CORPORATE
HIGH YIELD
FUND II, INC.
FUND LOGO
Annual Report
August 31, 1996
<PAGE>
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.
Corporate High
Yield Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
<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. 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.
DEAR SHAREHOLDER
<PAGE>
High-Yield Market Overview
High-yield bonds have performed well relative to other fixed-income
investments over the last year. The high-yield market, as measured
by the unmanaged Merrill Lynch High Yield Index, returned +9.3% for
the year ended August 31, 1996 and +2.8% during the six months ended
August 31, 1996. This compares to +1.4% and -2.4%, respectively, for
ten-year US Treasury bonds. Strong earnings fundamentals, moderate
default levels, high coupon income and good technical support from
cash inflows to the high-yield market have buoyed prices for high-
yield bonds in the past year. Although there were periods when high-
yield bonds tracked other bond types quite closely, the importance
of earnings and credit risk perception led high-yield bonds to offer
very different returns than other fixed-income investments over an
extended time period. The table below reflects the correlation of
investment returns of US Treasury notes with other financial asset
categories from 1980 to 1995. A perfect correlation would be 1.0,
and no correlation in returns would be 0.
Correlation with US Treasury Notes
High Yield Index 0.60 Somewhat correlated
Equity Index:
S&P 500 Index 0.29 Minimally correlated
Bond Indexes:
High Quality
Corporate Index 0.93 Highly correlated
Mortgage Index 0.91 Highly correlated
We believe that high-yield bond market returns will continue to
diverge from other fixed-income investments over the next few
months, but that in the next period the high-yield bond market is
likely to reverse its favorable trend and underperform US Treasury
securities. Because high-yield bonds reacted only modestly to the
major drop in Government and high-grade bond prices early this year,
yield spreads tightened substantially. The yield spread between ten-
year Treasury securities and the unmanaged Merrill Lynch Master
Index at December 31, 1995 was 400 basis points (4%) as compared to
only 276 basis points at August 30, 1996. Historically, high-yield
investors required a larger spread than this to compensate for the
greater credit risk of high-yield securities. Although high-yield
fundamentals remain sound, we expect spreads to widen, causing
underperformance in the high-yield market. Furthermore, with fixed-
income markets in a nervous transition period while investors
evaluate the potential for strong economic growth, we believe there
is room for further downside in fixed-income investments.
<PAGE>
Fund Performance
For the year ended August 31, 1996, total investment return on the
Fund's Common Stock was +12.71%, based on a change in the per share
net asset value from $12.44 to $12.56, and assuming reinvestment of
$1.376 per share income dividends. For the six months ended August
31, 1996, total investment return for the Fund was +3.57%. During
the same period, the net annualized yield of the Fund's Common Stock
was 10.96%.
Leverage Strategy
For the six months ended August 31, 1996, the Fund was on average
10% leveraged. In other words, the Fund borrowed the equivalent of
10% of its total assets. On August 30, 1996, the Fund was 7.8%
leveraged, having borrowed $9.25 million of the $60 million credit
line available at an average borrowing cost of 5.81%. This
represents a decrease in borrowing from the 20% leverage peak of the
Fund in December 1995.
Our reduced leverage position reflects our caution on the direction
of high-yield bond prices. At this time our borrowings are primarily
invested in bonds that we believe have limited downside risk from
adverse interest rate moves or from earnings disappointments. While
such bonds generally have limited upside as well, we are able to
enhance somewhat the yield of the portfolio by earning the modest
spread between our borrowing cost and the yield on our investments.
Given our cautious view on the market and barring a dramatic market
move in one direction or the other, we expect to maintain or
somewhat reduce leverage in the coming months. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of
this report to shareholders.)
Fund Strategy and
Portfolio Characteristics
Given our cautious view on the high-yield market, we intend to
continue to invest in bonds that will provide a modest income pick
up for limited risk. We will also selectively participate in new
issues and seek out attractively valued situations. However, at this
time, we do not expect major shifts in the composition of the
portfolio based on our market outlook.
At the end of the August period, major industries represented in the
portfolio as a percentage of total high-yield investments included:
communications, 13%; energy, 12.1%; utilities, 6.8%; transportation
services, 6.3%; and broadcast/cable, 5.8%. The average maturity of
the portfolio at August 31, 1996 was 5 years, 11 months.
In Conclusion
We thank you for your investment in Corporate High Yield Fund II,
Inc., and we look forward to assisting you with your financial goals
in the months and years ahead.
