CORPORATE
HIGH YIELD
FUND II, INC.
FUND LOGO
Semi-Annual Report
February 29, 1996
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. Statements and other information herein are as dated
and are subject to change.
<PAGE>
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. To the extent that 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 will benefit from 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>
DEAR SHAREHOLDER
High-Yield Overview
The high-yield market outperformed Treasury securities during the
six-month period ended February 29, 1996. Total return of the
unmanaged Merrill Lynch High Yield Master Index was +6.32% versus
+3.87% for the ten-year Treasury note. This performance reflects the
sharp drop in Treasury prices during February and strong high-yield
market technical factors, particularly cash inflows to high-yield
funds which totaled over $5 billion from September 1995 through
January 1996. Since the high-yield market did not experience the
magnitude of the fall in Treasury bond prices in February, the
already tight spread between Treasury securities and high-yield
bonds tightened further. At February 29, 1996, the spread between
high-yield bond yields and ten-year Treasury yields was 349 basis
points (3.49%) compared to 412 basis points at December 31, 1995. We
do not believe this tight spread bodes well for the performance of
high-yield bonds relative to Treasury securities in the near term.
In addition, a sizable new-issue calendar may put pressure on high-
yield bond prices.
Within the high-yield market, lower-rated B bonds outperformed
higher-rated BB bonds because of the latter's relatively higher
interest rate sensitivity. Homebuilders, hotels and gaming, cable
television, and air transport areas performed strongly and benefited
from solid earnings reports. The retailing, food/beverage and
textile industries were laggards, reflecting poor earnings
performance.
Fund Performance
For the six-month period ended February 29, 1996, total investment
return on the Fund's Common Stock was +8.83%, based on a change in
the per share net asset value from $12.44 to $12.78 and assuming
reinvestment of $0.717 per share income dividends. During the same
period, the net annualized yield of the Fund's Common Stock was
11.26%.
<PAGE>
Leverage Strategy
Throughout the six-month period ended February 29, 1996, the Fund
was approximately 17% leveraged. At February 29, 1996, the Fund was
9.8% leveraged, having borrowed $11.75 million of the $60 million of
available credit at an average borrowing cost of 6.0%. This
represents a low borrowing level relative to our maximum legal
borrowings of 33% of total assets. Although markets were strong in
the fall of 1995, we became concerned that interest rates would not
continue to fall, thus weakening prices in our market. Therefore,
late in the year, we began to sell positions and deleverage the
Fund. Leverage reached a six-month peak in early December at 20.2%.
While deleveraging, we attempted to selectively buy bonds that are
cushioned from the effects of rising interest rates as well as
having limited potential for near-term earnings disappointment.
Among these purchases was Walters Industries, 12.19% due 2000, which
has since been redeemed.
Portfolio Strategy
We overweighted some industry groups because of above-average value,
including broadcasting and publishing, broadcasting/cable and
communications, which aggregate 16.1% of aggregate long-term
investments. This broad media category includes cable television
operations in the United States, Canada, and Great Britain;
television broadcasting companies; and US and foreign cellular and
paging services. Also included in this category have been large
telephone companies in Argentina and the Philippines whose bond
ratings are below investment grade because of the sovereign risk of
investing in these two countries.
Our concentration in the broad communications industry boosted
performance during the six-month period ended February 29, 1996,
because our top-performing sectors included broadcast/cable and
communications. The broadcast/cable sector, in particular, benefited
from the market's reevaluation of the competitive position and asset
values of companies that provide alternative methods of delivery for
video and communications. The Fund also has holdings in wireless
cable and in start-up cable/telephone companies in the United
Kingdom and Australia. In the communications subcategory,
performance was strong for most of the Fund's investments. The
September initial public offering of PanAmSat L.P., one of our large
holdings, is notable as was the continuing improvement in our
overseas telephone and cellular investments.
