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 811-08497
Name of Fund: Corporate High Yield Fund III, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Corporate High Yield Fund III, Inc., 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 05/31/05
Date of reporting period: 06/01/04 - 05/31/05
Item 1 - Report to Stockholders
Corporate High Yield
Fund III, Inc.
Annual Report
May 31, 2005
Corporate High Yield Fund III, Inc.
The Benefits and Risks of Leveraging
Corporate High Yield Fund III, Inc. utilizes leveraging through borrowings or
issuance of short-term debt securities or shares of Preferred Stock. The concept
of leveraging is based on the premise that the cost of assets to be obtained
from leverage will be based on short-term interest rates, which normally will be
lower than the income earned by the Fund on its longer-term portfolio
investments. Since the total assets of the Fund (including the assets obtained
from leverage) are invested in higher-yielding portfolio investments, the Fund's
Common Stock shareholders are the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its net asset value and market
price. If the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, the Fund's
net income will be less than if leverage had not been used, and therefore the
amount available for distribution to Common Stock shareholders will be reduced.
Important Tax Information
The following information is provided with respect to the ordinary income
distributions paid monthly by Corporate High Yield Fund III, Inc. during the
fiscal year ended May 31, 2005:
================================================================================
August 2004
through
July 2004 December 2004
================================================================================
Qualified Dividend
Income for Individuals 3.00% 5.00%
--------------------------------------------------------------------------------
Dividends Qualifying for the
Dividends Received Deduction
for Corporations 3.00% 5.00%
--------------------------------------------------------------------------------
2 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
A Letter From the President
Dear Shareholder
After expanding at an annualized rate of 4.4% in 2004, U.S. gross domestic
product grew at an estimated 3.5% in the first quarter of 2005. The slowdown was
not entirely unexpected given last year's healthy growth and the evolution of
the economic cycle. The Federal Reserve Board -- with one eye firmly affixed on
the economic indicators and the other on inflationary measures -- has increased
the federal funds rate by 25 basis points (.25%) at each of its eight meetings
since June 2004. At period-end, the target short-term interest rate stood at 3%.
U.S. equity markets ended 2004 in a strong rally, but have struggled to record
meaningful gains in 2005. The potential for slowing economic and corporate
earnings growth, as well as volatile energy prices, have intermittently hampered
equity market progress. On the positive side, corporate transactions, such as
mergers and acquisitions, stock buy-backs and dividend payouts, have all
increased. In Asia, equities have continued to benefit from higher economic
growth prospects and valuations that appear inexpensive relative to other parts
of the world.
In the bond market, the yield curve flattening "conundrum" continued as
short-term and long-term yields moved still closer together. Over the past year,
the two-year Treasury yield increased 106 basis points while the 10-year
Treasury yield declined 66 basis points. At May 31, 2005, the two-year Treasury
note yielded 3.60% and the 10-year Treasury note yielded 4%. The falling
long-term rates may be partly attributed to foreign interest in U.S. assets and
increased issuance of short-term Treasury bonds to finance the federal deficit.
Notably, the government is considering the reissuance of the 30-year Treasury,
which was suspended in August 2001. This would allow the U.S. Treasury to adopt
a more flexible approach to borrowing, while providing investors with another
long-term fixed income option.
Amid these conditions, the major benchmarks posted six-month and 12-month
returns as follows:
Total Returns as of May 31, 2005 6-month 12-month
===============================================================================================
U.S. equities (Standard & Poor's 500 Index) +2.42% + 8.24%
-----------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) -2.10% + 9.82%
-----------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) +1.81% +14.62%
-----------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +2.90% + 6.82%
-----------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +3.51% + 7.96%
-----------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +0.60% + 9.97%
-----------------------------------------------------------------------------------------------
While the environment is likely to remain somewhat challenging, we believe
opportunities exist for investors. With this in mind, we encourage you to meet
with your financial advisor to review your goals and asset allocation and to
rebalance your portfolio, as necessary, to ensure it remains aligned with your
objectives and risk tolerance. As always, we thank you for trusting Merrill
Lynch Investment Managers with your investment assets, and we look forward to
serving you in the months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 3
A Discussion With Your Fund's Portfolio Manager
The positive effect of an emphasis on CCC-rated securities in the first
half of the fiscal year was enough to offset the underperformance that resulted
from an overweight to that sector in the last six months, as the Fund
outperformed its benchmark for the 12-month period.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended May 31, 2005, the Common Stock of Corporate High
Yield Fund III, Inc. had net annualized yields of 10.44% and 10.54%, based on a
year-end per share net asset value of $8.46 and a per share market price of
$8.38, respectively, and $.883 per share income dividends. For the same period,
the total investment return on the Fund's Common Stock was +11.24%, based on a
change in per share net asset value from $8.43 to $8.46, and assuming
reinvestment of all distributions. For the same period, the high yield bond
market, as measured by the Credit Suisse First Boston (CSFB) High Yield Index,
returned +9.97%, while the Fund's comparable Lipper category of High Current
Yield Funds (Leveraged) had an average return of +12.58%. (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.)
Fund performance reflects the changing risk appetite of investors in the high
yield market over the past year. The high yield bond market benefited from
optimistic views of economic and corporate earnings growth early in the period.
However, as earnings growth slowed and prospects for a decelerating economy
increased, investors increasingly questioned the benefits of higher-risk assets.
The well-publicized problems at General Motors Corporation and the downgrade of
its debt to below investment grade by two credit rating agencies, Standard &
Poor's and Moody's, also had an adverse effect on high yield bonds. The spreads
of high yield bonds versus 10-year Treasury notes as measured by the CSFB High
Yield Index, narrowed from 474 basis points (4.74%) at May 31, 2004, to 357
basis points at November 30, 2004, and then widened to 430 basis points at May
31, 2005. The average bond price in the CSFB High Yield Index dropped 2.8% in
the six months ended May 31, 2005. Most affected in the weakening market of the
past six months were bonds in the higher-risk categories, particularly those
rated CCC. Given our expectation of continued modest economic and earnings
growth through 2005, the Fund's holdings were more heavily weighted in the
higher-risk categories. This benefited relative performance in the first half of
the year, but hurt Fund results during the last six months of the fiscal period.
For the six-month period ended May 31, 2005, the total investment return on the
Fund's Common Stock was -1.13%, based on a change in per share net asset value
from $9.02 to $8.46, and assuming reinvestment of all distributions. For the
same period, the CSFB High Yield Index returned +.60% and the Lipper High
Current Yield Funds (Leveraged) category posted an average return of -.46%.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or a discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
What changes were made to the portfolio during the year?
Although the general composition of the portfolio was similar at the beginning
and end of the period, we did modestly reconfigure our holdings. We sold our
entire position in Mission Energy following the bond's strong performance. The
company is an affiliate of Edison International Inc., one of the Fund's top 10
holdings. The security had recovered dramatically from a low of approximately
25% of par value to a high of nearly 125% of par value. We believe the security
had reached full value. We also reduced our exposure to the chemicals sector
during the period by eliminating our positions in Rockwood Specialties Group
Inc., Millennium America Inc. and Crompton Corp.
4 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
The Fund's leverage position averaged 26% during the six-month period ended May
31, 2005. That is, the Fund borrowed the equivalent of 26% of total assets
invested, earning incremental yield on the investments we made with the borrowed
funds. For the year ended May 31, 2005, the average amount borrowed was $112.5
million, and the daily weighted average interest rate was 2.38%. While
leveraging will hinder the Fund's total return in a weak market, the converse
also is true. We intend to maintain our leverage position in the mid-20% range,
although that level may vary somewhat as we adjust the portfolio's holdings.
(For a more complete discussion of the benefits and risks of leveraging, see
page 2 of this report to shareholders.)
