CORPORATE
HIGH YIELD
FUND II, INC.
Annual Report August 31, 1994
This report, including the financial information herein, is
transmitted to the shareholders of Corporate High Yield Fund II,
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.
Corporate High
Yield Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
CORPORATE HIGH YIELD FUND II, INC.
The Benefits and
Risks of
Leveraging
Corporate High Yield Fund II, 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.
<PAGE>
<TABLE>
Per Share Selected
Quarterly Financial
Data* (unaudited)
<CAPTION>
Net Dividends/Distributions
Investment Realized Unrealized Net Investment Capital
For the Period Income Gains Gains Income Gains
<S> <C> <C> <C> <C> <C>
November 26, 1993++ to February 28, 1994 $.31 $.03 $ .17 $(.20) --
March 1, 1994 to May 31, 1994 .38 (.04) (1.69) (.37) --
June 1, 1994 to August 31, 1994 .37 (.13) (.25) (.37) --
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
November 26, 1993++ to February 28, 1994 $14.62 $14.15 $15.00 $13.875 772
March 1, 1994 to May 31, 1994 14.43 12.75 14.375 12.25 942
June 1, 1994 to August 31, 1994 12.95 12.30 13.625 11.875 736
<FN>
++Commencement of Operations.
*Calculations are based upon shares of Common Stock outstanding at
the end of each period.
**As reported in the consolidated transaction reporting system.
***In thousands.
</TABLE>
DEAR SHAREHOLDER
The six-month period ended August 31, 1994 proved to be a difficult
one for a broad cross-section of investment markets. While the high-
yield corporate bond market fared better than other markets, the
total return of the unmanaged Merrill Lynch High Yield Master Index
was -1.505% from the end of February through August 31, 1994
(-2.964% on an annualized basis). Since inception (November 26,
1993) to August 31, 1994, the total investment return on the Fund's
Common Stock was -6.28%, based on a change in the per share net
asset value from $14.18 to $12.37, and assuming reinvestment of
$0.938 per share income dividends. During the same period, and
reflecting the initial investment and leveraging process, the net
annualized yield of the Fund's Common Stock was 10.22%. On August
31, 1994, the Fund was 30.8% leveraged, representing $45 million
borrowed of the total $60 million line of credit available at an
average borrowing cost of 5.91%. This compares to 9% leverage at an
average borrowing cost of 4.52% on February 28, 1994.
<PAGE>
While the fiscal year began with strong demand and upward bias in
high-yield bond prices, in late February the market succumbed to the
pressure of rising interest rates in competing bond sectors, and
prices declined. Price declines were initially more pronounced in
the higher quality BB-rated bonds than in lesser-rated issues priced
during the strong market earlier in the year. More recently, higher-
rated bonds regained some ground as investors shifted toward better
quality names. At August 31, 1994, the average yield on B-rated
industrials was near 11.3%, and the average yield on BB-rated
securities was about 9.5%, according to Merrill Lynch Global
Securities Research & Economics Group. By contrast, at the end of
February, B-rated industrials yielded 10.1% and BB-rated securities
yielded 8.6%. The yield spread between high-yield bonds and US
Treasury bonds and notes widened over the course of the period by 39
basis points (0.39%), providing yield premiums in the 55%--60%
range.
We believe yield spreads between high-yield bonds and Treasuries
will remain fairly stable, given the fairly benign economic
environment and our expectation that high-yield default rates are
likely to remain modest. Last year's default rates in the high-yield
universe were about 1%, the lowest since 1984. While default rates
ultimately will rise, we believe that this year will be similar to
last year as strong corporate profits and reequitization continue to
benefit the high-yield market.
In late February, cash flows into high-yield mutual funds reversed
sharply and have remained erratic with a generally positive trend.
We believe that the fundamental investment case for high-yield
securities remains compelling. However, the high-yield market will
remain coupled to the Government bond market as it has been through
this year. Therefore, we see a continued downward pressure on high-
yield bonds until the US Government bond market stabilizes.
