000 7% due 3/01/2014 573,000
B B3 2,550,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 2,715,750
CCC+ B3 425,000 Leiner Health Products Inc., 11% due 6/01/2012 (e) 438,812
Samsonite Corporation:
B- Caa1 3,875,000 10.75% due 6/15/2008 4,030,000
B- B3 2,200,000 8.875% due 6/01/2011 (e) 2,222,000
------------
11,036,062
===================================================================================================================================
Diversified Media-- B- B3 2,150,000 CBD Media LLC, 8.625% due 6/01/2011 2,246,750
6.4% B Caa1 1,400,000 Dex Media West LLC, 9.875% due 8/15/2013 (e) 1,541,750
B B2 1,900,000 Houghton Mifflin Company, 8.25% due 2/01/2011 1,928,500
BBB- Baa3 3,800,000 Liberty Media Corporation, 0.75% due 3/30/2023
(Convertible) 4,260,750
PRIMEDIA Inc.:
B B3 2,475,000 7.625% due 4/01/2008 2,468,813
B B3 875,000 8.875% due 5/15/2011 872,813
R.H. Donnelley Financial Corporation I:
B+ B1 200,000 8.875% due 12/15/2010 220,000
B+ B2 725,000 10.875% due 12/15/2012 (e) 848,250
B- B3 2,450,000 Six Flags, Inc., 9.50% due 2/01/2009 2,495,938
BB- B1 3,302,000 Yell Finance BV, 12.52%** due 8/01/2011 3,062,605
------------
19,946,169
===================================================================================================================================
Energy--Exploration CCC+ Caa1 825,000 Continental Resources, Inc., 10.25% due 8/01/2008 845,625
& Production--1.3% B B2 425,000 Encore Acquisition Company, 6.25% due 4/15/2014 (e) 399,500
B+ B2 2,525,000 Plains Exploration & Production Company, 8.75%
due 7/01/2012 2,727,000
------------
3,972,125
=========================================================================================================
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds Value
===================================================================================================================================
Energy--Other--6.3% BB Ba3 $1,925,000 CITGO Petroleum Corporation, 11.375% due 2/01/2011 $ 2,213,750
B B2 1,875,000 Dresser, Inc., 9.375% due 4/15/2011 1,996,875
B B2 2,075,000 Ferrellgas Partners LP, 8.75% due 6/15/2012 2,189,125
BBB Baa2 2,300,000 Halliburton Company, 3.125% due 7/15/2023 (Convertible) (e) 2,472,500
CCC B3 3,325,000 Ocean Rig Norway AS, 10.25% due 6/01/2008 3,291,750
BB Ba3 3,536,000 Port Arthur Finance Corporation, 12.50% due 1/15/2009 4,101,760
B B3 2,250,000 Star Gas Partners, LP, 10.25% due 2/15/2013 2,396,250
D Ca 2,025,000 Trico Marine Services, Inc., 8.875% due 5/15/2012 (c) 972,000
------------
19,634,010
===================================================================================================================================
Food/Tobacco-- B B3 750,000 American Seafoods Group LLC, 10.125% due 4/15/2010 900,000
5.5% Commonwealth Brands, Inc. (e):
B- B2 1,925,000 9.75% due 4/15/2008 1,982,750
B- B3 1,475,000 10.625% due 9/01/2008 1,519,250
B+ B2 3,250,000 Cott Beverages, Inc., 8% due 12/15/2011 3,469,375
B B2 1,250,000 Del Monte Corporation, 8.625% due 12/15/2012 1,328,125
CCC B2 2,200,000 Doane Pet Care Company, 10.75% due 3/01/2010 2,293,500
B- B3 2,500,000 Merisant Company, 9.50% due 7/15/2013 (e) 2,637,500
NR* Caa3 1,950,000 New World Pasta Company, 9.25% due 2/15/2009 (c) 214,500
BB Ba2 2,100,000 Smithfield Foods, Inc., 8% due 10/15/2009 2,257,500
B- Caa1 1,250,000 Tabletop Holdings, Inc., 12.25%** due 5/15/2014 (e) 712,500
------------
17,315,000
===================================================================================================================================
Gaming--9.2% B+ B3 1,225,000 Argosy Gaming Company, 7% due 1/15/2014 (e) 1,185,187
B+ B1 3,250,000 Boyd Gaming Corporation, 8.75% due 4/15/2012 3,445,000
B- Caa1 925,000 Global Cash Access LLC, 8.75% due 3/15/2012 (e) 950,437
B Caa1 1,925,000 Inn of the Mountain Gods Resort and Casino, 12%
due 11/15/2010 (e) 2,098,250
B+ B2 2,250,000 Kerzner International Limited, 8.875% due 8/15/2011 2,373,750
BB+ Ba1 1,550,000 MGM Mirage Inc., 8.50% due 9/15/2010 1,708,875
B B2 3,425,000 The Majestic Star Casino, LLC, 9.50% due 10/15/2010 3,442,125
BB- Ba2 2,325,000 Park Place Entertainment Corporation, 7.875% due 3/15/2010 2,441,250
NR* Caa1 1,425,000 Pinnacle Entertainment, Inc., 8.25% due 3/15/2012 (e) 1,350,188
B B2 2,175,000 Poster Financial Group Inc., 8.75% due 12/01/2011 (e) 2,213,063
B B2 2,700,000 Resorts International Hotel & Casino, Inc., 11.50%
due 3/15/2009 2,997,000
CCC+ Caa1 2,875,000 Trump Casino Holdings, LLC, 12.625% due 3/15/2010 2,918,125
CCC+ B3 1,475,000 Wynn Las Vegas, LLC, 12% due 11/01/2010 1,718,375
------------
28,841,625
===================================================================================================================================
Health Care--6.1% B B3 2,100,000 Alpharma Inc., 8.625% due 5/01/2011 (e) 2,189,250
BBB- Ba1 1,400,000 Apogent Technologies Inc., 1.183% due 12/15/2033
(Convertible) (d)(e) 1,729,000
BB- B2 1,325,000 Biovail Corporation, 7.875% due 4/01/2010 1,285,250
B- B3 425,000 Concentra Operating Corporation, 9.125% due 6/01/2012 (e) 431,375
B+ B2 2,902,000 Fisher Scientific International Inc., 8.125% due 5/01/2012 3,068,865
BB- Ba2 3,750,000 Fresenius Medical Care Capital Trust II, 7.875%
due 2/01/2008 3,984,375
InSight Health Services Corp.:
B- B3 475,000 9.875% due 11/01/2011 483,312
B- B3 1,500,000 9.875% due 11/01/2011 (e) 1,526,250
NR* B2 1,100,000 InterMune Inc., 5.75% due 7/15/2006 (Convertible) 1,123,375
B- B3 1,000,000 Tenet Healthcare Corporation, 5.375% due 11/15/2006 950,000
B B3 1,525,000 Triad Hospitals, Inc., 7% due 11/15/2013 1,464,000
VWR International, Inc. (e):
B B2 475,000 6.875% due 4/15/2012 469,063
B B3 525,000 8% due 4/15/2014 526,313
------------
19,230,428
=========================================================================================================
8 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds Value
===================================================================================================================================
Housing--4.3% Building Materials Corporation of America:
B+ B2 $ 400,000 7.75% due 7/15/2005 $ 401,000
B+ B2 850,000 8% due 10/15/2007 843,625
B+ B2 5,325,000 8% due 12/01/2008 5,285,062
BB- Ba3 650,000 Forest City Enterprises, Inc., 7.625% due 6/01/2015 663,000
B- B3 425,000 MAAX Corporation, 9.75% due 6/15/2012 (e) 435,625
Nortek Holdings, Inc.:
B+ B1 2,250,000 4.17% due 12/31/2010 (d)(e) 2,250,000
B- Caa1 1,775,000 10%** due 5/15/2011 (e) 1,331,250
B- B3 550,000 9.875% due 6/15/2011 607,750
BB- B1 1,475,000 Texas Industries, Inc., 10.25% due 6/15/2011 1,642,781
------------
13,460,093
===================================================================================================================================
Hybrid--0.6% NR* B3 1,900,000 Dow Jones TRAC-X North America High Yield, Series 2,