How would you characterize the Fund's position at the close of the period?
We believe that the high yield market will benefit from continued growth in the
economy and in corporate earnings for the remainder of 2005, despite investors'
perception of increased risk in the marketplace. We will continue to trim
positions that we believe are overvalued, as well as securities that, based on
their fundamental outlook, no longer warrant a position in the portfolio. We are
focusing on securities that we believe offer a combination of value and
reasonable risk.
The Fund's position in convertible securities -- corporate bonds that can be
converted to shares of company stock -- increased slightly to 8% of long-term
investments at period-end. We continue to see value and diversification in that
asset class relative to high yield bonds. We also have increased our investments
in floating rate securities, including bank loans, with total holdings
representing 10.6% of long-term investments at May 31, 2005. We believe that
rising short-term interest rates will benefit these securities. The Fund had an
average credit rating of B at the end of the period, as did the CSFB High Yield
Index.
Elizabeth M. Phillips
Vice President and Portfolio Manager
June 22, 2005
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 5
Schedule of Investments (in U.S. dollars)
Face
Industry+ Amount Corporate Bonds Value
==========================================================================================================================
Aerospace & $2,275,000 Alliant Techsystems, Inc., 3% due 8/15/2024 (b)(i) $ 2,502,500
Defense--4.5% 2,275,000 DRS Technologies, Inc., 6.875% due 11/01/2013 (i) 2,320,500
975,000 Esterline Technologies Corp., 7.75% due 6/15/2013 1,038,375
775,000 K&F Acquisition, Inc., 7.75% due 11/15/2014 (i) 775,000
1,750,000 Standard Aero Holdings, Inc., 8.25% due 9/01/2014 (i) 1,833,125
2,000,000 Titan Corp., 8% due 5/15/2011 2,140,000
1,400,000 Transdigm, Inc., 8.375% due 7/15/2011 1,456,000
2,350,000 Vought Aircraft Industries, Inc., 8% due 7/15/2011 2,297,125
------------
14,362,625
==========================================================================================================================
Airlines--2.2% 2,250,000 American Airlines, Inc. Series 2001-2, 7.80% due 4/01/2008 2,038,315
Continental Airlines, Inc.:
950,000 8% due 12/15/2005 929,812
1,209,126 Series 1997-4-B, 6.90% due 1/02/2017 943,201
235,853 Series 1998-1-C, 6.541% due 9/15/2009 202,609
750,000 Series 1998-3, 7.25% due 11/01/2005 719,811
1,239,207 Series 2001-1-C, 7.033% due 6/15/2011 1,020,165
Delta Air Lines, Inc.:
1,225,000 7.90% due 12/15/2009 459,375
1,930,000 2.875% due 2/18/2024 (b)(i) 716,513
------------
7,029,801
==========================================================================================================================
Automotive--0.9% 1,500,000 Autocam Corp., 10.875% due 6/15/2014 716,250
Metaldyne Corp.:
1,750,000 11% due 6/15/2012 1,242,500
1,165,000 10% due 11/01/2013 (i) 978,600
------------
2,937,350
==========================================================================================================================
Broadcasting--5.1% 2,675,000 Granite Broadcasting Corp., 9.75% due 12/01/2010 2,447,625
1,375,000 Nextmedia Operating, Inc., 10.75% due 7/01/2011 1,498,750
Paxson Communications Corp.:
2,125,000 10.75% due 7/15/2008 2,082,500
550,000 12.121% due 1/15/2009 (h) 508,750
1,700,000 Radio One, Inc., 6.375% due 2/15/2013 (i) 1,678,750
1,175,000 Salem Communications Corp., 7.75% due 12/15/2010 1,216,125
1,364,000 Salem Communications Holding Corp. Series B, 9% due 7/01/2011 1,449,250
Sinclair Broadcast Group, Inc.:
400,000 8% due 3/15/2012 415,000
3,005,000 Class A, 4.875% due 7/15/2018 (b) 2,655,669
2,300,000 Young Broadcasting, Inc., 8.75% due 1/15/2014 2,081,500
------------
16,033,919
==========================================================================================================================
Cable-- 2,100,000 NTL Cable Plc, 8.141% due 10/15/2012 (d) 2,142,000
International--0.7%
==========================================================================================================================
Cable--U.S.--8.3% 750,000 Adelphia Communications Corp., 6% due 2/15/2006 (b)(e) 39,375
2,275,000 CSC Holdings, Inc. Series B, 7.625% due 4/01/2011 2,411,500
1,900,000 Century Communications Series B, 9.05% due 1/15/2008 (e) 1,149,500
Charter Communications Holdings LLC:
3,500,000 8.625% due 4/01/2009 2,598,750
2,000,000 9.625% due 11/15/2009 1,495,000
945,000 Charter Communications, Inc., 5.875% due 11/16/2009 (b)(i) 581,175
Intelsat Bermuda Ltd. (i):
2,675,000 7.805% due 1/15/2012 (d) 2,715,125
2,775,000 8.625% due 1/15/2015 2,847,844
3,494,000 Loral Cyberstar, Inc., 10% due 7/15/2006 (e) 2,646,705
3,775,000 Mediacom Broadband LLC, 11% due 7/15/2013 4,086,438
450,000 Mediacom LLC, 9.50% due 1/15/2013 446,625
New Skies Satellites BV (i):
750,000 8.539% due 11/01/2011 (d) 757,500
1,000,000 9.125% due 11/01/2012 990,000
1,375,000 Quebecor Media, Inc., 10.465% due 7/15/2011 (h) 1,361,250
1,900,000 Rainbow National Services LLC, 10.375% due 9/01/2014 (i) 2,166,000
------------
26,292,787
6 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry+ Amount Corporate Bonds Value
==========================================================================================================================
Chemicals--8.3% $1,519,000 BCP Caylux Holdings Luxembourg SCA, 9.625% due 6/15/2014 (i) $ 1,705,077
Crompton Corp.:
1,675,000 9.164% due 8/01/2010 (d) 1,871,812
1,375,000 9.875% due 8/01/2012 1,564,062
1,525,000 Huntsman International LLC, 10.125% due 7/01/2009 1,582,187
1,025,000 ISP Chemco, Inc. Series B, 10.25% due 7/01/2011 1,104,437
1,075,000 ISP Holdings, Inc. Series B, 10.625% due 12/15/2009 1,147,562
1,950,000 Innophos, Inc., 8.875% due 8/15/2014 (i) 1,901,250
Millennium America, Inc.:
2,300,000 7% due 11/15/2006 2,346,000
975,000 9.25% due 6/15/2008 1,050,563
Nalco Co.:
450,000 7.75% due 11/15/2011 470,250
1,125,000 8.875% due 11/15/2013 1,175,625
1,324,000 Nalco Finance Holdings, Inc., 9.099% due 2/01/2014 (h) 940,040
3,125,000 Omnova Solutions, Inc., 11.25% due 6/01/2010 3,250,000
725,000 PCI Chemicals Canada, Inc., 10% due 12/31/2008 757,625
PolyOne Corp.:
2,625,000 10.625% due 5/15/2010 2,841,563
300,000 8.875% due 5/01/2012 310,125
1,966,000 Terra Capital, Inc., 11.50% due 6/01/2010 2,221,580
------------
26,239,758
==========================================================================================================================
Consumer-- 1,350,000 Sealy Mattress Co., 8.25% due 6/15/2014 1,366,875
Durables--0.7% 785,000 Tempur-Pedic, Inc., 10.25% due 8/15/2010 871,350
------------
2,238,225
==========================================================================================================================
Consumer-- Chattem, Inc.:
Non-Durables--3.0% 1,575,000 6.33% due 3/01/2010 (d) 1,590,750
600,000 7% due 3/01/2014 613,500
1,175,000 Church & Dwight Co., Inc., 6% due 12/15/2012 (i) 1,175,000
3,525,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 3,630,750
2,200,000 Samsonite Corp., 8.875% due 6/01/2011 2,310,000
------------
9,320,000
==========================================================================================================================
Diversified 2,350,000 CBD Media, Inc., 8.625% due 6/01/2011 2,350,000
Media--7.7% 2,275,000 CanWest Media, Inc., 8% due 9/15/2012 (i) 2,366,000