<PAGE>
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 1, 1996
Officers and
Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
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
Ira P. Shapiro, Secretary
<PAGE>
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--1.9% USAir Inc.:
B+ B1 $1,565,744 11.20% due 3/19/2005** $ 1,377,854 $ 1,587,351
B+ B1 500,000 10.375% due 3/01/2013 477,500 496,250
------------ ------------
1,855,354 2,083,601
Automotive--0.6% B B3 625,000 Collins & Aikman Products, 11.50% due 4/15/2006 625,000 640,625
Broadcasting/ CCC+ Caa 2,948,149 American Telecasting, Inc., 13.49% due
Cable--6.1% 6/15/2004* 2,082,174 2,078,445
CCC+ Caa 2,961,000 Australis Media Ltd., 14.09% due 5/15/2003* (d) 1,785,405 1,658,160
BB- B3 500,000 CAI Wireless Systems, Inc., 12.25% due
9/15/2002 500,000 515,000
B- B2 1,250,000 EZ Communication, Inc., 9.75% due 12/01/2005 1,265,625 1,262,500
B+ B3 1,515,000 Videotron Holdings PLC, 12% due 7/01/2004* 1,054,757 1,132,463
------------ ------------
6,687,961 6,646,568
Broadcasting & BB Ba3 1,250,000 Grupo Televisa S.A., 11.375% due 5/15/2003 (b) 1,250,000 1,300,000
Publishing--3.5% B B3 1,090,000 The Katz Corp., 12.75% due 11/15/2002 1,205,350 1,209,900
NR+++ NR+++ 1,301,116 SCI Television Inc., 8.50% due 6/30/1998 1,302,742 1,301,116
------------ ------------
3,758,092 3,811,016
Building BB B1 500,000 Building Materials Corporation, 11.06%
Materials--2.8% due 7/01/2004* 377,097 393,750
BB B1 625,000 Cemex S.A., 12.75% due 7/15/2006 (b) 625,000 662,500
B- Caa 2,000,000 Inter-City Products Corp., 9.75% due 3/01/2000 1,975,000 1,925,000
------------ ------------
2,977,097 2,981,250
<PAGE>
Chemicals--2.1% B+ Ba3 1,217,000 G-I Holdings Inc., 11.86% due 10/01/1998* 950,151 1,010,110
B- Ba3 850,000 Indspec Chemical Corp., 9.26% due 12/01/2003* 744,059 743,750
BB+ Ba3 500,000 Veridian Inc., 9.75% due 4/01/2003 485,625 518,125
------------ ------------
2,179,835 2,271,985
Communications-- CCC+ B3 2,250,000 Cellular Communications International Inc.,
13.7% 11.885% due 8/15/2000* 1,423,885 1,378,125
B+ B3 2,070,000 Comunicacion Celular, 13.153% due 11/15/2003* 1,210,012 1,252,350
NR+++ NR+++ 2,000,000 Echostar Communications Corp., 11.519%
due 6/01/2004* 1,525,688 1,480,000
B- B3 1,250,000 Millicom International Cellular S.A., 14.62%
due 6/01/2006* (b) 638,696 675,000
B- B3 1,000,000 Nextel Communications, Inc., 11.966% due
8/15/2004* 687,637 590,000
NR+++ NR+++ 1,250,000 Nextlink Communications, 12.50% due
4/15/2006 (b) 1,250,000 1,234,375
B B3 3,500,000 PanAmSat L.P., 10.65% due 8/01/2003* 2,860,873 3,110,625
BB- B2 2,000,000 Rogers Communications Inc., 10.875% due
4/15/2004 2,005,000 2,045,000
BB- B1 2,000,000 Telefonica de Argentina S.A., 11.875%
due 11/01/2004 1,960,160 2,115,000
B B3 1,915,000 Wireless One Inc., 13.499% due 8/01/2006* (e) 1,007,997 981,438
------------ ------------
14,569,948 14,861,913
Conglomerates-- B+ B1 2,000,000 Coltec Industries, Inc., 10.25% due 4/01/2002 2,135,000 2,070,000
