CORPORATE
HIGH YIELD
FUND, INC.
FUND LOGO
Annual Report
May 31, 1997
Officers and Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Vincent T. Lathbury III, Vice President
Elizabeth M. Phillips, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
<PAGE>
Custodian
The Chase Manhattan Bank
4 MetroTech Center, 18th Floor
Brooklyn, NY 11245
Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
NYSE Symbol
COY
This report, including the financial information herein,is
transmitted to the shareholders of Corporate High Yield Fund, Inc.
for their information. It is not a prospectus, circular or
representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a
representation of future performance. 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. Statements and other information herein are as dated
and are subject to change.
Corporate High
Yield Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
CORPORATE HIGH YIELD FUND, INC.
<PAGE>
The Benefits and
Risks of
Leveraging
Corporate High Yield Fund, Inc. has the ability to utilize leverage
through borrowings or issuance of short-term debt securities or
shares of Preferred Stock. The concept of leveraging is based on the
premise that the cost of assets to be obtained from leverage will be
based on short-term interest rates, which normally will be lower
than the return earned by the Fund on its longer-term portfolio
investments. Since the total assets of the Fund (including the
assets obtained from leverage) are invested in higher-yielding
portfolio investments, the Fund's Common Stock shareholders are the
beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the Fund were to issue Preferred Stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the Fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the Fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the Fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
Quality Ratings
The quality ratings of securities in the Fund as of May 31, 1997
were as follows:
Percent of
Rating Net Assets
<PAGE>
B 50%
BB 32
BBB 2
C 7
NR(Not Rated) 15
DEAR SHAREHOLDER
High-Yield Market Overview
The high-yield market performed well during the six-month period
ended May 31, 1997, despite a weak period in March that was
precipitated by a Federal Reserve Board (FRB) interest rate hike.
The unmanaged Credit Suisse First Boston High Yield Index returned
+6.47% for the six months ended May 31, 1997, compared to a -0.14%
return for ten-year Treasury notes. High-yield returns were
supported by both strong technicals and healthy fundamentals. On the
technical side, cash flows into high-yield mutual funds totaled over
$8.5 billion year-to-date May 31, 1997. Additional funds entered the
high-yield market in the form of high-yield collateralized bond
obligations, high-grade corporate funds seeking to enhance yield,
and new commitments by insurance companies and pension funds.
Fundamentals also favored the high-yield market as the economy
remains healthy, the quality of new-issue supply was excellent, and
default rates were historically low.
We believe the high-yield market remains fully valued. Yield spreads
relative to ten-year Treasury notes are near historically tight
levels. Using the Credit Suisse First Boston High Yield Index, the
average spread for high-yield bonds compared to Treasury securities
was 461 basis points (4.61%) for the period from January 1992 to
December 1996. In other words, the yield on high-yield bonds was
4.61 percentage points higher than the yield on ten-year US Treasury
notes. The index spread at May 31, 1997 was 334 basis points
compared to 412 basis points at November 30, 1996. Thus, investors
are now accepting a smaller incremental yield to compensate for the
additional credit risk of high-yield bonds. Furthermore, spreads are
compressing within the high-yield market as well. The spread between
BB-rated and B-rated issues tightened to 151 basis points compared
to a year-to-date May 31, 1997 mean of 161 basis points, and the
divergence between strong and weak single-B spreads is narrowing.
Fund Performance
For the year ended May 31, 1997, total investment return on the
Fund's Common Stock was +11.69%, based on a change in per share net
asset value from $13.68 to $13.74, and assuming reinvestment of
$1.459 per share income dividends. For the six months ended May 31,
1997, total investment return for the Fund was +5.47%. During the
same period, the net annualized yield of the Fund's Common Stock was
10.46%. The Fund's performance was driven by both weakness in a few
specific credits and our defensive market posture, which determined
both our leverage strategy and our focus on low-volatility, low-
yielding bonds. We disposed of those credits where we believe
improved performance is unlikely and held our positions in others
where we believe upside still exists.
<PAGE>
Leverage Strategy
For the six months ended May 31, 1997, our leverage position was
considerably lower than that of most other closed-end high-yield
funds. The Fund was on average 10.8% leveraged over the six-month
period. Thus, the Fund borrowed the equivalent of 10.8% of total
assets invested, earning incremental yield on the investments we
made with the borrowed funds. On May 31, 1997, the Fund was 8.2%
leveraged, having borrowed $28 million at a borrowing cost of 5.81%.
Our leverage position reflects our caution on the direction of high-
yield bond prices. At this time, our borrowings are primarily
invested in cushion bonds that we believe have limited downside risk
from adverse interest rate moves or from earnings disappointments.
While such bonds generally have limited upside potential as well, we
are able to enhance the yield of the portfolio somewhat by earning
the modest spread between our borrowing cost and the yield on our
investments. (For a complete explanation of the benefits and risks
of leveraging, see page 1 of this report to shareholders.)
