[LOGO] Merrill Lynch Investment Managers
Semi-Annual Report
November 30, 2002
Corporate
High Yield
Fund III, Inc.
www.mlim.ml.com
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 return 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 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. In this case, the
Fund may nevertheless decide to maintain its leveraged position in order to
avoid capital losses on securities purchased with leverage. However, the Fund
will not generally utilize leverage if it anticipates that its leveraged capital
structure would result in a lower rate of return for its Common Stock than would
be obtained if the Common Stock were unleveraged for any significant amount of
time.
Corporate High Yield Fund III, Inc., November 30, 2002
DEAR SHAREHOLDER
The High-Yield Market Overview
For the six-month period ended November 30, 2002, the high-yield market returned
-1.84%, as measured by the unmanaged Credit Suisse First Boston (CSFB) High
Yield Index. The market bottomed in October, but recovered sharply in November,
with the Index returning +5.29% for the month. By way of comparison, the Index
historically has experienced significant high monthly returns at the end of what
were considered to be bear markets, returning +7.61% in February 1991, +5.38% in
March of that year, and more recently, gaining +5.10% in January 2001. During
the last six months, investors fled the market because of ongoing concerns
relating to corporate governance issues, accounting irregularities and
recessionary fears, as well as the potential for military conflict in Iraq. Some
market sectors were more negatively affected, as evidenced by the cable
industry, hurt by the accounting misdeeds of Adelphia Communications, Inc. Those
concerns also spread throughout the energy and utility sectors. The period saw
bonds of former investment-grade issuers such as Enron Corporation become nearly
valueless, with significant and swift downgrades of corporate bonds of other
electric utility and power producers. Accounting concerns spread throughout many
sectors as the period progressed. While consumer spending continued to buoy the
economy, corporate spending decreased significantly. Investors became
increasingly concerned that the U.S. economy would experience a "double-dip"
recession, fleeing to U.S. Treasury securities and cash equivalents.
Yield spreads off U.S. Treasury bonds, at 8.77% in November 2001, widened to
9.29% at the end of November 2002 after having eased to 7.36% at the end of May.
Throughout much of the 1990s, yield spreads averaged approximately 5.4%. In many
cases, it appears that high-yield bonds are inexpensive at current levels and
their market prices already reflect the deteriorated credit conditions of many
high-yield issuers. Corporate earnings have begun to improve with many
corporations reporting better-than-expected earnings, albeit at significantly
reduced expectations. Liquidity in the high-yield market, while considerably
reduced during the past six months, began to return in October and November 2002
as both individual and institutional investors realized that the high-yield
market was significantly undervalued and offered considerable opportunity, in
addition to attractive yields unavailable in other asset classes.
As the economy gradually improves, we believe that default rates should continue
to decline during the next six months since default rates are a lagging
indicator of the high-yield market credit trends in general. We see particular
value in the high-yield market overall, but caution that bond selection
continues to be critical in the current economic climate. We are cautiously
optimistic about the high-yield market, supported by fair valuations, a stable
to an improving economy, modestly strengthening earnings and improved liquidity.
Fund Performance
For the six-month period ended November 30, 2002, the total investment return on
the Fund's Common Stock was -7.42%, based on a change in the per share net asset
value from $7.68 to $6.67, and assuming reinvestment of $.422 per share income
dividends. For the same period, the net annualized yield of the Fund was 15.16%.
Despite the loss for the period, compared with its peer group, the Fund
significantly outperformed the Lipper average of leveraged closed end high-yield
funds for the six months ended November 30, 2002, which had a total return of
-9.41%.
Though the Fund's relative performance is good, the Fund's loss for the period
is disappointing. In part, the loss reflects the inherent volatility of a
leveraged fund, in which both down and up market moves are exaggerated. There
was also significant fallout from the well-publicized problems at Adelphia that
spread to other cable names, notably Charter Communications Holdings, a large
portfolio holding. We believe that Charter has adequate asset values to provide
upside potential from current depressed levels. Similarly, a significant drag on
performance for the past six months was our overweight in utilities,
particularly the bonds of Mission Energy Holdings, an independent power
producer. During the period, independent power producers and utilities suffered
from investor fears that Enron-related complications would spread to others in
the industry. We agree that there are increased risks in the sector and that
some industry participants may be permanently damaged as a result. We have
reduced holdings nearer to a market weighting in this sector. However, we
believe in the solid asset values and eventual recovery of those companies in
which we invest. The weak market gave us the opportunity to take advantage of
significant values in bonds of higher-quality utilities, pipelines and
independent power producers. We also continued to hold positions in several more
downtrodden names in the sector. We believe that we benefited from holding these
positions because of the sizeable yields on the bonds and that the negative bond
trend will reverse as the sector recovers during 2003.
Performance was also hurt by credit-specific, rather than industry-wide,
problems. Bonds of Foamex LP, a foam producer for furniture and auto markets,
fell as company earnings were hard hit by an unexpected and dramatic rise in raw
material costs. Petroleum-Geo Services, a seismic measurement company for the
oil industry, suffered from the failed sale of the company, raising fears that
the company would not be able to meet near-term maturities. We continue to
monitor these situations, but believe that asset values should support
recoveries at higher-than-current market prices.
Leverage Strategy
For the six-month period ended November 30, 2002, the Fund was on average about
24% leveraged, which was well within our mid-20% comfort range. At the end of
November 2002, the Fund was 22% leveraged having borrowed $69 million at a cost
of 1.58%. Thus, the Fund borrowed the equivalent of 22% of total assets, earning
incremental yield on the investments we made with the borrowed funds. While
leverage hurts total return in a weak market, the converse is also true. We
believe that market timing is generally not a successful approach, as this
strategy adds to incremental yield, but increases volatility both in weak and in
strong markets. (For a more complete explanation of the benefits and risks of
leveraging, see page 1 of this report to shareholders.)