1,367,000 Dex Media West LLC, 9.875% due 8/15/2013 1,561,797
Houghton Mifflin Co.:
2,650,000 8.25% due 2/01/2011 2,756,000
1,775,000 10.378% due 10/15/2013 (h)(i) 1,215,875
5,600,000 Liberty Media Corp., 0.75% due 3/30/2023 (b) 6,006,000
Primedia, Inc.:
565,000 7.625% due 4/01/2008 569,238
1,225,000 8.875% due 5/15/2011 1,286,250
Universal City Florida Holding Co. I:
1,700,000 7.96% due 5/01/2010 (d) 1,768,000
1,025,000 8.375% due 5/01/2010 1,055,750
3,302,000 Yell Finance BV, 12.52% due 8/01/2011 (h) 3,219,450
------------
24,154,360
==========================================================================================================================
Energy--Exploration & 2,000,000 Belden & Blake Corp., 8.75% due 7/15/2012 1,810,000
Production--1.4% 2,525,000 Plains Exploration & Production Co. Series B, 8.75% due 7/01/2012 2,752,250
------------
4,562,250
==========================================================================================================================
Energy-- 850,000 Aventine Renewable Energy Holdings, Inc., 9.01% due 12/15/2011 (d)(i) 773,500
Other--3.5% 1,875,000 Dresser, Inc., 9.375% due 4/15/2011 1,954,687
650,000 Energy Corp. of America Series A, 9.50% due 5/15/2007 648,375
3,700,000 Ocean Rig Norway AS, 10.25% due 6/01/2008 3,764,750
Star Gas Partners LP:
1,525,000 10.25% due 2/15/2013 1,418,250
375,000 10.25% due 2/15/2013 (i) 348,750
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 7
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry+ Amount Corporate Bonds Value
==========================================================================================================================
Energy--Other Suburban Propane Partners, LP:
(concluded) $ 400,000 6.875% due 12/15/2013 $ 376,000
1,975,000 6.875% due 12/15/2013 (i) 1,856,500
------------
11,140,812
==========================================================================================================================
Financial--0.9% 2,850,000 Refco Finance Holdings LLC, 9% due 8/01/2012 2,978,250
==========================================================================================================================
Food & Tobacco--5.1% 800,000 AmeriQual Group LLC, 9% due 4/01/2012 (i) 804,000
Commonwealth Brands, Inc. (i):
1,975,000 9.75% due 4/15/2008 2,068,812
1,525,000 10.625% due 9/01/2008 1,597,437
2,725,000 Cott Beverages USA, Inc., 8% due 12/15/2011 2,888,500
Del Monte Corp.:
1,250,000 8.625% due 12/15/2012 1,362,500
475,000 6.75% due 2/15/2015 (i) 473,812
1,550,000 Doane Pet Care Co., 10.75% due 3/01/2010 1,639,125
1,275,000 Merisant Co., 10.25% due 7/15/2013 (i) 930,750
1,950,000 New World Pasta Co., 9.25% due 2/15/2009 (e) 136,500
2,100,000 Smithfield Foods, Inc. Series B, 8% due 10/15/2009 2,268,000
1,250,000 Tabletop Holdings Inc., 12.25% due 5/15/2014 (h)(i) 450,000
1,600,000 The Wornick Co., 10.875% due 7/15/2011 1,600,000
------------
16,219,436
==========================================================================================================================
Gaming--6.3% 3,225,000 Boyd Gaming Corp., 8.75% due 4/15/2012 3,499,125
1,350,000 Caesars Entertainment, Inc., 7.875% due 3/15/2010 1,491,750
1,925,000 Inn of the Mountain Gods Resort & Casino, 12% due 11/15/2010 2,233,000
1,550,000 MGM Mirage, 8.50% due 9/15/2010 1,708,875
3,625,000 Majestic Star Casino LLC, 9.50% due 10/15/2010 3,760,938
1,425,000 Pinnacle Entertainment, Inc., 8.25% due 3/15/2012 1,432,125
2,575,000 Poster Financial Group, Inc., 8.75% due 12/01/2011 2,594,313
2,675,000 Resorts International Hotel and Casino, Inc., 11.50% due 3/15/2009 3,036,125
------------
19,756,251
==========================================================================================================================
Health Care--7.8% Alpharma, Inc.:
2,950,000 3% due 6/01/2006 (b) 3,746,500
2,175,000 8.625% due 5/01/2011 (i) 2,126,062
2,700,000 DaVita, Inc., 7.25% due 3/15/2015 (i) 2,713,500
2,125,000 Elan Finance Plc, 7.268% due 11/15/2011 (d)(i) 1,838,125
3,750,000 Fresenius Medical Care Capital Trust II, 7.875% due 2/01/2008 3,928,125
2,825,000 Healthsouth Corp., 8.375% due 10/01/2011 2,803,812
1,450,000 Select Medical Corp., 7.625% due 2/01/2015 (i) 1,431,875
2,675,000 US Oncology, Inc., 9% due 8/15/2012 2,862,250
1,000,000 Vanguard Health Holding Co. II LLC, 9% due 10/01/2014 1,080,000
1,950,000 Ventas Realty LP, 6.75% due 6/01/2010 (i) 1,989,000
------------
24,519,249
==========================================================================================================================
Housing--3.3% Building Materials Corp. of America:
400,000 7.75% due 7/15/2005 399,000
1,050,000 8% due 10/15/2007 1,039,500
5,850,000 8% due 12/01/2008 5,798,812
Goodman Global Holding Co., Inc. (i):
450,000 5.76% due 6/15/2012 (d) 429,750
1,300,000 7.875% due 12/15/2012 1,170,000
1,475,000 Texas Industries, Inc., 10.25% due 6/15/2011 1,674,125
------------
10,511,187
==========================================================================================================================
Information 3,600,000 Advanced Micro Devices, Inc., 7.75% due 11/01/2012 3,546,000
Technology--6.0% Amkor Technology, Inc.:
775,000 9.25% due 2/15/2008 703,312
2,000,000 7.125% due 3/15/2011 1,630,000
3,215,000 Cypress Semiconductor Corp., 1.25% due 6/15/2008 (b) 3,427,994
1,925,000 Freescale Semiconductor, Inc., 5.891% due 7/15/2009 (d) 1,992,375
8 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry+ Amount Corporate Bonds Value
==========================================================================================================================
Information MagnaChip SemiConductor SA (i):
Technology $ 600,000 6.26% due 12/15/2011 (d) $ 558,000
(concluded) 650,000 8% due 12/15/2014 565,500
1,835,000 Quantum Corp., 4.375% due 8/01/2010 (b) 1,601,038
775,000 Telcordia Technologies Inc., 10% due 3/15/2013 (i) 678,125
1,150,000 UGS Corp., 10% due 6/01/2012 1,265,000
3,400,000 Viasystems, Inc., 10.50% due 1/15/2011 3,026,000
------------
18,993,344
==========================================================================================================================
Leisure--1.7% Felcor Lodging LP:
2,850,000 7.78% due 6/01/2011 (d) 2,928,375
1,550,000 9% due 6/01/2011 1,650,750
775,000 True Temper Sports, Inc., 8.375% due 9/15/2011 701,375
------------
5,280,500
==========================================================================================================================
Manufacturing--5.9% 2,175,000 CPI Holdco, Inc., 8.83% due 2/01/2015 (d)(i) 2,109,750
800,000 Columbus McKinnon Corp., 8.50% due 4/01/2008 792,000
3,725,000 EaglePicher Inc., 9.75% due 9/01/2013 (e) 2,495,750
2,950,000 Invensys Plc, 9.875% due 3/15/2011 (i) 2,780,375
2,475,000 JohnsonDiversey, Inc. Series B, 9.625% due 5/15/2012 2,487,375
975,000 Mueller Group, Inc., 10% due 5/01/2012 1,023,750
775,000 Rexnord Corp., 10.125% due 12/15/2012 829,250
1,175,000 Superior Essex Communications LLC, 9% due 4/15/2012 1,180,875
3,525,000 Trimas Corp., 9.875% due 6/15/2012 2,855,250
1,555,000 Tyco International Group SA, 2.75% due 1/15/2018 (b) 1,994,288
------------
18,548,663
==========================================================================================================================
Metal--Other--2.6% 585,000 Asia Aluminum Holdings Ltd., 8% due 12/23/2011 (i) 560,137
1,200,000 Century Aluminum Co., 7.50% due 8/15/2014 1,176,000