Investment Strategy & Outlook
Various factors contributed to the Fund's performance during the
August period. Notably, the negative impact of leverage magnified
the reduction in the Fund's net asset value as borrowings remained
fixed in the face of falling asset values. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of
this report to shareholders.) The relatively long-term average
portfolio maturity for most of the period also exposed us to
dramatic drops in long-term bond prices. We believe that over the
long term, the factors affected by the downward adjustment in prices
will contribute to improved performance prospects. Specific
industries whose weakness had the most impact on the Fund's reduced
net asset value included food and beverage, financial services and
casinos. In our view, market intolerance for earnings disappointment
or for potential future credit weakness has excessively punished
these and other sectors. The Fund's casino holdings are largely of
Atlantic City properties. Atlantic City casino bonds have been hard
hit by investor concerns that Atlantic City will be seriously
damaged by potential gaming in Philadelphia. While we agree that new
competition will hurt, we believe that these concerns are overblown.
<PAGE>
Over the past six months, we increased exposure to sectors where we
see improving earnings trends and that we believe are undervalued.
These sectors included communications, steel and utilities. In those
sectors, new purchases included bonds of Bell Cablemedia PLC,
Videotron Holdings PLC, American Telecasting, Inc., A.K. Steel
Holding Corp., Public Service Company of New Mexico, and Tucson
Electric & Power Co. Bell Cablemedia and Videotron are both start-up
cable television/telephone companies in and near London with
excellent growth prospects and well-capitalized parent companies.
American Telecasting is a new competitor to existing cable
television operators that either provided service where none was
previously available or service at a better price. Our other
purchases in the utilities sector reflect our belief that feared
competition in the utilities industry will be slow in coming and
will have only a moderate impact on the ability of most utilities to
service their debt. We reduced exposure to the energy sector
primarily by selling our position in Ferrell Gas Company, Inc.,
which we viewed as fully valued in the market at the time. The
average portfolio maturity was shortened from nearly 15 years in
June to 9 years, 8 months by August 31, 1994. Major industries
represented in the portfolio include: food & beverage, 17.5% of net
assets; hotels & casinos, 12.0%; communications, 10.8%; energy,
8.8%; and utilities, 7.5%.
With the Fund fully invested and leveraged, our strategy is to
selectively upgrade the portfolio while reducing our investments in
bonds we view as fully valued in this market. Our emphasis will be
on improving credit quality for a given yield level and on enhancing
upside potential. We will continue to invest selectively in
attractively priced new issues. Given our view that the market
should not experience another dramatic drop in the near term, and
given the continued wide yield spread between interest earned on our
investments and interest paid on our borrowings, we intend to remain
close to fully leveraged to take advantage of the potential for
