CORPORATE
HIGH YIELD
FUND II, INC.
FUND LOGO
Annual Report
August 31, 1995
<PAGE>
Officers & 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, MA 02110
NYSE Symbol
KYT
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.
<TABLE>
Per Share Selected
Quarterly Financial
Data*
<CAPTION>
<PAGE> Net Realized Unrealized Dividends
Investment Gains Gains Net Investment
For the Period Income (Losses) (Losses) Income
<S> <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)
September 1, 1994 to November 30, 1994 .35 (.24) (.78) (.36)
December 1, 1994 to February 28, 1995 .38 (.11) .53 (.39)
March 1, 1995 to May 31, 1995 .35 (.11) .88 (.35)
June 1, 1995 to August 31, 1995 .32 (.07) --++++ (.33)
<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 $14.14 $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 12.99 12.30 13.625 11.875 736
September 1, 1994 to November 30, 1994 12.41 11.41 12.625 10.375 1,198
December 1, 1994 to February 28, 1995 12.00 11.09 12.125 11.00 887
March 1, 1995 to May 31, 1995 12.55 11.63 12.75 11.625 744
June 1, 1995 to August 31, 1995 12.63 12.32 12.75 12.00 845
<FN>
++Commencement of Operations.
++++Amount is less than $.01 per share.
*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 high-yield market held its own during the past six months. An
improved Treasury market, better technicals and strong earnings
reports pushed up high-yield bond prices at the beginning of the six-
month period ended August 31, 1995. During the past six months, a
heavy new-issue calendar and concerns about cyclical earnings
slowdown moderated high-yield performance. For the six months ended
August 31, 1995, the total return on the unmanaged Merrill Lynch
High Yield Master Index was +9.7%, slightly outpacing the ten-year
Treasury bond at +9.7%, and falling behind the +16.8% total return
of the Standard & Poor's 500 Index.
<PAGE>
Overall, bonds in the higher rating categories outperformed those in
the lower rating categories, as BB bonds generally are tied more
closely to Treasury yields and lower-rated bonds are more dependent
on earnings prospects. The best-performing sectors in the high-yield
market during the past six months were airlines, homebuilders,
utilities and media. Improved returns for these sectors primarily
reflect a more optimistic fundamental environment, especially for
airlines. Cyclical sectors, such as paper, surged early in the year,
then slowed in the face of mounting evidence of an economic
slowdown. The retail sector underperformed throughout the six months
ended August 31, 1995.
Our view is that the high-yield market will not move dramatically
over the next few months. We believe that high-yield issues are
fairly valued relative to Treasury securities and that Treasury
markets will remain in a fairly narrow range through the end of the
year. Support for the market will come from the ongoing inflows of
cash to mutual funds as well as from credit improvement through
initial public offerings and equity infusions. However, the economic
slowdown may lead to some earnings disappointments and falling bond
prices for specific issuers. We continue to believe that defaults
and credit problems will rise in 1995 and 1996, but be moderate by
historic standards.
Investment Strategy & Outlook
For the six-month period ended August 31, 1995, total investment
return on the Fund's Common Stock was +11.83%, based on a change in
the per share net asset value from $11.75 to $12.44, and assuming
reinvestment of $0.674 per share income dividends. During the same
period, the net annualized yield of the Fund's Common Stock was
10.73%. Throughout the six-month period, the Fund was, on average,
18% leveraged. On August 31, 1995, the Fund was 15.8% leveraged,
having borrowed $19.7 million of the $60 million of credit available
at an average borrowing cost of 6.625%.
Corporate High Yield Fund II, Inc.'s performance benefited from
strength in high-yield market sectors where we are somewhat
overweighted. Outperforming sectors in the portfolio included media,
which includes such areas as broadcasting/cable, telecommunications
and communications. Other outperforming sectors were transportation
services, airlines and the food and beverage category. The
broadcasting/cable sector rebounded because investors reassessed the
asset values of cable television competitor American Telecasting,
Inc. The telecommunications sector results reflected increased
investor confidence in Argentina, where most of our telephone
investments are located. During the past six months, we added
exposure to these sectors, including Telecom Argentina S.A., Horizon
Cellular Telephone and Dial Page, Inc. The airline segment benefited
from stronger earnings, particularly at USAir Inc. We used the
opportunity to sell our position in Delta Air Lines Inc.
Underperforming sectors included cyclical industries such as steel,
specialty retail and building materials, where concerns about
weakening earnings prospects resulted in lower bond prices.