The portfolio experienced a surprise bankruptcy filing in November
when Harrah's Jazz Company, a casino project in New Orleans, sought
bankruptcy protection after its bank lenders withdrew financing. We
are pursuing recovery vigorously. Other gaming holdings, primarily
established casinos in Atlantic City that are generally secured by
mortgages on the properties, performed well because of strengthening
in the Atlantic City market.
<PAGE>
The average maturity of the portfolio was 6 years, 11 months on
February 29, 1996. At the close of the six-month period, major
industries represented in the portfolio included: communications,
10.5% of total high-yield investments; energy, 10.0%; utilities,
8.1%; consumer products, 7.6%; and gaming, 7.1%.
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
March 28, 1996
Officers and
Directors
<PAGE>
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
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
<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--2.6% USAir Inc.:
BB B1 $ 1,845,232 11.20% due 3/19/2005** $ 1,623,804 $ 1,853,055
BB- B1 1,000,000 10.375% due 3/01/2013 955,000 1,000,000
------------ ------------
2,578,804 2,853,055
Broadcasting/ CCC+ Caa 2,948,149 American Telecasting, Inc., 13.49%
Cable--4.8% due 6/15/2004* 1,956,480 2,211,112
CCC B3 1,961,000 Australis Media Ltd., 14% due
5/15/2003* (d) 1,109,586 1,392,310
BB- B3 500,000 CAI Wireless Systems, Inc., 12.25%
due 9/15/2002 500,000 542,500
B+ B3 1,515,000 Videotron Holdings PLC, 12% due 7/01/2004* 994,750 1,113,525
------------ ------------
4,560,816 5,259,447
Broadcasting & B B3 1,090,000 The Katz Corp., 12.75% due 11/15/2002 1,205,350 1,220,800
Publishing--1.1%
<PAGE>
Building BB B1 250,000 Building Materials Corporation, 11.24%
Materials--3.3% due 7/01/2004* 173,524 190,000
B Caa 2,000,000 InterCity Products Corp., 9.75% due
3/01/2000 1,975,000 1,600,000
B B2 1,675,000 Southdown, Inc., 14% due 10/15/2001 1,849,828 1,844,594
------------ ------------
3,998,352 3,634,594
Chemicals--2.0% G-I Holdings Inc.:
B+ Ba3 1,217,000 11.86% due 10/01/1998* 898,495 979,685
B+ Ba3 1,159,000 10% due 2/15/2006 (b) 1,199,565 1,193,770
------------ ------------
2,098,060 2,173,455
Communications-- Cellular Communications International Inc.:*
11.3% CCC+ B3 1,000,000 10.94% due 8/15/2000 622,177 620,000
CCC+ B3 1,250,000 11.65% due 8/15/2000 (f) 754,320 781,250
B+ B3 2,820,000 Comunicacion Celular, 13.125% due 11/15/2003*
(b)(g) 1,555,528 1,677,900
CCC+ B3 1,000,000 Nextel Communications Inc., 11.966% due
8/15/2004* 648,537 590,000
B- B3 3,500,000 PanAmSat L.P., 10.65% due 8/01/2003* 2,722,333 3,018,750
BB- B2 2,000,000 Rogers Communications Inc., 10.875% due
4/15/2004 2,005,000 2,100,000
BB- B1 1,500,000 Telecom Argentina S.A., 8.375% due
10/18/2000 1,206,250 1,436,250
BB- B1 2,000,000 Telefonica de Argentina S.A., 11.875%
due 11/01/2004 1,960,160 2,100,000
------------ ------------
11,474,305 12,324,150