March 2009, Trust 3, 8% due 3/25/2009 (e) 1,809,750
===================================================================================================================================
Information ADC Telecommunications, Inc. (Convertible):
Technology--0.9% NR* NR* 2,200,000 1% due 6/15/2008 2,090,000
NR* NR* 750,000 1.605% due 6/15/2013 (d) 751,875
------------
2,841,875
===================================================================================================================================
Leisure--1.7% FelCor Lodging LP:
B- B1 2,850,000 5.84% due 6/01/2011 (d)(e) 2,864,250
B- B1 1,550,000 9% due 6/01/2011 1,581,000
B+ B1 1,050,000 Intrawest Corporation, 7.50% due 10/15/2013 1,008,000
------------
5,453,250
===================================================================================================================================
Manufacturing--7.7% CCC+ Caa1 800,000 Columbus McKinnon Corporation, 8.50% due 4/01/2008 738,000
B- B2 925,000 Da-Lite Screen Company, Inc., 9.50% due 5/15/2011 (e) 958,531
B- B3 2,500,000 Eagle-Picher Incorporated, 9.75% due 9/01/2013 2,668,750
B- B3 2,700,000 Invensys PLC, 9.875% due 3/15/2011 (e) 2,673,000
B B2 2,475,000 JohnsonDiversey, Inc., 9.625% due 5/15/2012 2,648,250
B- Caa1 1,175,000 Mueller Group, Inc., 10% due 5/01/2012 (e) 1,204,375
B- B3 775,000 Rexnord Corporation, 10.125% due 12/15/2012 837,000
B- Caa1 975,000 Sensus Metering Systems Inc., 8.625% due 12/15/2013 (e) 921,375
B B3 2,800,000 Superior Essex Communications LLC, 9% due 4/15/2012 (e) 2,688,000
B B3 3,125,000 TriMas Corporation, 9.875% due 6/15/2012 3,359,375
Tyco International Group SA (Convertible):
BBB Baa3 3,330,000 2.75% due 1/15/2018 4,728,600
BBB Baa3 500,000 2.75% due 1/15/2018 (e) 710,000
------------
24,135,256
===================================================================================================================================
Metal--Other--1.6% BB Ba3 2,925,000 Luscar Coal Ltd., 9.75% due 10/15/2011 3,276,000
NR* Ba2 1,925,000 Vale Overseas Ltd., 8.25% due 1/17/2034 1,650,688
------------
4,926,688
===================================================================================================================================
Packaging--6.1% CCC B3 1,400,000 Consolidated Container Company LLC, 10.75%**
due 6/15/2009 (e) 1,043,000
Crown Euro Holdings SA:
B+ B1 950,000 9.50% due 3/01/2011 1,030,750
B B2 500,000 10.875% due 3/01/2013 560,000
CCC+ Caa1 950,000 Graham Packaging Company, 8.75% due 1/15/2008 959,500
CCC+ Caa2 2,625,000 Graham Packaging Holdings Company, 10.75% due 1/15/2009 2,690,625
BB- B2 3,325,000 Owens-Brockway Glass Container, Inc., 8.875% due 2/15/2009 3,491,250
Pliant Corporation:
B B3 2,200,000 11.125%** due 6/15/2009 (e) 1,804,000
B- Caa2 3,550,000 13% due 6/01/2010 3,195,000
B- B3 825,000 Tekni-Plex, Inc., 12.75% due 6/15/2010 816,750
U.S. Can Corporation:
CCC+ Caa1 375,000 10.875% due 7/15/2010 383,438
CCC+ Caa2 2,825,000 12.375% due 10/01/2010 2,542,500
B B2 650,000 Wise Metals Group LLC, 10.25% due 5/15/2012 (e) 653,250
------------
19,170,063
=========================================================================================================
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds Value
===================================================================================================================================
Paper--6.6% D Ca $1,000,000 APP International Finance Company B.V., 11.75%
due 10/01/2005 (c) $ 462,500
BB Ba2 3,025,000 Bowater Incorporated, 4.11% due 3/15/2010 (d) 2,994,750
B Caa1 2,125,000 Caraustar Industries, Inc., 9.875% due 4/01/2011 2,114,375
Doman Industries Limited (c):
D Ca 4,475,000 8.75% due 3/15/2004 (g) 1,398,437
D Ca 550,000 9.25% due 11/15/2007 171,875
Georgia-Pacific Corporation:
BB+ Ba2 1,425,000 7.375% due 7/15/2008 1,499,812
BB+ Ba2 1,925,000 9.375% due 2/01/2013 2,170,437
Graphic Packaging International Inc.:
B- B2 825,000 8.50% due 8/15/2011 878,625
B- B3 950,000 9.50% due 8/15/2013 1,021,250
B B3 1,900,000 JSG Funding PLC, 9.625% due 10/01/2012 2,061,500
B B2 2,975,000 Jefferson Smurfit Corporation, 8.25% due 10/01/2012 3,056,812
Norske Skog Canada Ltd.:
BB Ba3 2,450,000 8.625% due 6/15/2011 2,572,500
BB Ba3 150,000 7.375% due 3/01/2014 (e) 146,250
------------
20,549,123
===================================================================================================================================
Retail--0.1% B+ B1 425,000 Finlay Fine Jewelry Corporation, 8.375% due 6/01/2012 (e) 425,000
===================================================================================================================================
Services--5.3% Allied Waste North America, Inc.:
BB- Ba3 2,625,000 8.875% due 4/01/2008 2,841,562
BB- Ba3 950,000 7.875% due 4/15/2013 969,000
B B2 2,900,000 The Coinmach Corporation, 9% due 2/01/2010 3,074,000
B B1 2,725,000 Corrections Corporation of America, 7.50% due 5/01/2011 2,752,250
BB- Ba2 875,000 MSW Energy Finance Co. II, Inc., 7.375% due 9/01/2010 (e) 861,875
BB Ba1 1,500,000 MSW Energy Holdings LLC, 8.50% due 9/01/2010 1,552,500
B- Caa1 400,000 Waste Services, Inc., 9.50% due 4/15/2014 (e) 404,000
Williams Scotsman, Inc.:
B- B3 3,750,000 9.875% due 6/01/2007 3,656,250
B B2 375,000 10% due 8/15/2008 405,000
------------
16,516,437
===================================================================================================================================
Steel--1.6% B+ B1 1,425,000 CSN Islands VIII Corp., 9.75% due 12/16/2013 (e) 1,232,625
B- Caa1 1,550,000 Ispat Inland ULC, 9.75% due 4/01/2014 (e) 1,584,875
B B2 1,950,000 UCAR Finance Inc., 10.25% due 2/15/2012 2,174,250
------------
4,991,750
===================================================================================================================================
Telecommunications-- B- B2 2,475,000 Alaska Communications System Holdings, Inc., 9.875%
5.7% due 8/15/2011 2,524,500
B- B3 1,800,000 Cincinnati Bell Inc., 8.375% due 1/15/2014 1,611,000
B- Caa1 3,250,000 FairPoint Communications, Inc., 12.50% due 5/01/2010 3,436,875
NR* Caa1 2,000,000 LCI International, Inc., 7.25% due 6/15/2007 1,815,000
CCC+ Caa2 2,475,000 Qwest Capital Funding, Inc., 7.25% due 2/15/2011 2,048,063
CCC+ Caa1 1,350,000 Qwest Services Corp., 13.50% due 12/15/2010 (e) 1,555,875
B B1 850,000 Time Warner Telecom Holdings, Inc., 5.25%
due 2/15/2011 (d)(e) 833,000
Time Warner Telecom, Inc.:
CCC+ B3 500,000 9.75% due 7/15/2008 467,500
CCC+ B3 3,875,000 10.125% due 2/01/2011 3,487,500
------------
17,779,313
===================================================================================================================================
Transportation--1.5% B+ B2 1,900,000 Laidlaw International, Inc., 10.75% due 6/15/2011 2,035,375
BB- Ba2 2,325,000 Teekay Shipping Corporation, 8.875% due 7/15/2011 2,548,781