1.9%
Consumer B NR+++ 2,000,000 Coleman Holdings, Inc., 10.65% due 5/27/1998* 1,671,803 1,705,000
Products--5.5% B- B2 1,333,000 Polymer Group Inc., 12.25% due 7/15/2002 1,290,083 1,436,307
B B2 2,000,000 Revlon Consumer Products Corp., 9.375%
due 4/01/2001 1,757,658 2,010,000
B- B2 820,000 Samsonite Corporation, 11.125% due 7/15/2005 793,038 852,800
------------ ------------
5,512,582 6,004,107
Consumer B B2 1,110,000 Affinity Group Inc., 11.50% due 10/15/2003 1,140,250 1,137,750
Services--1.0%
Diversified--1.2% NR+++ B3 1,250,000 Crain Industries, 13.50% due 8/15/2005 1,256,875 1,343,750
<PAGE>
Energy--12.8% B B2 1,125,000 Benton Oil & Gas Co., 11.625% due 5/01/2003 (b) 1,125,000 1,203,750
BB B2 500,000 California Energy Company, Inc., 9.875%
due 6/30/2003 500,000 511,250
B+ B2 2,000,000 Clark USA Inc., 10.875% due 12/01/2005 2,000,000 2,030,000
B- B1 1,250,000 KCS Energy Inc., 11% due 1/15/2003 1,279,375 1,340,625
BB- B1 750,000 Maxus Energy Corp., 11.50% due 11/15/2015 781,875 788,437
BBB- Baa3 2,000,000 Oleoducts Central S.A., 9.35% due 9/01/2005 (b) 2,000,000 1,986,000
NR+++ NR+++ 2,500,000 Trans Dakota Oil, 24% due 9/16/1996 (b) 2,501,563 2,500,000
CCC+ Caa 1,000,000 Transamerican Refining Corporation, 16.50%+++++
due 2/15/2002 991,805 940,000
BB- Ba3 2,000,000 TransTexas Gas Corp., 11.50% due 6/15/2002 2,000,000 2,085,000
BB- B1 500,000 Yacimientos Petroliferos Fiscales S.A., 8% due
2/15/2004 322,500 453,750
------------ ------------
13,502,118 13,838,812
Entertainment-- B Caa 2,425,000 Marvel Holdings Inc., 9.125% due 2/15/1998 2,193,625 2,267,375
2.4% D Ca 3,604,000 Spectravision, Inc., 11.65% due
12/01/2002++ (c) 3,230,551 351,390
------------ ------------
5,424,176 2,618,765
Financial BB+ Ba1 2,000,000 Penncorp Financial Group, Inc., 9.25%
Services--3.7% 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 2,005,000
------------ ------------
4,010,000 4,045,000
Food & B B3 500,000 Curtice Burns Foods, Inc., 12.25% due
Beverage--3.8% 2/01/2005 500,000 475,000
B- B3 1,000,000 Envirodyne Industries, Inc., 10.25% due
12/01/2001 1,018,750 880,000
CCC+ Caa 3,000,000 Fresh Del Monte Produce Corp., 10% due
5/01/2003 2,875,000 2,805,000
------------ ------------
4,393,750 4,160,000
Foreign Government BB- B1 2,000,000 Republic of Argentina, 8.375% due 12/20/2003 1,901,500 1,707,500
Obligations--1.6%
Gaming--5.3% BB Ba3 1,000,000 Bally's Park Place, Inc., 9.25% due 3/15/2004 971,250 1,060,000
B+ B2 2,000,000 GB Property Funding Corp., 10.875% due 1/15/2004 1,952,500 1,740,000
D Caa 2,000,000 Harrah's Jazz Company, 14.25% due 11/15/2001 (c) 2,000,000 1,040,000
BB- B1 2,000,000 Trump Atlantic City, 11.25% due 5/01/2006 2,000,000 1,910,000
------------ ------------
6,923,750 5,750,000
<PAGE>
Health Services-- B B 1,150,000 MEDIQ/PRN Life Support Services Inc., 12.125%
2.7% due 7/01/1999 1,201,313 1,242,000
B+ B1 1,500,000 Quorum Health Group, 11.875% due 12/15/2002 1,657,500 1,657,500
------------ ------------
2,858,813 2,899,500