Conglomerates-- BB- B3 2,000,000 Coltec Industries, Inc., 10.25% due
2.4% 4/01/2002 2,135,000 2,085,000
BB- B1 500,000 Sherritt Gordon, Ltd., 9.75% due 4/01/2003 485,625 525,000
------------ ------------
2,620,625 2,610,000
Consumer B B3 1,000,000 Cabot Safety Acquisition Corp.,
Products--8.1% 12.50% due 7/15/2005 1,000,000 1,100,000
B NR+++ 2,000,000 Coleman Holdings, Inc., 10.65% due
5/27/1998* 1,586,498 1,620,000
B- Caa 2,000,000 Polymer Group Inc., 12.25% due 7/15/2002 1,958,750 2,080,000
B B2 2,000,000 Revlon Consumer Products Corp., 9.375%
due 4/01/2001 1,755,305 2,030,000
B- B3 1,500,000 Revlon Worldwide Corp., 12.63% due
3/15/1998* 1,169,488 1,205,625
B- B3 820,000 Samsonite Corp., 11.125% due 7/15/2005 793,037 811,800
------------ ------------
8,263,078 8,847,425
<PAGE>
Consumer B B2 1,110,000 Affinity Group Inc., 11.50% due 10/15/2003 1,140,250 1,132,200
Services--1.0%
Diversified-- NR+++ B3 1,250,000 Crain Industries Inc., 13.50% due
1.2% 8/15/2005 (b) 1,256,875 1,300,000
Energy--10.7% BB- Ba3 500,000 California Energy Company, Inc.,
9.875% due 6/30/2003 500,000 535,000
B+ B2 2,000,000 Clark USA Inc., 10.875% due 12/01/2005 (b) 2,000,000 2,105,000
B- B2 500,000 Falcon Drilling Company, Inc., 9.75% due
1/15/2001 500,000 515,000
B- B1 750,000 KCS Energy Inc., 11% due 1/15/2003 (b) 750,000 776,250
BB- B1 2,000,000 Maxus Energy Corp., 11.50% due 11/15/2015 2,130,000 2,090,000
BBB- Baa3 2,000,000 Oleoducts Central S.A., 9.35% due
9/01/2005 (b) 2,000,000 2,040,000
B+ Ba3 250,000 Rowan Companies, Inc., 11.875% due
12/01/2001 270,000 272,500
B- Caa 1,000,000 Transamerican Refining Corporation,
16.50%+++++ due 2/15/2002 990,851 880,000
BB+ B2 2,000,000 TransTexas Gas Corp., 11.50% due 6/15/2002 2,000,000 2,030,000
BB- B1 500,000 Yacimientos Petroliferos Fiscales S.A.
(Sponsored) (ADR), 8% due 2/15/2004++++ 322,500 473,125
------------ ------------
11,463,351 11,716,875
Entertainment-- B- Caa 2,000,000 Marvel Holdings Inc., 9.125% due 2/15/1998 1,780,000 1,840,000
1.9% D Ca 3,604,000 Spectravision, Inc., 11.65% due
12/01/2002++ (c) 3,230,551 234,260
------------ ------------
5,010,551 2,074,260
Financial BB- B1 2,000,000 Penncorp Financial Group, Inc., 9.25%
Services--3.8% due 12/15/2003 2,000,000 2,040,000
BB- B1 2,000,000 Reliance Group Holdings Inc., 9.75%
due 11/15/2003 2,010,000 2,075,000
------------ ------------
4,010,000 4,115,000
<PAGE>
Food & B B3 500,000 Curtice Burns Foods, Inc., 12.25%
Beverage--4.5% due 2/01/2005 500,000 492,500
B- B2 2,000,000 Envirodyne Industries, Inc., 10.25%
due 12/01/2001 2,037,500 1,590,000
CCC+ Caa 3,000,000 Fresh Del Monte Produce Corp., 10% due
5/01/2003 2,875,000 2,880,000
------------ ------------
5,412,500 4,962,500
Foreign--1.5% BB- B1 2,000,000 Republic of Argentina (ADR), 8.375%
due 12/20/2003++++ 1,901,500 1,670,000
Gaming--7.6% BB B1 1,500,000 Bally's Park Place, Inc., 9.25% due
3/15/2004 1,456,875 1,537,500
B+ B2 3,000,000 GB Property Funding Corp., 10.875%