improved returns using leverage.
In Conclusion
We thank you for your investment in Corporate High Yield Fund II,
Inc., and we look forward to assisting you with your financial goals
in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
<PAGE>
(Vincent T. Lathbury III)
Vincent T. Lathbury III
Vice President and Portfolio Manager
(Elizabeth M. Phillips)
Elizabeth M. Phillips
Vice President and Portfolio Manager
September 30, 1994
Officers and Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Vincent T. Lathbury III, Vice President
Elizabeth M. Phillips, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian & Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
NYSE Symbol
KYT
<PAGE>
<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>
Airlines--4.5% BB+ Baa3 $1,952,996 Delta Air Lines Inc., 9.875% due
4/30/2008** $ 2,060,411 $ 1,943,895
USAIR Inc.:
BB B1 1,895,428 11.20% due 3/19/2005** 1,667,977 1,743,794
BB B1 1,000,000 10.375% due 3/01/2013 955,000 905,000
------------ ------------
4,683,388 4,592,689
Broadcasting & B+ B1 2,000,000 Comcast Corp., 10.625% due 7/15/2012 2,050,000 1,975,000
Publishing--3.9% CCC+ B3 2,000,000 SCI Television Inc., 11.00% due
6/30/2005 2,081,563 2,025,000
------------ ------------
4,131,563 4,000,000
Building CCC Caa 2,000,000 Nortek Inc., 9.875% due 3/01/2004 1,984,280 1,820,000
Materials--1.8%
Building B B1 3,150,000 American Standard Inc., 11.378% due
Products--4.3% 6/01/2005* 1,963,576 2,063,250
B Ba3 2,500,000 Inter-City Products Corp., 9.75% due
3/01/2000 2,468,750 2,300,000
------------ ------------
4,432,326 4,363,250
Capital BB- Ba3 2,000,000 AMETEK, Inc., 9.75% due 3/15/2004 2,000,000 2,035,000
Goods--3.8% B+ B3 2,000,000 Sequa Corp., 9.375% due 12/15/2003 2,051,875 1,850,000
------------ ------------
4,051,875 3,885,000
Chemicals--1.8% B Ba3 3,000,000 G-I Holdings Inc., 12.37% due 10/01/1998* 1,979,882 1,837,500
Communications-- CCC+ Caa 3,670,000 American Telecasting, Inc., 12.50% due
10.8% 6/15/2004* 2,030,030 1,724,900
B+ B2 4,600,000 Bell Cablemedia PLC, 12.32% due
7/15/2004* 2,549,250 2,616,250
CCC- B3 1,000,000 Nextel Communications, 11.97% due
8/15/2004* 542,901 540,000
Pan Am Sat L.P.:
B+ Ba3 1,000,000 9.75% due 8/01/2000 1,052,500 990,000
B- B3 2,000,000 9.94% due 8/01/2003* 1,387,253 1,290,000
CCC+ B3 2,000,000 USA Mobile Communications Holdings,
Inc., 9.50% due 2/01/2004 1,965,000 1,780,000
B+ B3 3,665,000 Videotron Holdings PLC, 12.00% due
7/01/2004* 2,011,933 2,034,075
------------ ------------
11,538,867 10,975,225
<PAGE>
Conglomerates-- B+ B1 2,000,000 Coltec Industries, Inc., 10.25% due
5.9% 4/01/2002 2,135,000 2,020,000
B+ Ba3 1,999,000 Interco Inc., 10.00% due 6/01/2001 2,023,988 1,994,003
BB- Ba3 2,000,000 Sherritt Gordon Ltd., 9.75% due
4/01/2003 2,000,000 1,940,000
------------ ------------
6,158,988 5,954,003
Consumer B- Caa 1,000,000 Polymer Group Inc., 12.25% due
Products--3.8% 7/15/2002 (b) 1,002,500 1,005,000
B- B3 2,000,000 Revlon Consumer Products Corp., 10.50%
due 2/15/2003 1,925,000 1,620,000
B B3 3,000,000 Revlon Worldwide Corp., 19.73% due
3/15/1998* 1,630,897 1,215,000
------------ ------------
4,558,397 3,840,000
Containers--6.2% B B2 3,000,000 Anchor Glass Container Corp., 9.875%
due 12/15/2008 3,052,500 2,790,000
B- Caa 3,000,000 Ivex Holdings Corp., 11.91% due
3/15/2005* 1,598,530 1,470,000
B- B3 2,485,000 Silgan Holdings, Inc., 11.99% due