Home-Builders-- B+ B1 750,000 Ryland Group, Inc. (The), 10.50% due 7/01/2006 738,652 746,250
0.7%
Industrials--0.5% BB- Ba1 500,000 Advanced Micro Devices Inc., 11% due 8/01/2003 500,000 506,250
</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 & Chemical Corp., 12.75%
Mining--5.1% due 2/01/2003 $ 2,090,000 $ 2,150,000
Maxxam Group, Inc.:
B- B3 2,000,000 11.25% due 8/01/2003 1,990,000 2,010,000
B- B3 1,835,000 14.726% due 8/01/2003* 1,301,979 1,339,550
------------ ------------
5,381,979 5,499,550
Packaging--0.9% Anchor Glass Container Corp.:
CCC- Caa 1,000,000 10.25% due 6/30/2002 695,000 500,000
CCC- Ca 2,000,000 9.875% due 12/15/2008 2,035,000 500,000
------------ ------------
2,730,000 1,000,000
Paper--5.1% B B3 1,125,000 Crown Paper Co., 11% due 9/01/2005 1,047,656 1,057,500
BB- Ba3 750,000 Doman Industries Ltd., 8.75% due 3/15/2004 685,312 690,000
BB- B2 1,000,000 Repap New Brunswick, Inc., 9.875% due
7/15/2000 1,000,000 995,000
BB- B1 1,000,000 Repap Wisconsin Finance, Inc., 9.25% due
2/01/2002 872,500 980,000
B B3 750,000 Riverwood International Corp., 10.875% due
4/01/2008 744,375 727,500
B+ B1 1,000,000 S.D. Warren Co., 12% due 12/15/2004 1,000,000 1,057,500
------------ ------------
5,349,843 5,507,500
<PAGE>
Real Estate--1.3% NR+++ NR+++ 2,325,000 Rockefeller Center Properties, Inc., 11.07%
due 12/31/2000* 1,475,188 1,395,000
Restaurants & CCC+ Caa 1,250,000 Flagstar Corp., 11.375% due 9/15/2003 1,296,875 837,500
Food Service--
0.8%
Specialty B- B3 1,500,000 Specialty Retailers, Inc., 11% due 8/15/2003 1,518,750 1,500,000
Retailing--1.4%
Steel--2.3% B B1 1,375,000 Gulf States Steel Acquisition Corp., 13.50%
due 4/15/2003 1,347,512 1,244,375
B+ B1 1,250,000 WCI Steel, Inc., 10.50% due 3/01/2002 1,250,000 1,293,750
------------ ------------
2,597,512 2,538,125
Textiles--0.9% B- Caa 1,250,000 Decorative Home Accents, Inc., 13% due 6/30/2002 1,244,141 962,500
Transportation-- BB- B1 500,000 Sea Containers Ltd., 12.50% due 12/01/2004 547,500 547,500
0.5%
Transportation BB- Ba2 2,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 2,030,000 1,920,000
Services--6.2% B- B3 4,271,000 Transtar Holdings, Inc., 12.75% due 12/15/2003* 2,848,684 3,117,830
B B2 1,750,000 Trism Inc., 10.75% due 12/15/2000 1,666,875 1,645,000
------------ ------------
6,545,559 6,682,830
Utilities--7.2% B+ B1 2,454,000 Beaver Valley Funding Corp., 9% due 6/01/2017 2,302,665 1,946,660
CTC Mansfield Funding Corp.:
B+ Ba3 698,000 10.25% due 3/30/2003 647,395 712,672
B+ Ba3 1,300,000 11.125% due 9/30/2016 1,399,937 1,306,968
BB- B1 1,500,000 Metrogas S.A., 12% due 8/15/2000 1,497,500 1,591,875
NR+++ NR+++ 2,359,520 Tucson Electric & Power Co., 10.21%
due 1/01/2009 (b) 2,312,331 2,219,554
------------ ------------
8,159,828 7,777,729
Total Investments in Corporate Bonds--105.5% 119,797,928 114,372,876
<PAGE>
Shares Held Common Stocks & Warrants
Broadcasting/ 18,350 American Telecasting, Inc. (Warrants) (a) 0 91,750
Cable--0.1%
Communications-- 1,250 Cellular Communications International Inc.