due 1/15/2004 2,952,500 2,760,000
D Caa 2,000,000 Harrah's Jazz Company, 14.25% due
11/15/2001 (c) 2,000,000 780,000
NR+++ Caa 1,000,000 Trump Castle Funding, Inc., 11.75%
due 11/15/2003++ 935,811 950,000
B+ B3 2,000,000 Trump Plaza Funding, Inc., 10.875%
due 6/15/2001 1,963,750 2,240,000
------------ ------------
9,308,936 8,267,500
Health B+ B2 1,000,000 Dynacare Inc., 10.75% due 1/15/2006 1,000,000 1,030,000
Services--1.8% B+ B1 900,000 MEDIQ/PRN Life Support Services Inc.,
12.125% due 7/01/1999 936,000 940,500
------------ ------------
1,936,000 1,970,500
Home Builders-- B B3 500,000 Greystone Homes Inc., 10.75% due 3/01/2004 500,000 505,000
0.5%
</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>
Metals & B- B2 $ 2,000,000 Kaiser Aluminum and Chemical Corp.,
Mining--6.4% 12.75% due 2/01/2003 $ 2,090,000 $ 2,170,000
Maxxam Group, Inc.:
B- B3 2,000,000 11.25% due 8/01/2003 1,990,000 1,920,000
B- B3 1,835,000 14.726% due 8/01/2003* 1,207,002 1,247,800
B+ B3 1,550,000 Renco Metals Inc., 12% due 7/15/2000 1,682,937 1,689,500
------------ ------------
6,969,939 7,027,300
<PAGE>
Packaging--4.2% Anchor Glass Container Corp.:
B- Caa 1,000,000 10.25% due 6/30/2002 695,000 830,000
CCC+ Ca 2,000,000 9.875% due 12/15/2008 2,035,000 1,400,000
B- B3 2,485,000 Silgan Holdings, Inc., 11.99% due
12/15/2002* 2,416,303 2,404,238
------------ ------------
5,146,303 4,634,238
Paper--4.8% B B3 1,125,000 Crown Paper Co., 11% due 9/01/2005 1,047,656 1,043,437
BB- Ba3 1,000,000 Repap New Brunswick, Inc., 9.875%
due 7/15/2000 1,000,000 1,010,000
BB- B1 1,000,000 Repap Wisconsin Finance, Inc., 9.25%
due 2/01/2002 872,500 960,000
B B1 1,000,000 Riverwood International Corp., 11.25%
due 6/15/2002 1,087,500 1,105,000
B+ B1 1,000,000 S.D. Warren Co., 12% due 12/15/2004 1,000,000 1,075,000
------------ ------------
5,007,656 5,193,437
Restaurants-- CCC+ Caa 2,000,000 Flagstar Corp., 11.375% due9 /15/2003 2,075,000 1,345,000
1.2%
Retail B- B3 1,500,000 Specialty Retailers, Inc., 11% due 8/15/2003 1,518,750 1,432,500
Specialty--1.3%
Steel--2.9% B B1 1,500,000 Gulf States Steel Acquisition Corp.,
13.50% due 4/15/2003 1,471,137 1,372,500
B+ B1 1,250,000 WCI Steel Inc., 10.50% due 3/01/2002 1,250,000 1,268,750
B B2 500,000 Weirton Steel Corporation, 10.75%
due 6/01/2005 470,000 483,750
------------ ------------
3,191,137 3,125,000
Supermarkets-- B- B3 2,000,000 Ralph's Grocery Co., 11% due 6/15/2005 1,931,875 1,860,000
1.7%
Textiles--1.1% B+ B2 1,250,000 Decorative Home Accents, Inc., 13%
due 6/30/2002 (e) 1,244,141 1,237,500
<PAGE>
Transportation BB- Ba2 2,000,000 Eletson Holdings, Inc., 9.25% due
Services--4.5% 11/15/2003 2,030,000 2,000,000
B- B3 4,271,000 Transtar Holdings, Inc., 12.75% due
12/15/2003* 2,677,846 2,946,990
------------ ------------
4,707,846 4,946,990
Utilities--8.7% B+ B1 2,454,000 Beaver Valley Funding Corp., 9%
due 6/01/2017 2,302,665 2,060,894
CTC Mansfield Funding Corp.:
B+ Ba3 700,000 10.25% due 3/30/2003 649,250 714,000
B+ Ba3 1,300,000 11.125% due 9/30/2016 1,399,937 1,383,603
BB- B1 1,500,000 MetroGas S.A., 12% due 8/15/2000 1,497,500 1,575,000
NR+++ B1 1,500,000 Transportadora de Gas Del Sur S.A.,
7.75% due 12/23/1998 1,323,750 1,432,500
NR+++ NR+++ 2,359,520 Tucson Electric & Power Co., 10.21%
due 1/01/2009 (b) 2,312,331 2,296,687
------------ ------------
9,485,433 9,462,684
Total Investments in
Corporate Bonds--106.9% 120,017,433 116,901,410
Shares Held Common Stocks & Warrants
Broadcasting/ 18,350 American Telecasting, Inc. (Warrants) (a) 0 119,275
Cable--0.1%
Energy--0.0% 8,417 Transamerican Refining Corporation
(Warrants) (a) 20,193 18,938
Gaming--0.0% 40,005 Capital Gaming International, Inc. (c) 360,314 7,601
34,125 Capital Gaming International, Inc.
(Warrants) (a) 168,019 1,024
------------ ------------
528,333 8,625
Steel--0.0% 1,500 Gulf States Steel Corp. (Warrants) (a)(b) 16,363 375
Supermarkets-- 35,348 Grand Union Co. (c) 2,103,750 214,297
0.2%
<PAGE>
Textiles--0.0% 1,250 Decorative Home Accents, Inc.
(Class F) (b)(c) 9,609 12,500
Total Investments in
Common Stocks & Warrants--0.3% 2,678,248 374,010
Face Amount Short-Term Securities
Commercial $ 1,245,000 General Electric Capital Corp.,
Paper***--1.1% 5.42% due 3/01/1996 1,245,000 1,245,000
Total Investments in
Short-Term Securities--1.1% 1,245,000 1,245,000
Total Investments--108.3% $123,940,681 118,520,420
============
Liabilities in Excess of Other Assets--(8.3%) (9,137,103)
------------
Net Assets--100.0% $109,383,317
============
<FN>
*Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Fund.
**Subject to principal paydowns.
***Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
++Represents a pay-in-kind security which may pay interest/dividends
in additional face amount/shares.
++++American Depositary Receipts (ADR).
+++Not Rated.
+++++Coupon rate resets periodically. The coupon rate shown is the
rate in effect at February 29, 1996.
(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)Restricted security as to resale. The value of the Fund's
investment in restricted securities was approximately $11,402,000,
representing 10.4% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Clark USA Inc., 10.875% due 12/01/2005 11/21/1995 $ 2,000,000 $ 2,105,000
Comunicacion Celular, 13.125% due 11/15/2003 11/17/1995 1,555,528 1,677,900
Crain Industries Inc., 13.50% due 8/15/2005 8/22/1995-1/18/1996 1,256,875 1,300,000
Decorative Home Accents, Inc. (Class F) 6/30/1995-9/20/1995 9,609 12,500
G-I Holdings, Inc., 10% due 2/15/2006 2/14/1996 1,199,565 1,193,770
Gulf States Steel Corp. 4/12/1995-6/30/1995 16,363 375
KCS Energy Inc., 11% due 1/15/2003 1/19/1996 750,000 776,250
Oleoducts Central S.A., 9.35% due 9/01/2005 6/21/1995 2,000,000 2,040,000
Tucson Electric &Power Co., 10.21% due 1/01/2009 3/23/1994 2,312,331 2,296,687
Total $11,100,271 $11,402,482
=========== ===========
(c)Non-income producing security.