1,150,000 Foundation PA Coal Co., 7.25% due 8/01/2014 1,184,500
2,925,000 Luscar Coal Ltd., 9.75% due 10/15/2011 3,188,250
2,150,000 Novelis, Inc., 7.25% due 2/15/2015 (i) 2,107,000
------------
8,215,887
==========================================================================================================================
Packaging--5.0% 2,650,000 AEP Industries, Inc., 7.875% due 3/15/2013 (i) 2,646,619
1,400,000 Consolidated Container Co. LLC, 10.75% due 6/15/2009 (h) 1,092,000
Crown European Holdings SA:
950,000 9.50% due 3/01/2011 1,040,250
500,000 10.875% due 3/01/2013 576,875
3,000,000 Owens-Brockway, 8.875% due 2/15/2009 3,187,500
Pliant Corp.:
1,848,880 11.625% due 6/15/2009 (g)(i) 1,954,033
1,475,000 13% due 6/01/2010 1,180,000
Tekni-Plex, Inc.:
775,000 12.75% due 6/15/2010 515,375
400,000 8.75% due 11/15/2013 (i) 344,000
US Can Corp.:
375,000 10.875% due 7/15/2010 373,125
2,575,000 12.375% due 10/01/2010 2,369,000
650,000 Wise Metals Group LLC, 10.25% due 5/15/2012 536,250
------------
15,815,027
==========================================================================================================================
Paper--6.2% 3,625,000 Abitibi-Consolidated, Inc., 6.51% due 6/15/2011 (d) 3,516,250
1,200,000 Ainsworth Lumber Co. Ltd., 6.84% due 10/01/2010 (d) 1,200,000
1,625,000 Boise Cascade LLC, 6.016% due 10/15/2012 (d)(i) 1,625,000
3,325,000 Bowater, Inc., 6.01% due 3/15/2010 (d) 3,275,125
1,125,000 Caraustar Industries, Inc., 9.875% due 4/01/2011 1,071,562
Graphic Packaging International Corp.:
825,000 8.50% due 8/15/2011 820,875
950,000 9.50% due 8/15/2013 926,250
925,000 JSG Funding Plc, 9.625% due 10/01/2012 904,188
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 9
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry+ Amount Corporate Bonds Value
==========================================================================================================================
Paper NewPage Corp. (i):
(concluded) $1,450,000 9.46% due 5/01/2012 (d) $ 1,421,000
1,450,000 12% due 5/01/2013 1,413,750
2,450,000 Norske Skog Canada Ltd. Series D, 8.625% due 6/15/2011 2,499,000
1,003,000 Western Forest Products, Inc., 15% due 7/28/2009 (g)(i) 1,027,591
------------
19,700,591
==========================================================================================================================
Retail--0.9% 2,850,000 Jean Coutu Group, Inc., 8.50% due 8/01/2014 2,771,625
==========================================================================================================================
Service--6.0% 2,625,000 Allied Waste North America Series B, 8.875% due 4/01/2008 2,743,125
2,725,000 Corrections Corp. of America, 7.50% due 5/01/2011 2,796,531
775,000 Knowledge Learning Corp., Inc., 7.75% due 2/01/2015 (i) 728,500
875,000 MSW Energy Holdings II LLC, 7.375% due 9/01/2010 879,375
1,500,000 MSW Energy Holdings LLC, 8.50% due 9/01/2010 1,552,500
3,125,000 United Rentals North America, Inc., 7.75% due 11/15/2013 3,093,750
3,100,000 Waste Services, Inc., 9.50% due 4/15/2014 (i) 3,069,000
Williams Scotsman, Inc.:
3,700,000 9.875% due 6/01/2007 3,644,500
375,000 10% due 8/15/2008 405,000
------------
18,912,281
==========================================================================================================================
Steel--0.4% 1,200,000 Ucar Finance, Inc., 10.25% due 2/15/2012 1,242,000
==========================================================================================================================
Telecommunications-- ADC Telecommunications, Inc. (b):
4.9% 2,200,000 1% due 6/15/2008 2,024,000
750,000 3.065% due 6/15/2013 (d) 676,875
1,616,000 Alaska Communications Systems Holdings, Inc., 9.875% due 8/15/2011 1,700,840
2,150,000 Cincinnati Bell, Inc., 8.375% due 1/15/2014 2,128,500
2,550,000 LCI International, Inc., 7.25% due 6/15/2007 2,397,000
675,000 Qwest Capital Funding, Inc., 7.25% due 2/15/2011 626,063
1,000,000 Terremark Worldwide, Inc., 9% due 6/15/2009 (b)(i) 930,000
850,000 Time Warner Telecom Holdings, Inc., 7.268% due 2/15/2011 (d) 862,750
Time Warner Telecom, Inc.:
250,000 9.75% due 7/15/2008 250,625
3,875,000 10.125% due 2/01/2011 3,758,750
------------
15,355,403
==========================================================================================================================
Transportation-- 1,850,000 Laidlaw International, Inc., 10.75% due 6/15/2011 2,092,813
1.6% 2,325,000 Teekay Shipping Corp., 8.875% due 7/15/2011 2,627,250
375,000 Titan Petrochemicals Group Ltd., 8.50% due 3/18/2012 335,156
------------
5,055,219
==========================================================================================================================
Utility--11.4% The AES Corp.:
4,458,000 9.375% due 9/15/2010 5,015,250
2,100,000 8.75% due 5/15/2013 (i) 2,331,000
850,000 AES Drax Energy Ltd. Series B, 11.50% due 8/30/2010 (e) 4,250
800,000 Aquila, Inc., 7.625% due 11/15/2009 804,000
6,825,000 Calpine Canada Energy Finance ULC, 8.50% due 5/01/2008 4,060,875
Calpine Corp.:
1,500,000 8.25% due 8/15/2005 1,440,000
950,000 8.75% due 7/15/2007 598,500
3,205,000 Centerpoint Energy, Inc., 3.75% due 5/15/2023 (b) 3,641,681
2,025,000 ESI Tractebel Acquisition Corp. Series B, 7.99% due 12/30/2011 2,154,426
1,900,000 Edison Mission Energy, 9.875% due 4/15/2011 2,194,500
1,550,000 El Paso CGP Co., 7.75% due 6/15/2010 1,550,000
Nevada Power Co.:
600,000 9% due 8/15/2013 673,500
3,300,000 Series E, 10.875% due 10/15/2009 3,704,250
1,650,000 Reliant Energy, Inc., 6.75% due 12/15/2014 1,571,625
1,650,000 Sierra Pacific Power Co. Series A, 8% due 6/01/2008 1,761,375
1,200,000 Sierra Pacific Resources, 8.625% due 3/15/2014 1,299,000
925,000 Southern Natural Gas Co., 8.875% due 3/15/2010 1,007,520
2,000,000 Texas Genco LLC, 6.875% due 12/15/2014 (i) 2,055,000
------------
35,866,752
10 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry+ Amount Corporate Bonds Value
==========================================================================================================================
Wireless $ 825,000 American Tower Escrow Corp., 14.887% due 8/01/2008 (h) $ 629,062
Communications-- 2,000,000 Centennial Cellular Operating Co. LLC, 10.125% due 6/15/2013 2,232,500
4.0% 1,750,000 Iwo Escrow Co., 6.891% due 1/15/2012 (d)(i) 1,741,250
Rogers Wireless Communications, Inc.:
450,000 6.135% due 12/15/2010 (d) 469,125
250,000 8% due 12/15/2012 265,938
3,400,000 6.375% due 3/01/2014 3,383,000
625,000 Rural Cellular Corp., 7.51% due 3/15/2010 (d) 632,813
1,375,000 SBA Communications Corp., 8.50% due 12/01/2012 (i) 1,457,500
1,925,000 SBA Telecommunications, Inc., 7.432% due 12/15/2011 (h) 1,684,375
------------
12,495,563
--------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost--$400,670,141)--126.3% 398,691,115
==========================================================================================================================
Floating Rate Loan Interests (a)
==========================================================================================================================
Cable--U.S.--1.5% 4,850,000 Century Cable Holdings LLC Discretionary Term Loan, due 12/31/2009 4,797,863
==========================================================================================================================
Chemicals--1.0% 2,830,000 Wellman, Inc. Second Lien Term Loan, due 2/10/2010 2,932,588
==========================================================================================================================