Investment Strategy
In an investment environment in which risk premiums are small, we
believe it is appropriate to maintain a defensive posture. We
continue to emphasize shorter maturities and higher-quality issues,
which we believe will be less sensitive to widening yield spreads.
Favorable financing rates and enhanced liquidity attracted
increasing numbers of overseas issuers to the US high-yield market
in recent years. Among these are US dollar-denominated bonds of
issuers from Canada, Great Britain, Germany and Australia, as well
as from emerging markets such as Mexico, Brazil and Argentina. To
benefit from the increased international focus of the high-yield
market, the Fund's Board of Directors agreed to lift limitations on
investing in bonds of foreign issuers. At May 31, 1997, 27.6% of the
Fund's portfolio was invested in bonds of overseas corporations,
including 5% from European companies, 6% from Canadian issuers and
12% from issuers in Latin America. The concentration of the
portfolio will remain in US high-yield issuers. However, we believe
that Fund returns will be enhanced by increased flexibility to
invest selectively in attractive foreign-issuer bonds denominated in
US dollars.
<PAGE>
Portfolio Characteristics
In the schedule of investments included in this report to
shareholders, we reclassified several of the communications industry
categories into more narrowly defined sectors that more closely
reflect fundamental industry categories. Communications and media
remain our largest broad industry category, totaling nearly 30% of
total long-term investments. Of the narrowly classified sectors, the
largest industries were: energy, 8.2%; utilities, 7.6%; paper &
forest products, 6.9%; cable--international, 6.6%; and trans-
portation services, 5.9%. During the six-month period ended May
31, 1997, the average portfolio maturity was 6 years, 2 months.
In Conclusion
We thank you for your investment in Corporate High Yield Fund, Inc.,
and we look forward to assisting you with your financial needs in
the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent T. Lathbury III)
Vincent T. Lathbury III
Vice President and Portfolio Manager
(Elizabeth M. Phillips)
Elizabeth M. Phillips
Vice President and Portfolio Manager
June 30, 1997
<PAGE>
As of December 31, 1996, N. John Hewitt retired as Senior Vice
President of the Fund. His colleagues at Merrill Lynch Asset
Management, L.P. join the Fund's Board of Directors in wishing Mr.
Hewitt well in his retirement.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Aerospace & B- Ba $1,850,000 L-3 Communications Corp., 10.375% due
Defense--1.3% 5/01/2007 (e) $ 1,850,000 $ 1,942,500
B+ B1 2,250,000 Tracor, Inc., 8.50% due 3/01/2007 2,241,045 2,238,750
------------ ------------
4,091,045 4,181,250
Airlines--1.0% USAir Inc.:
B+ B1 2,545,286 11.20% due 3/19/2005** 2,239,851 2,647,403
B+ B1 500,000 10.375% due 3/01/2013 477,500 532,500
------------ ------------
2,717,351 3,179,903
Automotive--0.7% B B3 1,875,000 Collins & Aikman Corp., 11.50% due
4/15/2006 1,875,000 2,104,688
Broadcasting/ Radio B- B2 3,750,000 EZ Communications, Inc., 9.75% due
& Television--1.8% 12/01/2005 3,796,875 3,881,250
B B2 1,500,000 Sinclair Broadcast Group, Inc., 10% due
9/30/2005 1,483,125 1,563,750
------------ ------------
5,280,000 5,445,000
Building BB B1 3,500,000 Building Materials Corporation of America,
Materials--1.7% 10.241%* due 7/01/2004 2,962,036 3,145,625
