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: 05/31/06
Date of reporting period: 06/01/05 - 05/31/06
Item 1 - Report to Stockholders
Annual Report
May 31, 2006
Corporate High Yield
Fund III, Inc.
Corporate High Yield Fund III, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with approximately $1 trillion in assets under management
(based on combined assets under management as of March 31, 2006) (the
"Transaction"). The Transaction is expected to close in the third quarter of
2006, at which time the new company will operate under the BlackRock name. The
Fund's Board of Directors has approved a new investment advisory agreement with
BlackRock Advisors, Inc. or its successor on substantially the same terms and
for the same advisory fee as the current investment advisory agreement with the
Investment Adviser. If the new agreement is approved by the Fund's shareholders,
BlackRock Advisors, Inc. or its successor is expected to become the investment
adviser of the Fund upon the closing of the Transaction.
The Benefits and Risks of Leveraging
Corporate High Yield Fund III, Inc. utilizes leveraging through borrowings or
issuance of short-term debt securities or shares of Preferred Stock. The concept
of leveraging is based on the premise that the cost of assets to be obtained
from leverage will be based on short-term interest rates, which normally will be
lower than the income earned by the Fund on its longer-term portfolio
investments. Since the total assets of the Fund (including the assets obtained
from leverage) are invested in higher-yielding portfolio investments, the Fund's
Common Stock shareholders are the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its net asset value and market
price. If the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, the Fund's
net income will be less than if leverage had not been used, and therefore the
amount available for distribution to Common Stock shareholders will be reduced.
2 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). Earlier this year, Merrill Lynch announced plans to combine
its investment advisory business, including MLIM, with another highly regarded
investment manager -- BlackRock, Inc. ("BlackRock").
At the completion of the transaction, which is expected at the end of the third
quarter of this year (subject to regulatory and shareholder approvals), the
resultant firm will be a top-10 investment manager worldwide with approximately
$1 trillion in assets under management.* The combined company will provide a
wider selection of high-quality investment solutions across a range of asset
classes and investment styles. MLIM and BlackRock possess complementary
capabilities that together create a well-rounded organization uniting some of
the finest money managers in the industry. At the same time, the firms share
similar values and beliefs -- they are focused on delivering excellence on
behalf of clients, and both make investment performance their single most
important mission. In short, the combination only reinforces our commitment to
shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. As a shareholder in one or more MLIM-advised mutual funds, you
recently were mailed a proxy package asking you to vote on proposed changes that
affect those funds. The proposals vary based on the funds in which you invest.
However, all shareholders are asked to vote on a new investment advisory
agreement with BlackRock Advisors, Inc. Your Fund's Board of Directors has
approved, and recommends that you approve, the new agreement. Your Fund's Board
also has approved, and recommends that you approve, a contingent subadvisory
agreement that will serve to ensure that management services can continue during
the course of completing the transaction.
It is important that you exercise your right as a mutual fund shareholder by
voting on the proposals that are presented to you in your funds' proxy
statements. Your participation -- via phone, mail, online or in person -- is
critical. (Refer to your proxy card for detailed voting procedures and
deadlines.) You should know that your vote on these proposals will not affect
your brokerage account or change your relationship with your financial advisor.
If you are a client of Merrill Lynch, you will remain a client of Merrill Lynch.
Should you have any questions or concerns, please do not hesitate to call
1.866.752.6486.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 3
A Discussion With Your Fund's Portfolio Manager
The Fund's performance for the fiscal year benefited from the positive
returns of many of our more speculative holdings and from strong security
selection in the airlines sector.
How did the Fund perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended May 31, 2006, the Common Stock of Corporate High
Yield Fund III, Inc. had net annualized yields of 8.68% and 9.97%, based on a
year-end per share net asset value of $8.46 and a per share market price of
$7.36, respectively, and $.734 per share income dividends. For the same period,
the total investment return on the Fund's Common Stock was +9.78%, based on an
unchanged per share net asset value of $8.46, and assuming reinvestment of all
distributions. The high yield bond market, as measured by the Credit Suisse High
Yield Index, returned +7.38% for the 12-month period, while the Fund's
comparable Lipper category of High Current Yield Funds (Leveraged) had an
average return of +9.24%. (Funds in this Lipper category aim for relatively high
current yield from investment in fixed income securities, have no quality or
maturity restrictions, and tend to invest in lower-grade debt issues.)
For the six-month period ended May 31, 2006, the total investment return on the
Fund's Common Stock was +5.27%, based on a change in per share net asset value
from $8.41 to $8.46, and assuming reinvestment of all distributions. The Credit
Suisse High Yield Index returned +4.94% for the period, while the Lipper High
Current Yield Funds (Leveraged) category had an average return of +5.53%.
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.
The Federal Reserve Board (the Fed) continued its monetary tightening campaign
during the 12-month period ended May 31, 2006. The Fed increased the federal
funds rate in eight increments of 25 basis points (.25%) each, bringing the
target rate from 3% to 5% during the period. The Fed is clearly concerned about
inflation. The May 2006 Federal Open Market Committee (FOMC) minutes mentioned
the increase in inflationary expectations repeatedly, noting concurrent energy
price pass-through, rising commodity prices, a weaker dollar and a "relatively
high level of resource utilization." Moreover, further monetary tightening may
help burnish the image of Fed Chairman Ben Bernanke as an inflation fighter -- a
key consideration for those arguing for an increase in the target federal funds
rate at the June FOMC meeting.
The default rate of high yield issuers as measured by Standard & Poor's (S&P)
has declined sharply from 8.5% at year-end 2002. The 12-month rolling default
rate was 2.7% as of March 2006, the most recent data available. S&P has
projected a default rate of 2.8% by the end of the third quarter of 2006.
The spreads of high yield bonds versus 10-year U.S. Treasury issues, as measured
by the Credit Suisse High Yield Index, narrowed from 430 basis points (4.30%) at
May 31, 2005 to 329 basis points at May 31, 2006. The spread compression
benefited the high yield sector, which significantly outperformed the -5.23%
one-year total return of the Merrill Lynch 10-Year U.S. Treasury Securities
Index. The yield spread tightening and positive return of the high yield market
over the past year reflect continued economic growth and the gradual absorption
of the securities of General Motors Corp. and Ford Motor Co. into the market.
4 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
What factors most influenced Fund performance?
With the strengthening high yield market, the performance of many of our more
speculative holdings improved during the year. Companies such as diversified
manufacturers Trimas Corp. and Invensys Plc and electronics manufacturer
Viasystems Inc. resolved financial issues, showed solid earnings recovery and
generated positive returns. Fund performance also benefited from our airlines
positions, as the industry began to resolve overcapacity problems and instituted
price hikes to counteract rising fuel costs.
What changes were made to the portfolio during the period?
In anticipation of gradually slowing economic growth and a moderate increase in
the default rates on high yield bonds, we reduced the portfolio's risk profile
during the year. We trimmed the Fund's position in riskier CCC-rated bonds to
10% of net assets from 19% a year ago, and increased the weighting in
higher-quality BB-rated issues to 20% from 17% a year ago. We also reduced the
portfolio's exposure to cyclical sectors such as chemicals, manufacturing and
paper from 16% of total investments to 13%. While this has decreased the Fund's
earnings in the short term, we believe these changes should result in a higher
net asset value in the medium term.
The Fund's leverage position averaged 25.4% during the year ended May 31, 2006.
That is, the Fund borrowed the equivalent of 25.4% of total assets invested,
earning incremental yield on the investments we made with the borrowed funds.
For the year ended May 31, 2006, the average amount borrowed was $109.1 million,
and the daily weighted average interest rate was 4.36%.
During the year, rising interest rates resulted in higher borrowing costs for
the Fund. The increasing cost of leverage had an adverse effect on the Fund's
earnings during the period. We increased the Fund's leverage position at the end
of the period, both in anticipation of a large number of bond calls in the near
future, and in an effort to offset the negative impact of higher borrowing costs
and the lower yields of our more conservative credit stance. While leveraging
will hinder the Fund's total return in a weak market, the converse also is true.
(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?
Both the Fund and the Credit Suisse High Yield Index had an average credit
rating of B at the end of the period, unchanged from the rating at the beginning
of the fiscal year. The Fund's largest industry exposures are in less cyclical
sectors such as U.S. cable, utilities, health care, gaming and diversified
media. We have positioned the portfolio with limited exposure to the automotive,
retail and financial sectors, given many of these companies' uncertain asset
values and insecure competitive positions.
Our position in convertible securities (corporate bonds that pay interest and
also can be converted to shares of company stock at a specific price) comprised
4.1% of the Fund's non-cash investments at period-end. We continue to believe
that there is upside potential in these securities relative to high yield bonds.
Our holdings in floating rate securities, including bank loans, totaled 13% of
noncash investments at May 31, 2006. We believe that rising short-term interest
rates should continue to benefit these securities.
Elizabeth M. Phillips
Vice President and Portfolio Manager
June 22, 2006
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 5
Portfolio Information
Percent of
As of May 31, 2006 Total Assets
====================================================================================================================================
Ten Largest Holdings
------------------------------------------------------------------------------------------------------------------------------------
The AES Corp.* AES is a worldwide power producer with operations in the United States,
Europe, Latin America and Asia. Electricity generation and sales are
primarily to wholesale customers, although the company has a direct
distribution business to end users. 1.6%
------------------------------------------------------------------------------------------------------------------------------------
Building Materials Corp. of America* Building Materials is a manufacturer of residential roofing products, with
Timberline as its major brand. 1.5
------------------------------------------------------------------------------------------------------------------------------------
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. 1.3
------------------------------------------------------------------------------------------------------------------------------------
Qwest* Qwest provides a broad range of telecommunications services, including
broadband Internet-based data, voice and image communication, local
exchange services and data, and long-distance services to residential and
business customers. The company also provides Web hosting, high-speed
Internet access and private networks. 1.2
------------------------------------------------------------------------------------------------------------------------------------
SunGard Data Systems, Inc.* SunGard is a top financial software firm, brought private by a group of
seven financial investors. The company provides information technology and
electronic processing for financial services companies worldwide. It also
offers a high availability infrastructure for business continuity. 1.2
------------------------------------------------------------------------------------------------------------------------------------
Mediacom* Mediacom is a cable television company that provides a variety of broadband
services across the United States. Services include traditional video
services, digital television and high-speed Internet access. 1.1
------------------------------------------------------------------------------------------------------------------------------------
RH Donnelley Corp.* The company publishes Sprint yellow pages directories for various
locations, including Las Vegas, Orlando and Ft. Meyers. RH Donnelley also
sells SBC directories in Illinois and northwest Indiana. 1.1
------------------------------------------------------------------------------------------------------------------------------------
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. 1.1
------------------------------------------------------------------------------------------------------------------------------------
Cablevision Systems Corp. Cablevision provides telecommunications and entertainment services. The
company has operations in multimedia delivery, subscription cable
television services, championship professional sports teams, and national
television program networks. Cablevision serves cable customers primarily
in the New York metropolitan area. 1.1
------------------------------------------------------------------------------------------------------------------------------------
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. 1.0
------------------------------------------------------------------------------------------------------------------------------------
*Includes combined holdings and/or affiliates.