Manufacturing--0.3% 997,462 EaglePicher Holdings, Inc. Tranche B Term Loan, due 8/07/2009 980,006
--------------------------------------------------------------------------------------------------------------------------
Total Floating Rate Loan Interests (Cost--$8,323,233)--2.8% 8,710,457
==========================================================================================================================
Shares
Held Common Stocks
==========================================================================================================================
Airlines--0.2% 81,243 ABX Air, Inc. (c) 610,947
==========================================================================================================================
Cable-- 117,037 Telewest Global, Inc. (c) 2,447,244
International--0.8%
==========================================================================================================================
Energy--Other--0.4% 80,000 Trico Marine Services, Inc. (c) 1,456,000
==========================================================================================================================
Paper--0.3% 203,785 Western Forest Products, Inc. (c) 918,060
--------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost--$5,685,338)--1.7% 5,432,251
==========================================================================================================================
Preferred Stocks
==========================================================================================================================
Automotive--0.9% 128,000 General Motors Corp. Series C, 6.25% (b) 2,707,200
--------------------------------------------------------------------------------------------------------------------------
Total Preferred Stocks (Cost--$3,199,472)--0.9% 2,707,200
==========================================================================================================================
Warrants (j)
==========================================================================================================================
Cable--U.S.--0.0% 32,981 Loral Space & Communications (expires 12/26/2006) 231
==========================================================================================================================
Health Care--0.0% 32,042 HealthSouth Corp. (expires 1/16/2014) 80,105
==========================================================================================================================
Packaging--0.0% 4,000 Pliant Corp. (expires 6/01/2010) 40
==========================================================================================================================
Paper--0.0% 700 MDP Acquisitions Plc (expires 10/01/2013) 3,500
==========================================================================================================================
Wireless 825 American Tower Corp. (expires 8/01/2008) 209,432
Communications--0.1%
--------------------------------------------------------------------------------------------------------------------------
Total Warrants (Cost--$112,170)--0.1% 293,308
==========================================================================================================================
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 11
Schedule of Investments (concluded) (in U.S. dollars)
Beneficial
Industry+ Interest Other Interests (f) Value
==========================================================================================================================
Airlines--0.3% $3,780,240 US Airways Group, Inc.--Certificate of Beneficial Interest $ 1,058,467
--------------------------------------------------------------------------------------------------------------------------
Total Other Interests (Cost--$1,020,665)--0.3% 1,058,467
==========================================================================================================================
Short-Term Securities
==========================================================================================================================
$ 79,564 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (k) 79,564
--------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$79,564)--0.0% 79,564
==========================================================================================================================
Total Investments (Cost--$419,090,583*)--132.1% 416,972,362
Liabilities in Excess of Other Assets--(32.1%) (101,346,682)
------------
Net Assets--100.0% $315,625,680
============
+ 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.
* The cost and unrealized appreciation (depreciation) of investments as of
May 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ........................................ $ 419,108,723
=============
Gross unrealized appreciation ......................... $ 17,973,221
Gross unrealized depreciation ......................... (20,109,582)
-------------
Net unrealized depreciation ........................... $ (2,136,361)
=============
(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. The base lending rates are generally (i)
the lending rate offered by one or more major European banks, such as
LIBOR (London InterBank Offered Rate), (ii) the prime rate offered by one
or more U.S. banks or (iii) the certificate of deposit rate.
(b) Convertible security.
(c) Non-income producing security.
(d) Floating rate note.
(e) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(f) Other interests represent beneficial interest in liquidation trusts and
other reorganization entities.
(g) Represents a pay-in-kind security that may pay interest/dividends in
additional face/shares.
(h) Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
(i) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(j) 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.
(k) 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) were as follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $(2,935) $5,225
--------------------------------------------------------------------------
Financial futures contracts sold as of May 31, 2005 were as follows:
--------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Depreciation
--------------------------------------------------------------------------
49 Ten-Year U.S.
Treasury Notes September 2005 $5,514,074 $(35,942)
--------------------------------------------------------------------------
Swaps outstanding as of May 31, 2005 were as follows:
--------------------------------------------------------------------------
Unrealized
Notional Appreciation
Amount (Depreciation)
--------------------------------------------------------------------------
Receive a variable rate return based on
1-month USD LIBOR and pay a fixed
rate of 1.56%
Broker, UBS Warburg
Expires June 2005 $30,000,000 $38,934
Sold credit default protection on
Ford Motor Company and receive 4.70%
Broker, Morgan Stanley
Capital Services, Inc.
Expires June 2007 $ 300,000 11,067
Sold credit default protection on
General Motors Corporation and
receive 4.40%
Broker, Morgan Stanley
Capital Services, Inc.
Expires June 2007 $ 400,000 (7,721)
Sold credit default protection on
General Motors Corporation and
receive 5.50%
Broker, Morgan Stanley
Capital Services, Inc.
Expires June 2007 $ 300,000 320
--------------------------------------------------------------------------
Total $42,600
=======
See Notes to Financial Statements.