------------
4,584,156
=========================================================================================================
10 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds Value
===================================================================================================================================
Utility--13.7% The AES Corporation:
B- NR* $4,458,000 9.375% due 9/15/2010 $ 4,625,175
B+ NR* 2,100,000 8.75% due 5/15/2013 (e) 2,215,500
NR* Ba2 850,000 AES Drax Energy Limited, 11.50% due 8/30/2010 (c) 4,250
CCC+ Caa1 8,275,000 Calpine Canada Energy Finance ULC, 8.50% due 5/01/2008 4,861,562
CCC+ Caa1 1,500,000 Calpine Corporation, 8.25% due 8/15/2005 1,297,500
BBB- Ba2 3,600,000 CenterPoint Energy, Inc., 3.75% due 5/15/2023 (Convertible) 3,960,000
BB Ba1 2,117,000 ESI Tractebel Acquisition Corp., 7.99% due 12/30/2011 2,180,510
B B2 1,900,000 Edison Mission Energy, 9.875% due 4/15/2011 1,909,500
CCC+ Caa1 4,625,000 El Paso CGP Company, 7.75% due 6/15/2010 4,058,437
B- B3 475,000 El Paso Production Holding Company, 7.75% due 6/01/2013 448,875
CCC Caa2 3,325,000 Mission Energy Holding Company, 13.50% due 7/15/2008 3,624,250
Nevada Power Company:
BB Ba2 3,300,000 10.875% due 10/15/2009 3,712,500
BB Ba2 600,000 9% due 8/15/2013 (e) 656,250
BB Ba2 1,650,000 Sierra Pacific Power Company, 8% due 6/01/2008 1,749,000
B- B2 1,200,000 Sierra Pacific Resources, 8.625% due 3/15/2014 (e) 1,161,000
B- B1 925,000 Southern Natural Gas Company, 8.875% due 3/15/2010 1,003,625
The Williams Companies, Inc.:
B+ B3 1,975,000 6.50% due 8/01/2006 2,081,156
B+ B3 3,350,000 8.125% due 3/15/2012 3,534,250
------------
43,083,340
===================================================================================================================================
Wireless--4.4% CCC Caa1 2,725,000 American Tower Corporation, 9.375% due 2/01/2009 2,915,750
CCC B3 825,000 American Tower Escrow Corporation, 14.887%** due 8/01/2008 598,125
CCC Caa1 2,000,000 Centennial Communications Corp., 10.125% due 6/15/2013 2,040,000
CCC B3 2,800,000 Crown Castle International Corp., 9.375% due 8/01/2011 3,031,000
B- B2 625,000 Rural Cellular Corporation, 5.61% due 3/15/2010 (d)(e) 637,500
CCC- Caa2 2,750,000 SBA Communications Corporation, 10.25% due 2/01/2009 2,722,500
C Caa3 1,900,000 US Unwired Inc., 13.009%** due 11/01/2009 1,957,000
------------
13,901,875
===================================================================================================================================
Total Investments in Corporate Bonds
(Cost--$401,111,967)--130.9% 410,555,047
===================================================================================================================================
Shares
Held Common Stocks
===================================================================================================================================
Airlines--0.1% 81,243 ABX Air, Inc. (c) 364,781
2,591 US Airways Group, Inc. (Class A) (c) 6,761
------------
371,542
===================================================================================================================================
Consumer Non-Durables--0.0% 34,177 WKI Holding Company, Inc. (c) 85,443
===================================================================================================================================
Telecommunications--0.1% 16,244 MCI, Inc. (c) 241,223
===================================================================================================================================
Total Investments in Common Stocks (Cost--$9,153,251)--0.2% 698,208
=========================================================================================================
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 11
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
Shares
Industry+ Held Warrants (b) Value
===================================================================================================================================
Airlines--0.0% 1,589 US Airways Group, Inc. $ 0
===================================================================================================================================
Cable--U.S.--0.0% 32,981 Loral Space & Communications Ltd. 330
===================================================================================================================================
Chemicals--0.0% 725 Huntsman Company LLC (e) 130,500
===================================================================================================================================
Health Care--0.0% 32,042 HealthSouth Corporation 72,095
===================================================================================================================================
Packaging--0.0% 4,000 Pliant Corporation 40
===================================================================================================================================
Paper--0.0% 700 JSG Funding PLC 7,000
===================================================================================================================================
Wireless--0.1% 825 American Tower Corporation 143,963
===================================================================================================================================
Total Investments in Warrants (Cost--$189,364)--0.1% 353,928
===================================================================================================================================
===================================================================================================================================
Preferred Securities
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Stocks
===================================================================================================================================
Airlines--0.0% 1,589 US Airways Group, Inc. (c) 0
===================================================================================================================================
Automotive--1.2% 128,000 General Motors Corporation (Convertible) 3,761,920
===================================================================================================================================
Total Investments in Preferred Stocks
(Cost--$3,199,472)--1.2% 3,761,920
===================================================================================================================================
Face
Amount Trust Preferred
===================================================================================================================================
Utility--1.4% $4,240,000 Citizens Utilities Trust, 5% due 1/15/2036 (Convertible) 4,347,595
===================================================================================================================================