Investment Strategy
Given our constructive market outlook, but recognizing the risk of near-term
volatility, we continued to invest in a core of solid credits and to maintain a
diverse portfolio, while taking advantage of more downtrodden names that we
believe represent significant value. We attempted to take advantage of market
volatility to establish or add to positions in companies that in our opinion
have favorable long-term fundamentals. We previously mentioned our purchase of
utility bonds. We also added to our position in bonds of Tyco International
Group SA at favorable prices, given our belief in the fundamental value of the
companies' businesses. Since it appears that fundamentals are improving in
agricultural chemicals, we established new positions in two companies in this
sector, IMC Global, Inc. and Terra Industries. We tiptoed back into the
telecommunications sector, adding Qwest Corporation bonds at a corporate level
that is close to the operating telephone company assets. We added bonds of Time
Warner Telecom Inc., a competitive local exchange provider that has demonstrated
an ability to maintain customers and financial resources in a difficult
environment. On the sell side, we pared down or eliminated positions where we
either were concerned about credit fundamentals or believed that bonds were
fully valued. We trimmed our position in HMH Properties, Inc. and Meristar
Hospitality Corp., expecting that hotels will continue to deliver unfavorable
2 & 3
Corporate High Yield Fund III, Inc., November 30, 2002
earnings in the near term. We also sold bonds of Avista Corporation, a utility,
at a substantial premium, avoiding a subsequent drop on fears of Enron ties and
sold our position in Tucson Electric, an illiquid bond that in our opinion was
fully valued. We sold a number of distressed positions that appeared to have had
minimal recovery value. These included several emerging markets corporate names,
and a number of companies facing extensive balance sheet restructuring either in
or out of bankruptcy. We continued to hold overweighted positions in cable and
wireless telecommunications, believing in the asset value and earnings potential
of our holdings. The Fund remains underweighted in the retail food and drug
companies, automotive and telecommunications sectors. We believe the Fund is
well positioned for the expected economic recovery.
In Conclusion
We thank you for your investment in Corporate High Yield Fund III, Inc., and we
look forward to assisting you with your financial needs in the months and years
ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ B. Daniel Evans
B. Daniel Evans
Vice President and Portfolio Manager
/s/ Elizabeth M. Phillips
Elizabeth M. Phillips
Vice President and Portfolio Manager
January 13, 2003
PROXY RESULTS
During the six-month period ended November 30, 2002, Corporate High Yield Fund
III, Inc.'s shareholders voted on the following proposal. The proposal was
approved at a shareholders' meeting on August 22, 2002. A description of the
proposal and number of shares voted are as follows:
------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
------------------------------------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors: Terry K. Glenn 32,885,258 1,730,080
James H. Bodurtha 32,889,251 1,726,087
Joe Grills 32,869,771 1,745,567
Herbert I. London 32,876,747 1,738,591
Andre F. Perold 32,889,788 1,725,550
Roberta Cooper Ramo 32,882,082 1,733,256
Robert S. Salomon, Jr. 32,855,769 1,759,569
Melvin R. Seiden 32,839,832 1,775,506
Stephen B. Swensrud 32,825,455 1,789,883
------------------------------------------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in U.S. dollars)
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Aerospace & BB- Ba3 $3,000,000 L-3 Communications Corp., 8% due 8/01/2008 $ 3,150,000
Defense--1.5% B- B3 500,000 Transdigm Inc., 10.375% due 12/01/2008 520,000
------------
3,670,000
=================================================================================================================================
Airlines--1.2% A- B1 750,000 American Airlines, 7.80% due 10/01/2006 510,080
Continental Airlines Inc.:
BBB Ba2 1,132,575 7.033% due 6/15/2011 637,866
A- Baa3 381,016 6.90% due 1/02/2017 286,886
D Ca 4,000,000 USAir Inc., 10.375% due 3/01/2013 (c) 1,360,000
------------
2,794,832
=================================================================================================================================
Automotive--0.9% BB+ Ba2 1,725,000 AutoNation Inc., 9% due 8/01/2008 1,811,250
B B3 223,000 Metaldyne Corporation, 11% due 6/15/2012 185,090
B B3 250,000 United Auto Group Inc., 9.625% due 3/15/2012 (e) 250,625
------------
2,246,965
=================================================================================================================================
Broadcasting--5.6% NR* NR* 5,000,000 Acme Intermediate Holdings/Finance, 12%** due 9/30/2005 4,425,000
CCC+ B3 275,000 Acme Television/Finance, 10.875% due 9/30/2004 277,750
B+ B1 525,000 Corus Entertainment Inc., 8.75% due 3/01/2012 555,187
B- B2 2,400,000 Emmis Communications Corporation, 8.125% due 3/15/2009 2,502,000
B- B3 275,000 Entravision Communications Corporation, 8.125% due 3/15/2009 290,125
B- Caa1 1,000,000 LIN Holdings Corporation, 10.725%** due 3/01/2008 1,030,000
B- B3 1,375,000 Nextmedia Operating Inc., 10.75% due 7/01/2011 1,436,875
B- B3 2,000,000 Salem Communications Holding Corporation, 9% due 7/01/2011 2,095,000
B- B3 1,125,000 Young Broadcasting Inc., 10% due 3/01/2011 1,122,188
------------
13,734,125
=================================================================================================================================
Cable-- C Caa2 2,900,000 Comcast UK Cable Partners Ltd., 11.20% due 11/15/2007 2,117,000
International--2.0% C Caa2 4,000,000 Diamond Holdings PLC, 9.125% due 2/01/2008 (c)(g) 2,840,000
------------
4,957,000
=================================================================================================================================
4 & 5
Corporate High Yield Fund III, Inc., November 30, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds Value
=================================================================================================================================
Cable--U.S.--8.3% CSC Holdings Inc.:
BB- B1 $2,750,000 8.125% due 8/15/2009 $ 2,591,875
BB- B1 2,600,000 7.625% due 4/01/2011 2,418,000
Charter Communications Holdings:
B- B3 3,500,000 8.625% due 4/01/2009 1,715,000
B- B3 2,000,000 10.75% due 10/01/2009 1,010,000
B+ B1 3,500,000 Echostar DBS Corporation, 9.125% due 1/15/2009 3,587,500
B- Caa1 3,925,000 Insight Communications, 12.25%** due 2/15/2011 1,942,875
B+ B2 1,650,000 Insight MidWest, 10.50% due 11/01/2010 1,641,750