<PAGE>
Company-specific events aided bond prices of several issuers in the
portfolio. Nextel Communications Inc., Dial Page, Inc. and Fresh Del
Monte Produce Corp. bond prices surged on news of actual or
potential equity investment. The acquisition of Dial Page by Mobile
Media was completed, and the bonds were called at a comfortable
profit. Fort Howard Corp. bonds were buoyed by an initial public
stock offering, and we used that opportunity to sell our position.
The Fund also benefited from its investment in emerging markets
bonds, which are primarily in strongly positioned and well-
capitalized corporate issuers. As of August 31, 1995, the Fund held
7.4% of total high-yield assets in this sector, with 5.6% in bonds
of Argentine issuers. These bonds rebounded sharply since the
beginning of the year on favorable economic news from Argentina and
other Latin American countries. We added to our positions throughout
the six-month period ended August 31, 1995 and continue to believe
these bonds represent good value relative to the high-yield
universe.
In March and April, high-yield bonds reached historically tight
spreads to Treasury securities. At that point, we took advantage of
the relatively high valuations of high-yield bonds and began to sell
into the rally and deleverage significantly. Leverage was reduced
from a near 30% average from December 1994 through mid-March 1995,
to a low of 9.5% in June. Given the favorable high-yield environment
this summer, we increased leverage modestly to the current 15.8%.
However, given our concerns about the long-term fundamentals of
fixed-income markets, we will be cautious in our use of leverage.
Less leverage will likely reduce the Fund's dividend yield from
previous levels. (For a complete explanation of the benefits and
risks of leveraging, see page 1 of this report to shareholders.)
Positions sold during the six-month period ended August 31, 1995
were generally in lower-yielding bonds that traded to unusually
tight spreads over Treasury securities, including ADT Operations
Inc., A.K. Steel Holding Corp., Gulf Canada Resources Ltd. and
National Medical Enterprises Inc. We also sold positions in bonds
where we saw potential for earnings disappointment, including Penn
Traffic Co. Positions bought on balance were at significantly wider
spreads to Treasury securities than positions sold, but with only a
modest reduction in credit quality. We focused our purchases on
higher-yielding bonds with stable or improving earnings prospects,
and either substantial appreciation potential or a high coupon to
enhance current yield. Among our purchases were Kaiser Aluminum &
Chemical Corp., 12.75% due 2003, and Argentine issuers including
Telecom Argentina S.A., a telephone company, and Yacimientos
Petroliferos Fiscales S.A., a major international oil producer.
<PAGE>
The average maturity of the portfolio was 8 years, 4 months on
August 31, 1995. At the close of the six-month period, major
industries represented in the portfolio included: hotels and
casinos, 10% of total high-yield investments; energy, 9.2%;
communications, 7.0%; utilities, 6.9%; and consumer products, 6.1%.
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 needs
and objectives 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
October 6, 1995
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
<S> <C> <C> <S> <S> <C> <C>
Airlines--2.7% USAir Inc.:
BB B1 $ 1,851,018 11.20% due 3/19/2005** $ 1,628,896 $ 1,895,813
BB- B1 1,000,000 10.375% due 3/01/2013 955,000 935,000