Total Investments in Trust Preferred
(Cost--$4,252,130)--1.4% 4,347,595
===================================================================================================================================
Total Investments in Preferred Securities
(Cost--$7,451,602)--2.6% 8,109,515
===================================================================================================================================
12 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Schedule of Investments (concluded) (in U.S. dollars)
Beneficial
Interest Other Interests (f) Value
===================================================================================================================================
$3,780,240 US Airways Group, Inc.--Certificate of Beneficial Interest $1,096,270
1,500 WorldCom, Inc.--Escrow Notes (c) 0
===================================================================================================================================
Total Investments in Other Interests
(Cost--$1,020,665)--0.4% 1,096,270
===================================================================================================================================
Short-Term Securities
===================================================================================================================================
82,499 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (h) 82,499
===================================================================================================================================
Total Investments in Short-Term Securities
(Cost--$82,499)--0.0% 82,499
===================================================================================================================================
Total Investments (Cost--$419,009,348)--134.2% 420,895,467
Liabilities in Excess of Other Assets--(34.2%) (107,312,277)
------------
Net Assets--100.0% $313,583,190
============
+ For Fund compliance purposes, "Industry" means 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 such industry sub-classifications for reporting ease. These
industry classifications are unaudited.
@ Ratings of issues shown are unaudited.
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
(a) Floating rate corporate debt in which the Fund invests generally pays
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. These 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 major U.S. banks or (iii) the certificate of deposit rate.
Floating rate corporate debt is generally considered to be restricted in
that the Fund ordinarily is contractually obligated to receive approval
from the agent bank and/or borrower prior to its disposition. Corporate
loans represent 1.8% of the Fund's net assets.
(b) 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.
(c) Non-income producing security.
(d) Floating rate note.
(e) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(f) Other interests represent beneficial interest in liquidation trusts and
other reorganization entities.
(g) As a result of bankruptcy proceedings, the company did not repay the
principal amount of the security upon maturity.
(h) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $82,499 $6,697
--------------------------------------------------------------------------
Swaps entered into as of May 31, 2004 were as follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Receive a variable rate return based on
1-month USD LIBOR and pay a fixed
rate equal to 1.56%
Broker, UBS Warburg
Expires June 2005 $30,000,000 $260,140
--------------------------------------------------------------------------
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 13
[LOGO] Merrill Lynch Investment Managers
Statement of Assets, Liabilities and Capital
As of May 31, 2004
============================================================================================================================
Assets
----------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified
cost--$418,926,849) ............................................. $ 420,812,968
Investments in affiliated securities, at value (identified
cost--$82,499) .................................................. 82,499
Cash ............................................................. 218,105
Unrealized appreciation on swaps ................................. 260,140
Receivables:
Interest ...................................................... $ 9,180,260
Securities sold ............................................... 1,632,437 10,812,697
-------------
Prepaid expenses and other assets ................................ 312,143
-------------
Total assets ..................................................... 432,498,552
-------------
============================================================================================================================
Liabilities
----------------------------------------------------------------------------------------------------------------------------
Loans ............................................................ 109,600,000
Payables:
Securities purchased .......................................... 8,630,687
Dividends to shareholders ..................................... 256,622
Investment adviser ............................................ 201,433
Interest on swaps ............................................. 192,250
Interest on loans ............................................. 31,594
Other affiliates .............................................. 2,776 9,315,362
-------------------------------
Total liabilities ................................................ 118,915,362
-------------
============================================================================================================================
Net Assets
----------------------------------------------------------------------------------------------------------------------------
Net Assets ....................................................... $ 313,583,190
=============
============================================================================================================================
Capital
----------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 200,000,000 shares authorized ...... $ 3,721,924
Paid-in capital in excess of par ................................. 539,942,470
Undistributed investment income--net ............................. $ 4,874,500
Accumulated realized capital losses on investments--net .......... (237,101,963)
Unrealized appreciation on investments--net ...................... 2,146,259
-------------
Total accumulated losses--net .................................... (230,081,204)
-------------
Total--Equivalent to $8.43 per share based on 37,219,239 shares
of capital stock outstanding (market price--$7.97) .............. $ 313,583,190
=============
See Notes to Financial Statements.