12 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Statement of Assets, Liabilities and Capital
As of May 31, 2005
=========================================================================================================================
Assets
-------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$419,011,019) .............................. $ 416,892,798
Investments in affiliated securities, at value
(identified cost--$79,564) ................................... 79,564
Unrealized appreciation on swaps .............................. 42,600
Cash on deposit for futures contracts ......................... 100,000
Receivables:
Interest (including $7 from affiliates) .................... $ 8,812,361
Securities sold ............................................ 772,767 9,585,128
-------------
Prepaid expenses and other assets ............................. 83,615
-------------
Total assets .................................................. 426,783,705
=========================================================================================================================
Liabilities
-------------------------------------------------------------------------------------------------------------------------
Loans ......................................................... 107,800,000
Payables:
Securities purchased ....................................... 2,175,027
Custodian bank ............................................. 463,538
Dividends to shareholders .................................. 211,564
Interest on swaps .......................................... 188,292
Investment adviser ......................................... 157,429
Interest on loans .......................................... 68,922
Variation margin ........................................... 21,437
Other affiliates ........................................... 2,926 3,289,135
-------------
Accrued expenses .............................................. 68,890
-------------
Total liabilities ............................................. 111,158,025
-------------
=========================================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------------------------
Net Assets .................................................... $ 315,625,680
=============
=========================================================================================================================
Capital
-------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 200,000,000 shares authorized.... $ 3,731,014
Paid-in capital in excess of par .............................. 540,741,636
Undistributed investment income--net .......................... $ 3,288,191
Accumulated realized capital losses--net ...................... (230,023,598)
Unrealized depreciation--net .................................. (2,111,563)
-------------
Total accumulated losses--net ................................. (228,846,970)
-------------
Total--Equivalent to $8.46 per share based on 37,310,139
shares of capital stock outstanding (market price--$8.38) .... $ 315,625,680
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 13
Statement of Operations
For the Year Ended May 31, 2005
=========================================================================================================================
Investment Income
-------------------------------------------------------------------------------------------------------------------------
Interest (including $5,225 from affiliates) ................... $ 36,172,484
Dividends ..................................................... 917,408
Other ......................................................... 546,194
-------------
Total income .................................................. 37,636,086
-------------
=========================================================================================================================
Expenses
-------------------------------------------------------------------------------------------------------------------------
Loan interest expense ......................................... $ 2,681,816
Investment advisory fees ...................................... 2,634,524
Borrowing costs ............................................... 167,111
Accounting services ........................................... 121,732
Professional fees ............................................. 88,054
Transfer agent fees ........................................... 65,431
Printing and shareholder reports .............................. 46,025
Listing fees .................................................. 27,084
Custodian fees ................................................ 26,765
Pricing services .............................................. 24,724
Directors' fees and expenses .................................. 19,622
Other ......................................................... 20,386
-------------
Total expenses ................................................ 5,923,274
-------------
Investment income--net ........................................ 31,712,812
-------------
=========================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-------------------------------------------------------------------------------------------------------------------------
Realized gain on:
Investments--net ........................................... 6,756,254
Futures contracts and swaps--net ........................... 163,207
Foreign currency transactions--net ......................... 5,945 6,925,406
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ........................................... (4,004,340)
Futures contracts and swaps--net ........................... (253,482) (4,257,822)
-------------------------------
Total realized and unrealized gain--net ....................... 2,667,584
-------------
Net Increase in Net Assets Resulting from Operations .......... $ 34,380,396
=============
See Notes to Financial Statements.
14 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Statements of Changes in Net Assets
For the Year Ended
May 31,
-------------------------------
Increase (Decrease) in Net Assets: 2005 2004
=========================================================================================================================
Operations
-------------------------------------------------------------------------------------------------------------------------
Investment income--net ........................................ $ 31,712,812 $ 32,517,140
Realized gain--net ............................................ 6,925,406 10,925,924
Change in unrealized appreciation/depreciation--net ........... (4,257,822) 10,759,183
-------------------------------
Net increase in net assets resulting from operations .......... 34,380,396 54,202,247
-------------------------------
=========================================================================================================================
Dividends to Shareholders
-------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income--net ......... (33,146,162) (33,172,274)
-------------------------------
=========================================================================================================================
Capital Stock Transactions
-------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in.........
reinvestment of dividends .................................... 808,256 2,726,368
Recovery of previously expensed Common Stock offering costs ... -- 7,080
-------------------------------
Net increase in net assets resulting from capital stock
transactions ................................................. 808,256 2,733,448
-------------------------------
=========================================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------------------------
Total increase in net assets .................................. 2,042,490 23,763,421
Beginning of year ............................................. 313,583,190 289,819,769
-------------------------------
End of year* .................................................. $ 315,625,680 $ 313,583,190
===============================
* Undistributed investment income--net ..................... $ 3,288,191 $ 4,874,500
===============================
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 15
Statement of Cash Flows
For the Year Ended May 31, 2005
======================================================================================================
Cash Provided by Operating Activities
------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ......... $ 34,380,396
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Decrease in receivables ................................... 367,899
Decrease in prepaid expenses and other assets ............. 228,528
Increase in other liabilities ............................. 79,843
Realized and unrealized gain--net ......................... (2,667,584)
Realized gain on futures contracts and swaps--net ......... 163,207
Unrealized loss on futures contracts--net ................. (35,942)
Realized gain on foreign currency transactions--net ....... 5,945
Amortization of discount .................................. (2,605,531)
Proceeds from sales and paydowns of long-term investments .... 247,766,259
Purchases of long-term investments ........................... (244,084,634)
Proceeds from sales of short-term investments--net ........... 2,935
-------------
Net cash provided by operating activities .................... 33,601,321
-------------
======================================================================================================
Cash Used for Financing Activities
------------------------------------------------------------------------------------------------------
Cash receipts from borrowings ................................ 170,400,000
Cash payments on borrowings .................................. (172,200,000)
Dividends paid to shareholders ............................... (32,382,964)
Increase in custodian bank payable ........................... 463,538
-------------
Net cash used for financing activities ....................... (33,719,426)
-------------
======================================================================================================
Cash
------------------------------------------------------------------------------------------------------
Net decrease in cash ......................................... (118,105)
Cash at beginning of year .................................... 218,105
-------------
Cash at end of year .......................................... $ 100,000
=============
======================================================================================================
Cash Flow Information
------------------------------------------------------------------------------------------------------
Cash paid for interest ....................................... $ 2,644,488
=============
======================================================================================================
Non-Cash Financing Activities
------------------------------------------------------------------------------------------------------
Reinvestment of dividends paid to shareholders ............... $ 808,256
=============
See Notes to Financial Statements.
16 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Financial Highlights
For the Year Ended May 31,
The following per share data and ratios have been derived -----------------------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ......... $ 8.43 $ 7.86 $ 7.68 $ 9.11 $ 10.65
-----------------------------------------------------------------------
Investment income--net* .................... .85 .88 .92 1.15 1.31
Realized and unrealized gain (loss)--net ... .07 .58 .17 (1.47) (1.48)
-----------------------------------------------------------------------
Total from investment operations ........... .92 1.46 1.09 (.32) (.17)
-----------------------------------------------------------------------
Less dividends from investment income--net . (.89) (.89) (.91) (1.11) (1.37)
-----------------------------------------------------------------------
Recovery of previously expensed offering
costs resulting from issuance of Common
Stock ..................................... -- --+ -- -- --
-----------------------------------------------------------------------
Net asset value, end of year ............... $ 8.46 $ 8.43 $ 7.86 $ 7.68 $ 9.11
=======================================================================
Market price per share, end of year ........ $ 8.38 $ 7.97 $ 8.36 $ 8.22 $ 9.38
=======================================================================
==================================================================================================================================
Total Investment Return**
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ......... 11.24% 19.33% 16.46% (3.13%) (1.44%)
=======================================================================
Based on market price per share ............ 16.55% 6.07% 15.73% .59% 6.21%
=======================================================================
==================================================================================================================================
Ratios to Average Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense ....... .99% 1.01% 1.04% 1.10% 1.00%
=======================================================================
Expenses ................................... 1.81% 1.51% 1.59% 2.14% 3.47%
=======================================================================
Investment income--net ..................... 9.71% 10.48% 13.35% 14.37% 13.26%
=======================================================================
==================================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings outstanding, end of
year (in thousands) ....................... $107,800 $109,600 $ 98,800 $ 84,900 $109,700
=======================================================================
Average amount of borrowings outstanding
during the year (in thousands) ............ $112,501 $112,297 $ 75,558 $ 98,924 $132,070
=======================================================================
Average amount of borrowings outstanding
per share during the year* ................ $ 3.02 $ 3.03 $ 2.07 $ 2.75 $ 3.73
=======================================================================
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ..... $315,626 $313,583 $289,820 $279,372 $325,000
=======================================================================
Portfolio turnover ......................... 54.64% 82.54% 76.61% 65.44% 46.99%
=======================================================================
* 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.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 17
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 shares
are listed on the New York Stock Exchange ("NYSE") under the symbol CYE. The
following is a summary of significant accounting policies followed by the Fund.