------------ ------------
2,583,896 2,830,813
Auto & A A3 500,000 Walbro Corp., 9.875% due 7/15/2005 498,250 497,500
Truck--0.5%
Broadcasting/ CCC+ Caa 3,948,149 American Telecasting, Inc.,
Cable--3.3% 13.486% due 6/15/2004* 2,465,140 2,270,186
NR+++ NR+++ 18,350 American Telecasting, Inc. (Warrants) (a) -- 55,050
CCC B3 1,961,000 Australis Media Ltd., 14% due
5/15/2003* (b) 1,037,322 1,127,575
------------ ------------
3,502,462 3,452,811
Broadcasting & B B3 340,000 The Katz Corp., 12.75% due 11/15/2002 357,850 367,200
Publishing B+ B3 1,925,000 Sinclair Broadcast Group, Inc., 10%
- --2.2% due 12/15/2003 1,799,875 1,934,625
------------ ------------
2,157,725 2,301,825
Building B Ba3 2,000,000 InterCity Products Corp., 9.75%
Products--1.6% due 3/01/2000 1,975,000 1,710,000
Capital B+ B3 1,000,000 Sequa Corp., 9.375% due 12/15/2003 1,020,625 910,000
Goods--0.9%
Cellular CCC Caa 2,000,000 Dial Page, Inc., 12.25% due 2/15/2000 2,063,062 2,170,000
Telephones CCC+ Caa 2,000,000 Horizon Cellular Telephone, 11.676%
- --3.6% due 10/01/2000* 1,569,478 1,670,000
------------ ------------
3,632,540 3,840,000
Chemicals--2.0% B+ Ba3 3,000,000 G-I Holdings Inc., 10.45% due
10/01/1998* (f) 2,184,169 2,145,000
<PAGE>
Communications-- CCC+ B3 1,000,000 Nextel Communications Inc., 11.966%
8.1% due 8/15/2004* 612,491 485,000
B- B3 3,500,000 Pan Am Sat L.P., 10.65% due 8/01/2003* 2,595,189 2,730,000
BB- B2 2,000,000 Rogers Communications, Inc., 10.875%
due 4/15/2004 2,005,000 2,050,000
CCC+ B3 2,000,000 USA Mobile Communications Holdings,
Inc., 9.50% due 2/01/2004 1,965,000 1,840,000
B+ B3 1,515,000 Videotron Holdings PLC, 11% due
7/01/2004* 939,364 958,238
B+ B3 1,000,000 Videotron Holdings PLC, 11% due
8/15/2005* 588,162 552,500
------------ ------------
8,705,206 8,615,738
Conglomerates-- BB- B1 2,000,000 Coltec Industries, Inc., 10.25%
2.4% due 4/01/2002 2,135,000 2,080,000
BB- B1 500,000 Sherritt Inc., 9.75% due 4/01/2003 485,625 505,000
------------ ------------
2,620,625 2,585,000
Consumer NR+++ B3 1,000,000 Cabot Safety, 12.50% due 7/15/2005 (e) 1,000,000 1,040,000
Products--7.1% B NR+++ 2,000,000 Coleman Holdings, Inc., 10.65%
due 5/27/1998* 1,507,316 1,540,000
B- Caa 2,000,000 Polymer Group Inc., 12.75% due
7/15/2002 (e) 1,958,750 2,040,000
B B2 2,000,000 Revlon Consumer Products Corp.,
9.375% due 4/01/2001 1,753,110 1,965,000
NR+++ B3 1,000,000 Selmer Co. Inc., 11% due 5/15/2005 (e) 1,000,000 960,000
------------ ------------
7,219,176 7,545,000
Containers B B2 2,000,000 Anchor Glass Container Corp., 9.875%
- --4.3% due 12/15/2008 2,035,000 1,640,000
B- Caa 1,000,000 Ivex Holdings Corp., 11.914% due
3/15/2005* 606,552 570,000
B- B3 2,485,000 Silgan Holdings, Inc., 11.992% due
12/15/2002* 2,305,211 2,317,262
------------ ------------
4,946,763 4,527,262
<PAGE>
Energy--10.7% BB- Ba3 500,000 California Energy Company, Inc.,
9.875% due 6/30/2003 500,000 505,000
B- B2 500,000 Falcon Drilling Company, Inc., 9.75%
due 1/15/2001 500,000 492,500
BB- B1 2,000,000 Maxus Energy Corp., 11.50% due
11/15/2015 2,130,000 2,010,000
BBB- NR+++ 2,000,000 Oleoducts Central S.A., 9.35% due
9/01/2005 (e) 2,000,000 1,980,000
B- Caa 1,000,000 Transamerican Refining Corporation,
16.50%+++++ due 2/15/2002 990,002 1,070,000
NR+++ NR+++ 8,417 Transamerican Refining Corporation
(Warrants) (a) 20,193 29,459
BB+ B2 2,000,000 TransTexas Gas Corp., 11.50% due
6/15/2002 2,000,000 2,095,000
B+ B1 2,510,000 Triton Energy Corp., 9.75% due
12/15/2000* 2,220,009 2,284,100
BB- B1 1,000,000 Yacimentos Petroliferos Fiscales S.A.