14 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Statement of Operations
For the Year Ended May 31, 2004
============================================================================================================================
Investment Income
----------------------------------------------------------------------------------------------------------------------------
Interest (including $6,697 from affiliates) ...................... $ 36,726,214
Dividends ........................................................ 107,222
Other ............................................................ 353,574
-------------
Total income ..................................................... 37,187,010
-------------
============================================================================================================================
Expenses
----------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ......................................... $ 2,533,242
Loan interest expense ............................................ 1,535,903
Borrowing costs .................................................. 162,152
Accounting services .............................................. 113,221
Professional fees ................................................ 87,131
Transfer agent fees .............................................. 60,285
Printing and shareholder reports ................................. 41,049
Custodian fees ................................................... 31,093
Pricing services ................................................. 30,809
Listing fees ..................................................... 30,356
Directors' fees and expenses ..................................... 14,150
Other ............................................................ 30,479
-------------
Total expenses ................................................... 4,669,870
-------------
Investment income--net ........................................... 32,517,140
-------------
============================================================================================================================
Realized & Unrealized Gain on Investments--Net
----------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ................................ 10,925,924
Change in unrealized appreciation/depreciation on investments--net 10,759,183
-------------
Total realized and unrealized gain on investments--net ........... 21,685,107
-------------
Net Increase in Net Assets Resulting from Operations ............. $ 54,202,247
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 15
[LOGO] Merrill Lynch Investment Managers
Statements of Changes in Net Assets
For the Year Ended
May 31,
-------------------------------
Increase (Decrease) in Net Assets: 2004 2003
============================================================================================================================
Operations
----------------------------------------------------------------------------------------------------------------------------
Investment income--net ........................................... $ 32,517,140 $ 33,621,413
Realized gain (loss) on investments--net ......................... 10,925,924 (54,338,746)
Change in unrealized appreciation/depreciation on investments--net 10,759,183 61,048,097
-------------------------------
Net increase in net assets resulting from operations ............. 54,202,247 40,330,764
-------------------------------
============================================================================================================================
Dividends to Shareholders
----------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income--net ............ (33,172,274) (33,386,856)
-------------------------------
============================================================================================================================
Capital Stock Transactions
----------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in
reinvestment of dividends ....................................... 2,726,368 3,503,982
Recovery of previously expensed Common Stock offering costs ...... 7,080 --
-------------------------------
Net increase in net assets resulting from capital stock
transactions .................................................... 2,733,448 3,503,982
-------------------------------
============================================================================================================================
Net Assets
----------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ..................................... 23,763,421 10,447,890
Beginning of year ................................................ 289,819,769 279,371,879
-------------------------------
End of year* ..................................................... $ 313,583,190 $ 289,819,769
===============================
* Undistributed investment income--net ........................ $ 4,874,500 $ 5,841,518
===============================
See Notes to Financial Statements.
16 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Statement of Cash Flows
For the Year Ended May 31, 2004
================================================================================================================
Cash Provided by Operating Activities
----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ............. $ 54,202,247
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Decrease in receivables ....................................... 592,799
Increase in prepaid expenses and other assets ................. (244,146)
Increase in other liabilities ................................. 194,242
Realized and unrealized gain on investments--net .............. (21,685,107)
Amortization of discount ...................................... (3,047,627)
Proceeds from sales and paydowns of long-term investments ........ 349,831,358
Purchases of long-term investments ............................... (360,854,939)
Purchases of short-term investments--net ......................... (82,499)
Termination of swap contracts .................................... (118,054)
-------------
Net cash provided by operating activities ........................ 18,788,274
-------------
================================================================================================================
Cash Used for Financing Activities
----------------------------------------------------------------------------------------------------------------
Cash receipts from borrowings .................................... 186,600,000
Cash payments on borrowings ...................................... (175,800,000)
Recovery of previously expensed Common Stock offering costs ...... 7,080
Dividends paid to shareholders ................................... (30,189,330)
-------------
Net cash used for financing activities ........................... (19,382,250)
-------------
================================================================================================================
Cash
----------------------------------------------------------------------------------------------------------------
Net decrease in cash ............................................. (593,976)
Cash at beginning of year ........................................ 812,081
-------------
Cash at end of year .............................................. $ 218,105
=============
================================================================================================================
Cash Flow Information
----------------------------------------------------------------------------------------------------------------
Cash paid for interest ........................................... $ 1,538,464
=============
================================================================================================================
Non-Cash Financing Activities
----------------------------------------------------------------------------------------------------------------
Reinvestment of dividends paid to shareholders ................... $ 2,726,368
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 17
[LOGO] Merrill Lynch Investment Managers
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended May 31,
---------------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2004 2003 2002 2001 2000
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 7.86 $ 7.68 $ 9.11 $ 10.65 $ 12.98
---------------------------------------------------------------------
Investment income--net* ........... .88 .92 1.15 1.31 1.46
Realized and unrealized gain (loss)
on investments--net .............. .58 .17 (1.47) (1.48) (2.30)
---------------------------------------------------------------------
Total from investment operations .. 1.46 1.09 (.32) (.17) (.84)
---------------------------------------------------------------------
Less dividends from investment
income--net ...................... (.89) (.91) (1.11) (1.37) (1.49)
---------------------------------------------------------------------
Capital charge resulting from
issuance of Common Stock ......... -- -- -- -- --+
---------------------------------------------------------------------
Recovery of previously expensed
offering costs (capital charge)
resulting from issuance of Common
Stock ............................ --++ -- -- -- --
---------------------------------------------------------------------
Net asset value, end of year ...... $ 8.43 $ 7.86 $ 7.68 $ 9.11 $ 10.65
=====================================================================
Market price per share, end of year $ 7.97 $ 8.36 $ 8.22 $ 9.38 $10.1875
=====================================================================
==================================================================================================================================
Total Investment Return**
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share 19.33% 16.46% (3.13%) (1.44%) (6.06%)
=====================================================================
Based on market price per share ... 6.07% 15.73% .59% 6.21% (8.96%)
=====================================================================
==================================================================================================================================
Ratios to Average Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest
expense .......................... 1.01% 1.04% 1.10% 1.00% .97%
=====================================================================
Expenses .......................... 1.51% 1.59% 2.14% 3.47% 3.07%
=====================================================================
Investment income--net ............ 10.48% 13.35% 14.37% 13.26% 12.13%
=====================================================================
==================================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings outstanding,
end of year (in thousands) ....... $109,600 $ 98,800 $ 84,900 $109,700 $137,400
=====================================================================
Average amount of borrowings
outstanding during the
year (in thousands) .............. $112,297 $ 75,558 $ 98,924 $132,070 $146,410
=====================================================================
Average amount of borrowings
outstanding per share during
the year* ........................ $ 3.03 $ 2.07 $ 2.75 $ 3.73 $ 4.16
=====================================================================
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands) ................... $313,583 $289,820 $279,372 $325,000 $375,465
=====================================================================
Portfolio turnover ................ 82.54% 76.61% 65.44% 46.99% 45.40%
=====================================================================
+ Amount is less than $(.01) per share.
