CORPORATE
HIGH YIELD
FUND II, INC.
Semi-Annual Report February 28, 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
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.
<PAGE>
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.
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report to
shareholders for Corporate High Yield Fund II, Inc. In this and
future shareholder reports, we will highlight the Fund's
performance, describe recent investment activities, and examine
some of the important market developments that helped shape our
investment strategy during the period under review.
The Fund seeks to provide shareholders with as high a level of
current income as is consistent with reasonable risk by investing
principally in fixed-income securities which are rated in the lower
rating categories of the established rating agencies or are unrated
securities of comparable quality.
On February 28, 1994, the Fund was 9% leveraged, having borrowed
$10.8 million of the $60 million line of credit available at an
average borrowing cost of 4.52%. Since inception (November 26, 1993)
through February 28, 1994, the total investment return on the Fund's
Common Stock was +3.42%, based on a change in per share net asset
value from $14.18 to $14.46, and assuming reinvestment of $0.201 per
share income dividends. During the same period, the net annualized
yield of the Fund's Common Stock was 8.18%, reflecting the initial
investment process as the Fund started operations. The Fund became
fully invested near the end of January.
<PAGE>
Investment Strategy &
Outlook
The first three months of the Fund's operation experienced generally
rising prices for high-yield bonds. During this period we invested
gradually, waiting to leverage until the market showed better values
for high-yield bonds. Since the period ended, prices have softened
and we have taken the opportunity to make selective purchases that
represent good value. Our ongoing strategy is to utilize our leveraging
ability to buy on weakness. The portfolio we have assembled
represents a group of companies carefully selected to balance yield
and credit quality. Given our leveraging strategy, we have emphasized
larger and more liquid companies and have attempted to choose well-
positioned companies with favorable industry prospects and manageable
debt burdens. (For a complete explanation of the benefits and risks
of leveraging, see page 1 of this report to shareholders.) A broad
range of industries is represented in the Fund's portfolio, the
largest of which include food and beverage, 14.9% of net assets;
energy, 11.7%; hotels and casinos, 10.0%; paper, 6.2%; containers,
5.7%; and conglomerates, 5.3%.
We believe that the outlook for the high-yield market remains
attractive. Our positive view reflects:
Attractive valuations--The yield spread between high-yield
issues and US Treasury securities of comparable maturities
remains favorable at 3.4%. Also yield premiums, which measure
the incremental yield provided by high-yield bonds over US
Treasury securities of similar maturity, remain high relative
to experience over the past ten years.
Low short-term interest rates--We believe that despite recent
rises in short-term interest rates, high-yield bonds will remain
an attractive investment alternative. Since the Fund also borrows
at short-term floating interest rates, low interest rates also
enhance the income benefits from leveraging. Although the Fund's
use of leverage is currently increasing its net income, it also
creates special risks, as we have outlined on page 1.
A benign environment for high-yield investments--The economy has
been growing at a healthy rate throughout the year, and we believe
that growth is likely to continue over at least the next few
quarters. This means generally improving corporate profits, a
positive particularly for cyclical companies. In addition,
relatively high valuations for equities have encouraged
re-equitization or the substitution of debt with equity on the
balance sheets of leveraged companies. These trends have resulted in
the lowest default rates in years. We believe that low default rates
will continue through 1994.
Given our positive outlook, we are maintaining a leveraged position.
We believe that the increased exposure to the market we assume by
using leverage will enhance the Fund's capital appreciation
potential. In addition, income is higher because of the wide spread
between the Fund's borrowing costs and yields on the securities in
which it invests.