(Sponsored) (ADR), 8% due 2/15/2004++++ 687,500 832,500
------------ ------------
11,047,704 11,298,559
Entertainment B Caa 2,000,000 Marvel Holdings Inc., 9.125%
- --1.9% due 2/15/1998 1,780,000 1,830,000
CCC- B3 3,604,000 Spectravision, Inc., 11.65% due
12/01/2002++ (f) 3,230,551 139,655
------------ ------------
5,010,551 1,969,655
Financial B+ B1 2,000,000 Lomas Mortgage USA, 10.25% due
Services--5.0% 10/01/2002 2,091,250 1,400,000
BB- B1 2,000,000 Penncorp Financial, 9.25% due
12/15/2003 2,000,000 2,000,000
BB- B1 2,000,000 Reliance Group Holdings Inc., 9.75%
due 11/15/2003 2,010,000 1,940,000
------------ ------------
6,101,250 5,340,000
Food & B B3 500,000 Curtice Burns Foods, Inc., 12.25% due
Beverage--4.3% 2/01/2005 500,000 532,500
B- B2 2,000,000 Envirodyne Industries, Inc., 10.25%
due 12/01/2001 2,037,500 1,620,000
B B3 3,000,000 Fresh Del Monte Produce Corp., 10% due
5/01/2003 2,875,000 2,400,000
------------ ------------
5,412,500 4,552,500
Government BB- B1 2,000,000 Republic of Argentina, 8.375% due
Obligations 12/20/2003 1,901,500 1,465,000
- --1.4%
<PAGE>
Home Builders-- B B3 1,000,000 Greystone Homes Inc., 10.75% due
0.8% 3/01/2004 1,000,000 877,500
Hotels--0.9% BB- B1 1,000,000 Host Marriot Hospitality, Inc.,
9.50% due 5/15/2005(e) 963,953 961,250
Hotels & BB B1 2,000,000 Bally's Park Place, Inc., 9.25% due
Casinos--11.5% 3/15/2004 1,942,500 1,885,000
NR+++ Caa 1,500,000 Capital Gaming International, Inc.,
11.50% due 2/01/2001 (f) 1,178,255 825,000
NR+++ NR+++ 34,125 Capital Gaming International, Inc.
(Warrants) (a) 168,019 1,066
B+ B2 3,000,000 GB Property Funding Corp., 10.875%
due 1/15/2004 2,952,500 2,610,000
B+ B1 2,000,000 Harrah's Jazz Company, 14.25% due
11/15/2001 2,000,000 1,987,500
B B2 2,000,000 Showboat, Inc., 13% due 8/01/2009 1,970,000 2,145,000
B+ B3 3,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 2,963,750 2,760,000
------------ ------------
13,175,024 12,213,566
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
<S> <C> <C> <S> <S> <C> <C>
Industrial B- B3 $ 250,000 Day International Corp., 11.125%
Services--2.4% due 6/01/2005 (e) $ 250,000 $ 259,375
B B1 750,000 SHL Systemhouse, Inc., 12.25% due
9/01/2001 (d) 750,000 759,375
B- Caa 1,500,000 Southeastern Public Service Company,
11.875% due 2/01/1998 1,500,000 1,500,000
------------ ------------
2,500,000 2,518,750
Industrials B- B3 1,000,000 Crain Industries, Inc., 13.50% due
- --0.9% 8/15/2005(e) 1,000,000 1,005,000
<PAGE>
Metals & B- B2 2,000,000 Kaiser Aluminum & Chemical Corp.,
Mining--5.0% 12.75% due 2/01/2003 2,090,000 2,180,000
Maxxam Group, Inc.:
B- B3 2,000,000 11.25% due 8/01/2003 1,990,000 1,900,000
B- B3 1,835,000 14.726% due 8/01/2003* 1,120,862 1,201,925
------------ ------------
5,200,862 5,281,925
Paper--4.9% BB- Ba3 1,000,000 Repap New Brunswick, Inc., 9.875%
due 7/15/2000 1,000,000 1,000,000
B+ B1 1,000,000 Repap Wisconsin Finance, Inc., 9.25%
due 2/01/2002 872,500 965,000
B B1 2,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 2,175,000 2,170,000
B+ B1 1,000,000 S.D. Warren Co., 12% due 12/15/2004 (e) 1,000,000 1,107,500
------------ ------------
5,047,500 5,242,500
Restaurants CCC+ Caa 2,000,000 Flagstar Corp., 11.375% due 9/15/2003 2,075,000 1,540,000
- --1.5%
Retail B- B3 2,000,000 Pamida Holdings Inc., 11.75%
Specialty due 3/15/2003 2,023,125 1,760,000
- --3.0% B- B3 1,500,000 Specialty Retailers, Inc., 11%
due 8/15/2003 1,518,750 1,410,000
------------ ------------
3,541,875 3,170,000
Steel--4.1% NR+++ NR+++ 1,500 Gulf States Steel Acquisition Corp.