B+ B2 1,625,000 Mediacom Broadband LLC, 11% due 7/15/2013 1,657,500
NR* NR* 2,525,000 Olympus Communications LP/Capital Corp., 10.625%
due 11/15/2006 (c) 1,944,250
B- Ba3 1,750,000 Panamsat Corporation, 8.50% due 2/01/2012 (e) 1,710,625
------------
20,219,375
=================================================================================================================================
Chemicals--4.9% B- Caa1 1,500,000 Huntsman ICI Chemicals, 10.125% due 7/01/2009 1,320,000
B- Caa2 2,300,000 Huntsman ICI Holdings, 13.898%** due 12/31/2009 552,000
B+ Ba3 1,750,000 IMC Global Inc., 7.625% due 11/01/2005 1,697,500
BB- B2 2,025,000 ISP ChemCo., 10.25% due 7/01/2011 2,095,875
B+ B2 2,000,000 ISP Holdings, Inc., 10.625% due 12/15/2009 1,800,000
BB- Ba3 1,350,000 MacDermid, Inc., 9.125% due 7/15/2011 1,458,000
BBB- Ba1 1,100,000 Millennium America Inc., 9.25% due 6/15/2008 1,149,500
B Caa3 2,100,000 Terra Industries, 10.50% due 6/15/2005 1,911,000
------------
11,983,875
=================================================================================================================================
Consumer BB+ Ba3 3,450,000 American Greetings, 11.75% due 7/15/2008 3,795,000
Products--4.8% B- B2 1,350,000 Armkel LLC/Armkel Finance, 9.50% due 8/15/2009 1,461,375
B- B2 2,887,000 Chattem, Inc., 8.875% due 4/01/2008 2,973,610
NR* NR* 8,500,000 Corning Consumer Products, 9.625% due 5/01/2008 (c) 425,000
CCC Caa2 3,875,000 Samsonite Corporation, 10.75% due 6/15/2008 3,138,750
------------
11,793,735
=================================================================================================================================
Diversified Media-- B B2 525,000 Dex Media East LLC, 9.875% due 11/15/2009 (e) 559,125
4.4% Primedia, Inc.:
B B3 3,175,000 7.625% due 4/01/2008 2,833,688
B B3 2,000,000 8.875% due 5/15/2011 1,845,000
R.H. Donnelley Financial Corporation I (e):
B+ B1 200,000 8.875% due 12/15/2010 209,500
B+ B2 725,000 10.875% due 12/15/2012 769,406
BBB Baa2 1,000,000 World Color Press Inc., 7.75% due 2/15/2009 988,304
B B2 5,080,000 Yell Finance BV, 12.863%** due 8/01/2011 3,632,200
------------
10,837,223
=================================================================================================================================
Energy--Exploration CCC+ Caa1 1,225,000 Mission Resources Corporation, 10.875% due 4/01/2007 698,250
& Production--2.3% B B2 1,300,000 Nuevo Energy Company, 9.375% due 10/01/2010 1,319,500
B B2 825,000 Plains E&P Company, 8.75% due 7/01/2012 (e) 862,125
B+ B2 475,000 Stone Energy Corporation, 8.25% due 12/15/2011 494,000
BB- Ba3 1,150,000 Vintage Petroleum, 8.25% due 5/01/2012 1,196,000
B+ Ba3 975,000 Westport Resources Corporation, 8.25% due 11/01/2011 1,014,000
------------
5,583,875
=================================================================================================================================
Energy--Other--9.6% BB- B1 1,850,000 El Paso Energy Partners, 8.50% due 6/01/2011 1,688,125
B B2 1,500,000 Ferrellgas Partners LP, 8.75% due 6/15/2012 1,567,500
BB- Ba3 425,000 Grant Prideco Escrow, 9% due 12/15/2009 (e) 437,750
Hanover Equipment (e):
BB- B1 525,000 Trust A, 8.50% due 9/01/2008 507,938
BB- B1 1,650,000 Trust B, 8.75% due 9/01/2011 1,584,000
CCC B3 5,000,000 Ocean Rig Norway AS, 10.25% due 6/01/2008 4,450,000
CCC Caa3 2,750,000 Petroleum Geo-Services, 6.25% due 11/19/2003 1,045,000
BB Ba3 3,932,000 Port Arthur Finance Corporation, 12.50% due 1/15/2009 4,187,580
B B3 3,225,000 Tesoro Petroleum Corp., 9% due 7/01/2008 2,225,250
B B2 1,400,000 Trico Marine Services, 8.875% due 5/15/2012 1,298,500
B- B3 2,750,000 United Refining Co., 10.75% due 6/15/2007 2,145,000
B Caa1 3,350,000 Williams Companies Inc., 8.125% due 3/15/2012 (e) 2,278,000
------------
23,414,643
=================================================================================================================================
Food/Tobacco--4.3% B B3 750,000 American Seafood Group LLC, 10.125% due 4/15/2010 768,750
B+ Ba3 725,000 Constellation Brands Inc., 8.125% due 1/15/2012 764,875
B+ B2 3,250,000 Cott Beverages Inc., 8% due 12/15/2011 3,412,500
CCC- Caa1 1,375,000 New World Pasta Company, 9.25% due 2/15/2009 962,500
BB+ Ba2 1,675,000 Smithfield Foods Inc., 8% due 10/15/2009 1,702,219
BB Ba1 2,700,000 Yum! Brands Inc., 8.875% due 4/15/2011 2,956,500
------------
10,567,344
=================================================================================================================================
Gaming--7.6% B+ B1 1,575,000 Boyd Gaming Corporation, 8.75% due 4/15/2012 1,665,562
B B2 1,175,000 Isle of Capri Casinos, 9% due 3/15/2012 1,207,313
BBB- Ba1 1,550,000 MGM Mirage, Inc., 8.50% due 9/15/2010 1,686,268
BB+ Ba2 3,000,000 Park Place Entertainment, 7.875% due 3/15/2010 3,052,500
B- B3 1,400,000 Penn National Gaming Inc., 8.875% due 3/15/2010 1,438,500
B B2 1,750,000 Resorts International Hotel/Casino, 11.50% due 3/15/2009 1,566,250
B+ B2 3,250,000 Sun International Hotels, 8.875% due 8/15/2011 3,331,250
B- Caa1 2,925,000 Venetian Casino/LV Sands, 11% due 6/15/2010 (e) 3,042,000
CCC+ B3 1,475,000 Wynn Las Vegas LLC, 12% due 11/01/2010 1,471,313
------------
18,460,956
=================================================================================================================================
6 & 7
Corporate High Yield Fund III, Inc., November 30, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds Value
==================================================================================================================================
Government-- B+ B2 $3,000,000 Federal Republic of Brazil, 14.50% due 10/15/2009 $ 2,280,000
Foreign--0.9%
==================================================================================================================================
Health Care--6.8% B- Caa1 3,225,000 ALARIS Medical Systems, Inc., 9.75% due 12/01/2006 3,289,500
BB- Ba3 1,700,000 AmerisourceBergen Corp., 7.25% due 11/15/2012 (e) 1,768,000
CCC+ B3 1,800,000 Extendicare Health Services, 9.35% due 12/15/2007 1,503,000
B B3 1,525,000 Fisher Scientific International, 8.125% due 5/01/2012 1,582,187
B+ Ba2 3,750,000 Fresenius Medical Capital Trust II, 7.875% due 2/01/2008 3,675,000
B+ NR* 1,000,000 ICN Pharmaceuticals Inc., 6.50% due 7/15/2008 (Convertible) 778,310
CCC+ B3 1,825,000 Kinetic Concepts, Inc., 9.625% due 11/01/2007 1,884,313
BBB Ba1 1,475,000 Manor Care Inc., 8% due 3/01/2008 1,550,594
BBB- Baa3 750,000 Tenet Healthcare Corporation, 6.375% due 12/01/2011 671,250
------------
16,702,154
==================================================================================================================================
Housing--5.0% B B2 5,750,000 Building Materials Corporation, 8% due 12/01/2008 4,485,000