<PAGE>
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
(Vincent T. Lathbury)
Vincent T. Lathbury III
Vice President and Portfolio Manager
(Elizabeth M. Phillips)
Elizabeth M. Phillips
Vice President and Portfolio Manager
April 6, 1994
<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--3.6% BB+ Baa3 $1,963,717 Delta Air Lines Inc., 9.875% due 4/30/2008** $ 2,071,721 $ 2,133,898
BB+ Ba2 2,000,000 USAIR Inc., 10.375% due 3/01/2013 2,007,500 2,039,180
------------ ------------
4,079,221 4,173,078
Broadcasting & CCC+ B3 2,000,000 SCI Television Inc., 11.00% due 6/30/2005 2,081,562 2,090,000
Publishing--3.6% B+ B3 2,000,000 Sinclair Broadcasting, 10.00% due 12/15/2003 2,000,000 2,070,000
------------ ------------
4,081,562 4,160,000
Building CCC Caa 2,000,000 Nortek Inc., 9.875% due 3/01/2004 1,984,280 1,950,000
Materials--3.4% B- B3 2,000,000 USG Corp., 8.75% due 3/01/2017 1,875,000 2,000,000
------------ ------------
3,859,280 3,950,000
Building B Ba3 2,500,000 Inter-City Products Corp., 9.75% due 3/01/2000 2,468,750 2,506,250
Products--2.2%
Capital Goods--1.7% B+ B3 2,000,000 Sequa Corp., 9.375% due 12/15/2003 2,051,875 2,030,000
Chemicals--1.1% B+ Ba3 2,000,000 ++++G-I Holding Inc., 9.53% due 10/01/1998* 1,305,840 1,312,500
Communications-- Pan Am Sat L.P:
2.0% B+ Ba3 1,000,000 9.75% due 8/01/2000 1,052,500 1,045,000
B- B3 2,000,000 9.94% due 8/01/2003* 1,360,677 1,340,000
------------ ------------
2,413,177 2,385,000
<PAGE>
Conglomerates-- B+ B1 2,000,000 Coltec Industries, Inc., 10.25% due 4/01/2002 2,135,000 2,140,000
5.3% B+ Ba3 2,000,000 Interco Inc., 10.00% due 6/01/2001 2,025,000 2,015,000
BB- Ba3 2,000,000 Sherritt Gordon Ltd., 9.75% due 4/01/2003 2,000,000 2,080,000
------------ ------------
6,160,000 6,235,000
Consumer NR B3 2,000,000 Revlon Consumer Products Corp., 10.50%
Products--4.3% due 2/15/2003 1,925,000 1,945,000
B- B3 2,000,000 Revlon Worldwide Corp., 16.59% due 3/15/1998* 1,048,163 1,000,000
B+ B1 2,000,000 Sealy Corp., 9.50% due 5/01/2003 2,082,500 2,110,000
------------ ------------
5,055,663 5,055,000
Containers--5.7% B B2 3,000,000 Anchor Glass Container Corp., 9.875%
due 12/15/2008 3,052,500 3,150,000
B- Caa 3,000,000 Ivex Holdings Corp., 11.91% due 3/15/2005* 1,555,633 1,545,000
B- B3 2,485,000 Silgan Holdings, Inc., 11.99% due 06/15/1996* 2,009,218 1,988,000
------------ ------------
6,617,351 6,683,000
Energy--11.7% B- B2 2,000,000 ++++Falcon Drilling Company, 9.75% due 1/15/2001 2,000,000 2,025,000
B B2 1,750,000 Ferrell Gas Company, Inc., 11.625%
due 12/15/2003 1,900,938 1,916,250
B+ B2 2,000,000 Gulf Canada Resource Ltd., 9.25% due 1/15/2004 2,030,000 2,018,760
BB- Ba3 2,000,000 Maxus Energy Corp., 11.50% due 11/15/2015 2,130,000 2,100,000
CCC B3 2,000,000 Mesa Capital Corp., 12.12% due 6/30/1996* 1,640,897 1,685,000
BB- Ba3 2,000,000 Seagull Energy Corp., 8.625% due 8/01/2005 2,005,000 2,010,000
B+ B1 2,510,000 Triton Energy Corp., 9.75% due 12/15/2000* 1,886,918 1,926,425
------------ ------------
13,593,753 13,681,435
Entertainment--2.3% B B3 1,000,000 Marvel Holdings Inc., 10.58% due 4/15/1998* 654,572 655,000
B- B3 2,000,000 SPI Holdings, 11.65% due 12/01/2002++ 2,045,000 2,005,000
------------ ------------
2,699,572 2,660,000
Financial BB Ba1 2,000,000 Lomas Mortgage USA, 10.25% due 10/01/2002 2,091,250 2,140,000
Services--5.3% BB- B1 2,000,000 Penncorp Financial, 9.25% due 12/15/2003 2,000,000 2,045,000
BB- B1 2,000,000 Reliance Group Holdings Inc., 9.75%
due 11/15/2003 2,050,000 2,030,000
------------ ------------
6,141,250 6,215,000
Food & B+ B3 2,000,000 Chiquita Brands International Inc., 11.50%
Beverage--14.9% due 6/01/2001 2,120,000 2,135,000
B B2 1,000,000 Coca Cola Bottling Group, 9.00% due 11/15/2003 1,001,875 1,000,000
NR B2 2,000,000 Envirodyne Industries, 10.25% due 12/01/2001 2,037,500 2,060,000