BB B1 1,875,000 CEMEX S.A. de C.V., 12.75% due 7/15/2006 (e) 1,875,000 2,158,594
------------ ------------
4,837,036 5,304,219
Cable--3.6% CCC+ Caa 7,463,099 American Telecasting, Inc., 13.651%* due
6/15/2004 5,774,780 2,369,534
B B2 3,000,000 Intermedia Capital Partners LP, 11.25% due
8/01/2006 3,011,250 3,180,000
BB- B2 3,750,000 Lenfest Communications, Inc., 10.50% due
6/15/2006 3,803,438 4,021,875
B- B3 5,747,000 Wireless One Inc., 13.50%* due 8/01/2006 (d) 3,334,017 1,551,690
------------ ------------
15,923,485 11,123,099
<PAGE>
Cable--International CCC+ Caa 6,922,000 Austrailis Media Ltd., 14.12%* due
- --7.0% 5/15/2003 (c) 4,614,089 4,291,640
BB- B2 1,500,000 Bell Cablemedia PLC, 9.898%* due 7/15/2004 1,295,878 1,338,750
B- B3 2,625,000 Diamond Cable Communications Co., 10.772%*
due 12/15/2005 1,873,213 1,778,438
International Cabletel Inc.:
NR+++ NR+++ 1,500,000 10% due 2/15/2007 (e) 1,500,938 1,513,125
B B3 3,500,000 Series B, 11.643%* due 2/01/2006 2,300,877 2,375,625
BB- B2 5,000,000 Rogers Communications Inc., 10.875% due
4/15/2004 5,015,625 5,231,250
B+ B3 6,160,000 Videotron Holdings PLC, 11.125%* due
7/01/2004 4,671,448 5,497,800
------------ ------------
21,272,068 22,026,628
Computer Services/ BB- Ba1 3,000,000 Advanced Micro Devices Inc., 11% due
Electronics--2.5% 8/01/2003 3,116,250 3,352,500
B- B2 2,250,000 Amphenol Corporation, 9.875% due 5/15/2007 2,250,000 2,306,250
B B2 2,000,000 Celestica International Inc., 10.50% due
12/31/2006 2,000,000 2,145,000
------------ ------------
7,366,250 7,803,750
Conglomerates-- Sequa Corp.:
1.6% BB B1 2,000,000 9.625% due 10/15/1999 2,055,000 2,055,000
B+ B3 3,000,000 9.375% due 12/15/2003 2,941,250 3,075,000
------------ ------------
4,996,250 5,130,000
Consumer Products NR+++ NR+++ 3,825,000 Coleman Escrow Corp., 11.573%* due
- --4.7% 5/15/2001 (e) 2,456,055 2,467,125
B NR+++ 2,750,000 Coleman Holdings, Inc., 11.596%* due
5/27/1998 2,483,696 2,543,750
B- B2 4,459,000 Polymer Group Inc., 12.25% due 7/15/2002 4,501,813 4,899,326
Revlon Consumer Products Corp.:
B B2 1,500,000 9.50% due 6/01/1999 1,375,307 1,537,500
B B2 1,500,000 9.375% due 4/01/2001 1,366,793 1,541,250
B- B2 1,501,000 Samsonite Corporation, 11.125% due 7/15/2005 1,451,280 1,673,615
------------ ------------
13,634,944 14,662,566
Consumer Services-- B B2 3,325,000 Affinity Group, Inc., 11.50% due 10/15/2003 3,340,625 3,532,813
1.1%
Diversified--1.4% NR+++ B3 3,750,000 Crain Industries Inc., 13.50% due 8/15/2005 3,770,625 4,256,250
<PAGE>
Energy--8.8% B B2 3,375,000 Benton Oil & Gas Co., 11.625% due 5/01/2003 3,375,000 3,661,875
B+ B1 4,275,000 Clark R&M Holdings, Inc., 10.536%* due
2/15/2000 3,232,669 3,238,313
B- B1 3,250,000 KCS Energy Inc., 11% due 1/15/2003 3,338,125 3,510,000
BBB- Baa3 5,000,000 Oleoducto Centrale S.A., 9.35% due
9/01/2005 (e) 5,000,000 5,187,500
NR+++ NR+++ 2,794,384 ++Transamerican Exploration, 14% due 9/19/1998 2,766,440 2,850,272
CCC+ Caa 3,000,000 Transamerican Refining Corporation, 16.50%
due 2/15/2002 3,005,455 3,352,500
BB- B2 5,000,000 TransTexas Gas Corp., 11.50% due 6/15/2002 5,000,000 5,575,000
------------ ------------
25,717,689 27,375,460
Financial Services NR+++ Ba3 4,527,000 First Nationwide Holdings Inc., 10.625% due
- --3.5% 10/01/2003 5,040,105 4,889,160
BB- B1 5,000,000 Reliance Group Holdings Inc., 9.75% due
11/15/2003 5,008,750 5,225,000
BB- NR+++ 750,000 Veritas Holdings, 9.625% due 12/15/2003 (e) 756,563 768,750
------------ ------------
10,805,418 10,882,910
Food & Beverage-- B B3 2,500,000 Curtice-Burns Foods, Inc., 12.25% due