BB Ba1 1,800,000 D.R. Horton, Inc., 7.50% due 12/01/2007 1,795,500
BB- Ba3 4,225,000 Forest City Enterprises Inc., 8.50% due 3/15/2008 4,267,250
B B3 308,000 U.S. Industries, Inc., 11.25% due 12/31/2005 (e) 277,200
B B3 1,629,000 USI American Holdings Inc., 7.25% due 12/01/2006 1,303,200
------------
12,128,150
==================================================================================================================================
Information B B1 4,250,000 Amkor Technology Inc., 9.25% due 5/01/2006 4,101,250
Technology--3.1% BB- Ba2 2,350,000 Celestica Inc., 4.64%** due 8/01/2020 (Convertible) 1,074,279
CCC+ Caa1 3,725,000 SCG Holdings Corporation, 12% due 8/01/2009 1,378,250
BB Ba3 1,000,000 Solectron Corporation, 9.625% due 2/15/2009 985,000
------------
7,538,779
==================================================================================================================================
Leisure--7.9% BB- Ba3 1,550,000 Felcor Lodging LP, 9.50% due 9/15/2008 1,588,750
BB- Ba3 3,250,000 HMH Properties, Inc., 8.45% due 12/01/2008 3,258,125
BBB- Ba1 2,025,000 Hilton Hotels Corporation, 8.25% due 2/15/2011 2,126,491
BBB- Ba1 1,750,000 ITT Corporation (New), 7.75% due 11/15/2025 1,592,500
Intrawest Corporation:
B+ B1 3,750,000 9.75% due 8/15/2008 3,778,125
B+ B1 1,225,000 10.50% due 2/01/2010 1,261,750
Meristar Hospitality Corp.:
B B1 700,000 9% due 1/15/2008 647,500
B B1 175,000 10.50% due 6/15/2009 168,875
B B2 600,000 Premier Parks Inc., 9.75% due 6/15/2007 582,000
B B2 4,000,000 Six Flags Inc., 9.50% due 2/01/2009 3,820,000
B B2 475,000 Vail Resorts Inc., 8.75% due 5/15/2009 479,750
------------
19,303,866
==================================================================================================================================
Manufacturing--4.8% CCC+ Caa1 1,825,000 Columbus McKinnon Corp., 8.50% due 4/01/2008 1,286,625
B- Caa1 3,500,000 Eagle-Picher Industries, 9.375% due 3/01/2008 2,380,000
B- Caa2 2,250,000 Foamex LP, 13.50% due 8/15/2005 618,750
CCC+ Caa1 1,050,000 International Wire Group, Inc., 11.75% due 6/01/2005 651,000
B B2 2,475,000 Johnson Diversey Inc., 9.625% due 5/15/2012 (e) 2,561,625
B- B3 425,000 Rexnord Corporation, 10.125% due 12/15/2012 (e) 439,875
Tyco International Group SA:
BBB- Ba2 1,425,000 6.375% due 2/15/2006 1,353,750
BBB- Ba2 2,600,000 6.375% due 10/15/2011 2,327,000
------------
11,618,625
==================================================================================================================================
Metal--Other--3.1% B- B3 1,058,750 Great Lakes Carbon Corp., 10.25% due 5/15/2008 (d) 742,448
BB Ba3 2,925,000 Luscar Coal Ltd., 9.75% due 10/15/2011 3,173,625
B- Caa1 5,000,000 Ormet Corporation, 11% due 8/15/2008 (e) 2,900,000
B B3 950,000 UCAR Finance Inc., 10.25% due 2/15/2012 760,000
------------
7,576,073
==================================================================================================================================
Multi-Sector NR* Ba1 2,100,000 Morgan Stanley Tracers, 8.159% due 5/01/2012 (b)(e) 2,063,670
Holdings--0.9%
==================================================================================================================================
Packaging--3.6% B- B3 775,000 Bway Corporation, 10% due 10/15/2010 (e) 792,437
CCC+ NR* 1,350,000 Graham Packaging Company, 13.569%** due 1/15/2009 1,269,000
B+ B2 250,000 Graphic Packaging Corporation, 8.625% due 2/15/2012 262,813
BB B2 2,500,000 Owens-Brockway Glass Container, 8.875% due 2/15/2009 2,600,000
B+ B3 1,550,000 Owens-Illinois Inc., 7.15% due 5/15/2005 1,503,500
B- Caa1 1,275,000 Pliant Corporation, 13% due 6/01/2010 1,147,500
CCC+ Caa1 2,450,000 US Can Corporation, 12.375% due 10/01/2010 1,139,250
------------
8,714,500
==================================================================================================================================
Paper--6.7% D Ca 1,000,000 APP International Finance, 11.75% due 10/01/2005 (c) 310,000
BBB- Ba1 1,400,000 Abitibi Consolidated Inc., 8.55% due 8/01/2010 1,478,737
B- B3 3,025,000 Ainsworth Lumber Company, 12.50% due 7/15/2007 (d) 3,119,531
B+ Ba2 1,375,000 Caraustar Industries Inc., 9.875% due 4/01/2011 1,426,562
Doman Industries Limited (c):
D Ca 9,700,000 8.75% due 3/15/2004 1,746,000
D Ca 550,000 9.25% due 11/15/2007 99,000
B B2 1,250,000 Jefferson Smurfit-Stone Container, 8.25% due 10/01/2012 (e) 1,306,250
MDP Acquisitions PLC (e):
B B2 1,625,000 9.625% due 10/01/2012 1,694,063
B B3 700,000 15.50% due 10/01/2013 (d) 735,000
BB+ Ba2 3,000,000 Norske Skog of Canada, 8.625% due 6/15/2011 3,082,500
BB- Ba3 1,500,000 Smurfit Capital Funding PLC, 7.50% due 11/20/2025 1,290,090
------------
16,287,733
==================================================================================================================================
8 & 9
Corporate High Yield Fund III, Inc., November 30, 2002
SCHEDULE OF INVESTMENTS (continued) (in U.S. dollars)
S&P Moody's Face
INDUSTRIES Ratings Ratings Amount Corporate Bonds Value
==================================================================================================================================
Services--2.2% B+ Ba2 $ 450,000 Airgas Inc., 9.125% due 10/01/2011 $ 488,250
BB- Ba3 725,000 Allied Waste North America, 8.875% due 4/01/2008 746,750
B B2 900,000 Coinmach Corporation, 9% due 2/01/2010 945,000
B B3 3,500,000 Williams Scotsman, Inc., 9.875% due 6/01/2007 3,290,000
------------
5,470,000
==================================================================================================================================
Steel--0.4% BB- B1 975,000 Oregon Steel Mills Inc., 10% due 7/15/2009 (e) 1,011,563
==================================================================================================================================
Telecommunications-- B- Caa1 3,050,000 Fairpoint Communications, 12.50% due 5/01/2010 1,967,250
1.7% B- Ba3 1,200,000 Qwest Corporation, 8.875% due 3/15/2012 (e) 1,158,000
CCC+ B3 1,275,000 Time Warner Telecom Inc., 10.125% due 2/01/2011 698,063
CCC+ B3 550,000 Time Warner Telecom LLC, 9.75% due 7/15/2008 302,500
------------
4,125,813
==================================================================================================================================
Transportation--2.7% B+ B1 3,250,000 Sea Containers Ltd., 12.50% due 12/01/2004 3,087,500
BB- Ba3 325,000 Stena AB, 9.625% due 12/01/2012 (e) 331,500
BB- Ba2 2,325,000 Teekay Shipping Corporation, 8.875% due 7/15/2011 2,397,656
B+ B2 1,125,000 Transportacion Maritima Mexicana, SA de CV, 10.25%
due 11/15/2006 731,250
------------
6,547,906
==================================================================================================================================