12/15/2002* 2,102,159 2,012,850
------------ ------------
6,753,189 6,272,850
Energy--8.8% B- B2 500,000 Falcon Drilling Company, 9.75% due
1/15/2001 (b) 500,000 477,500
B+ B2 3,000,000 Gulf Canada Resources Ltd., 9.25%
due 1/15/2004 3,018,750 2,805,000
BB+ Ba3 2,000,000 Maxus Energy Corp., 11.50% due 11/15/2015 2,130,000 2,020,000
CCC B3 1,978,000 Mesa Capital Corp., 14.07% due 6/30/1996* 1,720,768 1,740,640
B+ B1 2,510,000 Triton Energy Corp., 9.75% due
12/15/2000* 1,942,160 1,888,775
------------ ------------
9,311,678 8,931,915
<PAGE>
Entertainment--2.3% B B3 1,000,000 Marvel Holdings Inc., 10.58% due
4/15/1998* 688,872 610,000
B- Caa 3,189,000 Spectravision, Inc., 11.65% due
12/01/2002++ 3,163,051 1,724,343
------------ ------------
3,851,923 2,334,343
Financial BB B1 2,000,000 Lomas Mortgage USA, 10.25% due 10/01/2002 2,091,250 1,760,000
Services--6.2% BB- B1 2,000,000 Penncorp Financial, 9.25% due 12/15/2003 2,000,000 1,860,000
BB- B1 3,000,000 Reliance Group Holdings Inc., 9.75% due
11/15/2003 3,035,000 2,700,000
------------ ------------
7,126,250 6,320,000
Food & B+ B3 2,000,000 Chiquita Brands International Inc.,
Beverage--17.5% 11.50% due 6/01/2001 2,120,000 2,070,000
B B2 2,000,000 Coca Cola Bottling Group, 9.00% due
11/15/2003 1,975,625 1,820,000
B- B2 2,000,000 Envirodyne Industries, 10.25% due
12/01/2001 2,037,500 1,600,000
BB- B1 3,000,000 Fresh Del Monte Produce, 10.00% due
5/01/2003 2,875,000 2,730,000
CCC+ B2 2,000,000 Grand Union Co., 12.25% due 7/15/2002 2,103,750 1,585,000
B- B3 2,000,000 Heileman Acquisition Co., 9.625% due
1/31/2004 2,000,000 1,710,000
B B2 3,000,000 Penn Traffic Co., 9.625% due 4/15/2005 3,113,750 2,782,500
B- B2 2,000,000 Pueblo Xtra International Inc., 9.50%
due 8/01/2003 1,940,000 1,640,000
B B2 2,000,000 Ralph's Grocery Co., 9.00% due 4/01/2003 1,981,250 1,835,000
------------ ------------
20,146,875 17,772,500
Foreign--1.7% BB- B1 2,000,000 Republic of Argentina, 8.375% due
12/20/2003 1,901,500 1,705,000
Health B B1 1,000,000 Healthtrust Inc., 10.25% due 4/15/2004 1,000,000 1,015,000
Services--1.0%
Home Builders-- B- B2 2,150,000 Baldwin Homes Company, 10.375% due
2.7% 8/01/2003 2,119,625 1,763,000
B B3 1,000,000 Greystone Homes Inc., 10.75% due
3/01/2004 (b) 1,000,000 960,000
------------ ------------
3,119,625 2,723,000
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Hotels & BB B- $2,000,000 Bally's Park Place, Inc., 9.25% due
Casinos--12.0% 3/15/2004 $ 1,942,500 $ 1,680,000
NR NR 1,500,000 Capital Gaming International, 11.50%
due 2/01/2001 (b)*** 1,700,025 1,320,000
NR NR 3,750 Capital Gaming International (Warrants)
(a) 6,562 20,625
B+ B2 3,000,000 GB Property Funding Corp., 10.875% due
1/15/2004 2,952,500 2,280,000
BB- B- 1,841,000 Host Marriott Hospitality, Inc., 10.375%
due 6/15/2011 1,891,628 1,841,000
Showboat, Inc.:
BB- Ba3 1,000,000 9.25% due 5/01/2008 1,022,500 842,500
B B2 1,000,000 13.00% due 8/01/2009 1,000,000 985,000
NR Caa 1,818,000 Trump Castle Funding Inc., 11.75% due
11/15/2003++ 1,553,848 1,099,890
B B3 3,000,000 Trump Plaza Funding, Inc., 10.875% due
6/15/2001 2,963,750 2,197,500
------------ ------------
15,033,313 12,266,515
Industrial BB- B2 3,000,000 ADT Operations Inc., 9.25% due 8/01/2003 3,065,000 2,850,000
Services--2.8%
Metals & B- B3 3,000,000 Maxxam Group, Inc., 11.25% due 8/01/2003 2,985,000 2,805,000
Mining--2.8%