0.0% (Warrants) (a)(c) 30,163 18,750
2,070 Comunicacion Celular (Warrants) (a)(b)(c) 2,261 10,350
------------ ------------
32,424 29,100
Energy--0.0% 8,417 Transamerican Refining Corporation (Warrants) (a) 20,193 16,834
Steel--0.0% 1,375 Gulf States Steel Corp. (Warrants) (a)(b) 14,988 344
Supermarkets-- 35,348 Grand Union Co. (c) 2,103,750 201,042
0.2%
Textiles--0.0% 1,250 Decorative Home Accents, Inc. (Class F) (b)(c) 9,609 6,875
Total Investments in Common Stocks &
Warrants--0.3% 2,180,964 345,945
Face Amount Short-Term Securities
Commercial $1,015,000 General Electric Capital Corp., 5.30%
Paper***--1.0% due 9/03/1996 1,015,000 1,015,000
Total Investments in Short-Term Securities--1.0% 1,015,000 1,015,000
Total Investments--106.8% $122,993,892 115,733,821
============
Liabilities in Excess of Other Assets--(6.8%) (7,343,144)
------------
Net Assets--100.0% $108,390,677
============
<PAGE>
<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 rate paid at the time of purchase by the Fund.
++Represents a pay-in-kind security which may pay interest in
additional face.
+++Not Rated.
+++++Coupon rate resets periodically. The coupon rate shown is the
rate in effect at August 31, 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 $11,799,000,
representing 10.9% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Benton Oil & Gas Co., 11.625% due 5/01/2003 5/02/1996 $ 1,125,000 $ 1,203,750
Cemex S.A., 12.75% due 7/15/2006 7/22/1996 625,000 662,500
Comunicacion Celular (Warrants) 5/15/1996 2,261 10,350
Decorative Home Accents, Inc. (Class F) 6/30/1995-9/20/1995 9,609 6,875
Grupo Televisa S.A., 11.375% due 5/15/2003 5/13/1996 1,250,000 1,300,000
Gulf States Steel Corp. (Warrants) 8/08/1995 14,988 344
Millicom International Cellular S.A.,
14.62% due 6/01/2006 7/30/1996-8/13/1996 638,696 675,000
Nextlink Communications,12.50% due 4/15/2006 4/25/1996 1,250,000 1,234,375
Oleoducts Central S.A, 9.35% due 9/01/2005 6/21/1995 2,000,000 1,986,000
Trans Dakota Oil, 24% due 9/16/1996 3/22/1996 2,501,563 2,500,000
Tucson Electric & Power Co., 10.21% due 1/01/2009 3/23/1994 2,312,331 2,219,554
Total $11,729,448 $11,798,748
=========== ===========
(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 warrant of Wireless One Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of August 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$122,993,892) (Note 1a) $115,733,821
Cash 50,562
Interest receivable 2,558,306
Deferred organization expenses (Note 1e) 26,189
Prepaid expenses and other assets 26,493
------------
Total assets 118,395,371
------------
Liabilities: Payables:
Loans (Note 5) $ 9,250,000
Securities purchased 563,472
Interest on loans (Note 5) 56,011
Investment adviser (Note 2) 53,510
Commitment fees 8,768 9,931,761
------------
Accrued expenses and other liabilities 72,933
------------
Total liabilities 10,004,694
------------
Net Assets: Net assets $108,390,677
============
Capital: Common stock, par value $.10 per share, 200,000,000 shares authorized $ 863,085
Paid-in capital in excess of par 120,214,523
Undistributed investment income--net 681,877
Accumulated realized capital losses on investments--net (Note 6) (6,108,737)
Unrealized depreciation on investments--net (7,260,071)
------------
Net Assets--Equivalent to $12.56 per share based on 8,630,851 shares of
capital stock outstanding (market price $13.00) $108,390,677
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended August 31, 1996
<S> <S> <C>
Investment Income Interest and discount earned $ 13,575,341
(Note 1d):
Expenses: Loan interest expense (Note 5) 1,056,660
Investment advisory fees (Note 2) 626,605
Professional fees 71,490
Borrowing cost (Note 5) 68,830
Accounting services (Note 2) 65,654
Directors' fees and expenses 49,954
Printing and shareholder reports 37,825
Transfer agent fees 30,279
Custodian fees 12,965
Amortization of organization expenses (Note 1e) 11,761
Pricing services 6,226
Listing fees 500
Other 31,953
------------
Total expenses 2,070,702
------------
Investment income--net 11,504,639
------------
Realized & Realized loss on investments--net (430,981)
Unrealized Gain Change in unrealized depreciation on investments--net 1,676,281
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 12,749,939
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year
Ended August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 11,504,639 $ 11,740,682
Realized loss on investments--net (430,981) (4,451,502)
Change in unrealized depreciation on investments--net 1,676,281 5,517,040
------------ ------------
Net increase in net assets resulting from operations 12,749,939 12,806,220
------------ ------------
Dividends to Investment income--net (11,768,201) (11,976,116)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (11,768,201) (11,976,116)
------------ ------------
Capital Share Value of shares issued to Common Stock shareholders in reinvestment
Transactions of dividends 1,355,059 3,527,544
(Note 4): ------------ ------------