Portfolio Profile
Percent of
Five Largest Industries Total Investments
--------------------------------------------------------------------------------
Cable -- U.S. ......................................................... 8.4%
Utility ............................................................... 7.9
Health Care ........................................................... 7.5
Gaming ................................................................ 7.1
Diversified Media ..................................................... 6.1
--------------------------------------------------------------------------------
For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report which may combine industry sub-classifications for reporting
ease.
Percent of
Five Largest Foreign Countries* Total Investments
--------------------------------------------------------------------------------
Canada ................................................................ 5.8%
Ireland ............................................................... 1.5
Netherlands ........................................................... 1.2
Bermuda ............................................................... 1.1
Brazil ................................................................ 0.9
--------------------------------------------------------------------------------
* All holdings are denominated in U.S. dollars.
Quality Ratings by Percent of
S&P/Moody's Total Investments
--------------------------------------------------------------------------------
A/A ................................................................... 0.6%
BBB/Baa ............................................................... 1.0
BB/Ba ................................................................. 24.5
B/B ................................................................... 60.8
CCC/Caa ............................................................... 8.7
NR (Not Rated) ........................................................ 2.6
Other* ................................................................ 1.8
--------------------------------------------------------------------------------
* Includes portfolio holdings in common stocks, preferred stocks, warrants,
and short-term investments.
--------------------------------------------------------------------------------
Average Portfolio Maturity 6.8 Years
--------------------------------------------------------------------------------
6 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Schedule of Investments (in U.S. dollars)
Face
Amount Corporate Bonds Value
====================================================================================
Aerospace & Defense--5.2%
Alliant Techsystems, Inc.:
$1,375,000 6.75% due 4/01/2016 $ 1,349,219
1,875,000 3% due 8/15/2024 (b)(i) 2,198,438
1,825,000 DRS Technologies, Inc., 6.875% due 11/01/2013 1,788,500
975,000 Esterline Technologies Corp., 7.75%
due 6/15/2013 999,375
800,000 K&F Acquisition, Inc., 7.75% due 11/15/2014 812,000
L-3 Communications Corp.:
625,000 7.625% due 6/15/2012 637,500
1,375,000 6.375% due 10/15/2015 1,299,375
1,380,000 3% due 8/01/2035 (b)(i) 1,338,600
750,000 Sensata Technologies B.V., 8% due 5/01/2014 (i) 738,750
1,750,000 Standard Aero Holdings, Inc., 8.25%
due 9/01/2014 1,540,000
1,800,000 TransDigm, Inc., 8.375% due 7/15/2011 1,912,500
1,950,000 Vought Aircraft Industries, Inc., 8% due 7/15/2011 1,833,000
-------------
16,447,257
====================================================================================
Airlines--1.3%
2,250,000 American Airlines, Inc. Class C, 7.80%
due 4/01/2008 2,254,682
Continental Airlines, Inc.:
1,150,194 Series 1997-4-B, 6.90% due 7/02/2018 1,076,565
101,997 Series 1998-1-C, 6.541% due 9/15/2009 96,451
829,500 Series 2001-1 Class C, 7.033%
due 12/15/2012 808,522
-------------
4,236,220
====================================================================================
Automotive--1.7%
AutoNation, Inc. (i):
2,400,000 7.045% due 4/15/2013 (d) 2,424,000
1,525,000 7% due 4/15/2014 1,517,375
600,000 General Motors Acceptance Corp., 7.25%
due 3/02/2011 572,441
965,000 Metaldyne Corp.,10% due 11/01/2013 926,400
-------------
5,440,216
====================================================================================
Broadcasting--4.8%
1,850,000 Allbritton Communications Co., 7.75%
due 12/15/2012 1,852,312
2,000,000 CMP Susquehanna Corp., 9.875%
due 5/15/2014 (i) 1,945,000
1,200,000 Nexstar Finance, Inc., 7% due 1/15/2014 1,120,500
2,975,000 Paxson Communications Corp., 8.318%
due 1/15/2012 (d)(i) 3,034,500
1,175,000 Salem Communications Corp., 7.75%
due 12/15/2010 1,175,000
1,364,000 Salem Communications Holding Corp. Series B,
9% due 7/01/2011 1,427,085
1,575,000 Sinclair Broadcast Group, Inc., 8% due 3/15/2012 1,612,406
2,000,000 Sirius Satellite Radio, Inc., 9.625% due 8/01/2013 1,890,000
1,200,000 XM Satellite Radio, Inc., 9.75% due 5/01/2014 (i) 1,116,000
-------------
15,172,803
====================================================================================
Cable--International--0.6%
New Skies Satellites NV:
750,000 10.414% due 11/01/2011 (d) 774,375
1,000,000 9.125% due 11/01/2012 1,070,000
-------------
1,844,375
====================================================================================
Cable--U.S.--9.3%
750,000 Adelphia Communications Corp., 6%
due 2/15/2006 (b)(c)(l) 7,500
1,800,000 CCH I LLC,11% due 10/01/2015 1,548,000
2,275,000 CSC Holdings, Inc. Series B, 7.625%
due 4/01/2011 2,286,375
Cablevision Systems Corp. Series B:
75,000 9.62% due 4/01/2009 (d) 79,687
2,525,000 8% due 4/15/2012 2,499,750
2,225,000 Charter Communications Holdings II LLC,
10.25% due 9/15/2010 2,219,437
Intelsat Subsidiary Holding Co. Ltd.:
2,675,000 9.614% due 1/15/2012 (d) 2,711,781
2,150,000 8.625% due 1/15/2015 2,176,875
596,000 Loral SpaceCom Corp., 14% due 11/15/2015 (g) 697,320
2,425,000 Mediacom Broadband LLC,11% due 7/15/2013 2,558,375
2,425,000 Mediacom LLC, 9.50% due 1/15/2013 2,437,125
2,193,000 PanAmSat Corp., 9% due 8/15/2014 2,275,238
1,000,000 PanAmSat Holding Corp., 9.90%
due 11/01/2014 (a) 727,500
2,000,000 Quebecor Media, Inc., 7.75% due 3/15/2016 (i) 2,030,000
3,175,000 Quebecor World Capital Corp., 8.75%
due 3/15/2016 (i) 2,993,050
1,900,000 Rainbow National Services LLC,10.375%
due 9/01/2014 (i) 2,123,250
-------------
29,371,263
====================================================================================
Chemicals--5.2%
1,544,000 BCP Caylux Holdings Luxembourg SCA,
9.625% due 6/15/2014 1,694,540
1,500,000 Huntsman International, LLC,10.125%
due 7/01/2009 1,526,250
1,575,000 Innophos, Inc., 8.875% due 8/15/2014 1,602,562
3,000,000 Millennium America, Inc., 9.25% due 6/15/2008 3,108,750
Nalco Co.:
1,200,000 7.75% due 11/15/2011 1,203,000
1,200,000 8.875% due 11/15/2013 1,234,500
924,000 Nalco Finance Holdings, Inc., 9.141%
due 2/01/2014 (a) 712,635
2,000,000 Nova Chemicals Corp., 8.405%
due 11/15/2013 (d) 2,015,000
2,300,000 Omnova Solutions, Inc.,11.25% due 6/01/2010 2,455,250
825,000 Unifi, Inc.,11.50% due 5/15/2014 (i) 825,000
-------------
16,377,487
====================================================================================
Consumer--Durables--0.9%
1,350,000 Sealy Mattress Co., 8.25% due 6/15/2014 1,404,000
600,000 Simmons Bedding Co., 7.875% due 1/15/2014 583,500
785,000 Tempur-Pedic, Inc.,10.25% due 8/15/2010 832,100
-------------
2,819,600
====================================================================================
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 7
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
====================================================================================
Consumer--Non-Durables--5.6%
$1,275,000 American Greetings Corp., 7.375%
due 6/01/2016 $ 1,294,125
2,425,000 Chattem, Inc., 7% due 3/01/2014 2,388,625
3,025,000 Church & Dwight Co., Inc., 6% due 12/15/2012 2,873,750
3,575,000 Hines Nurseries, Inc.,10.25% due 10/01/2011 3,432,000
Levi Strauss & Co.:
1,600,000 9.74% due 4/01/2012 (d) 1,654,000
2,000,000 8.875% due 4/01/2016 (i) 1,965,000
2,000,000 Quiksilver, Inc., 6.875% due 4/15/2015 1,890,000
2,200,000 Samsonite Corp., 8.875% due 6/01/2011 2,293,500
-------------
17,791,000
====================================================================================
Diversified Media--8.7%
1,000,000 American Media Operations, Inc. Series B,
10.25% due 5/01/2009 912,500
3,025,000 CBD Media, Inc., 8.625% due 6/01/2011 3,032,562
1,600,000 Cadmus Communications Corp., 8.375%
due 6/15/2014 1,604,000
2,325,000 CanWest Media, Inc., 8% due 9/15/2012 2,342,438
1,367,000 Dex Media West LLC, 9.875% due 8/15/2013 1,490,030
Houghton Mifflin Co.:
2,700,000 8.25% due 2/01/2011 2,767,500
1,600,000 12.031% due 5/15/2011 (d)(i) 1,582,000
3,339,000 Liberty Media Corp., 0.75% due 3/30/2023 (b) 3,530,993
RH Donnelley Corp.(i):
750,000 6.875% due 1/15/2013 686,250
1,525,000 8.875% due 1/15/2016 1,532,625
1,400,000 Series A-2, 6.875% due 1/15/2013 1,281,000
1,400,000 Six Flags, Inc., 9.625% due 6/01/2014 1,382,500
1,800,000 Universal City Florida Holding Co. I, 9.899%
due 5/01/2010 (d) 1,858,500
3,302,000 Yell Finance BV, 12.52% due 8/01/2011 (a) 3,493,120
-------------
27,496,018
====================================================================================
Energy--Exploration & Production--4.6%
1,625,000 Belden & Blake Corp., 8.75% due 7/15/2012 1,661,562