3.2% 2/01/2005 2,500,000 2,712,500
CCC+ Caa 5,000,000 Fresh Del Monte Produce, 10% due 5/01/2003 4,801,875 5,100,000
B- B3 2,250,000 Windy Hill Pet Food Co., 9.75% due
5/15/2007 (e) 2,250,000 2,266,875
------------ ------------
9,551,875 10,079,375
Gaming--4.6% B+ B2 6,000,000 Greate Bay Property Funding Corp., 10.875%
due 1/15/2004 5,930,000 5,310,000
D Caa 5,000,000 Harrah's Jazz Company, 14.25% due
11/15/2001 (b) 5,000,000 2,375,000
BB- B1 5,000,000 Trump Atlantic City, 11.25% due 5/01/2006 5,000,000 4,900,000
NR+++ Caa 2,250,000 Trump's Castle Funding, Inc., 11.75% due
11/15/2003 2,095,311 1,923,750
------------ ------------
18,025,311 14,508,750
Health Services-- B B3 3,000,000 Imed Corp., 9.75% due 12/01/2006 (e) 3,022,500 3,060,000
2.0% B+ B2 3,000,000 Quest Diagnostic Inc., 10.75% due 12/15/2006 3,000,000 3,195,000
------------ ------------
6,022,500 6,255,000
Independent Power BB- Ba3 1,500,000 AES China Generating Co., Ltd. (Class A),
Producers--2.9% 10.125% due 12/15/2006 1,498,560 1,552,500
BB Ba2 625,000 California Energy Company, Inc., 9.875% due
6/30/2003 625,000 667,188
NR+++ NR+++ 6,500,000 Consolidated Hydro Inc., 12%* due 7/15/2003
(b) 5,578,933 2,990,000
BB- Ba3 3,680,343 Midland Cogeneration Venture Limited
Partnership, 10.33% 3,606,736 3,937,967
due 7/23/2002** ------------ ------------
11,309,229 9,147,655
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Media & B+ B2 $3,750,000 Call-Net Enterprises Inc., 10.927%* due
Communications-- 12/01/2004 $ 3,058,978 $ 3,201,562
International-- NR+++ NR+++ 2,500,000 Comtel Brasileira Ltd., 10.75% due 9/26/2004
5.8% (e) 2,500,000 2,656,250
B+ B2 2,250,000 Globo Communicacoes Participacoes, Ltd.,
10.50% due 12/20/2006 (e) 2,244,428 2,337,187
BB Ba3 3,750,000 Grupo Televisa S.A., 11.375% due 5/15/2003 3,750,000 4,096,875
BB- B1 5,000,000 Telefonica de Argentina S.A., 11.875% due
11/01/2004 4,900,400 5,912,500
------------ ------------
16,453,806 18,204,374
Metals & Mining-- B- B2 4,200,000 Kaiser Aluminum & Chemical Corp., 12.75%
4.8% due 2/01/2003 4,389,000 4,599,000
B- B3 8,000,000 Maxxam Group, Inc., 12.25%* due 8/01/2003 6,962,350 7,340,000
B B3 3,000,000 Westmin Resources Ltd., 11% due 3/15/2007 3,000,000 3,112,500
------------ ------------
14,351,350 15,051,500
Packaging--1.2% B+ Ba3 3,750,000 Vicap S.A., 11.375% due 5/15/2007 (e) 3,730,125 3,900,000
Paper & Forest B+ B1 4,000,000 Container Corporation of America, 9.75%
Products--7.3% due 4/01/2003 4,080,000 4,190,000
BB- Ba3 4,625,000 Doman Industries Ltd., 8.75% due 3/15/2004 4,264,062 4,382,187
BB- Ba3 1,875,000 Malette Inc., 12.25% due 7/15/2004 2,085,937 2,062,500
Repap New Brunswick, Inc.:
BB- B1 2,000,000 9.875% due 7/15/2000 2,000,000 1,990,000
B+ B3 1,500,000 10.625% due 4/15/2005 1,421,250 1,402,500
BB- B2 3,000,000 Repap Wisconsin Finance, Inc., 9.25% due
2/01/2002 2,638,750 3,000,000
B B2 1,500,000 Riverwood International Corp., 10.25% due
4/01/2006 1,451,250 1,488,750
B+ B1 4,000,000 S.D. Warren Co., 12% due 12/15/2004 4,000,000 4,460,000
------------ ------------
21,941,249 22,975,937
<PAGE>
Publishing & Hollinger International, Inc.:
Printing--1.7% BB+ Ba3 1,500,000 8.625% due 3/15/2005 1,492,500 1,507,500
BB- B1 1,500,000 9.25% due 3/15/2007 1,490,370 1,518,750
B B3 2,250,000 MDC Communications Corp., 10.50% due
12/01/2006 2,250,000 2,379,375
------------ ------------
5,232,870 5,405,625
Real Estate--1.5% NR+++ NR+++ 6,975,000 Rockefeller Center Properties, Inc.