(Warrants) (a) 16,363 2,250
NR+++ B1 1,500,000 Gulf States Steel Acquisition Corp.,
13.50% due 4/15/2003 (e) 1,471,138 1,455,000
B+ B1 2,000,000 WCI Steel Inc., 10.50% due 3/01/2002 2,000,000 1,960,000
B B2 1,000,000 Weirton Steel Corporation, 10.75%
due 6/01/2005 (e) 940,000 920,000
------------ ------------
4,427,501 4,337,250
Supermarkets A A3 2,000,000 Ralph's Grocery Co., 11% due
- --1.8% 6/15/2005 1,941,250 1,880,000
Telecommuni- BB Ba2 250,000 Philippine Long Distance Telephone
cations--3.3% Co., 9.875% due 8/01/2005 249,968 252,500
NR+++ NR+++ 1,500,000 Telecom Argentina S.A., 8.375% due
10/18/2000 1,206,250 1,320,000
BB- B1 2,000,000 Telefonica de Argentina S.A., 11.875%
due 11/01/2004 1,960,160 1,980,000
------------ ------------
3,416,378 3,552,500
<PAGE>
Textiles--0.9% NR+++ NR+++ 1,000,000 Decorative Home Accents, Inc., 13%
due 6/30/2002 (c)(e) 1,000,000 1,000,000
Transportation BB- Ba2 2,000,000 Eletson Holdings, Inc., 9.25% due
Services--4.3% 11/15/2003 2,030,000 1,920,000
NR+++ NR+++ 4,271,000 Transtar Holdings, Inc., 12.75% due
12/15/2003* 2,521,237 2,690,730
------------ ------------
4,551,237 4,610,730
Utilities--8.0% B+ B1 2,954,000 Beaver Valley Funding Corp., 9%
due 6/01/2017 2,776,415 2,447,625
CTC Mansfield Funding Corp.:
B+ Ba3 700,000 10.25% due 3/30/2003 649,250 702,625
B+ Ba3 1,300,000 11.125% due 9/30/2016 1,399,938 1,329,952
BB- B1 1,250,000 MetroGas S.A., 12% due 8/15/2000(e) 1,250,000 1,225,000
NR+++ NR+++ 500,000 Transportadora de Gas Del Sur S.A.,
7.75% due 12/23/1998 433,750 442,500
NR+++ NR+++ 2,359,520 Tucson Electric & Power Co., 10.21%
due 1/01/2009 (e) 2,312,331 2,303,718
------------ ------------
8,821,684 8,451,420
Total Investments in
Corporate Bonds--115.3% 129,182,206 122,229,054
Shares Held Common Stocks
Hotels & 40,005 Capital Gaming International, Inc. (f) 360,314 12,502
Casinos--0.0%
Supermarkets 35,348 Grand Union Co.(f) 2,103,750 468,361
- --0.4%
Total Investments in
Common Stocks--0.4% 2,464,064 480,863
Face Amount Short-Term Securities
<PAGE>
Commercial $ 922,000 General Electric Capital Corp., 5.82%
Paper***--0.9% due 9/01/1995 922,000 922,000
Total Investments in
Short-Term Securities--0.9% 922,000 922,000
Total Investments--116.6% $132,568,270 123,631,917
============
Liabilities in Excess of
Other Assets--(16.6%) (17,578,037)
------------
Net Assets--100.0% $106,053,880
============
<FN>
*Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase.
**Subject to principal paydowns.
***Commercial Paper is traded on a discount basis; the interest rate
shown is the rate paid at the time of purchase by the Fund.
++Represents a pay-in-kind security which may pay interest in
additional face.
++++American Depositary Receipts (ADR).
+++Not Rated.
+++++Coupon rate resets periodically. The coupon rate shown is the
rate in effect at August 31, 1995.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of common stock/face amount of bonds. The purchase price and
the number of shares/face amount are subject to adjustment under
certain conditions until the expiration date.
(b)Each $1,000 face amount contains one warrant of Autrailis Media
Ltd..
(c)Each $1,000 face amount contains one share Decorative Home
Accents, Inc.'s Class F common stock.
(d)Each $1,000 face amount contains one warrant of SHL Systemhouse,
Inc.