Paper--7.4% B B2 3,000,000 Fort Howard Corp., 9.00% due 2/01/2006 2,966,250 2,580,000
B B- 2,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 2,175,000 2,085,000
B+ B- 2,000,000 Stone Consolidated Corp., 10.25% due
12/15/2000 2,000,000 1,965,000
B B- 1,000,000 Stone Container Corp., 9.875% due
2/01/2001 952,500 930,000
------------ ------------
8,093,750 7,560,000
Restaurants--4.2% CCC+ B2 3,000,000 Flagstar Corp., 11.375% due 9/15/2003 3,112,500 2,625,000
B- B2 2,000,000 Foodmaker, Inc., 9.75% due 6/01/2002 2,025,000 1,670,000
------------ ------------
5,137,500 4,295,000
<PAGE>
Retail B- B3 2,000,000 Pamida Holdings Inc., 11.75% due
Specialty--4.7% 3/15/2003 2,023,125 2,000,000
B- B3 2,850,000 Specialty Retailers, Inc., 11.00% due
8/15/2003 2,885,625 2,736,000
------------ ------------
4,908,750 4,736,000
Steel--5.8% B B2 2,000,000 A.K. Steel Holding Corp., 10.75% due
4/01/2004 2,000,000 2,040,000
B B2 2,000,000 Republic Engineering Steel, 9.875% due
12/15/2001 2,000,000 1,890,000
B+ B1 2,000,000 WCI Steel Inc., 10.50% due 3/01/2002 2,000,000 2,000,000
------------ ------------
6,000,000 5,930,000
Textiles--2.7% B+ B3 3,000,000 Westpoint Stevens, Inc., 9.375% due
12/15/2005 2,993,125 2,707,500
Transportation BB Ba2 2,000,000 Eletson Holdings, 9.25% due 11/15/2003 2,030,000 1,860,000
Services--4.1% NR NR 4,271,000 Transtar Holdings Inc., 11.00% due
12/15/2003* 2,161,135 2,317,017
------------ ------------
4,191,135 4,177,017
Utilities--7.5% B+ B1 3,000,000 Beaver Valley Funding, 9.00% due
6/01/2017 2,820,000 2,340,000
BB+ Ba1 1,300,000 CTC Mansfield Funding, 11.125% due
9/30/2016 1,399,937 1,258,855
Public Service Company of New Mexico:
B Ba3 1,000,000 10.30% due 1/15/2014 1,030,000 970,000
BB+ Ba3 1,000,000 10.15% due 1/15/2016 1,022,500 965,490
NR NR 2,359,521 Tucson Electric & Power Co., 10.21%
due 1/01/2009 (b) 2,312,331 2,065,902
------------ ------------
8,584,768 7,600,247
Total Investments in Corporate Bonds--
141.0% 157,722,947 143,269,554
<PAGE>
Short-Term Securities
<S> <C> <S> <C> <C>
US Government 1,885,000 Federal National Mortgage Association,
& Agency 4.75% due 9/01/1994 1,885,000 1,885,000
Obligations****--
1.8%
Commercial 220,000 General Electric Capital Corp., 4.75%
Paper*****--0.2% due 9/01/1994 220,000 220,000
Total Investments in Short-Term
Securities--2.0% 2,105,000 2,105,000
Total Investments--143.0% $159,827,947 145,374,554
============
Liabilities in Excess of Other Assets--
(43.0%) (43,678,322)
------------
Net Assets--100.0% $101,696,232
============
<FN>
*Represents the effective yield at the time of purchase.
**Subject to principal paydowns.
***Represents a unit. Each unit consists of one 11.50% note due
2001, 20.25 warrants and 26.67 shares of common stock.
****Coupon rates reset periodically. The coupon rate shown is the
rate in effect at August 31, 1994.
*****Commercial Paper is traded on a discount basis; the interest
rates shown are the discount rates paid at the time of purchase by
the Fund.
++Represents a pay-in-kind security which may pay interest in
additional face.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and the number of shares
are subject to adjustment under certain conditions until the
expiration date.
(b)Restricted securities. The value of the Fund's investment in
restricted securities was approximately $5,828,000, representing
5.7% of net assets.