(Convertible), 11.075%* due 12/31/2000 4,770,451 4,586,062
Specialty Retailing B- B3 4,000,000 Specialty Retailers, Inc., 11% due 8/15/2003 4,000,000 4,375,000
- --1.4%
Telephone/ NR+++ NR+++ 2,000,000 Brooks Fiber Properties Inc., 10.546%* due
Competitive Local 11/01/2006 1,335,627 1,290,000
Exchange Carriers-- NR+++ NR+++ 3,750,000 Nextlink Communications Inc., 12.50% due
2.5% 4/15/2006 3,750,000 3,960,937
B B1 2,250,000 Teleport Communications Group Inc., 9.875%
due 7/01/2006 2,374,875 2,385,000
------------ ------------
7,460,502 7,635,937
Transportation BB- Ba2 4,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 4,013,750 3,950,000
Services--6.3% BB- B1 3,750,000 Sea Containers Ltd., 12.50% due 12/01/2004 4,106,250 4,162,500
B- B3 4,250,000 Transtar Holdings L.P., 12.625%* due
12/15/2003 3,145,927 3,548,750
B B2 5,250,000 Trism Inc., 10.75% due 12/15/2000 5,000,625 4,830,000
BB Ba2 3,150,000 Viking Star Shipping Co., Inc., 9.625% due
7/15/2003 2,919,500 3,244,500
------------ ------------
19,186,052 19,735,750
Utilities--8.1% B+ B1 2,954,000 Beaver Valley Funding Corp., 9% due
6/01/2017 2,281,160 3,001,589
CTC Mansfield Funding Corp.:
B+ Ba3 1,972,000 10.25% due 3/30/2003 1,829,655 1,975,096
B+ Ba3 3,000,000 11.125% due 9/30/2016 3,213,750 3,197,310
B Ba3 3,029,000 First PV Funding Corp., 10.30% due 1/15/2014 3,224,032 3,249,208
BB- B1 4,000,000 Metrogas S.A., 12% due 8/15/2000 3,997,500 4,411,600
B+ B1 4,000,000 Texas-New Mexico Power Co., 10.75% due
9/15/2003 4,085,000 4,320,000
NR+++ NR+++ 5,106,532 ++Tucson Electric & Power Co., 10.21% due
1/01/2009** 4,798,574 5,037,849
------------ ------------
23,429,671 25,192,652
Waste Management-- D Ca 4,000,000 Mid-American Waste Systems, Inc., 12.25%
0.6% due 2/15/2003 (b) 4,000,000 2,010,000
<PAGE>
Wireless CCC- B3 3,000,000 Cencall Communications Corp., 13.935%* due
Communications-- 1/15/2004 2,074,301 2,310,000
Domestic Paging B- B3 3,850,000 Nextel Communications Inc., 13.675%* due
& Cellular--2.6% 8/15/2004 2,607,374 2,926,000
B- B3 3,000,000 Western Wireless Corp., 10.50% due 2/01/2007 2,987,813 3,022,500
------------ ------------
7,669,488 8,258,500
Wireless CCC+ B3 6,750,000 Cellular Communications, Inc., 11.89%* due
Communications-- 8/15/2000 4,641,990 4,927,500
International B+ B3 6,208,000 Comunicacion Celular, 13.154%* due 11/15/2003 3,983,976 4,485,280
Paging & B- B3 4,500,000 Millicom International Cellular S.A., 13.803%*
Cellular--4.1% due 6/01/2006 2,617,781 3,296,250
------------ ------------
11,243,747 12,709,030
Total Investments in Corporate Bonds--101.3% 314,006,012 317,039,683
<CAPTION>
Shares Held Common Stocks
Entertainment--0.6% 191,749 On Command Corp. (b) 5,573,706 1,893,521
Supermarkets--0.1% 70,697 Grand Union Co. (b) 4,152,500 145,813
Total Investments in Common Stocks--0.7% 9,726,206 2,039,334
Preferred Stocks & Warrants
Broadcasting/Radio 4,018 Paxson Communications Corp. (Convertible) (e) 3,735,014 3,957,730
& Television--1.3%
Cable--0.0% 45,725 American Telecasting, Inc. (Warrants) (a) 0 18,290
Energy--0.0% 16,835 Transamerican Refining Corporation
(Warrants) (a) 40,388 75,757
Entertainment--1.8% 61,014 On Command Corp. (Series B) (Warrants) (a) 488,120 213,549
4,794 Time Warner Inc. (Series M) 5,254,615 5,285,385
------------ ------------
5,742,735 5,498,934
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Value
INDUSTRIES Held Preferred Stocks & Warrants Cost (Note 1a)
<S> <C> <S> <C> <C>
Publishing & 95,665 K-III Communications Corp. $ 2,606,871 $ 2,559,039
Printing--0.8%
<PAGE>
Telephone/ 150 Intermedia Communications Inc. (Convertible)
Competitive (b)(e) 1,500,000 1,560,000
Local Exchange
Carriers--0.5%
Wireless 3,750 Cellular Communications International Inc.
Communications-- (Warrants) (a) 90,489 56,250
International Paging 6,208 Comunicacion Celular (Warrants) (a)(e) 6,782 45,008
& Cellular--0.0% ------------ ------------
97,271 101,258
Total Investments in Preferred Stocks &
Warrants--4.4% 13,722,279 13,771,008
<CAPTION>
Face
Amount Short-Term Securities
Commercial $305,000 General Motors Acceptance Corp., 5.62%
Paper***--0.1% due 6/02/1997 305,000 305,000
Total Investments in Short-Term
Securities--0.1% 305,000 305,000
Total Investments--106.5% $337,759,497 333,155,025
============
Liabilities in Excess of Other Assets--(6.5%) (20,245,768)
------------
Net Assets--100.0% $312,909,257
============
<FN>
*Represents a zero coupon or step bond; the interest rate
shown is the effective yield at the time of purchase by
the Fund.
**Subject to principal paydowns.
***Commercial Paper is traded on a discount basis; the
interest rate shown is the discount rate paid at the time
of purchase by the Fund.