Utility--8.6% The AES Corporation:
B+ B3 825,000 8.75% due 12/15/2002 734,250
B- Caa1 900,000 8.375% due 8/15/2007 243,000
B+ B3 5,350,000 9.375% due 9/15/2010 2,461,000
B+ B3 3,325,000 8.875% due 2/15/2011 1,496,250
C C 850,000 AES Drax Energy Ltd., 11.50% due 8/30/2010 10,625
CMS Energy Corporation:
B+ B3 800,000 7.50% due 1/15/2009 680,000
NR* B3 1,025,000 8.50% due 4/15/2011 871,250
BB Ba2 1,400,000 CMS Panhandle Holding Company, 6.50% due 7/15/2009 1,325,444
B+ B1 4,025,000 Calpine Canada Energy Finance, 8.50% due 5/01/2008 1,851,500
Calpine Corporation:
B+ B1 1,500,000 8.25% due 8/15/2005 727,500
B+ B1 100,000 4% due 12/26/2006 (Convertible) (e) 52,027
B+ B1 1,100,000 8.625% due 8/15/2010 486,750
BBB- Baa3 1,400,000 Consumers Energy Company, 7.375% due 9/15/2023 1,376,631
BB Ba1 1,430,000 ESI Tractebel Acquisition Corp., 7.99% due 12/30/2011 1,188,859
BB- Ba3 1,250,000 Midland Funding II, 11.75% due 7/23/2005 1,262,500
BB Ba3 4,850,000 Mirant Americas Generation Inc., 8.30% due 5/01/2011 2,255,250
B- B3 5,400,000 Mission Energy Holdings, 13.50% due 7/15/2008 1,188,000
B+ B3 550,000 Northwest Pipeline Corporation, 6.625% due 12/01/2007 497,750
BB Ba2 1,000,000 Sierra Pacific Power Company, 8% due 6/01/2008 899,420
BBB- Ba1 1,300,000 Western Resources Inc., 7.875% due 5/01/2007 1,300,000
------------
20,908,006
==================================================================================================================================
Wireless--8.1% B- Caa1 5,100,000 American Tower Systems Corporation, 9.375% due 2/01/2009 3,914,250
B B3 3,200,000 Crown Castle International Corporation, 9.375% due 8/01/2011 2,688,000
CCC+ Caa1 4,019,000 Loral Cyberstar Inc., 10% due 7/15/2006 1,326,270
B- Caa1 5,000,000 Millicom International Cellular SA, 13.50% due 6/01/2006 2,000,000
NR* NR* 2,034,235 NII Holdings Inc., 13.07%** due 11/01/2009 (e) 1,484,992
B B3 625,000 Nextel Communications, Inc., 9.50% due 2/01/2011 578,125
CCC+ Caa1 5,500,000 Nextel Partners Inc., 12.576%** due 2/01/2009 3,960,000
Telesystem International Wireless:
B- NR* 1,725,701 14% due 12/30/2003 1,285,647
B- Ca 121,299 14% due 12/30/2003 (e) 90,368
BBB Baa2 2,250,000 Tritel PCS Inc., 10.375% due 1/15/2011 2,362,500
------------
19,690,152
==================================================================================================================================
Total Investments in Corporate Bonds
(Cost--$352,059,100)--123.9% 302,230,938
==================================================================================================================================
Shares
Held Common Stocks
==================================================================================================================================
Automotive--0.0% 5,000 Allied Signal Litigation Trust (c) 0
5,000 Breed Creditors Litigation Trust (c) 0
------------
0
==================================================================================================================================
Financial--0.1% 5,000,000 LTC-Amresco 125,000
==================================================================================================================================
Food/Tobacco--0.0% 88,554 Aurora Foods Inc. (c) 43,391
==================================================================================================================================
Metal-- 252,102 Metal Management, Inc. (c) 957,988
Other--0.4%
==================================================================================================================================
Wireless--1.0% 194,342 NII Holdings Inc. (Class B) (c) 2,468,143
==================================================================================================================================
Total Investments in Common Stocks (Cost--$12,557,648)--1.5% 3,594,522
==================================================================================================================================
10 & 11
Corporate High Yield Fund III, Inc., November 30, 2002
SCHEDULE OF INVESTMENTS (concluded) (in U.S. dollars)
Shares
INDUSTRIES Held Preferred Stocks & Warrants Value
=================================================================================================================================
Food & Drug--0.0% 60,617 Nebco Evans Holding Co. (d) $ 606
=================================================================================================================================
Packaging--0.0% 4,000 Pliant Corporation (Warrants) (f) 4,000
=================================================================================================================================
Paper--0.0% 3,750 APP China Group Ltd. (Warrants) (e)(f) 0
=================================================================================================================================
Steel--0.0% 2,750 Republic Technologies (Warrants) (f) 28
=================================================================================================================================
Wireless--0.0% 32,981 Loral Space & Communications (Warrants) (f) 1,649
=================================================================================================================================
Total Investments in Preferred Stocks & Warrants (Cost--$5,881,993)--0.0% 6,283
=================================================================================================================================
Short-Term Securities
=================================================================================================================================
Common Stock--0.5% 1,313,390 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (a) 1,313,390
=================================================================================================================================
Total Investments in Short-Term Securities (Cost--$1,313,390)--0.5% 1,313,390
=================================================================================================================================
Total Investments (Cost--$371,812,131)--125.9% 307,145,133
Liabilities in Excess of Other Assets--(25.9%) (63,183,607)
------------
Net Assets--100.0% $243,961,526
============
=================================================================================================================================
* 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) 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 Share Net Dividend
Affiliate Activity Cost Income
--------------------------------------------------------------------------
Merrill Lynch
Liquidity Series, LLC
Cash Sweep Series I 1,313,390 $1,313,390 $235
--------------------------------------------------------------------------
(b) Floating rate note.