++ Amount is less than $.01 per share.
* 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 effect of sales
charges.
See Notes to Financial Statements.
18 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
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. 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 is
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 -- Equity securities that are held by the Fund that
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 ask
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 over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
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 ask 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.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, 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 security is purchased or sold through
an exercise of an
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 19
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (continued)
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
over-the-counter 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.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
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.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) 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 default or in the event of losses on investments made with cash
collateral.
(g) Reclassification -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $311,884 has been reclassified between undistributed net investment income
and accumulated net realized capital losses as a result of permanent differences
attributable to
20 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Notes to Financial Statements (continued)
amortization methods on fixed income securities and accounting
treatment for swap contracts. This reclassification has no effect on net assets
or net asset values per share.
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 operation 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"), a subsidiary of ML & Co., 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 $5,438 in commissions on the execution of portfolio
security transactions for the Fund for the year ended May 31, 2004.
For the year ended May 31, 2004, the Fund reimbursed FAM $6,153 for certain
accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, MLAM U.K. and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended May 31, 2004 were $361,660,436 and $342,175,095, respectively.
Net realized gains (losses) for the year ended May 31, 2004 and net unrealized
appreciation as of May 31, 2004 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Appreciation
--------------------------------------------------------------------------------
Long-term investments ............... $ 11,043,978 $ 1,886,119
Swaps ............................... (118,054) 260,140
----------------------------------
Total ............................... $ 10,925,924 $ 2,146,259
==================================
As of May 31, 2004, net unrealized appreciation for federal income tax purposes
aggregated $2,901,976, of which $25,219,738 related to appreciated securities
and $22,317,762 related to depreciated securities. The aggregate cost of
investments at May 31, 2004 for federal income tax purposes was $417,993,491.
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 years ended May 31, 2004 and May 31,
2003 increased by 325,778 and 496,500, respectively, as a result of dividend
reinvestment.
5. Short-Term Borrowings:
On May 26, 2004, the Fund entered into a $160,000,000 revolving credit and
security agreement with Citibank, N.A. and other lenders (the "Lenders"). Under
the revolving credit and security agreement, the Fund may borrow money through
(i) a line of credit from certain Lenders at the eurodollar rate plus .75% or
the highest of the Federal Funds rate plus .50%, a base rate as determined by
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 21
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
Citibank, N.A. and/or the latest three-week moving average of secondary market
morning offering rates in the United States for three-month certificates of
deposit of major U.S. money market banks plus .50%, or (ii) the issuance of
commercial paper notes by certain Lenders at rates of interest based upon the
weighted average of the per annum rates paid or payable by such Lenders in
respect of those commercial paper notes. As security for its obligations to the
Lenders under the revolving credit and security agreement, the Fund has granted
a security interest in substantially all of its assets to and in favor of the
Lenders. The Fund also pays additional borrowing costs which include a
commitment fee for this facility at the annual rate of .10% and a program fee of
..24% on the borrowings outstanding.
For the year ended May 31, 2004, the average amount borrowed was approximately
$112,297,000 and the daily weighted average interest rate was 1.37%.
6. Distributions to Shareholders:
The Fund paid an ordinary income dividend in the amount of $.072000 per share on
June 30, 2004 to shareholders of record on June 14, 2004.
The tax character of distributions paid during the fiscal years ended May 31,
2004 and May 31, 2003 was as follows:
--------------------------------------------------------------------------------
5/31/2004 5/31/2003
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ....................... $33,172,274 $33,386,856
------------------------------
Total taxable distributions .............. $33,172,274 $33,386,856
==============================
As of May 31, 2004, the components of accumulated losses on a tax basis were as
follows:
-----------------------------------------------------------------------------
Undistributed ordinary income--net ..................... $ 3,753,970
Undistributed long-term capital gains--net ............. --
-------------
Total undistributed earnings--net ...................... 3,753,970
Capital loss carryforward .............................. (236,944,109)*
Unrealized gains--net .................................. 3,108,935**
-------------
Total accumulated losses--net .......................... $(230,081,204)
=============
* On May 31, 2004, the Fund had a net capital loss carryforward of
$236,944,109, of which $6,419,421 expires in 2007, $21,954,305 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.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales, the
difference between book and tax amortization methods for premiums and
discounts on fixed income securities and book/tax differences in the
accrual of income on securities in default.