+++Not Rated.
(a)Warrants entitle the Fund to purchase a predetermined
number of shares of common stock/face amount of bonds. The
purchase price and number of shares/face amount are subject
to adjustment under certain conditions until the expiration
date.
(b)Non-income producing security.
(c)Each $1,000 face amount contains one warrant of Australis
Media Ltd.
(d)Each $1,000 face amount contains one warrant of Wireless
One Inc.
(e)The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities
Act of 1933.
++Restricted security as to resale. The value of the Fund's
investment in restricted securities was approximately
$7,888,000, representing 2.5% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Transamerican Exploration, 14% due 9/19/1998 9/17/1996-
5/30/1997 $ 2,766,440 $ 2,850,272
Tucson Electric & Power Co., 10.21% due 1/01/2009 6/25/1993-
7/28/1993 4,798,574 5,037,849
----------- -----------
Total $ 7,565,014 $ 7,888,121
=========== ===========
Ratings of issues shown have not been audited by Deloitte
& Touche LLP.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of May 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$337,759,497) (Note 1a) $333,155,025
Receivables:
Interest $ 6,890,636
Securities sold 1,522,500
Principal paydowns 1,205,616 9,618,752
------------
Deferred organization expenses (Note 1e) 18,271
Prepaid expenses and other assets 65,972
------------
Total assets 342,858,020
------------
Liabilities: Loans (Note 5) 28,000,000
Payables:
Custodian bank (Note 1g) 1,521,624
Interest on loans (Note 5) 215,142
Investment adviser (Note 2) 143,942 1,880,708
------------
Accrued expenses and other liabilities 68,055
------------
Total liabilities 29,948,763
------------
<PAGE>
Net Assets: Net assets $312,909,257
============
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized $ 2,277,460
Paid-in capital in excess of par 318,320,998
Undistributed investment income--net 3,569,440
Accumulated realized capital losses on investments--net (Note 6) (6,654,169)
Unrealized depreciation on investments--net (4,604,472)
------------
Total--Equivalent to $13.74 per share based on 22,774,599 shares
of capital stock outstanding (market price $14.125) $312,909,257
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1997
<S> <S> <C>
Investment Income Interest and discount earned $ 35,724,131
(Note 1d): Dividends 430,416
Other 305,575
------------
Total income 36,460,122
------------
Expenses: Loan interest expense (Note 5) 2,089,500
Investment advisory fees (Note 2) 1,701,993
Borrowing costs (Note 5) 176,840
Professional fees 72,497
Transfer agent fees 66,981
Accounting services (Note 2) 58,073
Printing and shareholder reports 46,093
Directors' fees and expenses 40,137
Custodian fees 25,325
Amortization of organization expenses (Note 1e) 17,188
Pricing services 7,547
Listing fees 125
Other 41,388
------------
Total expenses 4,343,687
------------
Investment income--net 32,116,435
------------
<PAGE>
Realized & Realized loss on investments--net (223,424)
Unrealized Gain Change in unrealized depreciation on investments--net 2,092,741
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 33,985,752
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 32,116,435 $ 31,817,802
Realized gain (loss) on investments--net (223,424) 3,786,936
Change in unrealized depreciation on investments--net 2,092,741 3,322,391
------------ ------------
Net increase in net assets resulting from operations 33,985,752 38,927,129
------------ ------------
Dividends to Investment income--net (32,632,299) (31,825,075)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders (32,632,299) (31,825,075)
------------ ------------
Capital Stock Value of shares issued to Common Stock shareholders in
Transactions reinvestment of dividends 10,651,397 6,516,883
(Note 4): ------------ ------------
Net increase in net assets derived from capital stock transactions 10,651,397 6,516,883
------------ ------------
Net Assets: Total increase in net assets 12,004,850 13,618,937
Beginning of year 300,904,407 287,285,470
------------ ------------
End of year* $312,909,257 $300,904,407
============ ============
<FN>
*Undistributed investment income--net (Note 1h) $ 3,569,440 $ 2,782,777
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended May 31, 1997
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 33,985,752
by Operating Adjustments to reconcile net increase (decrease) in net assets
Activities: resulting from operations to net cash provided by
operating activities:
Decrease in receivables 978,899
Increase in other assets (13,130)
Increase in other liabilities 1,147,159
Realized and unrealized gain on investments--net (1,869,317)
Amortization of discount (9,814,114)
------------
Net cash provided by operating activities 24,415,249
------------
Cash Provided Proceeds from sales of long-term investments 201,520,658
Investing by Purchases of long-term investments (177,788,008)
Activities: Purchases of short-term investments (232,104,564)
Proceeds from sales and maturities of short-term investments 232,847,000
------------
Net cash provided by investing activities 24,475,086
------------
Cash Used for Cash receipts from borrowings 127,450,000
Financing Cash payments on borrowings (153,450,000)
Activities: Dividends paid to shareholders (22,890,345)
------------
Net cash used for financing activities (48,890,345)
------------
Cash: Net decrease in cash (10)
Cash at beginning of year 10
------------
Cash at end of year $ 0
============
Cash Flow Cash paid for interest $ 2,332,234
Information: ============
Non-Cash Reinvestment of dividends paid to shareholders $ 10,651,397
Financing ============
Activities:
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have been Period