Acquisition Value
Issue Date Cost (Note 1a)
Capital Gaming International,
11.50% due 2/01/2001 1/10/1994 $1,700,025 $1,320,000
Falcon Drilling Company,
9.75% due 1/15/2001 1/14/1994 500,000 477,500
Greystone Homes Inc., 10.75%
due 3/01/2004 3/03/1994 1,000,000 960,000
Polymer Group Inc., 12.25%
due 7/15/2002 7/07/1994 1,002,500 1,005,000
Tucson Electric & Power Co.,
10.21% due 1/01/2009 3/23/1994 2,312,331 2,065,902
Total $6,514,856 $5,828,402
========== ==========
<PAGE>
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 August 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$159,827,947) (Note 1a) $145,374,554
Cash 3,466
Interest receivable 3,494,205
Deferred facility fees (Note 1d) 37,500
Deferred organization expenses (Note 1d) 49,679
Prepaid expenses and other assets 43,213
------------
Total assets 149,002,617
------------
Liabilities: Payables:
Loans (Note 5) $ 45,000,000
Securities purchased 1,496,250
Dividends to shareholders (Note 1e) 453,826
Interest on loans (Note 5) 134,173
Investment adviser (Note 2) 61,656
Commitment fees (Note 5) 4,846 47,150,751
------------
Accrued expenses and other liabilities 155,634
------------
Total liabilities 47,306,385
------------
Net Assets: Net assets $101,696,232
============
<PAGE>
Capital: Common stock, par value $.10 per share; 200,000,000
shares authorized $ 822,432
Paid-in capital in excess of par 115,372,574
Undistributed investment income--net 1,013,497
Accumulated realized capital losses--net (1,058,878)
Unrealized depreciation on investments--net (14,453,393)
------------
Net Assets--Equivalent to $12.37 per share based on 8,224,317
shares of capital stock outstanding (market price $12.125) $101,696,232
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period
November 26, 1993++
to August 31, 1994
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 10,165,013
(Note 1c): Dividends 71,944
Other 62,133
------------
Total income 10,299,090
------------
Expenses: Loan interest expense and commitment fees (Note 5) $ 1,198,322
Investment advisory fees (Note 2) 526,707
Facility fees amortization (Note 1d) 52,500
Accounting services (Note 2) 50,372
Directors' fees and expenses 23,494
Listing fees 16,686
Printing and shareholder reports 15,912
Professional fees 14,315
Transfer agent fees (Note 2) 13,862
Custodian fees 12,197
Amortization of organization expenses (Note 1d) 8,965
Pricing fees 3,933
Registration fees 125
Other 35,547
------------
Total expenses before reimbursement 1,972,937
Reimbursement of expenses (Note 2) (314,978)
------------
Total expenses after reimbursement 1,657,959
------------
Investment income--net 8,641,131
------------
<PAGE>
Realized & Realized loss on investments--net (1,058,878)
Unrealized Unrealized depreciation on investments--net (14,453,393)
Loss on ------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $ (6,871,140)
(Notes 1c & 3): ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
November 26, 1993++
Increase (Decrease) in Net Assets: to August 31, 1994
<S> <S> <C>
Operations: Investment income--net $ 8,641,131
Realized loss on investments--net (1,058,878)
Unrealized depreciation on investments--net (14,453,393)
------------
Net decrease in net assets resulting from operations (6,871,140)
------------
Dividends to Investment income--net (7,627,634)
Shareholders ------------
(Note 1e): Net decrease in net assets resulting from dividends to
shareholders (7,627,634)
------------
Capital Share Value of shares sold to Common Stock shareholders 116,286,687
Transactions: Offering costs resulting from the issuance of shares (191,686)
------------
Net increase in net assets resulting from capital share
transactions 116,095,001
------------
Net Assets: Total increase in net assets 101,596,227
Beginning of period 100,005
------------
End of period* $101,696,232
============
<PAGE>
<FN>
*Undistributed investment income--net $ 1,013,497
============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Period
November 26, 1993++
to August 31, 1994
<S> <S> <C>
Cash Provided Net decrease in net assets resulting from operations $ (6,871,140)
by Operating Adjustments to reconcile net increase in net assets
Activities: resulting from operations to net cash provided by operating
activities:
Increase in receivables (3,494,205)
Increase in other assets (130,392)
Increase in other liabilities 356,309
Realized and unrealized loss on investments--net 15,512,271
Amortization of discount (1,057,394)
------------
Net cash provided by operating activities 4,315,449
------------
Cash Used for Proceeds from sales of long-term investments 47,855,384
Investing Purchases of long-term investments (204,343,333)
Activities: Purchases of short-term investments (595,031,099)
Proceeds from sales and maturities of short-term
investments 593,185,867
------------
Net cash used for investing activities (158,333,181)
------------
Cash Provided Cash receipts on capital shares sold 116,095,001
by Financing Dividends paid to shareholders (7,173,808)
Activities: Short-term borrowings--net 45,000,000
------------
Net cash provided by financing activities 153,921,193
------------
<PAGE>
Cash: Net decrease in cash (96,539)
Cash at beginning of period 100,005
------------
Cash at end of period $ 3,466
============
Cash Flow Cash paid for interest $ 1,034,435
Information: ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
November 26, 1993++
Increase (Decrease) in Net Asset Value: to August 31, 1994
<S> <S> <C>