(d)Each $1,000 face amount contains one warrant of Australis Media
Ltd.
(e)Each $1,000 face amount contains one share of Decorative Home
Accents, Inc.'s Class F Common Stock.
(f)Each $1,000 face amount contains one warrant of Cellular
Communications International, Inc.
(g)Each $1,000 face amount contains one warrant of Comunicacion
Celular.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of February 29, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$123,940,681) (Note 1a) $118,520,420
Cash 195
Receivables:
Interest $ 2,605,044
Securities sold 464,618 3,069,662
------------
Deferred organization expenses (Note 1e) 37,950
Prepaid expenses fees and other assets 32,679
------------
Total assets 121,660,906
------------
<PAGE>
Liabilities: Payables:
Loans (Note 5) 11,750,000
Dividends to shareholders (Note 1f) 316,371
Interest on loans (Note 5) 87,886
Investment adviser (Note 2) 51,439
Commitment fees 9,768 12,215,464
------------
Accrued expenses and other liabilities 62,125
------------
Total liabilities 12,277,589
------------
Net Assets: Net assets $109,383,317
============
Capital: Common stock, par value $.10 per share, 200,000,000
shares authorized $ 855,936
Paid-in capital in excess of par 119,323,425
Undistributed investment income--net 249,579
Accumulated realized capital losses on investments--net
(Note 6) (5,625,362)
Unrealized depreciation on investments--net (5,420,261)
------------
Net Assets--Equivalent to $12.78 per share based on 8,559,358
shares of capital stock outstanding (market price $12.50) $109,383,317
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended February 29, 1996
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 6,768,739
(Note 1d): Other 6,300
------------
Total income 6,775,039
------------
Expenses: Loan interest expense (Note 5) 694,029
Investment advisory fees (Note 2) 320,963
Professional fees 36,056
Borrowing cost (Note 5) 33,982
Accounting services (Note 2) 29,090
Directors' fees and expenses 24,894
Printing and shareholder reports 16,395
Transfer agent fees 16,212
Custodian fees 6,575
Amortization of organization expenses (Note 1e) 6,147
Pricing services 3,311
Listing fees 196
Other 16,730
------------
Total expenses 1,204,580
------------
Investment income--net 5,570,459
------------
<PAGE>
Realized & Realized loss on investments--net (92,385)
Unrealized Gain Change in unrealized depreciation on investments--net 3,516,092
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 8,994,166
(Notes 1b, 1d & 3): ============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
February 29, August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 5,570,459 $ 11,740,682
Realized loss on investments--net (92,385) (4,451,502)
Change in unrealized depreciation on investments--net 3,516,092 5,517,040
------------ ------------
Net increase in net assets resulting from operations 8,994,166 12,806,220
------------ ------------
Dividends to Investment income--net (6,121,540) (11,976,116)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders (6,121,540) (11,976,116)
------------ ------------
Capital Share Value of shares sold to Common Stock shareholders 456,811 3,527,544
Transactions ------------ ------------
(Note 4): Net increase in net assets derived from capital share transactions 456,811 3,527,544
------------ ------------
Net Assets: Total increase in net assets 3,329,437 4,357,648
Beginning of period 106,053,880 101,696,232
------------ ------------
End of period* $109,383,317 $106,053,880
============ ============
<FN>
*Undistributed investment income--net $ 249,579 $ 800,660
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended February 29, 1996
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 8,994,166
by Operating Adjustments to reconcile net increase (decrease) in net assets
Activities: resulting from operations to net cash provided by
operating activities:
Decrease in receivables 112,714
Decrease in other liabilities (109,963)
Realized and unrealized gain on investments--net (3,423,707)
Amortization of discount (1,193,278)
------------
Net cash provided by operating activities 4,379,932
------------
Cash Provided Proceeds from sales of long-term investments 54,607,004
by Investing Purchases of long-term investments (45,032,642)
Activities: Purchases of short-term investments (125,454,498)
Proceeds from sales and maturities of short-term investments 125,159,000
------------
Net cash provided by investing activities 9,278,864
------------
Cash Used for Cash receipts from borrowings 14,250,000
Financing Cash payments from borrowings (22,250,000)