BB- Ba3 2,000,000 ++++Fresh Del Monte Produce, 10.00% due 5/01/2003 1,900,000 1,940,000
B+ B2 2,000,000 Grand Union Co., 12.25% due 7/15/2002 2,103,750 2,105,000
B B3 2,000,000 Heileman Acquisition Co., 9.625% due 1/31/2004 2,000,000 2,000,000
B B2 3,000,000 Penn Traffic Co., 9.625% due 4/15/2005 3,113,750 3,086,250
B B2 1,000,000 Ralph's Grocery Co., 9.00% due 4/01/2003 998,750 990,000
B+ B1 2,000,000 Royal Crown Corp., 9.75% due 8/01/2000 2,047,500 2,040,000
------------ ------------
17,323,125 17,356,250
<PAGE>
Foreign--0.8% BB- B1 1,000,000 Republic of Argentina, 8.375% due 12/20/2003 996,500 967,209
Home Builders--1.9% B- B2 2,150,000 Baldwin Homes Company, 10.375% due 8/01/2003 2,119,625 2,171,500
Hotels & NR NR 1,500 ++++Capital Gaming International, 11.50%
Casinos--10.0% due 2/01/2001*** 1,700,025 1,882,500
B+ B2 2,000,000 GB Property Funding Corp., 10.875% due 1/15/2004 2,000,000 1,980,000
BB- B 2,000,000 Host Marriott Hospitality, Inc., 10.375%
due 6/15/2011 2,055,000 2,050,000
BB- Ba3 2,000,000 Showboat, Inc., 9.25% due 5/01/2008 2,043,750 2,040,000
Trump Castle Funding Inc.:
NR Caa 1,500,000 11.75% due 11/15/2003 1,362,641 1,425,000
NR Ca 310,000 7.00% due 11/15/2005++* 251,570 275,230
B B3 2,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 2,000,000 1,965,000
------------ ------------
11,412,986 11,617,730
Industrial BB- B2 2,000,000 ADT Operations Inc., 9.25% due 8/01/2003 2,060,000 2,030,000
Services--1.7%
Metals & B- B3 3,000,000 Maxxam Group, Inc., 11.25% due 8/01/2003 2,985,000 3,090,000
Mining--2.6%
Paper--6.2% B B2 2,000,000 Fort Howard Corp., 9.00% due 2/01/2006 2,000,000 1,940,000
B B1 2,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 2,175,000 2,185,000
B+ B1 2,000,000 Stone Consolidated Corp., 10.25%
due 12/15/2000 2,000,000 2,030,000
B B1 1,000,000 Stone Container Corp., 11.875% due 12/01/1998 1,007,500 1,057,500
------------ ------------
7,182,500 7,212,500
</TABLE>
<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>
Restaurants--4.4% B- B2 $3,000,000 Flagstar Corp., 11.375% due 9/15/2003 $ 3,112,500 $ 3,090,000
B- B2 2,000,000 Foodmaker, Inc., 9.75% due 6/01/2002 2,025,000 2,020,000
------------ ------------
5,137,500 5,110,000
Retail B- B3 2,000,000 Pamida Holdings Inc., 11.75% due 3/15/2003 2,023,125 2,040,000
Specialty--4.3% B- B3 2,850,000 Specialty Retailers, Inc., 11.00%
due 8/15/2003 2,885,625 2,949,750
------------ ------------
4,908,750 4,989,750
Steel--3.6% B B2 2,000,000 Republic Engineering Steel, 9.875%
due 12/15/2001 2,000,000 2,070,000
B+ B1 2,000,000 WCI Steel Inc., 10.50% due 3/01/2002 2,000,000 2,185,000
------------ ------------
4,000,000 4,255,000
<PAGE>
Textiles--1.7% B+ B3 2,000,000 Westpoint Stevens, Inc., 9.375%
due 12/15/2005 2,000,000 2,030,000
Transportation BB Ba2 2,000,000 Eletson Holdings, 9.25% due 11/15/2003 2,030,000 2,070,000
Services--3.8% NR NR 4,271,000 ++++Transtar Holdings Inc., 13.375%
due 12/15/2003* 2,084,551 2,306,340
------------ ------------
4,114,551 4,376,340
Utilities--2.8% NR Ba3 2,000,000 Beaver Valley Funding, 9.00% due 6/01/2017 1,895,000 1,869,384
BB+ Ba1 1,300,000 CTC Mansfield Funding, 11.125% due 9/30/2016 1,399,938 1,336,381
------------ ------------
3,294,938 3,205,765
Total Corporate Bonds--110.9% 128,062,769 129,458,307
<CAPTION>
Shares Held Preferred Stock
<S> <C> <S> <C> <C>
Steel--1.7% 80,000 USX Capital Corp. 2,000,000 1,984,000
Total Investments in Preferred Stocks--1.7% 2,000,000 1,984,000
Total Investments--112.6% $130,062,769 131,442,307
============
Liabilities in Excess of Other Assets--(12.6%) (14,700,508)
------------
Net Assets--100.0% $116,741,799
============
<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.
++ Represents a pay-in-kind security which may pay interest
in additional face.
++++ Restricted securities pursuant to Rule 144A.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of February 28, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$130,062,769) (Note 1a) $131,442,307