Net increase in net assets derived from capital share transactions 1,355,059 3,527,544
------------ ------------
Net Assets: Total increase in net assets 2,336,797 4,357,648
Beginning of year 106,053,880 101,696,232
------------ ------------
End of year* $108,390,677 $106,053,880
============ ============
<FN>
*Undistributed investment income--net (Note 1g) $ 681,877 $ 800,660
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended August 31, 1996
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 12,749,939
Operating Adjustments to reconcile net increase (decrease) in net assets
Activities: resulting from operations to net cash provided by operating activities:
Decrease in receivables 159,452
Decrease in other assets 17,947
Decrease in other liabilities (129,959)
Realized and unrealized loss on investments--net (1,245,300)
Amortization of discount (2,407,428)
------------
Net cash provided by operating activities 9,144,651
------------
<PAGE>
Cash Provided by Proceeds from sales of long-term investments 96,423,428
Investing Purchases of long-term investments (84,252,174)
Activities: Purchases of short-term investments (234,271,958)
Proceeds from sales and maturities of short-term investments 234,230,000
------------
Net cash provided by investing activities 12,129,296
------------
Cash Used for Cash receipts from borrowings 38,500,000
Financing Cash payments on borrowings (49,000,000)
Activities: Dividends paid to shareholders (10,734,310)
------------
Net cash used for financing activities (21,234,310)
------------
Cash: Net increase in cash 39,637
Cash at beginning of year 10,925
------------
Cash at end of year $ 50,562
============
Cash Flow Cash paid for interest $ 1,183,634
Information: ============
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders $ 1,355,059
Financing ============
Activities:
See Notes to Financial Statements.
</TABLE>
<PAGE>
<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: 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 1.35 1.40 1.06
Realized and unrealized gain (loss) on
investments--net .15 .10 (1.91)
------------ ------------ ------------
Total from investment operations 1.50 1.50 (.85)
------------ ------------ ------------
Less dividends from investment income--net (1.38) (1.43) (.94)
------------ ------------ ------------
Capital charge resulting from the issuance of
Common Stock -- -- (.02)
------------ ------------ ------------
Net asset value, end of period $ 12.56 $ 12.44 $ 12.37
============ ============ ============
Market price per share, end of period $ 13.00 $ 12.00 $ 12.125
============ ============ ============
Total Investment Based on net asset value per share 12.71% 13.41% (6.27%)+++
Return:** ============ ============ ============
Based on market price per share 20.94% 11.61% (13.15%)+++
============ ============ ============
Ratios to Average Expenses, net of reimbursement and excluding interest
Net Assets: expense .81% .86% .50%*
============ ============ ============
Expenses, net of reimbursement 1.65% 2.49% 1.68%*
============ ============ ============
Expenses 1.65% 2.49% 2.00%*
============ ============ ============
Investment income--net 9.15% 8.73% 8.75%*
============ ============ ============
Leverage: Amount of borrowings (in thousands) $ 9,250 $ 19,750 $ 45,000
============ ============ ============
Average amount of borrowings outstanding during
the period (in thousands) $ 16,948 $ 21,336 $ 41,935
============ ============ ============
Average amount of borrowings outstanding per share
during the period $ 1.98 $ 2.55 $ 5.10
============ ============ ============
Supplemental Net assets, end of period (in thousands) $ 108,391 $ 106,054 $ 101,696
Data: ============ ============ ============
Portfolio turnover 69.75% 61.97% 42.21%
============ ============ ============
<PAGE>
<FN>
++Commencement of Operations.
*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.
+++Aggregate total investment return.
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.
(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. Options written are valued at the last
sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. 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.
<PAGE>
(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.
* 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).
<PAGE>
(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.
(g) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $144,779 have been reclassified from accumulated net realized
capital losses to undistributed net investment income. These
reclassifications have no effect on net assets or net asset value
per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to 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, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), $4,361 for security price quotations
to compute the net asset value of the Fund.
<PAGE>
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, 1996 were $84,815,646 and $96,408,428,
respectively.