derived from information provided in the financial June 25,
statements. 1993++ to
For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1997++++ 1996++++ 1995++++ 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 13.68 $ 13.35 $ 13.21 $ 14.18
Operating -------- -------- -------- --------
Performance: Investment income--net 1.44 1.46 1.62 1.30
Realized and unrealized gain (loss) on investments
--net .08 .33 .14 (1.10)
-------- -------- -------- --------
Total from investment operations 1.52 1.79 1.76 .20
-------- -------- -------- --------
Less dividends from investment income--net (1.46) (1.46) (1.62) (1.17)
-------- -------- -------- --------
Net asset value, end of period $ 13.74 $ 13.68 $ 13.35 $ 13.21
======== ======== ======== ========
Market price per share, end of period $ 14.125 $ 13.375 $ 13.625 $ 13.875
======== ======== ======== ========
Total Investment Based on market price per share 17.44% 9.35% 11.67% .36%+++
Return:** ======== ======== ======== ========
Based on net asset value per share 11.69% 14.15% 14.92% 1.08%+++
======== ======== ======== ========
Ratios to Average Expenses, excluding interest expense .66% .70% .69% .68%*
Net Assets: ======== ======== ======== ========
Expenses 1.27% 1.62% 2.53% 1.76%*
======== ======== ======== ========
Investment income--net 9.43% 9.20% 9.03% 7.55%*
======== ======== ======== ========
Leverage: Amount of borrowings (in thousands) $ 28,000 $ 54,000 $ 46,000 $124,000
======== ======== ======== ========
Average amount of borrowings outstanding during the
period (in thousands) $ 36,667 $ 49,424 $107,934 $ 98,601
======== ======== ======== ========
Average amount of borrowings outstanding per share
during the period $ 1.64 $ 2.27 $ 5.13 $ 4.78
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $312,909 $300,904 $287,285 $272,737
Data: ======== ======== ======== ========
Portfolio turnover 52.91% 65.68% 45.73% 45.82%
======== ======== ======== ========
<PAGE>
<FN>
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
*Annualized.
**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 loads.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Corporate High Yield Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, closed-end management
investment company. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly basis.
The Fund's Common Stock is listed on the New York Stock Exchange under
the symbol COY.
(a) Valuation of investments--Portfolio securities are valued on the
basis of prices furnished by one or more pricing services, which
determine prices for normal, institutional-size trading units. In
certain circumstances, portfolio securities are valued at the last
sale price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The
value of interest rate swaps, caps, and floors is determined in
accordance with a formula and then confirmed periodically by
obtaining a bank quotation. Positions in options are valued at the
last sale price on the market where any such option is principally
traded. Obligations with remaining maturities of sixty days or less
are valued at amortized cost, which approximates market value.
Securities for which there exist no price quotations or valuations
and all other assets are valued at fair value as determined in good
faith by or on behalf of the Board of Directors of the Fund.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Options--The Fund is authorized to write covered call options and
purchase put options. When the Fund writes an option, an amount
equal to the premium received by the Fund is reflected as an asset
and an equivalent liability. The amount of the liability is sub-
sequently 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.
* Interest rate swap transactions--The Fund is authorized to enter
into interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
<PAGE>
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses--Deferred organization ex-penses
are amortized on a straight-line basis over a five-year period.
(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) Custodian Bank--The Fund recorded an amount payable to the
custodian bank reflecting an overnight overdraft which resulted from
a failed trade which settled the next day.
(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$1,302,527 have been reclassified between accumulated net realized
capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
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 perform the investment advisory
function. For such services the Fund pays a monthly fee at an annual
rate of 0.50% of the Fund's average weekly net assets plus the
proceeds of any outstanding borrowings used for leverage.
For the year ended May 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), $4,504 for providing security price
quotations to compute the net asset value of the Fund.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1997 were $177,788,008 and $201,884,520,
respectively.
Net realized and unrealized losses as of May 31, 1997 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $ (223,424) $ (4,604,472)
------------ ------------
Total $ (223,424) $ (4,604,472)
============ ============
As of May 31, 1997, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $5,371,042, of
which $17,262,574 related to appreciated securities and $22,633,616
related to depreciated securities. The aggregate cost of investments
at May 31, 1997 for Federal income tax purposes was $338,526,067.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of Common Stock,
par value $.10 per share. For the year ended May 31, 1997, shares
issued and outstanding increased by 778,495 to 22,774,599 as a
result of dividend reinvestment. At May 31, 1997, total paid-in
capital amounted to $320,598,458.