(c) Non-income producing security.
(d) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(e) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(f) 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.
(g) Restricted securities as to resale. The value of the Fund's investment in
restricted securities was $2,840,000, representing 1.2% of net assets.
--------------------------------------------------------------------------
Acquisition
Issue Date Cost Value
--------------------------------------------------------------------------
Diamond Holdings,
PLC, 9.125% due 2/01/2008 1/30/1998 $4,000,000 $2,840,000
--------------------------------------------------------------------------
Total $4,000,000 $2,840,000
========== ==========
--------------------------------------------------------------------------
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of November 30, 2002
==============================================================================================================================
Assets: Investments, at value (identified cost--$371,812,131) ............ $ 307,145,133
Cash ............................................................. 2,173,489
Receivables:
Interest ...................................................... $ 9,016,505
Securities sold ............................................... 8,556,242
Dividends ..................................................... 235 17,572,982
-------------
Prepaid expenses and other assets ................................ 24,451
-------------
Total assets ..................................................... 326,916,055
-------------
==============================================================================================================================
Liabilities: Loans ............................................................ 68,600,000
Payables:
Securities purchased .......................................... 14,193,845
Investment adviser ............................................ 138,116
Interest on loans ............................................. 21,675 14,353,636
-------------
Accrued expenses ................................................. 893
-------------
Total liabilities ................................................ 82,954,529
-------------
==============================================================================================================================
Net Assets: Net assets ....................................................... $ 243,961,526
=============
==============================================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized ...... $ 3,659,529
Paid-in capital in excess of par ................................. 535,061,473
Undistributed investment income--net ............................. $ 6,156,332
Accumulated realized capital losses on investments--net .......... (236,248,810)
Unrealized depreciation on investments--net ...................... (64,666,998)
-------------
Total accumulated losses--net .................................... (294,759,476)
-------------
Total--Equivalent to $6.67 per share based on 36,595,290
shares of capital stock outstanding (market price--$6.86) ........ $ 243,961,526
=============
==============================================================================================================================
See Notes to Financial Statements.
12 & 13
Corporate High Yield Fund III, Inc., November 30, 2002
STATEMENT OF OPERATIONS
For the Six Months Ended November 30, 2002
=========================================================================================================================
Investment Income: Interest ................................................... $ 18,489,403
Securities lending--net .................................... 2,498
Dividends .................................................. 235
Other ...................................................... 72,263
-------------
Total income ............................................... 18,564,399
-------------
=========================================================================================================================
Expenses: Investment advisory fees ................................... $ 947,738
Loan interest expense ...................................... 765,834
Borrowing costs ............................................ 101,778
Professional fees .......................................... 51,385
Accounting services ........................................ 47,035
Transfer agent fees ........................................ 31,681
Directors' fees and expenses ............................... 27,391
Printing and shareholder reports ........................... 20,950
Listing fees ............................................... 15,586
Custodian fees ............................................. 12,925
Pricing services ........................................... 8,404
Other ...................................................... 11,691
-------------
Total expenses ............................................. 2,042,398
-------------
Investment income--net ..................................... 16,522,001
-------------
=========================================================================================================================
Realized & Realized loss on investments--net .......................... (42,824,812)
Unrealized Change in unrealized depreciation on investments--net ...... 4,994,023
Gain (Loss) on -------------
Investments--Net: Total realized and unrealized loss on investments--net ..... (37,830,789)
-------------
Net Decrease in Net Assets Resulting from Operations ....... $ (21,308,788)
=============
=========================================================================================================================
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Six For the
Months Ended Year Ended
November 30, May 31,
Increase (Decrease) in Net Assets: 2002 2002
=========================================================================================================================
Operations: Investment income--net ..................................... $ 16,522,001 $ 41,568,319
Realized loss on investments--net .......................... (42,824,812) (101,928,792)
Change in unrealized depreciation on investments--net ...... 4,994,023 49,263,127
------------- -------------
Net decrease in net assets resulting from operations ....... (21,308,788) (11,097,346)
------------- -------------
=========================================================================================================================
Dividends to Dividends to shareholders from investment income--net ...... (15,395,603) (40,453,896)
Shareholders: ------------- -------------
=========================================================================================================================
Capital Stock Value of shares issued to Common Stock shareholders in
Transactions: reinvestment of dividends .................................. 1,294,038 5,922,956
------------- -------------
=========================================================================================================================
Net Assets: Total decrease in net assets ............................... (35,410,353) (45,628,286)
Beginning of period ........................................ 279,371,879 325,000,165
------------- -------------
End of period* ............................................. $ 243,961,526 $ 279,371,879
============= =============
=========================================================================================================================
*Undistributed investment income--net ....................... $ 6,156,332 $ 5,029,934
============= =============
=========================================================================================================================
See Notes to Financial Statements.