Activities: Dividends paid to shareholders (5,669,526)
------------
Net cash used for financing activities (13,669,526)
------------
Cash: Net decrease in cash (10,730)
Cash at beginning of period 10,925
------------
Cash at end of period $ 195
============
Cash Flow Cash paid for interest $ 789,128
Information: ============
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders $ 456,811
Financing ============
Activities:
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION> For the
The following per share data and ratios Period
have been derived from information provided For the Six For the November 26,
in the financial statements. Months Ended Year Ended 1993++ to
February 29, August 31, August 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.44 $ 12.37 $ 14.18
Operating ----------- ----------- -----------
Performance: Investment income--net .66 1.40 1.06
Realized and unrealized gain (loss) on
investments--net .40 .10 (1.91)
----------- ----------- -----------
Total from investment operations 1.06 1.50 (.85)
----------- ----------- -----------
Less dividends from investment income--net (.72) (1.43) (.94)
----------- ----------- -----------
Capital charge resulting from the issuance
of Common Stock -- -- (.02)
----------- ----------- -----------
Net asset value, end of period $ 12.78 $ 12.44 $ 12.37
=========== =========== ===========
Market price per share, end of period $ 12.50 $ 12.00 $ 12.125
=========== =========== ===========
Total Investment Based on net asset value per share 8.83%+++ 13.41% (6.27%)+++
Return:** =========== =========== ===========
Based on market price per share 10.35%+++ 11.61% (13.15%)+++
=========== =========== ===========
Ratios to Expenses, net of reimbursement and excluding
Average Net Assets: interest expense .79%* .86% .50%*
=========== =========== ===========
Expenses, net of reimbursement 1.87%* 2.49% 1.68%*
=========== =========== ===========
Expenses 1.87%* 2.49% 2.00%*
=========== =========== ===========
Investment income--net 8.66%* 8.73% 8.75%*
=========== =========== ===========
Supplemental Net assets, end of period (in thousands) $ 109,383 $ 106,054 $ 101,696
Data: =========== =========== ===========
Portfolio turnover 36.11% 61.97% 42.21%
=========== =========== ===========
<PAGE>
Leverage: Amount of borrowings (in thousands) $ 11,750 $ 19,750 $ 45,000
=========== =========== ===========
Asset coverage per $1,000 $ 10,309 $ 6,370 $ 3,260
=========== =========== ===========
<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. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
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
<PAGE>
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 including futures contracts and related
options, 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.
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.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures
contracts are contracts for delayed delivery of securities at a
specific future date and at a specific price or yield. Upon entering
into a contract, the Fund deposits and maintains as collateral such
initial margin as required by the exchange on which the transaction
is effected. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* 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). Dividend income is recorded on the ex-
dividend dates. Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses--Deferred organization 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.
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.
<PAGE>
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 six months ended February 29, 1996, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), $2,192 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 six months ended February 29, 1996 were $45,032,642 and
$55,056,623, respectively.
Net realized and unrealized losses as of February 29, 1996 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $ (92,385) $ (5,420,261)
----------- ------------
Total $ (92,385) $ (5,420,261)
=========== ============
As of February 29, 1996, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $5,420,261, of
which $4,775,515 related to appreciated securities and $10,195,776
related to depreciated securities. The aggregate cost of investments
at February 29, 1996 for Federal income tax purposes was
$123,940,681.
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 six months ended February 29, 1996, shares issued and
outstanding increased by 36,462 to 8,559,358 as a result of dividend
reinvestment. At February 29, 1996, total paid-in capital amounted
to $120,179,361.