(e)Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $16,257,000,
representing 15.3% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Cabot Safety, 12.50% due 7/15/2005 6/29/1995 $1,000,000 $1,040,000
Crain Industries, Inc., 13.50% due 8/15/2005 8/22/1995 1,000,000 1,005,000
Day International Corp., 11.125% due 6/01/2005 5/26/1995 250,000 259,375
Decorative Home Accents, Inc.,13% due 6/30/2002 6/30/1995 1,000,000 1,000,000
Gulf States Steel Acquisition Corp., 13.50% due
4/15/2003 4/12/1995 1,471,138 1,455,000
Host Marriot Hospitality, Inc.,9.50% due 5/15/2005 2/23/1995 963,953 961,250
MetroGas S.A., 12% due 8/15/2000 8/07/1995-
9/07/1995 1,250,000 1,225,000
Oleoducts Central S.A., 9.35% due 9/01/2005 6/21/1995 2,000,000 1,980,000
Polymer Group Inc., 12.75% due 7/15/2002 7/07/1994-
3/16/1995 1,958,750 2,040,000
S.D. Warren Co., 12% due 12/15/2004 12/13/1994 1,000,000 1,107,500
Selmer Co. Inc., 11% due 5/15/2005 5/18/1995 1,000,000 960,000
Tucson Electric & Power Co., 10.21% due 1/01/2009 3/23/1994 2,312,331 2,303,718
Weirton Steel Corporation, 10.75% due 6/01/2005 6/30/1995 940,000 920,000
Total $16,146,172 $16,256,843
=========== ===========
(f)Non-income producing security.
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, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$132,568,270) (Note 1a) $123,631,917
Cash 10,925
Receivables:
Interest $ 2,717,758
Securities sold 15,000 2,732,758
------------
Deferred organization expenses (Note 1e) 37,950
Prepaid expenses and other assets 32,679
------------
Total assets 126,446,229
------------
<PAGE>
Liabilities: Payables:
Loans (Note 5) 19,750,000
Dividends to shareholders (Note 1f) 321,168
Interest on loans (Note 5) 182,985
Investment adviser (Note 2) 52,634
Commitment fees 24,865 20,331,652
------------
Accrued expenses and other liabilities 60,697
------------
Total liabilities 20,392,349
------------
Net Assets: Net assets $106,053,880
============
Capital: Common stock, par value $.10 per share; 200,000,000 shares authorized $ 852,290
Paid-in capital in excess of par 118,870,260
Undistributed investment income--net 800,660
Accumulated realized capital losses on investments--net (Note 6) (5,532,977)
Unrealized depreciation on investments--net (8,936,353)
------------
Net Assets--Equivalent to $12.44 per share based on 8,522,896 shares of
capital stock outstanding (market price $12.00) $106,053,880
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended August 31, 1995
<S> <S> <C>
Investment Income Interest and discount earned $ 14,983,933
(Note 1d): Other 100,786
------------
Total income 15,084,719
------------
<PAGE>
Expenses: Loan interest expense (Note 5) 2,192,837
Investment advisory fees (Note 2) 670,766
Borrowing cost (Note 5) 140,529
Professional fees 111,512
Accounting services (Note 2) 66,737
Directors' fees and expenses 45,298
Transfer agent fees 31,553
Printing and shareholder reports 22,421
Custodian fees 12,804
Amortization of organization expenses (Note 1e) 11,729
Pricing services 5,912
Listing fees 250
Other 31,689
------------
Total expenses 3,344,037
------------
Investment income--net 11,740,682
------------
Realized & Realized loss on investments--net (4,451,502)
Unrealized Gain Change in unrealized depreciation on investments--net 5,517,040
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 12,806,220
- --Net (Notes 1b, ============
1d & 3):
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the Period
Year November 26,
Ended 1993++ to
August 31, August 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 11,740,682 $ 8,641,131
Realized loss on investments--net (4,451,502) (1,058,878)
Change in unrealized depreciation on investments--net 5,517,040 (14,453,393)
------------ ------------
Net increase (decrease) in net assets resulting from operations 12,806,220 (6,871,140)
------------ ------------
Dividends to Investment income--net (11,976,116) (7,627,634)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders (11,976,116) (7,627,634)
------------ ------------
<PAGE>
Capital Share Value of shares sold to Common Stock shareholders 3,527,544 116,286,687
Transactions Offering costs resulting from the issuance of shares -- (191,686)
(Note 4): ------------ ------------
Net increase in net assets derived from capital share
transactions 3,527,544 116,095,001
------------ ------------
Net Assets: Total increase in net assets 4,357,648 101,596,227
Beginning of period 101,696,232 100,005
------------ ------------
End of period* $106,053,880 $101,696,232
============ ============
<FN>
*Undistributed investment income--net (Note 1g) $ 800,660 $ 1,013,497
============ ============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended August 31, 1995
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 12,806,220
by Operating Adjustments to reconcile net increase (decrease) in net assets
Activities: resulting from operations to net cash provided by (used for)
operating activities:
Decrease in receivables 776,447
Decrease in other assets 59,763
Decrease in other liabilities (35,128)
Realized and unrealized gain on investments--net (1,065,538)