1,550,000 Chaparral Energy, Inc., 8.50% due 12/01/2015 (i) 1,569,375
3,000,000 Compton Petroleum Finance Corp., 7.625%
due 12/01/2013 2,925,000
2,000,000 Encore Acquisition Co., 6.25% due 4/15/2014 1,835,000
2,600,000 Exco Resources, Inc., 7.25% due 1/15/2011 2,535,000
Plains Exploration & Production Co.:
325,000 7.125% due 6/15/2014 320,938
2,575,000 Series B, 8.75% due 7/01/2012 2,690,875
975,000 Quicksilver Resources, Inc., 7.125%
due 4/01/2016 931,125
-------------
14,468,875
====================================================================================
Energy--Other--4.0%
1,100,000 Copano Energy LLC, 8.125% due 3/01/2016 (i) 1,116,500
1,875,000 Dresser, Inc., 9.375% due 4/15/2011 1,940,625
375,000 Ferrellgas Escrow LLC, 6.75% due 5/01/2014 359,062
2,425,000 Ferrellgas Partners LP, 8.75% due 6/15/2012 2,473,500
2,000,000 Ocean RIG ASA, 8.99% due 4/04/2011 1,990,000
675,000 PHI, Inc., 7.125% due 4/15/2013 (i) 658,125
2,350,000 SemGroup LP, 8.75% due 11/15/2015 (i) 2,385,250
2,000,000 Suburban Propane Partners, LP, 6.875%
due 12/15/2013 1,890,000
-------------
12,813,062
====================================================================================
Financial--0.4%
1,100,000 Saxon Capital, Inc.,12% due 5/01/2014 (i) 1,122,000
====================================================================================
Food & Drug--0.2%
450,000 Stripes Acquisition LLC,10.625%
due 12/15/2013 (i) 488,250
====================================================================================
Food & Tobacco--2.8%
800,000 AmeriQual Group LLC, 9.50% due 4/01/2012 (i) 828,000
675,000 Constellation Brands Inc., 8.125% due 1/15/2012 693,562
2,925,000 Cott Beverages USA, Inc., 8% due 12/15/2011 2,932,312
2,424,000 Del Monte Corp., 8.625% due 12/15/2012 2,527,020
600,000 Michael Foods, Inc., 8% due 11/15/2013 598,500
1,400,000 National Beef Packing Co. LLC,10.50%
due 8/01/2011 1,407,000
-------------
8,986,394
====================================================================================
Gaming--10.2%
3,125,000 Boyd Gaming Corp., 8.75% due 4/15/2012 3,304,687
1,500,000 CCM Merger, Inc., 8% due 8/01/2013 (i) 1,440,000
1,350,000 Caesars Entertainment, Inc., 7.875%
due 3/15/2010 1,414,125
Galaxy Entertainment Finance Co. Ltd. (i):
1,050,000 9.602% due 12/15/2010 (d) 1,097,250
550,000 9.875% due 12/15/2012 574,750
1,725,000 Inn of the Mountain Gods Resort & Casino,
12% due 11/15/2010 1,845,750
Isle of Capri Casinos, Inc.:
1,200,000 9% due 3/15/2012 1,266,000
400,000 7% due 3/01/2014 388,000
1,650,000 Little Traverse Bay Bands of Odawa Indians,
10.25% due 2/15/2014 (i) 1,633,500
MGM Mirage:
1,550,000 8.50% due 9/15/2010 1,635,250
850,000 6.75% due 4/01/2013 (i) 829,812
975,000 Mirage Resorts, Inc., 6.75% due 2/01/2008 984,750
2,025,000 Penn National Gaming, Inc., 6.875%
due 12/01/2011 2,009,813
2,575,000 Poster Financial Group, Inc., 8.75%
due 12/01/2011 2,710,188
2,650,000 Resorts International Hotel and Casino, Inc.,
11.50% due 3/15/2009 2,888,500
975,000 San Pasqual Casino, 8% due 9/15/2013 (i) 979,875
Station Casinos, Inc.:
1,225,000 6.50% due 2/01/2014 1,169,875
1,400,000 6.625% due 3/15/2018 1,302,000
3,000,000 Trump Entertainment Resorts, Inc., 8.50%
due 6/01/2015 2,940,000
1,800,000 Wynn Las Vegas LLC, 6.625% due 12/01/2014 1,707,750
-------------
32,121,875
====================================================================================
8 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
====================================================================================
Health Care--9.5%
$ 625,000 Angiotech Pharmaceuticals, Inc., 7.75%
due 4/01/2014 (i) $ 623,437
1,200,000 Athena Neurosciences Finance LLC, 7.25%
due 2/21/2008 1,194,000
2,000,000 Cubist Pharmaceuticals, Inc., 5.50%
due 11/01/2008 (b) 2,045,000
3,625,000 DaVita, Inc., 7.25% due 3/15/2015 3,534,375
2,000,000 Elan Finance Plc, 9.17% due 11/15/2011 (d) 2,025,000
1,975,000 HCA, Inc., 5.50% due 12/01/2009 1,912,298
Mylan Laboratories, Inc.:
2,175,000 5.75% due 8/15/2010 2,109,750
575,000 6.375% due 8/15/2015 554,875
Select Medical Corp.:
1,425,000 7.625% due 2/01/2015 1,271,813
1,950,000 10.82% due 9/15/2015 (d)(i) 1,837,875
1,000,000 Tenet Healthcare Corp., 9.875% due 7/01/2014 1,017,500
2,000,000 Triad Hospitals, Inc., 7% due 5/15/2012 1,982,500
2,675,000 U.S. Oncology, Inc., 9% due 8/15/2012 2,802,063
1,000,000 VWR International, Inc., 8% due 4/15/2014 1,005,000
2,000,000 Vanguard Health Holding Co. II, LLC, 9%
due 10/01/2014 2,050,000
4,000,000 Ventas Realty LP, 6.75% due 6/01/2010 4,015,000
-------------
29,980,486
====================================================================================
Housing--5.3%
Building Materials Corp. of America:
1,050,000 8% due 10/15/2007 1,057,875
5,850,000 8% due 12/01/2008 5,915,812
2,775,000 Forest City Enterprises, Inc., 7.625%
due 6/01/2015 2,830,500
Goodman Global Holding Co., Inc.:
975,000 7.491% due 6/15/2012 (d) 987,187
1,350,000 7.875% due 12/15/2012 1,323,000
2,000,000 Ply Gem Industries, Inc., 9% due 2/15/2012 1,885,000
2,100,000 Technical Olympic USA, Inc., 8.25%
due 4/01/2011 (i) 2,052,750
725,000 Texas Industries, Inc., 7.25% due 7/15/2013 739,500
-------------
16,791,624
====================================================================================
Information Technology--6.6%
2,340,000 Advanced Micro Devices, Inc., 7.75%
due 11/01/2012 2,416,050
1,777,000 Cypress Semiconductor Corp., 1.25%
due 6/15/2008 (b) 2,061,320
2,200,000 Freescale Semiconductor, Inc., 7.818%
due 7/15/2009 (d) 2,244,000
MagnaChip Semiconductor SA:
1,700,000 8.16% due 12/15/2011 (d) 1,687,250
975,000 8% due 12/15/2014 848,250
1,835,000 Quantum Corp., 4.375% due 8/01/2010 (b) 1,715,725
SunGard Data Systems, Inc. (i):
2,450,000 9.125% due 8/15/2013 2,569,438
1,625,000 9.431% due 8/15/2013 (d) 1,710,313
975,000 10.25% due 8/15/2015 1,018,875
375,000 Telcordia Technologies Inc.,10% due 3/15/2013 (i) 353,438
1,150,000 UGS Corp.,10% due 6/01/2012 1,247,750
3,100,000 Viasystems, Inc.,10.50% due 1/15/2011 3,131,000
-------------
21,003,409
====================================================================================
Leisure--1.8%
FelCor Lodging LP:
1,525,000 8.50% due 6/01/2011 1,631,750
2,850,000 8.83% due 6/01/2011 (d) 2,939,062
1,000,000 Host Marriott LP, 6.75% due 6/01/2016 (i) 971,250
-------------
5,542,062
====================================================================================
Manufacturing--4.4%
2,175,000 CPI Holdco, Inc.,10.561% due 2/01/2015 (d) 2,240,250
2,000,000 Chart Industries, Inc., 9.125% due 10/15/2015 (i) 2,120,000
3,475,000 EaglePicher Inc., 9.75% due 9/01/2013 (e) 2,302,187
1,900,000 Invensys Plc, 9.875% due 3/15/2011 (i) 2,061,500
975,000 Mueller Group, Inc.,10% due 5/01/2012 1,065,187
775,000 Rexnord Corp.,10.125% due 12/15/2012 860,250
1,000,000 Superior Essex Communications LLC, 9%
due 4/15/2012 1,022,500
2,450,000 Trimas Corp., 9.875% due 6/15/2012 2,339,750
-------------
14,011,624
====================================================================================
Metal--Other--1.8%
1,200,000 Foundation PA Coal Co., 7.25% due 8/01/2014 1,206,000
2,350,000 Indalex Holding Corp.,11.50% due 2/01/2014 (i) 2,467,500
2,150,000 Novelis, Inc., 7.75% due 2/15/2015 2,053,250
-------------
5,726,750
====================================================================================
Packaging--2.6%
2,200,000 Graham Packing Co., Inc., 9.875%
due 10/15/2014 2,244,000
Owens-Brockway:
3,000,000 8.875% due 2/15/2009 3,097,500
1,000,000 8.25% due 5/15/2013 1,010,000
1,725,000 Packaging Dynamics Finance Corp.,10%
due 5/01/2016 (i) 1,737,938
-------------
8,089,438
====================================================================================
Paper--6.4%
2,000,000 Abitibi-Consolidated, Inc., 8.41%
due 6/15/2011 (d) 2,005,000
1,975,000 Boise Cascade LLC, 7.943% due 10/15/2012 (d) 1,984,875
2,825,000 Bowater, Inc., 7.91% due 3/15/2010 (d) 2,853,250
3,025,000 Domtar, Inc., 7.125% due 8/15/2015 2,631,750
Graphic Packaging International Corp.:
1,050,000 8.50% due 8/15/2011 1,057,875
1,825,000 9.50% due 8/15/2013 1,834,125
2,150,000 JSG Funding Plc, 9.625% due 10/01/2012 2,241,375
NewPage Corp.:
1,450,000 11.399% due 5/01/2012 (d) 1,576,875
1,500,000 12% due 5/01/2013 1,605,000
2,375,000 Norske Skog Canada Ltd. Series D, 8.625%
due 6/15/2011 2,363,125
-------------
20,153,250
====================================================================================
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 9
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
====================================================================================
Retail--1.8%
$2,625,000 Jean Coutu Group, Inc., 8.50% due 8/01/2014 $ 2,441,250
Neiman-Marcus Group, Inc. (i):
1,375,000 9% due 10/15/2015 1,431,719
1,600,000 10.375% due 10/15/2015 1,684,000
-------------
5,556,969
====================================================================================
Service--6.2%
Avis Budget Car Rental LLC (i):
1,600,000 7.576% due 5/15/2014 (d) 1,624,000
500,000 7.625% due 5/15/2014 502,500
2,825,000 Corrections Corp. of America, 7.50%
due 5/01/2011 2,853,250
1,750,000 Dycom Industries, Inc., 8.125% due 10/15/2015 1,785,000
1,150,000 MSW Energy Holdings LLC, 8.50% due 9/01/2010 1,193,125
375,000 MSW Energy Holdings II LLC, 7.375%
due 9/01/2010 376,875
2,000,000 Mac-Gray Corp., 7.625% due 8/15/2015 2,040,000