Cash 449,235
Receivables:
Interest $ 2,681,217
Securities sold 1,002,500
Investment advisory fee (Note 2) 49,723 3,733,440
------------
Deferred organization expenses (Note 1d) 58,300
------------
Total assets 135,683,282
------------
Liabilities: Loans (Note 5) 10,750,000
Payables:
Securities purchased 7,661,613
Dividends to shareholders (Note 1e) 419,913
Interest on loans (Note 5) 13,514
Commitment fees 9,656 8,104,696
------------
Accrued expenses and other liabilities 86,787
------------
Total liabilities 18,941,483
------------
Net Assets: Net assets $116,741,799
============
Capital: Common stock, par value $.10 per share; 200,000,000 shares authorized $ 807,249
Paid-in capital in excess of par 113,433,124
Undistributed investment income--net 862,901
Undistributed realized capital gains--net 258,987
Unrealized appreciation on investments--net (Note 3) 1,379,538
------------
Net Assets--Equivalent to $14.46 per share based on 8,072,493
shares of capital stock outstanding (market price $13.875) $116,741,799
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period
November 26, 1993++
to February 28, 1994
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 2,506,261
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 149,896
Loan interest expense (Note 5) 13,514
Accounting services (Note 2) 12,431
Borrowing cost (Note 5) 9,656
Directors' fees and expenses 6,807
Facility fee amortization (Note 5) 6,320
Printing and shareholder reports 5,802
Custodian fees 4,848
Transfer agent fees 3,630
Amortization of organization expenses (Note 1d) 2,665
Professional fees 1,969
Pricing services 1,681
Registration fees (Note 1d) 40
Other 3,530
-----------
Total expenses before reimbursement 222,789
Reimbursement of expenses (Note 2) (199,619)
-----------
Total expenses after reimbursement 23,170
------------
Investment income--net 2,483,091
------------
Realized & Realized gain on investments--net 258,987
Unrealized Unrealized appreciation on investments--net 1,379,538
Gain on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 4,121,616
(Notes 1c & 3): ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
November 26, 1993++
Increase (Decrease) in Net Assets: to February 28, 1994
<S> <S> <C>
Operations: Investment income--net $ 2,483,091
Realized gain on investments--net 258,987
Unrealized appreciation on investments--net 1,379,538
------------
Net increase in net assets resulting from operations 4,121,616
------------
Dividends to Investment income--net (1,620,190)
Shareholders ------------
(Note 1e): Net decrease in net assets resulting from dividends and
distributions to shareholders (1,620,190)
------------
Capital Share Net increase in net assets resulting from capital share transactions 114,140,368
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 116,641,794
Beginning of period 100,005
------------
End of period* $116,741,799
============
<FN>
*Undistributed investment income--net $ 862,901
============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Period
November 26, 1993++
to February 28, 1994
<S> <S> <C>
Cash Used for Net increase in net assets resulting from operations $ 4,121,616
Operating Activities: Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Increase in receivables (2,730,940)
Increase in other assets (58,300)
Increase in other liabilities 109,957
Realized and unrealized gain on investments--net (1,638,525)
Amortization of discount (401,195)
-------------
Net cash used for operating activities (597,387)
-------------
Cash Used for Proceeds from sales of long-term investments 16,029,006
Investing Activities: Purchases of long-term investments (138,997,500)
Purchases of short-term investments (373,607,940)
Proceeds from sales and maturities of short-term investments--net 373,832,960
-------------