14 & 15
Corporate High Yield Fund III, Inc., November 30, 2002
STATEMENT OF CASH FLOWS
For the Six Months Ended November 30, 2002
============================================================================================================================
Cash Provided by Net decrease in net assets resulting from operations ........................... $ (21,308,788)
Operating Activities: Adjustments to reconcile net decrease in net assets resulting from operations
to net cash provided by operating activities:
Decrease in receivables ..................................................... 1,081,591
Decrease in other assets .................................................... 161,687
Decrease in other liabilities ............................................... (120,432)
Realized and unrealized loss on investments--net ............................ 37,830,789
Amortization of discount .................................................... (2,531,938)
-------------
Net cash provided by operating activities ...................................... 15,112,909
-------------
============================================================================================================================
Cash Provided by Proceeds from sales of long-term investments ................................... 123,262,112
Investing Activities: Purchases of long-term investments ............................................. (104,507,556)
Proceeds from sales and maturities of short-term investments--net .............. (1,310,669)
-------------
Net cash provided by investing activities ...................................... 17,443,887
-------------
============================================================================================================================
Cash Used for Cash receipts from borrowings .................................................. 51,000,000
Financing Activities: Cash payments on borrowings .................................................... (67,300,000)
Dividends paid to shareholders ................................................. (14,101,580)
-------------
Net cash used for financing activities ......................................... (30,401,580)
-------------
============================================================================================================================
Cash: Net increase in cash ........................................................... 2,155,216
Cash at beginning of period .................................................... 18,273
-------------
Cash at end of period .......................................................... $ 2,173,489
=============
============================================================================================================================
Cash Flow Cash paid for interest ......................................................... $ 806,176
Information: =============
============================================================================================================================
Non-Cash Financing Reinvestment of dividends to shareholders ...................................... $ 1,294,038
Activities: =============
============================================================================================================================
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended For the Year Ended May 31,
November 30, --------------------------------------------
Increase (Decrease) in Net Asset Value: 2002 2002 2001 2000 1999
===================================================================================================================================
Per Share Net asset value, beginning of period ................... $ 7.68 $ 9.11 $ 10.65 $ 12.98 $ 14.99
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............................... .45** 1.15** 1.31** 1.46** 1.47
Realized and unrealized loss on investments--net ..... (1.04) (1.47) (1.48) (2.30) (1.99)
-------- -------- -------- -------- --------
Total from investment operations ....................... (.59) (.32) (.17) (.84) (.52)
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net ............................... (.42) (1.11) (1.37) (1.49) (1.46)
In excess of realized gain on investments--net ....... -- -- -- -- (.03)
-------- -------- -------- -------- --------
Total dividends and distributions ...................... (.42) (1.11) (1.37) (1.49) (1.49)
-------- -------- -------- -------- --------
Capital charge resulting from issuance of Common Stock . -- -- -- --+ --+
-------- -------- -------- -------- --------
Net asset value, end of period ......................... $ 6.67 $ 7.68 $ 9.11 $ 10.65 $ 12.98
======== ======== ======== ======== ========
Market price per share, end of period .................. $ 6.86 $ 8.22 $ 9.38 $10.1875 $12.8125
======== ======== ======== ======== ========
===================================================================================================================================
Total Based on market price per share ........................ (11.04%)++ .59% 6.21% (8.96%) 1.45%
Investment ======== ======== ======== ======== ========
Return:*** Based on net asset value per share ..................... (7.42%)++ (3.13%) (1.44%) (6.06%) (2.73%)
======== ======== ======== ======== ========
===================================================================================================================================
Ratios to Expenses, excluding interest expense ................... 1.05%* 1.10% 1.00% .97% .85%
Average ======== ======== ======== ======== ========
Net Assets: Expenses ............................................... 1.68%* 2.14% 3.47% 3.07% 2.28%
======== ======== ======== ======== ========
Investment income--net ................................. 13.56%* 14.37% 13.26% 12.13% 10.58%
======== ======== ======== ======== ========
===================================================================================================================================
Leverage: Amount of borrowings outstanding, end of period
(in thousands).......................................... $ 68,600 $ 84,900 $109,700 $137,400 $155,700
======== ======== ======== ======== ========
Average amount of borrowings outstanding during
the period (in thousands)............................... $ 74,295 $ 98,924 $132,070 $146,410 $126,034
======== ======== ======== ======== ========
Average amount of borrowings outstanding per share
during the period ...................................... $ 2.04 $ 2.75 $ 3.73 $ 4.16 $ 3.60
======== ======== ======== ======== ========
===================================================================================================================================
Supplemental Net assets, end of period (in thousands) ............... $243,962 $279,372 $325,000 $375,465 $455,178
Data: ======== ======== ======== ======== ========
Portfolio turnover ..................................... 33.03% 65.44% 46.99% 45.40% 46.86%
======== ======== ======== ======== ========
===================================================================================================================================
+ Amount is less than $.01 per share.
++ Aggregate total investment return.
* Annualized.
** Based on average shares outstanding.
*** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
See Notes to Financial Statements.
16 & 17
Corporate High Yield Fund III, Inc., November 30, 2002
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 a diversified, closed-end management
investment company. The Fund's financial statements are prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. These unaudited
financial statements reflect all adjustments, which are, in the opinion of
management, necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal, recurring nature. The Fund
determines and makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol CYE. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities are valued on the basis of
prices furnished by one or more pricing services that determine prices for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders. In
certain circumstances, portfolio securities are valued at the last sale price on
the exchange that is the primary market for such securities, or the last quoted
bid price for those securities for which the over-the-counter market is the
primary market or for listed securities in which there were no sales during the
day. The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of such exchanges.
Options written or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price (options written) or the last bid
price (options purchased). Obligations with remaining maturities of sixty days
or less are valued at amortized cost, which approximates market value, unless
this method no longer produces fair valuations. Rights or warrants to acquire
stock, or stock acquired pursuant to the exercise of a right or warrant, may be
valued taking into account various factors such as original cost to the Fund,
earnings and net worth of the issuer, market prices for securities of similar
issuers, assessment of the issuer's future prosperity, liquidation value or
third party transactions involving the issuer's securities. Securities for which
there exist no price quotations or valuations and all other assets are valued at
fair value as determined in good faith by or on behalf of the Board of Directors
of the Fund.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
o Options--The Fund is authorized to 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 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 for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, 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 Interest rate swaps--The Fund is authorized to enter into swap agreements for
the purpose of hedging the market risk on existing securities. In a swap
agreement, the Fund exchanges with the counterparty their respective commitments
to pay or receive interest on a specified notional principal amount. If the
counterparty defaults on its obligation, the Fund's ability to receive interest
will be delayed or limited. Furthermore, if the Fund does not have sufficient
income to pay its obligation under the swap agreement, the Fund would be in
default and the counterparty would be able to terminate the swap agreement. When
the swap agreement is closed, the Fund records a realized gain or loss equal to
the difference between the value of the swap agreement at the time it was
entered into and the value at the time it was closed.
(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.
(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. 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.
18 & 19
Corporate High Yield Fund III, Inc., November 30, 2002
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
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") or its affiliates. Pursuant to that
order, the Fund also has retained QA Advisors, LLC ("QA Advisors"), an affiliate
of FAM, as the securities lending agent for a fee based on a share of the
returns on investment of cash collateral. QA Advisors 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 QA Advisors or in registered
money market funds advised by FAM or its affiliates. For the six months ended
November 30, 2002, QA Advisors received $862 in securities lending agent fees.
For the six months ended November 30, 2002, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of MLPF&S, $201 for security price quotations to
compute the net asset value of the Fund.
In addition, MLPF&S received $9,297 in commissions on the execution of portfolio
security transactions for the Fund for the six months ended November 30, 2002.
For the six months ended November 30, 2002, the Fund reimbursed FAM $2,870 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended November 30, 2002 were $103,568,890 and $115,735,768, respectively.