Net realized and unrealized losses as of August 31, 1996 were
as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (430,981) $ (7,260,071)
------------ ------------
Total $ (430,981) $ (7,260,071)
============ ============
As of August 31, 1996, net unrealized depreciation for Federal
income tax purposes aggregated $7,561,255, of which $3,132,755
related to appreciated securities and $10,694,010 related to
depreciated securities. The aggregate cost of investments at August
31, 1996 for Federal income tax purposes was $123,295,076.
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, 1996, shares issued and outstanding
increased by 107,955 to 8,630,851 as a result of dividend
reinvestment. At August 31, 1996, total paid-in capital amounted to
$121,077,338.
5. Short-Term Borrowings:
On February 2, 1996, the Fund extended its credit agreement with a
syndicate of banks led by State Street Bank & Trust Company. The
agreement is a $60,000,000 credit facility bearing interest at the
Federal Funds Rate plus 0.50% and/or the Eurodollar Rate plus 0.50%
and/or LIBOR plus 0.50%. For the year ended August 31, 1996, the
maximum amount borrowed was $26,500,000, the average amount borrowed
was approximately $16,948,000, and the daily weighted average
interest rate was 6.23%. For the year ended August 31, 1996,
facility and commitment fees aggregated approximately $69,000.
<PAGE>
6. Capital Loss Carryforward:
At August 31, 1996, the Fund had a net capital loss carryforward of
approximately $6,096,000, of which $2,725,000 expires in 2003 and
$3,371,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
7. Subsequent Event:
On September 6, 1996, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.112989 per share, payable on September 30, 1996 to shareholders
on record as of September 17, 1996.
<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, 1996, the related
statements of operations for the year then ended, changes in net
assets for each of the years in the two-year period then ended and
cash flows for the year then ended, and the financial highlights for
each of the years in the two-year period 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, 1996, by correspondence with the custodian and broker. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
<PAGE>
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Corporate High Yield Fund II, Inc. as of August 31, 1996, 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 7, 1996
</AUDIT-REPORT>
<TABLE>
PORTFOLIO INFORMATION (unaudited)
<CAPTION>
Percent of
As of August 31, 1996 Long-Term Investments
<S> <S> <S> <S> <C>
Ten Largest Maxxam Group, Inc. Maxxam is a holding company whose affiliate, Kaiser Aluminum,
Holdings 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. 3.1%
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. 2.9%
PanAmSat L.P. PanAmSat operates communications satellites covering an area that
10.65% 8/01/2003 includes 97% of the world's population, especially focused on Latin
America and Asia. Additional satellites are scheduled for launch in
the coming years. 2.9%
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 the
10% 5/01/2003 third-largest marketer of bananas in the world. 2.6%
Trans Dakota Oil This limited purpose subsidiary of TransTexas Gas holds publicly
24% 9/16/1996 traded TransTexas stock and gas-producing properties as security
for the bonds. 2.3%
Marvel Holdings Inc. Marvel is a holding company that controls 80% of Marvel
9.125% 2/15/1998 Entertainment. Marvel Entertainment is the largest publisher of
comic books, including Spiderman and X-Men, and a leading marketer
of cards. 2.1%
<PAGE>
Tucson Electric & Power Co. This electric utility serves Tucson, Arizona, and surrounding areas.
10.21% 1/01/2009 Our bonds are secured lease obligation bonds on the company's
Springerville coal fired power generation plant. 2.1%
American Telecasting, Inc. The company is the largest wireless cable television operator in the
13.49% 6/15/2004 United States. The company's total service area, when fully built-out,
(Warrants) will cover over 8 million homes. The company's largest operating
markets are Denver, Portland, Orlando and Columbus. 2.0%
Kaiser Aluminum & Kaiser, an affiliate of Maxxam Inc., is one of the world's largest
Chemical Corp. leading producers of aluminum. The company mines and refines bauxite
12.75% 2/01/2003 into alumina, produces aluminum from alumina and manufactures
fabricated aluminum products. 2.0%
Telefonica de Argentina S.A. The second-largest company in Argentina, Telefonica de Argentina
11.875% 11/01/2004 provides telephone service in southern Argentina, including 59% of
the business district of metropolitan Buenos Aires. 2.0%
</TABLE>
Quality
Ratings
The quality ratings of securities in the Fund as of August 31, 1996
were as follows:
Rating++ Percent of Net Assets
B or lower 62%
BB 27
BBB 2
NR(Not Rated) 9
[FN]
++The quality ratings shown are weighted averages by Standard &
Poor's Corp. and Moody's Investors Service, Inc.