Per Share Net asset value, beginning of period $ 14.18
Operating ------------
Performance: Investment income--net 1.06
Realized and unrealized loss on investments--net (1.91)
------------
Total from investment operations (.85)
------------
Less dividends and distributions:
Investment income--net (.94)
------------
Capital charge resulting from the issuance of Common Stock (.02)
------------
Net asset value, end of period $ 12.37
============
Market price per share, end of period $ 12.125
============
Total Investment Based on net asset value per share (6.28%)+++
Return:** ============
Based on market price per share (13.15%)+++
============
Ratios to Expenses, net of reimbursement 1.68%*
Average Net ============
Assets: Expenses 2.00%*
============
Investment income--net 8.75%*
============
<PAGE>
Supplemental Net assets, end of period (in thousands) $ 101,696
Data: ============
Portfolio turnover 42.21%
============
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value,
result in substantially different returns.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Corporate High Yield Fund II, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, closed-end
management investment company. Prior to commencement of operations
on November 26, 1993, the Fund had no operations other than those
relating to organizational matters and the issue of 7,055 capital
shares of the Fund to Fund Asset Management, L.P. ("FAM") for
$100,005. 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 KYT.
<PAGE>
(a) Valuation of investments--Portfolio securities (other than short-
term obligations but including listed issues) may be valued on the
basis of prices furnished by one or more pricing services which
determine prices for normal, institutional-size trading units of
such securities using market information, transactions for
comparable securities and various relationships between securities
which are generally recognized by institutional traders. In certain
circumstances, portfolio securities are valued at the last sale
price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The
value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by
obtaining a bank quotation. 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 unless this method no longer produces
fair valuations. Repurchase agreements are valued at cost plus
accrued interest. Rights or warrants to acquire stock, or stock
acquired pursuant to the exercise of a right or warrant, may be
valued taking into account various factors such as original cost to
the Fund, earnings and net worth of the issuer, market prices for
securities of similar issuers, assessment of the issuer's future
property, liquidation value or third party transactions involving
the issuer's securities. Securities for which there exist no price
quotations or valuations and all other assets are valued at fair
value as determined in good faith by or on behalf of the Board of
Directors of the Fund.
(b) 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 shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified costs basis.
(d) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
Facility fees are amortized over the term of the related loan.
(e) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
<PAGE>
2. Investment Advisory Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
Effective January 1, 1994, the investment advisory business of FAM
was reorganized from a corporation to a limited partnership. Both
prior to and after the reorganization, ultimate control of FAM was
vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of ML & Co. The limited partners are ML &
Co. and Fund Asset Management, Inc. ("FAMI"), which is also an
indirect wholly-owned subsidiary of ML & Co.
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 0.50% of
the Fund's average weekly net assets plus the proceeds of any
outstanding principal borrowed. For the period ended August 31,
1994, FAM earned fees of $526,707, of which $314,978 was voluntarily
waived.
During the period May 23, 1994 to August 31, 1994, Merrill Lynch
Securities Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), provided security price quotations
to compute the net asset value of the Fund.
Financial Data Services, Inc. (OFDSO), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
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, FAMI, FDS, Merrill Lynch Investment Management,
Inc., PSI, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended August 31, 1994 were $205,839,583 and
$47,855,384, respectively.
Net realized and unrealized gains (losses) as of August 31, 1994
were as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $(1,059,693) $(14,453,393)
Short-term investments 815 --
----------- ------------
Total $(1,058,878) $(14,453,393)
=========== ============
<PAGE>
As of August 31, 1994, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $14,453,393, of
which $546,950 related to appreciated securities and $15,000,343
related to depreciated securities. The aggregate cost of investments
at August 31, 1994 for Federal income tax purposes was $159,827,946.
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock
par value $.10, all of which are 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.
<PAGE>
For the period November 26, 1993 to August 31, 1994, shares issued
and outstanding increased by 8,217,262 to 8,224,317. At August 31,
1994, total paid-in capital amounted to $116,195,006.