<PAGE>
5. Short-Term Borrowings:
On February 2, 1996, 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 0.50%, an alternate base
rate plus 0.50%, and/or LIBOR plus 0.50%. Borrowings under this
commitment are subject to certain limitations contained in the
credit agreement. For this commitment, the Fund pays one-tenth of 1%
of the unused principal amount. For the six months ended February
29, 1996, the maximum amount borrowed was $26,500,000, the average
amount borrowed was approximately $21,669,000 and the daily weighted
average interest rate was 6.42%. For the six months ended February
29, 1996, facility and commitment fees aggregated approximately
$34,000.
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.
<TABLE>
PORTFOLIO INFORMATION
<CAPTION> Percent of
As of February 29, 1996 Net Assets
<S> <S> <C> <S> <C>
Ten Largest Revlon This well-known cosmetics and fragrance company recently
Holdings 9.375% 4/01/2001 completed a successful initial public offering of common
12.63% 3/15/1998 stock. The total market value of Revlon's equity is
$1.4 billion. 3.0%
Maxxam Group, Inc. Maxxam is a holding company whose affiliate, Kaiser Aluminum
11.25% 8/01/2003 is a leading producer of aluminum. Kaiser's common stock secures
14.726% 8/01/2003 these bonds. Through subsidiaries, Pacific Lumber and Britt
Lumber, Maxxam is the largest producer of premium-grade redwood
lumber in the world. 2.9%
PanAmSat L.P. PanAmSat operates communication satellites covering an area
10.65% 8/01/2003 that includes 97% of the world's population, especially focused
on Latin America and Asia. Additional satellites are scheduled for
launch in the coming years. 2.8%
<PAGE>
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. 2.7%
Fresh Del Monte Fresh Del Monte is a world leader in fresh tropical fruits,
Produce Corp. primarily bananas, but also pineapples and melon. The company is
10% 5/01/2003 the third largest marketer of bananas in the world. 2.6%
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. 2.6%
GB Property. GB Property Funding finances the Sands Casino in Atlantic City
Funding Corp which is the ultimate security for these first mortgage notes. 2.5%
10.875% 1/15/2004
Silgan Holdings, Inc. Silgan produces packaging products. The company is the largest
11.99% 12/15/2002 US producer of metal food cans and of aluminum soft drink cans.
The company also has a significant market share in plastic con-
tainers for personal care, food, household, and pharmaceutical
products and juice containers. 2.2%
Tucson Electric & This electric utility serves Tucson, Arizona and surrounding
Power Co. areas. Our bonds are secured by the company's Springerville
10.21% 1/01/2009 coal-fired power generation. 2.1%
American The company is the largest wireless cable operator in the US.
Telecasting, Inc. The company's total service area, when fully built-out, will
12.50% 6/15/2004 cover over 8 million homes. The company's largest operating
(Warrants) markets are Denver, Portland, Orlando and Columbus. 2.0%
</TABLE>
Quality
Ratings
The quality ratings of securities in the Fund as of February 29,
1996 were as follows:
Rating++ Percent of Net Assets
B or lower 62.2%
BB 26.8
BBB- 2.0
NR(Not Rated) 9.0
[FN]
++The quality ratings shown are weighted averages by Standard &
Poor's Corp. and Moody's Investors Service, Inc.
<PAGE>
PER SHARE INFORMATION
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends
Investment Gains Gains Net Investment
For the Quarter Income (Losses) (Losses) Income
<S> <C> <C> <C> <C>
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)
September 1, 1995 to November 30, 1995 .33 (.03) .01 (.33)
December 1, 1995 to February 29, 1996 .33 .02 .40 (.39)
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
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
September 1, 1995 to November 30, 1995 12.64 12.33 12.375 12.00 1,077
December 1, 1995 to February 29, 1996 12.90 12.30 13.25 11.875 1,289
<FN>
*Calculations are based upon shares of Common Stock outstanding at
the end of each quarter.
**As reported in the consolidated transaction reporting system.
***In thousands.
++Amount is less than $.01 per share.
</TABLE>