2,800,000 Service Corp. International, 8%
due 6/15/2017 (i) 2,660,000
3,425,000 United Rentals North America, Inc., 7.75%
due 11/15/2013 3,356,500
3,000,000 Waste Services, Inc., 9.50% due 4/15/2014 3,082,500
-------------
19,473,750
====================================================================================
Steel--1.1%
1,950,000 Chaparral Steel Co.,10% due 7/15/2013 2,169,375
1,200,000 Ucar Finance, Inc.,10.25% due 2/15/2012 1,278,000
-------------
3,447,375
====================================================================================
Telecommunications--4.8%
ADC Telecommunications, Inc. (b):
1,247,000 1% due 6/15/2008 1,164,386
750,000 5.045% due 6/15/2013 (d) 728,438
2,350,000 Eircom Funding Plc, 8.25% due 8/15/2013 2,520,375
2,025,000 Inmarsat Finance Plc, 7.625% due 6/30/2012 2,065,500
2,900,000 LCI International, Inc., 7.25% due 6/15/2007 2,914,500
2,300,000 Nordic Telephone Co. Holdings ApS, 8.875%
due 5/01/2016 (i) 2,374,750
350,000 Qwest Communications International, Inc.,
7.50% due 2/15/2014 346,500
Qwest Corp.:
1,550,000 8.16% due 6/15/2013 (d) 1,672,063
525,000 7.625% due 6/15/2015 534,188
850,000 Time Warner Telecom Holdings, Inc., 9.17%
due 2/15/2011 (d) 862,750
-------------
15,183,450
====================================================================================
Transportation--1.0%
600,000 OMI Corp., 7.625% due 12/01/2013 597,000
2,325,000 Teekay Shipping Corp., 8.875% due 7/15/2011 2,499,375
-------------
3,096,375
====================================================================================
Utility--11.2%
The AES Corp.:
4,458,000 9.375% due 9/15/2010 4,825,785
2,100,000 8.75% due 5/15/2013 (i) 2,268,000
2,025,000 Aquila, Inc., 7.625% due 11/15/2009 2,103,469
1,891,000 CenterPoint Energy, Inc. Series B, 3.75%
due 5/15/2023 (b) 2,108,465
2,100,000 Dynegy Holdings, Inc., 8.375% due 5/01/2016 (i) 2,089,500
2,158,000 ESI Tractebel Acquisition Corp. Series B, 7.99%
due 12/30/2011 2,233,385
2,525,000 Edison Mission Energy, 7.50% due 6/15/2013 (i) 2,499,750
2,450,000 Mirant North America LLC, 7.375%
due 12/31/2013 (i) 2,419,375
NRG Energy, Inc.:
1,625,000 7.25% due 2/01/2014 1,625,000
1,475,000 7.375% due 2/01/2016 1,476,844
Nevada Power Co.:
390,000 9% due 8/15/2013 426,276
2,145,000 Series E,10.875% due 10/15/2009 2,295,536
3,000,000 Reliant Energy, Inc., 9.50% due 7/15/2013 3,030,000
1,650,000 Sierra Pacific Power Co. Series A, 8%
due 6/01/2008 1,703,609
1,200,000 Sierra Pacific Resources, 8.625% due 3/15/2014 1,292,615
925,000 Southern Natural Gas Co., 8.875% due 3/15/2010 979,196
2,118,310 Tenaska Alabama Partners LP, 7%
due 6/30/2021 (i) 2,088,122
-------------
35,464,927
====================================================================================
Wireless Communications--4.4%
1,650,000 Centennial Cellular Operating Co. LLC,10.125%
due 6/15/2013 1,777,875
1,275,000 Dobson Communications Corp., 9.318%
due 10/15/2012 (d) 1,287,750
2,400,000 IWO Holdings, Inc., 8.813% due 1/15/2012 (d) 2,490,000
Rogers Wireless Communications, Inc.:
950,000 8.035% due 12/15/2010 (d) 979,688
250,000 8% due 12/15/2012 257,188
3,400,000 6.375% due 3/01/2014 3,238,500
Rural Cellular Corp.:
1,025,000 9.41% due 3/15/2010 (d) 1,045,500
2,000,000 8.25% due 3/15/2012 2,060,000
600,000 8.25% due 3/15/2012 (i) 618,000
-------------
13,754,501
------------------------------------------------------------------------------------
Total Corporate Bonds
(Cost--$422,126,512)--134.4% 424,272,685
====================================================================================
10 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (m) Value
====================================================================================
Cable--U.S.--1.5%
$4,850,000 Century Cable Holdings LLC, Discretionary Term
Loan,10% due 12/31/2009 $ 4,720,893
====================================================================================
Chemicals--0.9%
2,830,000 Wellman, Inc. Second Lien Term Loan,
11.899% due 2/10/2010 2,895,002
------------------------------------------------------------------------------------
Total Floating Rate Loan Interests
(Cost--$7,387,289)--2.4% 7,615,895
====================================================================================
Foreign Government Obligations
====================================================================================
Brazilian Government International Bond:
2,000,000 8.75% due 2/04/2025 2,130,000
1,975,000 8.25% due 1/20/2034 2,004,625
1,200,000 Philippine Government International Bond,
8.375% due 2/15/2011 1,266,000
1,150,000 Turkey Government International Bond,
6.875% due 3/17/2036 1,006,250
400,000 Venezuela Government International Bond,
7.65% due 4/21/2025 405,600
------------------------------------------------------------------------------------
Total Foreign Government Obligations
(Cost--$6,767,558)--2.1% 6,812,475
====================================================================================
Shares
Held Common Stocks
====================================================================================
Airlines--0.0%
12,573 ABX Air, Inc. (c) 84,742
====================================================================================
Cable--U.S.--0.8%
89,821 Loral Space & Communications Ltd. (c) 2,514,988
====================================================================================
Food Products--0.0%
11,727 New World Pasta Co. (c)(k) 83,848
====================================================================================
Manufacturing--0.6%
70,784 Medis Technologies Ltd. (c) 1,715,804
====================================================================================
Paper--0.1%
203,785 Western Forest Products, Inc. (c) 318,370
------------------------------------------------------------------------------------
Total Common Stocks
(Cost--$7,943,586)--1.5% 4,717,752
====================================================================================
====================================================================================
Preferred Securities
------------------------------------------------------------------------------------
Face
Amount Capital Trusts Value
====================================================================================
Health Care--1.2%
$3,750,000 Fresenius Medical Care Capital Trust II, 7.875%
due 2/01/2008 3,825,000
------------------------------------------------------------------------------------
Total Capital Trusts
(Cost--$3,697,654)--1.2% 3,825,000
====================================================================================
Shares
Held Preferred Stocks
====================================================================================
Automotive--0.5%
84,236 General Motors Corp. Series C, 6.25% (b) 1,683,878
====================================================================================
Cable--U.S.--0.4%
5,645 Loral SpaceCom Corp., Series A, 12% (g) 1,117,710
------------------------------------------------------------------------------------
Total Preferred Stocks
(Cost--$3,223,082)--0.9% 2,801,588
====================================================================================
Total Preferred Securities
(Cost--$6,920,736)--2.1% 6,626,588
====================================================================================
Warrants (h)
====================================================================================
Food Products--0.0%
New World Pasta Co. (k):
8,687 Series A (expires 12/07/2010) 23,455
9,652 Series B (expires 12/07/2010) 18,339
-------------
41,794
====================================================================================
Health Care--0.0%
32,042 HealthSouth Corp. (expires 1/16/2014) 56,074
====================================================================================
Paper--0.0%
700 MDP Acquisitions Plc (expires 10/01/2013) 7,000
====================================================================================
Wireless Communications--0.1%
825 American Tower Corp. (expires 8/01/2008) 359,673
------------------------------------------------------------------------------------
Total Warrants (Cost--$95,468)--0.2% 464,541
====================================================================================
Beneficial
Interest Short-Term Securities
====================================================================================
$157,118 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I, 4.85% (f)(j) 157,118
------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$157,118)--0.1% 157,118
====================================================================================
Total Investments (Cost--$451,398,267*)--142.8% 450,667,054
Liabilities in Excess of Other Assets--(42.8%) (134,968,241)
-------------
Net Assets--100.0% $ 315,698,813
=============
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 11
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
May 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ......................................... $451,269,411
============
Gross unrealized appreciation .......................... $ 10,958,564
Gross unrealized depreciation .......................... $(11,560,921)
------------
Net unrealized depreciation ............................ $ (602,357)
============
(a) Represents a step bond; the interest rate shown reflects the effective
yield at the time of purchase.