5. Short-Term Borrowings:
On February 4, 1994, the Fund entered into a one-year loan
commitment in the amount of $60,000,000. Borrowings under this
commitment are subject to certain limitations contained in the
credit agreement. For this commitment, the Fund pays one quarter
of 1% of the unused principal amount. From February 4, 1994 to August
31, 1994, the maximum amount borrowed was $51,750,000, the average
amount borrowed was $41,935,279 and the daily weighted average in-
terest rate was 5.02%. For the period ended August 31, 1994, facility
and commitment fees aggregated approximately $82,214.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Corporate High Yield Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Corporate
High Yield Fund II, Inc. as of August 31, 1994, the related
statements of operations, changes in net assets, and cash flows, and
the financial highlights for the period November 26, 1993
(commencement of operations) to August 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 audit.
We conducted our audit 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 August
31, 1994 by correspondence with the custodian and brokers. 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 audit
provides 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 II, Inc. as of August 31, 1994, the
results of its operations, the changes in its net assets, its cash
flows, and the financial highlights for the period November 26, 1993
to August 31, 1994 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 6, 1994
</AUDIT-REPORT>
PORTFOLIO INFORMATION (unaudited)
<TABLE>
Ten Largest
Holdings
<CAPTION>
Percent of
As of August 31, 1994 Net Assets
<S> <S> <C>
ADT Operations Inc. ADT is a leading provider of electronic security services for commercial and residential
9.25% markets. The company is also the largest provider of vehicle auction services in
8/01/03 the United Kingdom and the second largest in the United States. 2.8%
Gulf Canada This company is one of Canada's leading independent producers of crude oil, natural gas
Resources Ltd. liquids and natural gas. Gulf Canada's oil and gas exploration, development, and production
9.25% 1/15/04 activities are focused primarily in Western Canada. 2.8
Maxxam Group, Inc. Maxxam is a holding company whose affiliate, Kaiser Aluminum, is a leading producer of
11.25% aluminum. Kaiser's common stock secures these bonds. Through subsidiaries, Pacific
8/01/03 Lumber and Britt Lumber, Maxxam is the largest producer of premium-grade redwood
lumber in the world. 2.8
Anchor Glass Anchor is the second-largest glass container company in the United States. Together with
Container Corp. its parent, Vitro, a well-regarded Mexican conglomerate, Anchor is one of the three largest
9.875% 2/15/08 glass container companies in the world. 2.7
Penn Traffic Co. Penn Traffic is a leading US supermarket, operating 232 stores in upstate New York,
9.625% Pennsylvania, Ohio and northern West Virginia under the names P & C Foods,
4/15/05 Riverside Market, Bi-Lo Foods, Insalacos', Quality Markets, Big Bear and Big Bear Plus. 2.7
Specialty Retailers, Specialty Retailers has 230 family apparel stores located in the Southwest. Under the
Inc. Bealls and Palais Royal names, they operate primarily in Texas and under the Fashion
11.00% 8/15/03 Bar name principally in Colorado. 2.7
Fresh Del Monte Fresh Del Monte is a world leader in fresh tropical fruits, primarily bananas, but also
Produce pineapples, melons and vegetables. The company is the largest marketer of fresh pineapples
10.00% 5/01/03 and the third largest marketer of bananas in the world. 2.7
<PAGE>
Westpoint Stevens, This company is a US manufacturer of bed and bath products such as sheets, comforters,
Inc. blankets, bedspreads and towels. Brand names include Martex, Stevens, and Lady
9.375% 12/15/05 Pepperell. 2.7
Reliance Group Reliance Group is a holding company whose principal business is the ownership of property
Holdings Inc. and casualty and title insurance companies. 2.7
9.75% 11/15/03
Flagstar Corp. Flagstar owns a portfolio of restaurant and food service businesses, including Denny's,
11.375% the Hardee's franchise in the southeastern United States, Quincy's and a sizable institutional
9/15/03 food service. 2.6
</TABLE>
Quality
Ratings
The quality ratings of securities in the Fund as of August 31, 1994
were as follows:
Rating++ Percent of Net Assets
B or lower 63.2%
BB 30.0
BBB 1.4
NR(Not Rated) 5.4
[FN]
++The quality ratings shown are weighted averages by Standard &
Poor's Corp. and Moody's Investors Service, Inc.