22 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Corporate High Yield Fund III, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Corporate High Yield Fund III, Inc. as
of May 31, 2004, and the related statements of operations and cash flows for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 2004, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Corporate High Yield Fund III, Inc. as of May 31, 2004, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 16, 2004
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 23
[LOGO] Merrill Lynch Investment Managers
Automatic Dividend Reinvestment Plan (unaudited)
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by Federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
EquiServe (the "Plan Agent"), as agent for shareholders in administering the
Plan, in additional shares of Common Stock of the Fund. Holders of Common Stock
who elect not to participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name then to such nominee) by EquiServe, as
dividend paying agent. Such participants may elect not to participate in the
Plan and to receive all distributions of dividends and capital gains in cash by
sending written instructions to EquiServe, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely voluntary and
may be terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise such termination will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common Stock plus
estimated brokerage commissions (such conditions being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If on
the dividend payment date the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares certified from time to time by the record
24 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus commissions
of the Fund's shares is above the net asset value, participants in the Plan will
receive shares of the Fund at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a premium
over net asset value, the Fund issues shares pursuant to the Plan that have a
greater fair market value than the amount of cash reinvested, it is possible
that all or a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable distribution. If
the discount is viewed as a taxable distribution, it is also possible that the
taxable character of this discount would be allocable to all the shareholders,
including shareholders who do not participate in the Plan. Thus, shareholders
who do not participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable share of the
discount.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
EquiServe, P.O. Box 43010, Providence, RI 02940-3010, Telephone: 800-426-5523.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 25
[LOGO] Merrill Lynch Investment Managers
Portfolio Information (unaudited)
Percent of
As of May 31, 2004 Total Assets
====================================================================================================================================
Ten Largest Holdings
------------------------------------------------------------------------------------------------------------------------------------
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. 1.7%
------------------------------------------------------------------------------------------------------------------------------------
The AES Corporation* 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 Corporation of America* Building Materials is a manufacturer of residential roofing products, with
Timberline as its major brand. 1.5
------------------------------------------------------------------------------------------------------------------------------------
Samsonite Corporation* Samsonite designs, manufactures and distributes luggage, such as suitcases,
garment bags, casual bags, business cases and accessories, throughout the
United States and internationally. Its primary brand names are Samsonite,
American Tourister and Lark. The company also licenses its trademarks for use
on such products as travel accessories, leather goods, handbags, clothing and
furniture. 1.5
------------------------------------------------------------------------------------------------------------------------------------
Calpine Corporation* Calpine owns, develops and operates power generation facilities in addition
to selling electricity in the United States. The company also provides
thermal energy for industrial customers. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Edison International Inc.* This utility holding company operates, through subsidiaries, electric power
generation facilities worldwide. The company is also involved in energy and
infrastructure projects. Our bonds are at the company's Mission Energy and
Edison Mission subsidiaries. 1.3
------------------------------------------------------------------------------------------------------------------------------------
The Williams Companies, Inc.* Williams is involved in a number of energy-related businesses. Activities
include transport and storage of natural gas and other petroleum products, as
well as oil and gas exploration and production. The company is also a refiner
of petroleum products and trades energy and related commodities. 1.3
------------------------------------------------------------------------------------------------------------------------------------
El Paso* El Paso is a diversified energy company with operations primarily in natural
gas gathering, transportation and processing, as well as oil and gas
production. The company also has operations in power generation and merchant
energy services. Our bonds are at the company's Coastal Corporation, El Paso
Production Holdings and Southern Natural Gas subsidiaries. 1.3
------------------------------------------------------------------------------------------------------------------------------------
HMP Equity Holdings Corporation* HMP is a diversified specialty and performance chemical producer. The
company's polyurethane products have applications in coatings, athletic
footwear and insulation, among others. Titanium dioxide is used in paints and
architectural coatings. Other specialty chemicals have diverse uses in
industrial and consumer markets, including personal care and household
products. 1.3
------------------------------------------------------------------------------------------------------------------------------------
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. 1.3
------------------------------------------------------------------------------------------------------------------------------------
* Includes combined holdings and/or affiliates, where applicable.
26 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Portfolio Profile (unaudited)
As of May 31, 2004
Quality Ratings by Percent of
Standard & Poor's Total Market Value
--------------------------------------------------------------------------------
BBB ................................................................. 5%
BB .................................................................. 19
B ................................................................... 54
CCC ................................................................. 20
NR (Not Rated) ...................................................... 2
--------------------------------------------------------------------------------
Percent of
Five Largest Industries* Total Market Value
--------------------------------------------------------------------------------
Utility ............................................................. 11.3%
Chemicals ........................................................... 7.8
Gaming .............................................................. 6.9
Cable--U.S. ......................................................... 5.8
Manufacturing ....................................................... 5.7
--------------------------------------------------------------------------------
* For Fund compliance purposes, "Industries" means 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 such industry sub-classifications for reporting ease. These
industry classifications are unaudited.
Percent of
Five Largest Foreign Countries* Total Market Value
--------------------------------------------------------------------------------
Canada .............................................................. 3.8%
United Kingdom ...................................................... 2.0
Luxembourg .......................................................... 1.3
Netherlands ......................................................... 0.8
Norway .............................................................. 0.8
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
--------------------------------------------------------------------------------
Average Portfolio Maturity .......................................... 7.2 years
--------------------------------------------------------------------------------
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 27
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 1999 to President of the Merrill Lynch Investment Managers, 126 Funds None
Glenn* Princeton, NJ and present L.P. ("MLIM")/Fund Asset Management, L.P. 161 Portfolios
08543-9011 Director and ("FAM")--Advised Funds since 1999; Chairman
Age: 63 1998 to (Americas Region) of MLIM from 2000 to 2002;
present Executive Vice President of MLIM and FAM (which
terms as used herein include their corporate
predecessors) from 1983 to 2002; President of FAM
Distributors, Inc. ("FAMD") from 1986 to 2002 and
Director thereof from 1991 to 2002; Executive Vice
President and Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 2002; President
of Princeton Administrators, L.P. from 1989 to 2002;
Director of Financial Data Services, Inc. since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which MLIM
or FAM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his former positions with MLIM, FAM, FAMD, Princeton Services and Princeton Administrators, L.P. The
Director's term is unlimited. Directors serve until their resignation, removal, or death, or until December 31 of the
year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
------------------------------------------------------------------------------------------------------------------------------------
James H. P.O. Box 9095 Director 2002 to Director, The China Business Group, Inc. since 39 Funds None
Bodurtha Princeton, NJ present 1996 and Executive Vice President thereof from 56 Portfolios
08543-9095 1996 to 2003; Chairman of the Board, Berkshire
Age: 60 Holding Corporation since 1980; Partner, Squire,
Sanders & Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Joe Grills P.O. Box 9095 Director 1998 to Member of the Committee of Investment of 39 Funds Kimco
Princeton, NJ present Employee Benefit Assets of the Association of 56 Portfolios Realty
08543-9095 Financial Professionals ("CIEBA") since 1986; Corporation
Age: 69 Member of CIEBA's Executive Committee since
1988 and its Chairman from 1991 to 1992;
Assistant Treasurer of International Business
Machines Corporation ("IBM") and Chief
Investment Officer of IBM Retirement Funds
from 1986 to 1993; Member of the Investment
Advisory Committee of the State of New York
Common Retirement Fund since 1989; Member
of the Investment Advisory Committee of the
Howard Hughes Medical Institute from 1997 to
2000; Director, Duke Management Company since
1992 and Vice Chairman thereof since 1998;
Director, LaSalle Street Fund from 1995 to 2001;
Director, Kimco Realty Corporation since 1997;
Member of the Investment Advisory Committee of
the Virginia Retirement System since 1998 and
Vice Chairman thereof since 2002; Director,
Montpelier Foundation since 1998 and its Vice
Chairman since 2000; Member of the Investment
Committee of the Woodberry Forest School since
2000; Member of the Investment Committee of the
National Trust for Historic Preservation since 2000.