Net cash used for investing activities (122,743,474)
-------------
Cash Provided by Cash receipts on capital shares sold 113,752,209
Financing Activities: Dividends paid to shareholders (812,118)
Short-term borrowings 10,750,000
-------------
Net cash provided by financing activities 123,690,091
-------------
Cash: Net increase in cash 349,230
Cash at beginning of period 100,005
-------------
Cash at end of period $ 449,235
=============
Cash Flow Cash paid for interest $ 23,170
Information: =============
Non-Cash Financing Reinvestment of dividends paid to shareholders $ 388,159
Activities: =============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<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 February 28, 1994
<S> <S> <C>
Per Share Net asset value, beginning of period $ 14.18
Operating ----------
Performance: Investment income--net .31
Realized and unrealized gains on investments--net .17
----------
Total from investment operations .48
----------
Less dividends:
Investment income--net (.20)
----------
Net asset value, end of period $ 14.46
==========
Market price per share, end of period $ 13.875
==========
Total Investment Based on net asset value per share 3.42%+++
Return:** ==========
Based on market price per share (6.19%)+++
==========
Ratios to Expenses, net of reimbursement .08%*
Average Net Assets: ==========
Expenses .74%*
==========
Investment income--net 8.28%*
==========
Supplemental Net assets, end of period (in thousands) $ 116,742
Data: ==========
Portfolio turnover 23.49%
==========
<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.
Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
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.
(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
prosperity, liquidation value or third party transactions involving
the issuer's securities. Securities for which there exist no price
quotations or valuations and all other assets are valued at fair
value as determined in good faith by or on behalf of the Board of
Directors of the Fund.
(b) 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.
<PAGE>
(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 and prepaid registration
fees--Deferred organization expenses are amortized on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(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.
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 and Co., Inc. ("ML & Co."). The
general partner of FAM is Princeton Services, Inc., an indirect
wholly-owned subsidiary of ML & Co. The limited partners are ML
& Co. and Merrill Lynch Investment Management, Inc. ("MLIM"), 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 .50% of
the Fund's average weekly net assets plus outstanding principal
borrowed. For the period ended February 28, 1994, FAM earned fees of
$149,896, all of which were voluntarily waived. In addition, FAM
reimbursed the Fund $49,723 for additional expenses.
Financial Data Services, Inc. ("FDS"), 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, MLIM, Merrill Lynch, Pierce, Fenner & Smith, Inc.,
and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended February 28, 1994 were $146,659,113 and
$17,031,506, respectively.
Net realized and unrealized gains as of February 28, 1994 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 258,012 $ 1,379,538
Short-term investments 975 --
---------- ------------
Total $ 258,987 $ 1,379,538
========== ============
As of February 28, 1994, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $1,379,538, of
which $2,016,464 related to appreciated securities and $636,926
related to depreciated securities. The aggregate cost of
investments at February 28, 1994 for Federal income tax purposes
was $130,062,769.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
for the period ended February 28, 1994, was $114,140,368.