5. Short-Term Borrowings:
On August 13, 1996, the Fund extended its credit agreement with
Merrill Lynch International Bank Limited, an affiliate of MLPF&S.
The agreement is a $130,000,000 credit facility bearing interest at
the Federal Funds rate plus .25% and/or LIBOR plus .25%. For the
year ended May 31, 1997, the maximum amount borrowed was $58,400,000,
the average amount borrowed was approximately $36,667,000 and the
daily weighted average interest rate was 5.70%. For the year ended
May 31, 1997, facility and commitment fees aggregated approximately
$176,840.
<PAGE>
6. Capital Loss Carryforward:
At May 31, 1997, the Fund had a net capital loss carryforward of
approximately $6,234,000, of which $4,105,000 expires in 2003,
$1,820,000 expires in 2004 and $309,000 expires in 2005. This amount
will be available to offset like amounts of any future taxable
gains.
7. Subsequent Event:
On June 9, 1997 the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.109189 per share, payable on June 30, 1997 to shareholders of
record as of June 19, 1997.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Corporate High Yield Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Corporate
High Yield Fund, Inc. as of May 31, 1997, the related statements of
operations for the year then ended, changes in net assets for each
of the years in the two-year period then ended, and cash flows for
the year then ended, and the financial highlights for each of the
years in the three-year period then ended and the period June 25,
1993 (commencement of operations) to May 31, 1994. These financial
statements and the financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at May 31,
1997 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
<PAGE>
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Corporate High Yield Fund, Inc. as of May 31, 1997, the results of
its operations, the changes in its net assets, its cash flows, and
the financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 1, 1997
</AUDIT-REPORT>
<TABLE>
PORTFOLIO INFORMATION (unaudited)
<CAPTION>
Percent of Total
Long-Term Assets
<S> <S> <S> <C>
Ten Largest Maxxam Group, Inc. Maxxam is a holding company whose affiliate, Kaiser Aluminum is
Holdings 12.25% 8/01/2003 a leading producer of aluminum. Kaiser's common stock secures
these bonds. Through subsidiaries, Pacific Lumber and Britt
Lumber, Maxxam is the largest producer of premium-grade redwood
lumber in the world. 2.2%
Telefonica de Telefonica de Argentina provides monopoly telephone service to
Argentina S.A. the southern half of Argentina, including about half the Buenos
11.875% 11/01/2004 Aires metropolitan area where nearly one third of Argentina's
population is located. 1.8
TransTexas Gas Corp. TransTexas is an independent exploration and production company
11.50% 6/15/2002 with operations primarily in the Lower Wilcox Lobo Trend in south
Texas. The company also owns a pipeline and gathering system and
a drilling services operation. 1.7
Videotron Holdings Videotron is a start-up cable TV/telephone company operating
PLC primarily in London. The company is owned by a partnership between
11.125% 7/01/2004 Bell Cablemedia and Cable and Wireless PLC. 1.6
Greate Bay Property Greate Bay Property Funding finances the Sands Casino in Atlantic
Funding Corp. City which is the ultimate security for these first mortgage bonds.
10.875% 1/15/2004 1.6
Time Warner Inc. Time Warner is a media and entertainment company covering
Preferred Stock, entertainment, cable networks, publishing and cable operations.
Series K The company has interests in movie and television production,
recorded music, music publishing, cable-TV programming, magazine
and book publishing and cable-TV service. 1.6
<PAGE>
Nextel Communications, Nextel is building a network to provide digital wireless
Inc. communications services that ultimately will have a nationwide
13.675% 8/15/2004 footprint. The company currently has service in over 225 cities
13.935% 1/15/2004 and expects service to cover 85% of the US population by the end
of 1998. The company has over 423,000 subscribers currently. Cencall
Communications Corp. is part of Nextel Communications, Inc. 1.6
Rogers Communications Rogers is a diversified public Canadian communications and media
Inc. company. Wholly-owned subsidiaries provide cable television services
10.875% 4/15/2004 in Ontario and British Columbia, operate radio and TV stations
and video stores, and publish magazines and periodicals; 80% owned
Rogers Cantel Mobile Communications provides cellular and other
wireless communications services. 1.6
Reliance Group Reliance owns property/casualty insurance and title insurance
Holdings Inc. companies. The companies underwrite a broad range of standard
9.75% 11/15/2003 commercial and specialty commercial lines of property
and casualty insurance, as well as title insurance. 1.5
Oleoducto Centrale Oleoducto Centrale ("Ocensa") was formed to own and operate the
S.A. Oleoducto Central pipeline in Columbia that connects the large
9.35% 9/01/2005 Cusiana and Cupiagua oil fields to a port on the Caribbean
coast. The pipeline is under construction, with completion expected
in late 1997. Ocensa is owned by Ecopetrol, the Colombian state
oil company, and by subsidiaries of British Petroleum, Total, Triton
Energy, and Trans Canada Pipelines. 1.5
</TABLE>