28 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
Officers and Directors (unaudited) (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Herbert I. P.O. Box 9095 Director 2002 to John M. Olin Professor of Humanities, New York 39 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 56 Portfolios
08543-9095 1980; President, Hudson Institute since 1997
Age: 65 and Trustee thereof since 1980; Dean, Gallatin
Division of New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corp.
from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993; Limited Partner,
Hypertech LP since 1996.
------------------------------------------------------------------------------------------------------------------------------------
Andre F. P.O. Box 9095 Director 2002 to Harvard Business School: George Gund Professor 39 Funds None
Perold Princeton, NJ present of Finance and Banking since 2000; Senior Associate 56 Portfolios
08543-9095 Dean, Director of Faculty Recruiting since 2001;
Age: 52 Finance Area Chair from 1996 to 2001; Sylvan C.
Coleman Professor of Financial Management from 1993
to 2000; Director, Genbel Securities Limited and
Gensec Bank from 1999 to 2003; Director, Stockback,
Inc. from 2000 to 2002; Director, Sanlam Limited from
2001 to 2003; Trustee, Commonfund from 1989 to 2001;
Director, Sanlam Investment Management from 1999 to
2001; Director, Bulldogresearch.com from 2000 to 2001;
Director, Quantec Limited from 1991 to 1999; Director
and Chairman of the Board of UNX Inc. since 2003.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 2002 to Shareholder, Modrall, Sperling, Roehl, Harris & 39 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 56 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of the
Age: 61 Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly & Ramo, Attorneys at Law,
P.C. from 1977 to 1993; Director, Coopers, Inc. since
1999; Director of ECMC Group (service provider to
students, schools and lenders) since 2001; Director,
United New Mexico Bank (now Wells Fargo) from 1983
to 1988; Director, First National Bank of New Mexico
(now Wells Fargo) from 1975 to 1976.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 1998 to Principal of STI Management (investment adviser) 39 Funds None
Salomon, Princeton, NJ present since 1994; Chairman and CEO of Salomon Brothers 56 Portfolios
Jr. 08543-9095 Asset Management from 1992 until 1995; Chairman
Age: 67 of Salomon Brothers equity mutual funds from 1992
until 1995; regular columnist with Forbes Magazine
from 1992 to 2002; Director of Stock Research and U.S.
Equity Strategist at Salomon Brothers from 1975 until
1991; Trustee, Commonfund from 1980 to 2001.
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 1998 to Chairman, Fernwood Associates (investment adviser) 40 Funds None
Swensrud Princeton, NJ present since 1996; Principal, Fernwood Associates 57 Portfolios
08543-9095 (financial consultants) since 1975; Chairman of
Age: 70 R.P.P. Corporation (manufacturing company) since
1978; Director of International Mobile Communications,
Incorporated (telecommunications company) since 1998.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 29
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited) (concluded)
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1998 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof
Burke Princeton, NJ President present since 1999; Senior Vice President and Treasurer of Princeton Services since
08543-9011 and and 1999; Vice President of FAMD since 1999; Director of MLIM Taxation
Age: 43 Treasurer 1999 to since 1990.
present
------------------------------------------------------------------------------------------------------------------------------------
B. Daniel P.O. Box 9011 Vice 2002 to Director (Global Fixed Income) of MLIM since 2000; Vice President of MLIM
Evans Princeton, NJ President present from 1995 to 2000.
08543-9011
Age: 60
------------------------------------------------------------------------------------------------------------------------------------
Elizabeth P.O. Box 9011 Vice 1998 to Director (Global Fixed Income) of MLIM since 2001; Vice President of MLIM
M. Princeton, NJ President present from 1994 to 2001.
Phillips 08543-9011
Age: 54
------------------------------------------------------------------------------------------------------------------------------------
Phillip S. P.O. Box 9011 Secretary 2004 to First Vice President of MLIM since 2001; Director (Legal Advisory) from 2000 to
Gillespie Princeton, NJ present 2001; Vice President from 1999 to 2000 and Attorney associated with MLIM since
08543-9011 1998.
Age: 40
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
NYSE Symbol
CYE
30 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004
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 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.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2004 31
[LOGO] Merrill Lynch Investment Managers www.mlim.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.
Corporate High Yield Fund III, Inc.
Box 9011
Princeton, NJ
08543-9011
#COYIII -- 5/04
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Joe Grills,
(2) Andre F. Perold, (3) Robert S. Salomon, Jr., and (4) Stephen B.
Swensrud.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending May 31, 2004 - $35,000
Fiscal Year Ending May 31, 2003 - $35,000
(b) Audit-Related Fees - Fiscal Year Ending May 31, 2004 - $7,500
Fiscal Year Ending May 31, 2003 - $7,500
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending May 31, 2004 - $5,200
Fiscal Year Ending May 31, 2003 - $4,800
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending May 31, 2004 - $0
Fiscal Year Ending May 31, 2003 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for the project as a whole. Any proposed services exceeding the
pre-approved cost levels will require specific pre-approval by the
Committee, as will any other services not subject to general
pre-approval (e.g., unanticipated but permissible services). The
Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending May 31, 2004 - $16,581,086
Fiscal Year Ending May 31, 2003 - $17,622,606
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $541,640, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
James H. Bodurtha
Joe Grills
Herbert I. London
Andre F. Perold
Roberta Cooper Ramo
Robert S. Solomon, Jr.
Stephen B. Swensrud
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that that the Investment Adviser
considers the interests of its clients, including the Funds, and not
the interests of the Investment Adviser, when voting proxies and that
real (or perceived) material conflicts that may arise between the
Investment Adviser's interest and those of the Investment Adviser's
clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 10 - Controls and Procedures
10(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.
10(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 second 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 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(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/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Corporate High Yield Fund III, Inc.
Date: July 19, 2004
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/ Terry K. Glenn
----------------------------
Terry K. Glenn,
President of
Corporate High Yield Fund III, Inc.
Date: July 19, 2004
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Corporate High Yield Fund III, Inc.
Date: July 19, 2004