Transactions in capital shares were as follows:
For the Period November 26, 1993++ Dollar
to February 28, 1993 Shares Amount
Shares sold 8,038,370 $113,752,209
Shares issued to shareholders in
reinvestment of dividends and
distributions 27,068 388,159
---------- ------------
Net increase 8,065,438 $114,140,368
========== ============
[FN]
++Prior to November 26, 1993 (commencement of
operations), the Fund issued 7,055 shares to FAM for $100,005.
5. Short-Term Borrowings:
On February 4, 1994, the Fund entered into a one-year loan
commitment in the amount of $60,000,000. For this commitment, the
Fund pays one quarter of 1% of the unused principal amount.
From February 4, 1994 to February 28, 1994, the maximum amount
borrowed was $10,750,000, the average amount borrowed was
$4,380,000, and the daily weighted average interest rate was 4.44%.
For the period ended February 28, 1994, commitment fees aggregated
approximately $9,656.
<PAGE>
PER SHARE INFORMATION
<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 -- $.17 $(.20) --
<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
<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>
<TABLE>
PORTFOLIO INFORMATION
<CAPTION>
Percent of
As of February 28, 1994 Net Assets
<S> <S> <S> <C>
Ten Largest Anchor Glass Anchor is the second largest glass container company in the
Holdings Container Corp. United States. Together with its parent, Vitro, a well-regarded
9.875% 12/15/08 Mexican conglomerate, Anchor is one of the three largest glass
container companies in the world. 2.7%
Maxxam Group, Inc. Maxxam is a holding company whose affiliate, Kaiser Aluminum, is a
11.25% 8/01/03 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. 2.6
Flagstar Corp. Flagstar owns a portfolio of restaurant and food service businesses,
11.375% 9/15/03 including Denny's, the Hardee's franchise in the southeastern United
States, Quincy's and a sizable institutional food service. 2.6
Penn Traffic Co. Penn Traffic is a leading US supermarket, operating 232 stores in
9.625% 4/15/05 upstate New York, Pennsylvania, Ohio and northern West Virginia under
the names P & C Foods, Riverside Market, Bi-Lo Foods, Insalacos',
Quality Markets, Big Bear and Big Bear Plus. 2.6
<PAGE>
Specialty Retailers, Specialty Retailers has 230 family apparel stores located in the
Inc. Southwest. Under the Bealls and Palais Royal names, they operate
11.00% 8/15/03 primarily in Texas and under the Fashion Bar name principally in Colorado. 2.5
Inter-City Products Inter-City Products is a leading North American manufacturer of air
Corp. conditioners and other heating and cooling products for residential and
9.75% 3/01/00 light commercial markets. 2.1
Pan Am Sat L.P. Pan Am Sat operates PAS I, a communications satellite that services the
9.75% 8/01/00 Americas, especially Latin America. Three additional satellites are
9.94% 8/01/03 scheduled for launch in 1994 and 1995, providing a worldwide satellite
network. 2.0
Transtar Holdings Inc. Transtar is a transportation holding company with seven railroads,
13.375% 12/15/03 a Great Lakes shipping fleet and an inland barge operation. Transtar
provides sole rail access and primary water transport for nearly all
the steel making plants of USX. 2.0
WCI Steel Inc. WCI is one of the lowest cost-integrated steel companies in the United
10.50% 3/01/02 States. Over half of its production is in attractive flat-rolled specialty
products with end uses as saw blades, golf club shanks and garden tools. 1.9
Riverwood Riverwood is an international packaging and paper products company which
International Corp. is one of the two US producers of beverage carrying containers. The company
11.25% 6/15/02 also manufactures folding carton board and liner board. 1.9
</TABLE>
Quality
Ratings
The quality ratings of securities in the Fund as of February 28, 1994
were as follows:
Percent of
Rating Net Assets
B or lower 68%
BB 29
NR (Not Rated) 3
<PAGE>
OFFICERS AND DIRECTORS
Arthur Zeikel, President and 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