(a) Valuation of investments -- Debt securities are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general direction
of the Board of Directors. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Fund. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sale price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued by quoted fair valuations received daily by the Fund from the
counterparty. Short-term investments with a remaining maturity of 60 days or
less are valued at amortized cost, which approximates market value, under which
method the investment is valued at cost and any premium or discount is amortized
on a straight line basis to maturity. Repurchase agreements are valued at cost
plus accrued interest. Investments in open-end investment companies are valued
at their net asset value each business day. Securities and other assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund.
Equity securities that are held by the Fund, which are traded on stock exchanges
or the Nasdaq National Market, are valued at the last sale price or official
close price on the exchange, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available asked price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Fund. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price obtained from one or more dealers or
pricing services approved by the Board of Directors of the Fund. Short positions
traded in the OTC market are valued at the last available asked price. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the Fund's net asset value.
If events (for example, a company announcement, market volatility or a natural
disaster) occur during such periods that are expected to materially affect the
value of such securities, those securities may be valued at their fair value as
determined in good faith by the Fund's Board of Directors or by the Investment
Adviser using a pricing service and/or procedures approved by the Fund's Board
of Directors.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Options -- The Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
value of the option written. When a security is purchased or sold through
an exercise of an option,
18 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Notes to Financial Statements (continued)
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. These periodic payments received or made by the Fund are
recorded in the accompanying Statement of Operations as realized gains or
losses, respectively. Gains or losses are also realized upon termination
of the swap agreements. Swaps are marked-to-market daily based on
dealer-supplied valuations and changes in value are recorded as unrealized
appreciation (depreciation). Risks include changes in the returns of the
underlying instruments, failure of the counterparties to perform under the
contracts' terms and the possible lack of liquidity with respect to the
swap agreements.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies to U.S. dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 19
Notes to Financial Statements (continued)
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.
(h) Custodian bank -- The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft, which resulted from a failed trade that
settled the next day.
(i) 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, $152,959 has been reclassified between undistributed net investment income
and accumulated net realized capital losses as a result of permanent differences
attributable to amortization methods on fixed income securities, accounting for
swap agreements, and foreign currency transactions. 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 operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .60% of the Fund's average weekly net assets plus the proceeds
of any outstanding principal borrowed. FAM has entered into a Sub-Advisory
Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
affiliate of FAM, pursuant to which MLAM U.K. provides investment advisory
services to FAM with respect to the Fund. There is no increase in the aggregate
fees paid by the Fund for these services.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by FAM
or its affiliates.
In addition, MLPF&S received $13,266 in commissions on the execution of
portfolio security transactions for the Fund for the year ended May 31, 2005.
For the year ended May 31, 2005, the Fund reimbursed FAM $7,195 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 (including paydowns) of investments, excluding short-term
securities, for the year ended May 31, 2005 were $237,628,974 and $246,906,589,
respectively.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10, all of which were initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued shares
of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding during the years ended May 31, 2005 and May 31,
2004 increased by 90,900 and 325,778, respectively, as a result of dividend
reinvestment.
5. Short-Term Borrowings:
The Fund is party to a $160,000,000 revolving securitization facility with
certain conduit lenders and certain secondary backstop lenders (the "Lenders")
and Citicorp North America, Inc., as agent for the Lenders. The Fund may borrow
money under the facility at rates based on the cost of funding of the conduit
lenders incurred through the issuance by the conduit lenders of highly rated
commercial paper. The Fund also pays additional borrowing costs which include a
backstop commitment fee for this facility at the annual rate of .10% on the
total amount of the facility and a program fee of .21% on the borrowings
outstanding. As security for its obligations to the Lenders under the revolving
securitization facility, the Fund has granted a security interest in
substantially all of its assets to and in favor of the Lenders.
20 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Notes to Financial Statements (concluded)
For the year ended May 31, 2005, the average amount borrowed was approximately
$112,501,000 and the daily weighted average interest rate was 2.38%.
6. Distributions to Shareholders:
The Fund paid an ordinary income dividend in the amount of $.066000 per share on
June 30, 2005 to shareholders of record on June 14, 2005.
The tax character of distributions paid during the fiscal years ended May 31,
2005 and May 31, 2004 was as follows:
--------------------------------------------------------------------------------
5/31/2005 5/31/2004
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary Income .................. $33,146,162 $33,172,274
------------------------------
Total taxable distributions .............. $33,146,162 $33,172,274
==============================
As of May 31, 2005, the components of accumulated losses on a tax basis were as
follows:
-----------------------------------------------------------------------------
Undistributed ordinary income--net ..................... $ 3,153,607
Undistributed long-term capital gains--net ............. --
-------------
Total undistributed earnings--net ...................... 3,153,607
Capital loss carryforward .............................. (229,863,075)*
Unrealized losses--net ................................. (2,137,502)**
-------------
Total accumulated losses--net .......................... $(228,846,970)
=============
* On May 31, 2005, the Fund had a net capital loss carryforward of
$229,863,075, of which $21,292,692 expires in 2008, $34,200,029 expires in
2009, $52,918,036 expires in 2010, $119,513,437 expires in 2011 and
$1,938,881 expires in 2012. These amounts will be available to offset like
amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized losses 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 , book/tax differences in the accrual
of income on securities in default, the realization for tax purposes of
unrealized gains/losses on certain futures contracts and other book/tax
temporary differences.
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, 2005, 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. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2005, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. 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, 2005, 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 20, 2005
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 21
Automatic Dividend Reinvestment Plan
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
22 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
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.
Fund Certification
In September 2004, the Fund filed its Chief Executive Officer Certification for
the prior year with the New York Stock Exchange pursuant to Section 303A.12(a)
of the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 23
Portfolio Information
Percent of
As of May 31, 2005 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. 1.8%
------------------------------------------------------------------------------------------------------------------------------------
The AES Corp.* AES is a worldwide power producer with operations in the United States,
Europe, Latin America and Asia. Electricity generation and sales are primarily
to wholesale customers, although the company has a direct distribution
business to end users. 1.7
------------------------------------------------------------------------------------------------------------------------------------
Building Materials Corp. of America* Building Materials is a manufacturer of residential roofing products, with
Timberline as its major brand. 1.7
------------------------------------------------------------------------------------------------------------------------------------
Calpine Corp.* Calpine owns, develops and operates power generation facilities, as well as
sells electricity in the United States. The company also provides thermal
energy for industrial customers. 1.5
------------------------------------------------------------------------------------------------------------------------------------
Adelphia Communications Corp.* Adelphia is a cable television operator, with systems in suburban areas of
large- and medium-sized cities in the United States. Our holdings are
primarily in loans to Adelphia's Century Cable subsidiary that have continued
to pay interest through the bankruptcy proceedings. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Liberty Media Corp. These bonds are an obligation of Liberty Media, but upon conversion are
exchangeable into shares of media giant Time Warner common stock. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Alpharma Inc.* Alpharma manufactures generic and proprietary human pharmaceutical and animal
health products. Products include liquid and topical pharmaceuticals,
specialty antibiotics, animal health feed additives for poultry and livestock,
as well as vaccines for farmed fish. 1.4
------------------------------------------------------------------------------------------------------------------------------------
Intelsat* Intelsat owns and operates a global communications satellite system that
offers satellite service for voice, data, video and Internet communications to
over 200 countries and territories. 1.3
------------------------------------------------------------------------------------------------------------------------------------
Time Warner Telecom* Time Warner Telecom offers local telephone service and a wide range of
telephony products to medium- and large-sized businesses in selected
metropolitan areas. The company operates a fiber optic network. 1.2
------------------------------------------------------------------------------------------------------------------------------------
Felcor Lodging LP Felcor is a real estate investment trust holding upscale and full-service
hotels, primarily in Texas, California and Florida. The company's brands
include Embassy Suites, Crowne Plaza, Holiday Inn and Doubletree, as well as
Sheraton and Westin. 1.1
------------------------------------------------------------------------------------------------------------------------------------
*Includes combined holdings and/or affiliates.