Net realized losses for the six months ended November 30, 2002 and net
unrealized losses as of November 30, 2002 were as follows:
-------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
-------------------------------------------------------------------------------
Long-term investments............... $ (42,824,812) $ (64,666,998)
------------- -------------
Total............................... $ (42,824,812) $ (64,666,998)
============= =============
-------------------------------------------------------------------------------
As of November 30, 2002, net unrealized depreciation for Federal income tax
purposes aggregated $63,171,109, of which $11,429,345 related to appreciated
securities and $74,600,454 related to depreciated securities. The aggregate cost
of investments at November 30, 2002 for Federal income tax purposes was
$370,316,242.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued shares
of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding during the six months ended November 30, 2002 and
the year ended May 31, 2002 increased by 198,329 and 736,614, respectively, as a
result of dividend reinvestment.
5. Short-Term Borrowings:
On May 30, 2002, the Fund renewed its $185,000,000 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
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) through the issuance
of commercial paper notes by certain Lenders at rates of interest equivalent to
the weighted average of the per annum rates paid or payable by such Lenders in
respect of those commercial paper notes.
For the six months ended November 30, 2002, the average amount borrowed was
approximately $74,295,000 and the daily weighted average interest rate was
2.07%. For the six months ended November 30, 2002, facility and commitment fees
aggregated approximately $102,000. 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 and in favor of the
Lenders.
6. Capital Loss Carryforward:
On May 31, 2002, the Fund had a net capital loss carryforward of $115,491,791,
of which $6,419,421 expires in 2007, $21,954,305 expires in 2008, $34,200,029
expires in 2009 and $52,918,036 expires in 2010. This amount will be available
to offset like amounts of any future taxable gains.
7. Subsequent Event:
On December 3, 2002, an ordinary income dividend of $.076506 was declared. The
dividend was paid on December 20, 2002 to shareholders of record on December 10,
2002.
20 & 21
Corporate High Yield Fund III, Inc., November 30, 2002
PORTFOLIO INFORMATION
Percent of
As of November 30, 2002 Long-Term Investments
====================================================================================================================================
Top Ten Holdings 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 made primarily to wholesale
customers, although the company has a direct distribution
business to end users. 1.6%
-----------------------------------------------------------------------------------------------------------
Intrawest Corp. Intrawest develops and operates village-centered resorts
across North America. The company owns 10 mountain resorts,
including Whistler/Blackcomb in British Columbia, Mont
Tremblant in Quebec, Stratton in Vermont and Copper Mountain
in Colorado. The company also has other vacation/resort
interests. 1.6
-----------------------------------------------------------------------------------------------------------
NTL Communications NTL provides communication services to residential, business
Corporation and wholesale customers. The company offers residential
telephone, cable television and Internet access services. 1.6
-----------------------------------------------------------------------------------------------------------
Cablevisions Systems Cablevision Systems New York Group provides telecommunications
Corporation and entertainment services. The company has operations in
multimedia delivery, subscription cable television services,
championship professional sports teams and national television
program networks. The company serves customers primarily in
the New York metropolitan area. 1.5
-----------------------------------------------------------------------------------------------------------
Ocean Rig Norway AS Ocean Rig Norway owns and operates state-of-the-art oil
drilling and production rigs with a focus on operations in
deep waters and complex drilling environments. The rigs are
located off the coast of Canada in the Northern Atlantic and
in oil fields off the West Coast of Africa. 1.5
-----------------------------------------------------------------------------------------------------------
Building Materials Building Materials is a manufacturer of residential roofing
Corporation products, with Timberline as its premier brand. 1.5
-----------------------------------------------------------------------------------------------------------
Primedia, Inc. Primedia, a media company, provides specialized information to
the consumer, business-to-business and education markets. The
company's products include specialty magazines, technical and
trade magazines, information products, supplemental education
materials and vocational networks. Primedia's consumer
magazines include the well-known "Seventeen," "New York" and
"Modern Bride." 1.4
-----------------------------------------------------------------------------------------------------------
Acme Television/Finance Acme Television owns broadcast television stations in
mid-sized markets across the United States. Its stations are
affiliates of the WB Television Network. 1.4
-----------------------------------------------------------------------------------------------------------
Premier Parks Inc./ The company operates regional theme entertainment parks in the
Six Flags Inc. United States and Europe. Its parks operate under the Six
Flags name, as well as local brand names such as Frontier
City, Geanga Lake, Great Escape, Riverside Park and Walibi
Parks. The company also operates several water parks. 1.4
-----------------------------------------------------------------------------------------------------------
Port Arthur Finance Port Arthur Finance is an oil refinery owned and operated by
Corporation Premcor Inc. Bonds owned by the Fund are secured by the coker,
the part of the refinery that processes heavier crude oils,
thereby allowing the company to benefit from purchase of
cheaper heavy crude oils. 1.3
-----------------------------------------------------------------------------------------------------------
Portfolio Profile
Quality Ratings by Percent of
Standard & Poor's Long-Term Investments
--------------------------------------------------------------------------------
BBB ................................................................. 7%
BB .................................................................. 24
B ................................................................... 54
CCC ................................................................. 11
NR (Not Rated) ...................................................... 4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Percent of
Five Largest Industries Total Assets
--------------------------------------------------------------------------------
Energy--Other ....................................................... 7.2%
Wireless ............................................................ 6.8
Utility ............................................................. 6.4
Cable--U.S .......................................................... 6.2
Leisure ............................................................. 5.9
--------------------------------------------------------------------------------
Percent of
Five Largest Foreign Countries* Long-Term Investments
--------------------------------------------------------------------------------
Canada .............................................................. 7.4%
Bahamas ............................................................. 1.9
Luxembourg .......................................................... 1.9
Norway .............................................................. 1.8
Bermuda ............................................................. 1.7
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
--------------------------------------------------------------------------------
Percent of
Foreign Holdings* Long-Term Investments
--------------------------------------------------------------------------------
Total Foreign Holdings............................................... 19.6%
Emerging Market Holdings............................................. 1.2
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
B. Daniel Evans, Vice President
Elizabeth M. Phillips, Vice President
Donald C. Burke, Vice President and Treasurer
David W. Clayton, Secretary
--------------------------------------------------------------------------------
Effective January 1, 2003, Melvin R. Seiden, Director of Merrill Lynch Corporate
High Yield Fund III, Inc., retired. The Fund's Board of Directors wishes Mr.
Seiden well in his retirement.
--------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Equiserve Trust Company, N.A.
150 Royall Street
Canton, MA 02021
NYSE Symbol
CYE
22 & 23
[LOGO] Merrill Lynch Investment Managers
[GRAPHIC OMITTED]
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.
Corporate High Yield Fund III, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLE LOGO] Printed on post-consumer recycled paper COYIII--11/02