Amortization of premium and discount (2,864,462)
------------
Net cash provided by operating activities 9,677,302
------------
Cash Provided by Proceeds from sales of long-term investments 104,863,804
Investing Purchases of long-term investments (81,956,295)
Activities: Purchases of short-term investments (317,499,122)
Proceeds from sales and maturities of short-term investments--net 318,753,000
------------
Net cash provided by investing activities 24,161,387
------------
<PAGE>
Cash Used for Short-term borrowings--net (25,250,000)
Financing Dividends paid to shareholders (8,581,230)
Activities: ------------
Net cash used for financing activities (33,831,230)
------------
Cash: Net decrease in cash 7,459
Cash at beginning of year 3,466
------------
Cash at end of year $ 10,925
============
Cash Flow Cash paid for interest $ 2,144,025
Information: ============
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders $ 3,527,544
Financing ============
Activities:
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
Period
The following per share data and ratios have been derived For the November 26,
from information provided in the financial statements. Year Ended 1993++ to
August 31, August 31,
Increase (Decrease) in Net Asset Value: 1995 1994
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 12.37 $ 14.18
Operating ------------ ------------
Performance: Investment income--net 1.40 1.06
Realized and unrealized gain (loss) on investments--net .10 (1.91)
------------ ------------
Total from investment operations 1.50 (.85)
------------ ------------
Less dividends from investment income--net (1.43) (.94)
------------ ------------
Capital charge resulting from the issuance of Common Stock -- (.02)
------------ ------------
Net asset value, end of period $ 12.44 $ 12.37
============ ============
Market price per share, end of period $ 12.00 $ 12.125
============ ============
<PAGE>
Total Investment Based on net asset value per share 13.41% (6.27%)+++
Return:** ============ ============
Based on market price per share 11.61% (13.15%)+++
============ ============
Ratios to Expenses, net of reimbursement and excluding interest expense .86% .50%*
Average ============ ============
Net Assets: Expenses, net of reimbursement 2.49% 1.68%*
============ ============
Expenses 2.49% 2.00%*
============ ============
Investment income--net 8.73% 8.75%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 106,054 $ 101,696
Data: ============ ============
Portfolio turnover 61.97% 42.21%
============ ============
<FN>
++Commencement of Operations.
+++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 return excludes
the effects of sales loads.
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. 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, which approximates market value,
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) 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.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
<PAGE>
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.
* 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.
* Interest rate 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 shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade 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.
<PAGE>
(e) Deferred organization expenses--Deferred organization expenses
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) Reclassification--Generally accepted accounting principles
require that certain differences between accumulated net realized
capital losses for financial reporting and tax purposes, if
permanent, be reclassified to undistributed net investment income.
Accordingly, current year's permanent book/tax differences of
$22,597 have been reclassified from accumulated net realized capital
losses to undistributed net investment income. These reclassifica-
tions 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 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.
During the year ended August 31, 1995, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner, & Smith Inc. ("MLPF&S"), $4,542 for security price
quotations to compute the net asset value of the Fund.
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, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1995 were $80,460,045 and
$104,878,804, respectively.
Net realized and unrealized losses as of August 31, 1995 were as
follows:
<PAGE>
Realized Unrealized
Losses Losses
Long-term investments $ (4,451,502) $ (8,936,353)
------------- -------------
Total $ (4,451,502) $ (8,936,353)
============= =============
As of August 31, 1995, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $9,296,128, of
which $2,737,153 related to appreciated securities and $12,033,281
related to depreciated securities. The aggregate cost of investments
at August 31, 1995 for Federal income tax purposes was $132,928,045.
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.
For the year ended August 31, 1995, shares issued and outstanding
increased by 298,579 to 8,522,896 as a result of dividend
reinvestment. At August 31,1995, total paid-in capital amounted to
$119,722,550.