(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) Represents the current yield as of 5/31/2006.
(g) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(h) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(i) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(j) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $77,554 $18,607
--------------------------------------------------------------------------
(k) Restricted securities as to resale, representing less than 0.1% of net
assets, were as follows:
--------------------------------------------------------------------------
Acquisition
Issue Date(s) Cost Value
--------------------------------------------------------------------------
New World Pasta Co. 5/19/2006 $1,360,379 $ 83,848
New World Pasta Co.
Series A (expires 12/07/2010) 5/19/2006 23,455 23,455
New World Pasta Co.
Series B (expires 12/07/2010) 5/19/2006 18,339 18,339
--------------------------------------------------------------------------
$1,402,173 $125,642
======================
(l) As a result of bankruptcy proceedings, the company did not repay the
principal amount of the security upon maturity.
(m) Floating rate loan interests in which the Fund invests generally pay
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. The base lending rates are generally (i)
the lending rate offered by one or more major European banks, such as
LIBOR (London InterBank Offered Rate), (ii) the prime rate offered by one
or more major U.S. banks or (iii) the certificate of deposit rate.
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets. These industry
classifications are unaudited.
o Swaps outstanding as of May 31, 2006 were as follows:
---------------------------------------------------------------------------------------
Unrealized
Notional Appreciation
Description Amount (Depreciation)
---------------------------------------------------------------------------------------
Sold credit default protection on General Motors
Corp. and receive 5.00%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2006 $ 800,000 $ 23,134
Sold credit default protection on General Motors
Acceptance Corp. and receive 4.00%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2006 $ 800,000 1,159
Sold credit default protection on General Motors
Acceptance Corp. and receive 3.50%
Broker, JPMorgan Chase Bank
Expires March 2007 $ 800,000 2,215
Sold credit default protection on General Motors
Acceptance Corp. and receive 4.50%
Broker, Morgan Stanley Capital Services, Inc.
Expires March 2007 $ 800,000 8,346
Sold credit default protection on General Motors
Corp. and receive 4.40%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2007 $ 400,000 (14,024)
Sold credit default protection on General Motors
Corp. and receive 8.00%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2007 $ 400,000 (287)
Sold credit default protection on Russian
Federation and receive 0.73%
Broker, UBS Warburg
Expires October 2010 $1,600,000 4,360
Sold credit default protection on Federative
Republic of Brazil and receive 3.44%
Broker, Morgan Stanley Capital Services, Inc.
Expires October 2010 $1,000,000 63,139
Sold credit default protection on Dow Jones
CDX Emerging Markets Index
Series 5 and receive 1.35%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2011 $3,950,000 (41,933)
Sold credit default protection on Dow Jones
CDX North American High Yield Index
Series 6 and receive 3.45%
Broker, UBS Warburg
Expires June 2011 $1,000,000 (4,377)
Sold credit default protection on Dow Jones
CDX North American High Yield Index
Series 6 and receive 3.45%
Broker, UBS Warburg
Expires June 2011 $2,950,000 (16,316)
Sold credit default protection on Dow Jones
CDX North American High Yield B Index
Series 6 and receive 3.00%
Broker, UBS Warburg
Expires June 2011 $2,950,000 (12,701)
---------------------------------------------------------------------------------------
Total $ 12,715
=========
See Notes to Financial Statements.
12 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Statement of Assets, Liabilities and Capital
As of May 31, 2006
===============================================================================================================================
Assets
-------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$451,241,149) $ 450,509,936
Investments in affiliated securities, at value (identified cost--$157,118) ..... 157,118
Cash ........................................................................... 1,484,415
Swap premiums paid ............................................................. 41,522
Unrealized appreciation on swaps ............................................... 102,353
Receivables:
Interest .................................................................... $ 9,537,430
Swaps ....................................................................... 94,262
Paydowns .................................................................... 13,750 9,645,442
-------------
Prepaid expenses ............................................................... 9,643
-------------
Total assets ................................................................... 461,950,429
-------------
===============================================================================================================================
Liabilities
-------------------------------------------------------------------------------------------------------------------------------
Loans .......................................................................... 141,000,000
Unrealized depreciation on swaps ............................................... 89,638
Swap premiums received ......................................................... 44,797
Payables:
Securities purchased ........................................................ 4,580,389
Investment adviser .......................................................... 178,499
Dividends to shareholders ................................................... 151,297
Interest on loans ........................................................... 139,051
Other affiliates ............................................................ 2,680 5,051,916
-------------
Accrued expenses ............................................................... 65,265
-------------
Total liabilities .............................................................. 146,251,616
-------------
===============================================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------------------------------
Net Assets ..................................................................... $ 315,698,813
=============
===============================================================================================================================
Capital
-------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 200,000,000 shares authorized .................... $ 3,731,650
Paid-in capital in excess of par ............................................... 540,794,598
Undistributed investment income--net ........................................... $ 2,663,448
Accumulated realized capital losses--net (230,772,385)
Unrealized depreciation--net ................................................... (718,498)
-------------
Total accumulated losses--net .................................................. (228,827,435)
-------------
Total--Equivalent to $8.46 per share based on 37,316,497 shares of capital stock
outstanding (market price--$7.36) ............................................. $ 315,698,813
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 13
Statement of Operations
For the Year Ended May 31, 2006
===============================================================================================================================
Investment Income
-------------------------------------------------------------------------------------------------------------------------------
Interest (including $18,607 from affiliates) ................................... $ 34,253,911
Dividends ...................................................................... 200,000
Other .......................................................................... 390,497
-------------
Total income ................................................................... 34,844,408
-------------
===============================================================================================================================
Expenses
-------------------------------------------------------------------------------------------------------------------------------
Loan interest expense .......................................................... $ 4,758,724
Investment advisory fees ....................................................... 2,566,037
Borrowing costs ................................................................ 169,422
Accounting services ............................................................ 118,715
Professional fees .............................................................. 83,301
Transfer agent fees ............................................................ 59,276
Printing and shareholder reports ............................................... 42,585
Pricing services ............................................................... 31,082
Custodian fees ................................................................. 24,398
Listing fees ................................................................... 23,133
Directors' fees and expenses ................................................... 20,377
Other .......................................................................... 34,236
-------------
Total expenses ................................................................. 7,931,286
-------------
Investment income--net ......................................................... 26,913,122
-------------
===============================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ............................................................ (886,786)
Futures contracts and swaps--net ............................................ 360,718
Foreign currency transactions--net .......................................... (10) (526,078)
-------------
Change in unrealized appreciation/depreciation on:
Investments--net ............................................................ 1,387,008
Futures contracts and swaps--net ............................................ 6,057 1,393,065
-------------------------------
Total realized and unrealized gain--net ........................................ 866,987
-------------
Net Increase in Net Assets Resulting from Operations ........................... $ 27,780,109
=============
Statements of Changes in Net Assets
For the Year Ended May 31,
-------------------------------
Increase (Decrease) in Net Assets: 2006 2005
===============================================================================================================================
Operations
-------------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... $ 26,913,122 $ 31,712,812
Realized gain (loss)--net ...................................................... (526,078) 6,925,406
Change in unrealized appreciation/depreciation--net ............................ 1,393,065 (4,257,822)
-------------------------------
Net increase in net assets resulting from operations ........................... 27,780,109 34,380,396
-------------------------------
===============================================================================================================================
Dividends to Shareholders
-------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income--net .......................... (27,760,574) (33,146,162)
-------------------------------
===============================================================================================================================
Capital Stock Transactions
-------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in reinvestment of dividends 53,598 808,256
-------------------------------
Net increase in net assets resulting from capital stock transactions ........... 53,598 808,256
-------------------------------
===============================================================================================================================
Net Assets
-------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ................................................... 73,133 2,042,490
Beginning of year .............................................................. 315,625,680 313,583,190
-------------------------------
End of year* ................................................................... $ 315,698,813 $ 315,625,680
===============================
* Undistributed investment income--net ...................................... $ 2,663,448 $ 3,288,191
===============================
See Notes to Financial Statements.