Portfolio Profile
Percent of
Five Largest Industries* Total Investments
--------------------------------------------------------------------------------
Utility ................................................................ 8.6%
Cable--U.S. ............................................................ 7.5
Chemicals .............................................................. 7.0
Health Care ............................................................ 5.9
Diversified Media ...................................................... 5.8
--------------------------------------------------------------------------------
* 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 Investments
--------------------------------------------------------------------------------
Canada ................................................................. 7.3%
United Kingdom ......................................................... 1.8
Bermuda ................................................................ 1.6
Netherlands ............................................................ 1.2
Norway ................................................................. 0.9
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
Quality Ratings by Percent of
S&P/Moody's Total Investments
--------------------------------------------------------------------------------
BBB/Baa ................................................................ 2.8%
BB/Ba .................................................................. 17.8
B/B .................................................................... 59.8
CCC/Caa ................................................................ 12.9
CC/Ca .................................................................. 0.3
NR (Not Rated) ......................................................... 4.1
Other* ................................................................. 2.3
--------------------------------------------------------------------------------
* Includes portfolio holdings in common stocks, preferred stocks, warrants,
other interests and short-term investments.
--------------------------------------------------------------------------------
Average Portfolio Maturity ........................................ 6.3 Years
--------------------------------------------------------------------------------
24 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Officers and Directors
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
------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 125 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 169 Portfolios
08543-9011 Director (Americas Region) thereof from 2000 to 2001 and
Age: 50 Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc. ("Princeton
Services") since 2001; President of Princeton
Administrators, L.P. ("Princeton Administrators")
since 2001; Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll 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. Doll is an "interested person," as defined in the Investment Company Act, of the
Fund based on his current positions with MLIM, FAM, Princeton Services and Princeton Administrators. Directors serve
until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President,
Mr. Doll 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 38 Funds None
Bodurtha Princeton, NJ present 1996 and Executive Vice President thereof from 55 Portfolios
08543-9095 1996 to 2003; Chairman of the Board, Berkshire
Age: 61 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 38 Funds Kimco
Princeton, NJ present Employee Benefit Assets of the Association of 55 Portfolios Realty
08543-9095 Financial Professionals ("CIEBA") since 1986; Corporation
Age: 70 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 University Management Company
from 1992 to 2004, Vice Chairman thereof from 1998
to 2004 and Director Emeritus thereof since 2004;
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; Vice
Chairman thereof from 2002 to 2005 and Chairman
thereof since 2005; Director, Montpelier Foundation
since 1998 and its Vice Chairman thereof 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.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 25
Officers and Directors (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 38 Funds None
London Princeton, NJ present University since 1993 and Professor thereof since 55 Portfolios
08543-9095 1980; President, Hudson Institute since 1997
Age: 66 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.
------------------------------------------------------------------------------------------------------------------------------------
Roberta P.O. Box 9095 Director 2002 to Shareholder, Modrall, Sperling, Roehl, Harris & Sisk, 38 Funds None
Cooper Princeton, NJ present P.A. since 1993; President, American Bar Association 55 Portfolios
Ramo 08543-9095 from 1995 to 1996 and Member of the Board of
Age: 62 Governors thereof from 1994 to 1997; Shareholder,
Poole, Kelly & Ramo, Attorneys at Law, P.C. from
1977 to 1993; Director, 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; Vice President, American Law Institute since
2004.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 1998 to Principal of STI Management (investment adviser) 38 Funds None
Salomon, Princeton, NJ present since 1994; Chairman and CEO of Salomon Brothers 55 Portfolios
Jr. 08543-9095 Asset Management from 1992 to 1995; Chairman
Age: 68 of Salomon Brothers Equity Mutual Funds from 1992
to 1995; regular columnist with Forbes Magazine from
1992 to 2002; Director of Stock Research and U.S.
Equity Strategist at Salomon Brothers Inc. from 1975
to 1991; Trustee, Commonfund from 1980 to 2001.
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. P.O. Box 9095 Director 1998 to Chairman of Fernwood Advisors, Inc. (investment 39 Funds None
Swensrud Princeton, NJ present adviser) since 1996; Principal, Fernwood Associates 56 Portfolios
08543-9095 (financial consultants) since 1975; Chairman of
Age: 71 R.P.P. Corporation (manufacturing company) since
1978; Director of International Mobile
Communications, Incorporated (telecommunications)
since 1998.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
26 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005
Officers and Directors (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 since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
08543-9011 and and since 2004; Vice President of FAMD since 1999; Vice President of MLIM and FAM from
Age: 45 Treasurer 1999 to 1990 to 1997; Director of Taxation of MLIM from 1990 to 2001; Vice President,
present Treasurer and Secretary of the IQ Funds since 2004.
------------------------------------------------------------------------------------------------------------------------------------
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: 55
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 53 Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Commission's Division of
Enforcement in Washington, D.C. from 1990 to 1995.
------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 45
------------------------------------------------------------------------------------------------------------------------
* 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 Trust Company N.A.
(c/o Computershare Investor Services)
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
NYSE Symbol
CYE
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communi cations to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2005 27
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Corporate High Yield Fund III, Inc. seeks to provide shareholders with current
income by investing primarily in a diversified portfolio of fixed income
securities that are rated in the lower rating categories of the established
rating services (Ba or lower by Moody's Investors Service, Inc. or BB or lower
by Standard & Poor's Corporation) or are unrated securities of comparable
quality.
This report, including the financial information herein, is transmitted to
shareholders of Corporate High Yield Fund III, Inc. for their information. It is
not a prospectus. The Fund has leveraged its Common Stock to provide Common
Stock shareholders with a potentially higher rate of return. Leverage creates
risk for Common Stock shareholders, including the likelihood of greater
volatility of net asset value and market price of Common Stock shares, and the
risk that fluctuations in short-term interest rates may reduce the Common
Stock's yield. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Corporate High Yield Fund III, Inc.
Box 9011
Princeton, NJ 08543-9011
#COYIII -- 5/05
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 (resigned as of October 1, 2004), (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, 2005 - $37,000
Fiscal Year Ending May 31, 2004 - $35,000
(b) Audit-Related Fees - Fiscal Year Ending May 31, 2005 - $0
Fiscal Year Ending May 31, 2004 - $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, 2005 - $5,700
Fiscal Year Ending May 31, 2004 - $5,200
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending May 31, 2005 - $0
Fiscal Year Ending May 31, 2004 - $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 all of the registrants the Committee oversees. 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, 2005 - $9,030,943
Fiscal Year Ending May 31, 2004 - $16,581,086
(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) - $945,000, 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 (resigned as of October 1, 2004)
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 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 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable at this time
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the 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 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Corporate High Yield Fund III, Inc.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Corporate High Yield Fund III, Inc.
Date: July 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Corporate High Yield Fund III, Inc.
Date: July 15, 2005
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Chief Financial Officer of
Corporate High Yield Fund III, Inc.
Date: July 15, 2005