5. Short-Term Borrowings:
On February 4, 1995, the Fund renewed its one-year loan commitment
in the amount of $60,000,000 bearing interest on outstanding
balances at the Federal Funds rate plus 0.75%, an alternate base
rate plus 0.75%, and/or LIBOR plus 0.75%. Borrowings under this
commitment are subject to certain limitations contained in the
credit agreement. For this commitment, the Fund pays one fifth of 1%
of the unused principal amount. From September 1, 1994 to August 31,
1995, the average amount borrowed was $21,335,616 and the daily
weighted average interest rate was 6.54%. For the year ended August
31, 1995, facility and commitment fees aggregated approximately
$140,529.
6. Capital Loss Carryforward:
At August 31, 1995, the Fund had a net capital loss carryforward of
approximately $2,725,000, all of which expires in 2003. This amount
will be available to offset like amounts of any future taxable
gains.
<PAGE>
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
To 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, 1995, the related
statements of operations for the year then ended, changes in net
assets for the year then ended and the period November 26, 1993
(commencement of operations) to August 31, 1994, and cash flows for
the year then ended, and the financial highlights for the year then
ended and 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 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 August
31, 1995, 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.
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, 1995, 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
October 6, 1995
</AUDIT-REPORT>
<PAGE>
<TABLE>
PORTFOLIO INFORMATION (unaudited)
<CAPTION>
Percent of
As of August 31, 1995 Net Assets
<S> <C> <C> <S> <C>
Ten Largest Maxxam Group, Inc. Maxxam is a holding company whose affiliate, Kaiser
Holdings 11.25% 8/01/2003 Aluminum, is a leading producer of aluminum. Kaiser's
14.726% 8/01/2003 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. 2.9%
USAir Inc. USAir is the sixth largest US airline with major hubs in
11.20% 3/19/2005 Pittsburgh, Charlotte, Philadelphia and Baltimore. Our investment
10.375% 3/01/2013 is in equipment trust certificates secured by modern, saleable
aircraft. 2.7%
Trump Plaza Funding, Inc. Trump Plaza Funding owns and operates Trump Plaza Hotel &
10.875% 6/15/2001 Casino on the boardwalk in Atlantic City. The bonds are first
mortgage notes secured by the hotel and casino property. 2.6%
Pan Am Sat L.P. Pan Am Sat operates three communications satellites that service
10.65% 8/01/2003 the Americas, especially Latin America and the Far East. Additional
satellites are scheduled for launch in 1995 through 1997. 2.6%
Transtar Holdings Inc. Transtar is a transportation holding company with seven railroads,
12.75% 12/15/2003 a Great Lakes shipping fleet, and an inland barge operation. Transtar
provides sole rail access and primary water transport for nearly all
the steel plants of USX. 2.5%
GB Property Funding Corp. GB Property Funding finances the Sands Casino in Atlantic City
10.875% 1/15/2004 which is the ultimate security for these first mortgage notes. 2.5%
Beaver Valley Funding Corp. Beaver Valley Funding II finances Centerior Energy's share in
9% 6/01/2017 Beaver Valley II, a nuclear power plant in Ohio. Our bonds are
secured lease obligation bonds. 2.3%
Fresh Del Monte Fresh Del Monte is a world leader in fresh tropical fruits, primarily
Produce Corp. bananas, but also pineapples and melon. The company is the third
10% 5/01/2003 largest marketer of bananas in the world. 2.3%
American Telecasting, Inc. The company is the largest wireless cable operator in the US. The
13.486% 6/15/2004 company's total service area, when fully built-out, will cover over
(Warrants) 8 million homes. The company's largest operating markets are Denver,
Portland, Orlando and Columbus. 2.2%
Silgan Holdings, Inc. Silgan produces packaging products. The company is the largest US
11.992% 12/15/2002 producer of metal food cans and of aluminum soft drink cans. The
company also has a significant market share in plastic containers
for personal care, food, household, and pharmaceutical products and
juice containers. 2.2%
</TABLE>
<PAGE>
Quality
Ratings
The quality ratings of securities in the Fund as of August 31, 1995
were as follows:
Rating++ Percent of Net Assets
B or lower 67%
BB 26%
NR(Not Rated) 7%
[FN]
++The quality ratings shown are weighted averages by Standard &
Poor's Corp. and Moody's Investors Service, Inc.