14 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Statement of Cash Flows
For the Year Ended May 31, 2006
=================================================================================================================
Cash Used for Operating Activities
-----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ........................... $ 27,780,109
Adjustments to reconcile net increase in net assets resulting from operations to
net cash used for operating activities:
Increase in receivables and swap premiums paid .............................. (819,331)
Decrease in prepaid expenses and other assets ............................... 32,450
Decrease in cash on deposit for financial futures contracts ................. 100,000
Decrease in other liabilities and swap premiums received .................... (77,604)
Realized and unrealized gain--net ........................................... (866,987)
Amortization of premium and discount ........................................ (1,329,867)
Proceeds from sales and paydowns of long-term securities ....................... 237,753,773
Other investment-related transactions .......................................... 385,613
Purchases of long-term securities .............................................. (266,365,396)
Net purchases of short-term investments ........................................ (77,554)
-------------
Cash used for operating activities ............................................. (3,484,794)
-------------
=================================================================================================================
Cash Provided by Financing Activities
-----------------------------------------------------------------------------------------------------------------
Cash receipts from borrowings .................................................. 237,200,000
Cash payments on borrowings .................................................... (204,000,000)
Dividends paid to shareholders ................................................. (27,767,243)
Decrease in bank overdraft ..................................................... (463,538)
-------------
Cash provided by financing activities .......................................... 4,969,219
-------------
=================================================================================================================
Cash Impact from Foreign Exchange Fluctuations
-----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash ........................................ (10)
=============
=================================================================================================================
Cash
-----------------------------------------------------------------------------------------------------------------
Net increase in cash ........................................................... 1,484,415
Cash at beginning of year ...................................................... --
-------------
Cash at end of year ............................................................ 1,484,415
=============
=================================================================================================================
Cash Flow Information
-----------------------------------------------------------------------------------------------------------------
Cash paid for interest ......................................................... $ 4,688,595
=============
=================================================================================================================
Noncash Financing Activities
-----------------------------------------------------------------------------------------------------------------
Reinvestment of dividends paid to shareholders ................................. $ 53,598
=============
See Notes to Financial Statements.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 15
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. 2006 2005 2004 2003 2002
=================================================================================================================================
Per Share Operating Performance
---------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ................ $ 8.46 $ 8.43 $ 7.86 $ 7.68 $ 9.11
--------------------------------------------------------------------
Investment income--net* ........................... .72 .85 .88 .92 1.15
Realized and unrealized gain (loss)--net .......... .02 .07 .58 .17 (1.47)
--------------------------------------------------------------------
Total from investment operations .................. .74 .92 1.46 1.09 (.32)
--------------------------------------------------------------------
Less dividends from investment income--net ........ (.74) (.89) (.89) (.91) (1.11)
--------------------------------------------------------------------
Recovery of previously expensed offering costs
resulting from issuance of Common Stock .......... -- -- --+ -- --
--------------------------------------------------------------------
Net asset value, end of year ...................... $ 8.46 $ 8.46 $ 8.43 $ 7.86 $ 7.68
====================================================================
Market price per share, end of year ............... $ 7.36 $ 8.38 $ 7.97 $ 8.36 $ 8.22
====================================================================
=================================================================================================================================
Total Investment Return**
---------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ................ 9.78% 11.24% 19.33% 16.46% (3.13%)
====================================================================
Based on market price per share ................... (3.59%) 16.55% 6.07% 15.73% .59%
====================================================================
=================================================================================================================================
Ratios to Average Net Assets
---------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense .............. 1.00% .99% 1.01% 1.04% 1.10%
====================================================================
Expenses .......................................... 2.49% 1.81% 1.51% 1.59% 2.14%
====================================================================
Investment income--net ............................ 8.45% 9.71% 10.48% 13.35% 14.37%
====================================================================
=================================================================================================================================
Leverage
---------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings outstanding, end of year
(in thousands) ................................... $141,000 $107,800 $109,600 $ 98,800 $ 84,900
====================================================================
Average amount of borrowings outstanding during the
year (in thousands) .............................. $109,144 $112,501 $112,297 $ 75,558 $ 98,924
====================================================================
Average amount of borrowings outstanding per share
during the year* ................................. $ 2.93 $ 3.02 $ 3.03 $ 2.07 $ 2.75
====================================================================
=================================================================================================================================
Supplemental Data
---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) ............ $315,699 $315,626 $313,583 $289,820 $279,372
====================================================================
Portfolio turnover ................................ 56.00% 54.64% 82.54% 76.61% 65.44%
====================================================================
* Based on average shares outstanding.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
16 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
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.
Floating rate loan interests are valued at the mean between the last available
bid and asked prices from one or more brokers or dealers as obtained by a
pricing service. Pricing services use valuation matrixes that incorporate both
dealer-supplied valuations and valuation models. The procedures of the pricing
service and its valuations are reviewed by the officers of the Fund under the
general direction of the Board of Directors. Such valuations and procedures will
be reviewed periodically by the Board of Directors of the Fund. Financial
futures contracts and options thereon, which are traded on exchanges, are valued
at their closing prices as of the close of such exchanges. Options written or
purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the OTC market, valuation is the last
asked price (options written) or the last bid price (options purchased). Swap
agreements are valued based upon quoted fair valuations received daily by the
Fund from a pricing service or counterparty. Short-term investments with a
remaining maturity of 60 days or less are valued at amortized cost, which
approximates market value, under which method the investment is valued at cost
and any premium or discount is amortized on a straight line basis to maturity.
Valuation of other short-term investment vehicles is generally based on the net
asset value of the underlying investment vehicle or amortized cost. 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
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 17
Notes to Financial Statements (continued)
is subsequently marked-to-market to reflect the current market value of
the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to
(or deducted from) the basis of the security acquired or deducted from (or
added to) the proceeds of the security sold. When an option expires (or
the Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid (or gain
or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Swaps -- The Fund may enter into swap agreements, which are OTC contracts
in which the Fund and a counterparty agree to make periodic net payments
on a specified notional amount. The net payments can be made for a set
period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate;
the change in market value of a specified security, basket of securities,
or index; or the return generated by a security. These periodic payments
received or made by the Fund are recorded in the accompanying Statement of
Operations as realized gains or losses, respectively. Gains or losses are
also realized upon termination of the swap agreements. Swaps are
marked-to-market daily and changes in value are recorded as unrealized
appreciation (depreciation). Risks include changes in the returns of the
underlying instruments, failure of the counterparties to perform under the
contracts' terms and the possible lack of liquidity with respect to the
swap agreements.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies to U.S. dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments. The
Fund invests in foreign securities, which may involve a number of risk factors
and special considerations not present with investments in securities of U.S.
corporations.
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(g) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to
18 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Notes to Financial Statements (continued)
return borrowed securities because of insolvency or for any other reason, the
Fund could experience delays and costs in gaining access to the collateral. The
Fund also could suffer a loss where the value of the collateral falls below the
market value of the borrowed securities, in the event of borrower default or in
the event of losses on investments made with cash collateral.
(h) 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, $222,709 has been reclassified between accumulated net realized capital
losses and undistributed net investment income as a result of permanent
differences attributable to amortization methods on fixed income securities,
accounting for swap agreements, securities in default, 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
Merrill Lynch Investment Managers, L.P. ("MLIM"), an affiliate of FAM, or its
affiliates.
In addition, MLPF&S received $13,571 in commissions on the execution of
portfolio security transactions for the Fund for the year ended May 31, 2006.
For the year ended May 31, 2006, the Fund reimbursed FAM $7,162 for certain
accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, MLAM U.K., ML & Co., MLIM, and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close in the third quarter of 2006.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the year ended May 31, 2006 were $268,770,758 and $236,994,756,
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, 2006 and May 31,
2005 increased by 6,358 and 90,900, respectively, as a result of dividend
reinvestment.
5. Short-Term Borrowings:
On May 22, 2006, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citicorp North
America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The agreement
was renewed for one year and has a maximum limit of $160,000,000. Under the
Citicorp program, the conduits will fund advances to the Fund through the
issuance of highly rated commercial paper. As security for its obligations to
the Lenders under the revolving securitization facility, the Fund has granted a
security interest
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 19
Notes to Financial Statements (concluded)
in substantially all of its assets to and in favor of the Lenders. The interest
rate on the Fund's borrowings is based on the interest rate carried by the
commercial paper plus a program fee. The Fund pays additional borrowing costs
including a backstop commitment fee.
For the year ended May 31, 2006, the average amount borrowed was approximately
$109,144,000 and the daily weighted average interest rate was 4.36%.
6. Distributions to Shareholders:
The Fund paid an ordinary income dividend in the amount of $.056000 per share on
June 30, 2006 to shareholders of record on June 13, 2006.
The tax character of distributions paid during the fiscal years ended May 31,
2006 and May 31, 2005 was as follows:
--------------------------------------------------------------------------------
5/31/2006 5/31/2005
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ........................ $27,760,574 $33,146,162
------------------------------
Total taxable distributions .............. $27,760,574 $33,146,162
==============================
As of May 31, 2006, the components of accumulated losses on a tax basis were as
follows:
-----------------------------------------------------------------------------
Undistributed ordinary income -- net .................... $ 2,652,248
Undistributed long-term capital gains -- net ............ --
-------------
Total undistributed earnings -- net ..................... 2,652,248
Capital loss carryforward ............................... (229,577,118)*
Unrealized losses -- net ................................ (1,902,565)**
-------------
Total accumulated losses -- net ......................... $(228,827,435)
=============
* On May 31, 2005, the Fund had a net capital loss carryforward of
$229,577,118, of which $21,006,735 expires in 2008, $34,200,029 expires in
2009, $52,918,036 expires in 2010, $119,513,437 expires in 2011 and
$1,938,881 expires in 2012. This amount will be available to offset like
amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized 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, the deferral of post-October capital
losses for tax purposes, book/tax differences in the accrual of income on
securities in default and other book/tax temporary differences.
20 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
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, 2006, 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, 2006, 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, 2006, 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, 2006
Fund Certification (unaudited)
In September 2005, 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.
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distributions paid monthly by Corporate High Yield Fund III, Inc. for the fiscal
year ended May 31, 2006:
================================================================================
Interest-Related Dividends for Non-U.S. Residents
================================================================================
Month Paid: July 2005 ........................................... 62.32%*
August 2005 - January 2006 .......................... 86.63%*
February 2006 - May 2006 ............................ 80.99%*
--------------------------------------------------------------------------------
* Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for nonresident aliens and foreign
corporations.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 21
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by the Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Fund's Board of Directors considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Fund and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory
Agreement is approved by the Fund's shareholders, it will become effective upon
the closing of the Transaction, which is expected in the third quarter of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the New Investment Advisory Agreement at a
meeting held on May 9, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 9, 2006
meeting. In addition, the independent directors consulted with their counsel and
Fund counsel on numerous occasions, discussing, among other things, the legal
standards and certain other considerations relevant to the directors'
deliberations.
At the Board meetings, members of the Board discussed with Merrill Lynch
management and certain BlackRock representatives the Transaction, its strategic
rationale and BlackRock's general plans and intentions regarding the Fund. At
these Board meetings, representatives of Merrill Lynch and BlackRock made
presentations to and responded to questions from the Board. The directors also
inquired about the plans for and anticipated roles and responsibilities of
certain employees and officers of the Investment Adviser and certain affiliates
being transferred to BlackRock in connection with the Transaction. The
independent directors of the Board also conferred separately and with their
counsel about the Transaction and other matters related to the Transaction on a
number of occasions, including in connection with the April and May 2006
meetings. After the presentations and after reviewing the written materials
provided, the independent directors met in executive sessions with their counsel
to consider the New Investment Advisory Agreement.
In connection with the Board's review of the New Investment Advisory Agreement,
Merrill Lynch and/or BlackRock advised the directors about a variety of matters.
The advice included the following, among other matters:
o that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and its shareholders by BlackRock
Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
o that the Fund should benefit from having access to BlackRock's state of
the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable expense
waivers and reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
o that under the Transaction Agreement, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Fund
shareholders;
The directors considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
22 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees
will not increase by virtue of the New Investment Advisory Agreement, but
will remain the same;
o that within the past year the Board performed a full annual review of the
investment advisory agreement currently in effect for the Fund (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative
services currently provided to the Fund; and that the advisory and/or
management fees paid by the Fund, taking into account any applicable
agreed-upon fee waivers and breakpoints, represent reasonable compensation
to the Investment Adviser in light of the services provided, the costs to
the Investment Adviser of providing those services, economies of scale,
the fees and other expenses paid by similar funds (including information
provided by Lipper, Inc. ["Lipper"]), and such other matters as the
directors have considered relevant in the exercise of their reasonable
judgment (the Board had most recently performed a full annual review of
the Current Investment Advisory Agreement in November 2005); and
o that Merrill Lynch agreed to pay all expenses of the Fund in connection
with the Board's consideration of the New Investment Advisory Agreement
and related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory
Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing services
and assistance in meeting legal and regulatory requirements. In its review of
the New Investment Advisory Agreement, the Board also considered a range of
information in connection with its oversight of the services to be provided by
BlackRock Advisors and its affiliates. Among the matters considered were: (a)
fees (in addition to management fees) to be paid to BlackRock Advisors and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and BlackRock Advisors' compliance policies and procedures; and
(d) the nature, cost and character of non-investment management services to be
provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the agreement. These materials included (a) information
compiled by Lipper on the fees and expenses and the investment performance of
the Fund as compared to a comparable group of funds as classified by Lipper; (b)
information comparing the Fund's market price with its net asset value per
share; (c) a discussion by the Fund's portfolio management team on investment
strategies used by the Fund during its most recent fiscal year; (d) information
on the profitability to the Investment Adviser of the Current Investment
Advisory Agreement and other payments received by the Investment Adviser and its
affiliates from the Fund; and (e) information provided by the Investment Adviser
concerning services related to the valuation and pricing of Fund portfolio
holdings, the Fund's portfolio turnover statistics, and direct and indirect
benefits to the Investment Adviser and its affiliates from their relationship
with the Fund.
In their deliberations, the directors considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The directors did not
identify any particular information that was all-important or controlling. The
directors, including a majority of the independent directors, concluded that the
terms of the New Investment Advisory Agreement are appropriate, that the fees to
be paid are reasonable in light of the services to be provided to the Fund, and
that the
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 23
Disclosure of New Investment Advisory Agreement (continued)
New Investment Advisory Agreement should be approved and recommended to Fund
shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of the
Fund, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's advisory services and the Fund's investment performance, but also
considered certain areas in which both the Investment Adviser and the Fund
receive services as part of the Merrill Lynch complex. The Board compared the
Fund's performance -- both including and excluding the effects of the Fund's
fees and expenses -- to the performance of a comparable group of funds, and the
performance of a relevant index or combination of indexes. While the Board
reviews performance data at least quarterly, consistent with the Investment
Adviser's investment goals, the Board attaches more importance to performance
over relatively long periods of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of New BlackRock and how it
would affect the Fund; the ability of BlackRock Advisors to perform its duties
after the Transaction; and any anticipated changes to the current investment and
other practices of the Fund. The directors considered BlackRock's advice as to
proposed changes in portfolio management personnel of the Fund after the closing
of the Transaction.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the art
technology and risk management analytic tools, including the investment tools
provided under the BlackRock Solutions brand name.
The directors were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund will continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The directors were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the New Investment Advisory Agreement were expected to be as good or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in personnel
following the Transaction and the combination of the operations of the
Investment Adviser and its affiliates with those of BlackRock. The directors
noted that if current portfolio managers or other personnel cease to be
available, the Board would consider all available options, which could include
seeking the investment advisory or other services of BlackRock affiliates.
Accordingly, the directors concluded that, overall, they were satisfied at the
present time with assurances from BlackRock and BlackRock Advisors as to the
expected nature, extent and quality of the services to be provided to the Fund
under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
the directors had received, among other things, a report from Lipper comparing
the Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. The Board reviewed the Fund's contractual management fee
rate and actual management fee rate as a percentage of total assets at common
asset levels -- the actual rate includes advisory fees and the effects of any
fee waivers -- compared to the other funds in its Lipper category. They also
compared the Fund's total expenses to those of other comparable funds. The
information showed that the Fund had fees and expenses within the range of fees
and expenses of comparable funds. The Board considered the services to be
provided by and the fees to be charged by BlackRock Advisors to other funds with
similar investment mandates and noted that the fees charged by BlackRock
Advisors in those cases, including fee waivers and expense reimbursements, were
generally comparable to those being charged to the Fund. The Board also noted
that, as a general matter, according to the information provided by BlackRock,
fees charged to institutional clients were lower than the fees charged to the
Fund, but BlackRock Advisors provided less
24 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
extensive services to such clients. The Board concluded that the Fund's
management fee and fee rate and overall expense ratio are reasonable compared to
those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the directors considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the fact
that the New Investment Advisory Agreement is substantially similar to the
Current Investment Advisory Agreement in all material respects, including the
rate of compensation, the directors determined that the Transaction should not
increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. The directors noted
that it was not possible to predict how the Transaction would affect BlackRock
Advisors' profitability from its relationship with the Fund.
The directors discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with the
Fund. The directors noted that they expect to receive profitability information
from BlackRock Advisors on at least an annual basis and thus be in a position to
evaluate whether any adjustments in Fund fees and/or fee breakpoints would be
appropriate.
Fees and Economies of Scale -- The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in order
to enable the Fund to participate in these economies of scale. The Board
considered economies of scale to the extent applicable to the Fund's closed-end
structure and determined that the Fund currently appropriately benefits from any
economies of scale and no changes were currently necessary.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors determined
that as a result of the Transaction, the Fund's total advisory fees would be no
higher than the fees under its Current Investment Advisory Agreement. The
directors noted that in conjunction with their most recent deliberations
concerning the Current Investment Advisory Agreement, the directors had
determined that the total fees for advisory and administrative services for the
Fund were reasonable in light of the services provided. It was noted that in
conjunction with the recent review of the Current Investment Advisory Agreement,
the directors had received, among other things, a report from Lipper comparing
the Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Investment Adviser or its
affiliates to other registered investment company clients for investment
management services. The directors concluded that, because the rates for
advisory fees for the Fund would be no higher than its current fee rates, the
proposed management fee structure, including any fee waivers, was reasonable and
that no additional changes were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered whether the Transaction would have an impact on the fall-out benefits
received by the Investment Adviser by virtue of the Current Investment Advisory
Agreement. Based on their review of the materials provided, including materials
received in connection with their most recent approval or continuance of the
Current Investment Advisory Agreement, and their discussions with management of
the Investment Adviser and BlackRock, the directors determined that those
benefits could include increased ability for BlackRock to distribute shares of
its funds and other investment products. The directors noted that any such
benefits were difficult to quantify with certainty at this time, and indicated
that they would continue to evaluate them going forward.
Investment Performance -- The directors considered investment performance for
the Fund. The directors compared the Fund's performance -- both including and
excluding the effects of the Fund's fees and expenses -- to the performance of a
comparable group of funds, and the performance of a relevant index or
combination of indexes. The comparative information received from Lipper showed
Fund performance at various levels within the range of performance of comparable
funds over different time periods. While the Board reviews performance data at
least quarterly, consistent with the Investment Adviser's investment goals, the
Board attaches more importance over relatively long periods of time, typically
three to five years. The directors believed the Fund's performance was
satisfactory. Also, the directors took into account the investment performance
of funds currently advised by BlackRock Advisors. The Board considered
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 25
Disclosure of New Investment Advisory Agreement (concluded)
comparative information from Lipper which showed that the performance of the
funds advised by BlackRock Advisors was within the range of performance of
comparable funds over different time periods. The Board also noted that,
following the close of the Transaction, BlackRock Advisors intended to implement
steps to seek to improve the investment performance of the Fund. It was noted
that these steps include changes in the portfolio management personnel. The
Board noted BlackRock's considerable investment management experience and
capabilities, but were unable to predict what effect, if any, consummation of
the Transaction would have on the future performance of the Fund.
Conclusion -- After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the New Investment Advisory Agreement, concluding that the advisory fee
rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders. In
approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Subadvisory Agreement -- Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at which
the Board of Directors discussed and approved the New Investment Advisory
Agreement, the Board, including the independent directors, also discussed and
approved a contingent subadvisory agreement (the "Contingent Subadvisory
Agreement") between the Investment Adviser and BlackRock Advisors (the
"BlackRock Subadviser"). The Contingent Subadvisory Agreement is intended to
ensure that the Fund operates with efficient portfolio management services until
the closing of the Transaction, in the event that the Board deems it necessary
and in the best interests of the Fund and its shareholders that the BlackRock
Subadviser assist in managing the operations of the Fund during the interim
period until the closing of the Transaction. If shareholders approve the
Contingent Subadvisory Agreement, it will take effect only upon recommendation
from the Investment Adviser and upon subsequent approval of the Board in the
period up to the closing of the Transaction. The effectiveness of the Contingent
Subadvisory Agreement, therefore, would be contingent on further Board approval
after shareholders approve it. Pursuant to the Contingent Subadvisory Agreement,
the BlackRock Subadviser would receive a monthly fee from the Investment Adviser
equal to 50% of the advisory fee received by the Investment Adviser. The
Investment Adviser would pay the BlackRock Subadviser out of its own resources.
There would be no increase in Fund expenses as a result of the Contingent
Subadvisory Agreement.
In making its approval, the Board considered the Contingent Subadvisory
Agreement in conjunction with the New Investment Advisory Agreement and reviewed
the same information and factors discussed above, and came to the same
conclusions. The Board also considered in conjunction with the Contingent
Subadvisory Agreement the necessity of ensuring that the Fund operates with
effective management services until the closing of the Transaction. In reviewing
the subadvisory fee rate provided in the Contingent Subadvisory Agreement, the
Board took note of the fact that both the Investment Adviser and the BlackRock
Subadviser would have significant responsibilities under their respective
advisory agreements. The Investment Adviser would remain responsible for
oversight of the Fund's operations and administration and the BlackRock
Subadviser would provide advisory services to the Fund under the Contingent
Subadvisory Agreement. The Board also took into account the expected short
duration of the term of any Contingent Subadvisory Agreement and the fact that
total advisory fees paid by the Fund would not increase as a result of the
Contingent Subadvisory Agreement. Under all of the circumstances, the Board
concluded that it was a reasonable allocation of fees for the BlackRock
Subadviser to receive 50% of the advisory fee paid by the Fund to the Investment
Adviser.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the best
interests of shareholders.
26 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by Computershare Trust
Company, N.A. (the "Plan Agent"). Under the Plan, whenever the Fund declares a
dividend, participants in the Plan will receive the equivalent in shares of
Common Stock of the Fund. The Plan Agent will acquire the shares for the
participant's account either (i) through receipt of additional unissued but
authorized shares of the Fund ("newly issued shares") or (ii) by purchase of
outstanding shares of Common Stock on the open market on the New York Stock
Exchange or elsewhere. If, on the dividend payment date, the Fund's net asset
value per share is equal to or less than the market price per share plus
estimated brokerage commissions (a condition often referred to as a "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares. If the Fund's net asset value per share is greater than the market price
per share (a condition often referred to as a "market discount"), the Plan Agent
will invest the dividend amount by purchasing on the open market additional
shares. If the Plan Agent is unable to invest the full dividend amount in open
market purchases, or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the dividend
by either (i) when the shares are newly issued, the net asset value per share on
the date the shares are issued or (ii) when shares are purchased in the open
market, the average purchase price per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, 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 for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough 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.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- 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. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. 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
market premium, 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 the discount from the market value (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.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at Computershare
Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010, Telephone:
800-426-5523.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 27
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; 131 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 177 Portfolios
08543-9011 Director (Americas Region) thereof from 2000 to 2001 and
Age: 51 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 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 1996 39 Funds None
Bodurtha** Princeton, NJ present and Executive Vice President thereof from 1996 to 59 Portfolios
08543-9095 2003; Chairman of the Board, Berkshire Holding
Age: 62 Corporation since 1980; Partner, Squire, Sanders &
Dempsey from 1980 to 1993.
------------------------------------------------------------------------------------------------------------------------------------
Kenneth A. P.O. Box 9095 Director 2005 to Professor, Harvard University since 1992; Professor, 39 Funds None
Froot Princeton, NJ present Massachusetts Institute of Technology from 1986 to 59 Portfolios
08543-9095 1992.
Age: 48
------------------------------------------------------------------------------------------------------------------------------------
Joe P.O. Box 9095 Director 1998 to Member of the Committee of Investment of Employee 39 Funds Kimco
Grills** Princeton, NJ present Benefit Assets of the Association of Financial 59 Portfolios Realty
08543-9095 Professionals ("CIEBA") since 1986; Member of Corporation
Age: 71 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 since 2000; Member of the Investment
Committee of the Woodberry Forest School since 2000;
Member of the Investment Committee of the National
Trust for Historic Preservation since 2000.
28 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
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 Chairman of the Board of Directors of Vigilant 39 Funds None
London Princeton, NJ present Research, Inc. since 2006; Director of Reflex 59 Portfolios
08543-9095 Security since 2006; Director of Cerego, LLC since
Age: 67 2006; Director of InnoCentive, Inc. since 2006;
Professor Emeritus, New York University since 2005;
John M. Olin Professor of Humanities, New York
University from 1993 to 2005; and Professor thereof
from 1980 to 2005; President, Hudson Institute since
1997 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 & 39 Funds None
Cooper Princeton, NJ present Sisk, P.A. since 1993; President, American Bar 59 Portfolios
Ramo 08543-9095 Association from 1995 to 1996 and Member of the
Age: 63 Board of Governors thereof from 1994 to 1997;
Shareholder, Poole, Kelly & Ramo, Attorneys at Law
P.C. from 1977 to 1993; Director of ECMC Group
(service provider to students, schools and lenders)
since 2001; Director, United New Mexico Bank (now
Wells Fargo) from 1983 to 1988; Director, First
National Bank of New Mexico (now Wells Fargo) from
1975 to 1976; Vice President, American Law Institute
since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Robert S. P.O. Box 9095 Director 1998 to Principal of STI Management (investment adviser) 39 Funds None
Salomon, Princeton, NJ present from 1994 to 1995; Chairman and CEO of Salomon 59 Portfolios
Jr. 08543-9095 Brothers Asset Management Inc. from 1992 to 1995;
Age: 69 Chairman 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.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Co-Chairman of the Board of Directors and the Audit Committee.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 29
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 1993 to Managing Director of MLIM and FAM since 2006 and Treasurer thereof since 1999;
Burke Princeton, NJ President present First Vice President of MLIM and FAM from 1997 to 2005; Senior Vice President and
08543-9011 and and Treasurer of Princeton Services since 1999 and Director since 2004; Vice President
Age: 45 Treasurer 1999 of FAM Distributors, Inc. ("FAMD") since 1999 and Director since 2004; Vice
to President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from
present 1990 to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
------------------------------------------------------------------------------------------------------------------------------------
Elizabeth P.O. Box 9011 Vice 1998 to Managing Director (Fixed Income) of MLIM since 2006; Director of MLIM from 2001 to
M. Princeton, NJ President present 2005; Vice President of MLIM from 1994 to 2001.
Phillips 08543-9011
Age: 56
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
Hiller Princeton, NJ Compliance present and Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief
08543-9011 Officer Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Age: 54 Morgan Stanley 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 Securities and Exchange 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: 46
------------------------------------------------------------------------------------------------------------------------
* 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
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
NYSE Symbol
CYE
30 CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
CORPORATE HIGH YIELD FUND III, INC. MAY 31, 2006 31
[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 1-800-637-3863; (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 -- 5/06
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) Robert S. Salomon, Jr., and (3) Stephen B. Swensrud (retired as of
December 31, 2005).
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending May 31, 2006 - $38,850
Fiscal Year Ending May 31, 2005 - $37,000
(b) Audit-Related Fees - Fiscal Year Ending May 31, 2006 - $8,000
Fiscal Year Ending May 31, 2005 - $0
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, 2006 - $6,000
Fiscal Year Ending May 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending May 31, 2006 - $0
Fiscal Year Ending May 31, 2005 - $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, 2006 - $3,124,717
Fiscal Year Ending May 31, 2005 - $9,030,943
(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) - $1,227,000, 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
Kenneth A. Froot
Joe Grills
Herbert I. London
Roberta Cooper Ramo
Robert S. Salomon, Jr.
Stephen B. Swensrud (retired as of December 31, 2005)
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 - as
of May 31, 2006.
(a)(1) Ms. Elizabeth M. Phillips is primarily responsible for the
day-to-day management of the registrant's portfolio ("Portfolio
Manager"). Ms. Phillips has been a Managing Director of the
Investment Adviser since 2006 and was previously a Director at
the Investment Advisor from 2001 to 2005 and Vice President at
the Investment Adviser from 1994 to 2001. She has been a
portfolio manager and Vice President of the Fund since 1997.
(a)(2) As of May 31, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
------------------ --------------
Elizabeth M.
Phillips 3 2 0 0 0 0
$ 1,852,121,102 $ 213,001,968 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment. Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving their
respective investment objectives and after consideration of such factors as
their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of the Investment
Adviser and its affiliates may have differing investment strategies, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. The investment results for the Fund may differ
from the results achieved by other clients of the Investment Adviser and its
affiliates and results among clients may differ. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Investment Adviser and its affiliates to be equitable to each.
The Investment Adviser will not determine allocations based on whether it
receives a performance based fee from the client. In some cases, the allocation
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Investment Adviser may have an incentive, such as a performance
based fee, in managing one account and not with respect to other accounts it
manages or (ii) where a member of the Fund's portfolio management team owns an
interest in one fund or account he or she manages and not another.
(a)(3) As of May 31, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser (collectively, "MLIM"), is critical to MLIM's
ability to attract and retain the most talented asset management professionals.
This program ensures that compensation is aligned with maximizing investment
returns and it provides a competitive pay opportunity for competitive
performance.
Compensation Program
The elements of total compensation for MLIM portfolio managers are a fixed
base salary, annual performance-based cash and stock compensation (cash and
stock bonus) and other benefits. MLIM has balanced these components of pay to
provide portfolio managers with a powerful incentive to achieve consistently
superior investment performance. By design, portfolio manager compensation
levels fluctuate -- both up and down -- with the relative investment performance
of the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries that are fixed on an annual basis represent a relatively small portion
of a portfolio manager's total compensation. This approach serves to enhance the
motivational value of the performance-based (and therefore variable)
compensation elements of the compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent.
To that end, portfolio manager incentive compensation for MLIM and its
affiliates is based on a formulaic compensation program. MLIM's formulaic
portfolio manager compensation program includes: investment performance relative
to the CSFB High Yield Index over 1-, 3-, and 5-year performance periods and a
measure of operational efficiency. Portfolio managers are compensated based on
the pre-tax performance of the products they manage. A discretionary element of
portfolio manager compensation may include consideration of: financial results
of MLIM, expense control, profit margins, strategic planning and implementation,
quality of client service, market share, corporate reputation, capital
allocation, compliance and risk control, leadership, workforce diversity,
technology and innovation. MLIM and its affiliates also consider the extent to
which individuals exemplify and foster Merrill Lynch's principles of client
focus, respect for the individual, teamwork, responsible citizenship and
integrity. All factors are considered collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in a
combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based bonus
is paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the
"Company") stock. Paying a portion of annual bonuses in stock puts compensation
earned by a portfolio manager for a given year "at risk" based on the Company's
ability to sustain and improve its performance over future periods. The ultimate
value of stock bonuses is dependent on future Company stock price performance.
As such, the stock bonus aligns each portfolio manager's financial interests
with those of the Company shareholders and encourages a balance between
short-term goals and long-term strategic objectives. Management strongly
believes that providing a significant portion of competitive performance-based
compensation in stock is in the best interests of investors and shareholders.
This approach ensures that portfolio managers participate as shareholders in
both the "downside risk" and "upside opportunity" of the Company's performance.
Portfolio managers therefore have a direct incentive to protect the Company's
reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and financial
management objectives during a performance year are eligible to participate in a
deferred cash program. Awards under this program are in the form of deferred
cash that may be benchmarked to a menu of MLIM mutual funds (including their own
fund) during a five-year vesting period. The deferred cash program aligns the
interests of participating portfolio managers with the investment results of
MLIM products and promotes continuity of successful portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based plans
offered generally to the Company's employees, including broad-based retirement,
401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of May 31, 2006, Ms.
Phillips does not beneficially own any stock issued by the Fund.
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 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Corporate High Yield Fund III, Inc.
Date: July 21, 2006
By: /s/ Donald C. Burke
-----------------------------
Donald C. Burke,
Chief Financial Officer of
Corporate High Yield Fund III, Inc.
Date: July 21, 2006