CORPORATE
HIGH YIELD
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 1997
<PAGE>
CORPORATE HIGH YIELD FUND II, INC.
The Benefits Corporate High Yield Fund II, Inc. has the ability to utilize
and Risks of leverage through borrowings or issuance of short-term debt
Leveraging 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.
Quality The quality ratings of securities in the Fund as of August 31,
Ratings 1997 were as follows:
Rating+ Percent of Net Assets*
B or lower........................ 60%
BB................................ 31
BBB............................... 7
NR(Not Rated)..................... 12
+ The quality ratings shown are weighted averages by Standard
& Poor's Corp. and Moody's Investors Service, Inc.
* Total may not equal 100%.
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1997
DEAR SHAREHOLDER
High-Yield Market Overview
The high-yield market reflected the generally favorable bond market
fundamentals over the past six months. The unmanaged Credit Suisse First
Boston High Yield Index returned +5.8% for the six months ended August 31,
1997, compared to a +4.6% return for ten-year Treasury notes. High-yield
returns were supported by both strong technicals and healthy fundamentals. On
the technical side, cash flows into high-yield mutual funds totaled over $13
billion year-to-date August 31, 1997. Additional funds entered the high-yield
market from non-traditional high-yield investors such as high-grade corporate
funds seeking to enhance yield and new commitments by insurance companies and
pension funds. Fundamentals also favored the high-yield market since the
economy is healthy, the quality of new-issue supply was excellent, and default
rates were historically low. The strength of the equity markets and
availability of capital also boosted merger and acquisition activity,
favorably affecting many high-yield issuers.
While we believe that the generally favorable environment for high-yield
securities should continue, the small risk premium prevalent in the market
leaves little room for negative surprises. Yield spreads relative to ten-year
Treasury notes are near historically narrow levels. Using the Credit Suisse
First Boston High Yield Index, the average spread for high-yield bonds
compared to Treasury securities was 461 basis points (4.61%) for the five-year
period from January 1, 1992 to December 31, 1996. In other words, the yield on
high-yield bonds was 4.61 percentage points higher than the yield on ten-year
Treasury notes. The index spread at August 31, 1997 was 337 basis points.
Thus, investors are now accepting a smaller incremental yield to compensate
for the additional credit risk of high-yield bonds. Furthermore, spreads are
compressing within the high-yield market as well. The spread between BB-rated
and B-rated issues tightened to 133 basis points compared to 158 basis points
at December 31, 1996, and the divergence between strong and weak single-B
spreads has narrowed as well.
Fund Performance
For the year ended August 31, 1997, total investment return on the Fund's
Common Stock was +14.91%, based on a change in per share net asset value from
$12.56 to $13.07, and assuming reinvestment of $1.270 per share income
dividends. For the six months ended August 31, 1997, total investment return
on the Fund's Common Stock was +6.91%, based on a change in per share net
asset value from $12.83 to $13.07, and assuming reinvestment of $0.621 per
share income dividends. During this period, the net annualized yield of the
Fund's Common Stock was 9.53%. The Fund's performance primarily reflects the
defensive market posture we maintained over the past year.
Leverage Strategy
Our leverage position has been considerably lower than that of many other
closed-end leveraged high-yield funds. The Fund was on average 6% leveraged
over the six-month period ended August 31, 1997. Thus, the Fund borrowed the
equivalent of 6% of total assets invested, earning incremental yield on the
investments we made with the borrowed funds. On August 31, 1997, the Fund was
10.2% leveraged, having borrowed $13 million at a borrowing cost of 5.89%. Our
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 the yield of the portfolio somewhat by earning
the modest spread between our borrowing cost and the yield on our investments.
(For a complete explanation of the benefits and risks of leveraging, see page
1 of this report to shareholders.)
Investment Strategy
Though market conditions for high-yield bonds have been quite favorable, we
believe there are several events that could increase investor sensitivity to
credit risk and erode confidence in our market. Among these are a significant
stock market correction, rising default rates, a slower economy, or slower
profit growth. In an investment environment in which risk premiums are small,
we believe it is appropriate to maintain a defensive posture. We continue to
emphasize shorter maturities and higher-quality issues, which we believe will
be less sensitive to widening yield spreads.
Portfolio Characteristics
In the schedule of investments included in this report to shareholders, we
reclassified several of the communications industry categories into more
narrowly defined sectors that more closely reflect fundamental industry
characteristics. Media and communications remains our largest broad industry
category, totaling nearly 28% of total long-term investments. Of the narrowly
classified sectors, the largest industries were: transportation, 9.0%; energy,
7.2%; paper & forest products, 6.9%; media & communications -- international,
6.8%; and cable -- international, 6.1%. Non-US bonds totaled nearly 30% of the
portfolio, with emerging market issues accounting for 14.6% of total long-term
investments. During the six-month period ended August 31, 1997, the average
portfolio maturity was 6 years, 5 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 needs in the months and
years ahead.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent T. Lathbury
Vincent T. Lathbury III
Vice President and Portfolio Manager
/s/ Elizabeth M. Phillips
Elizabeth M. Phillips
Vice President and Portfolio Manager
September 29, 1997
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
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Vincent T. Lathbury III, Vice President
Elizabeth M. Phillips, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian & Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
NYSE Symbol
KYT
2 & 3
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1997
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aerospace & B- B2 $ 650,000 L-3 Communications Corp., 10.375% due 5/01/2007 (b) $ 650,000 $ 693,875
Defense--1.2% B+ B1 750,000 Tracor, Inc., 8.50% due 3/01/2007 747,015 751,875
------------ ------------
1,397,015 1,445,750
- ------------------------------------------------------------------------------------------------------------------------------------
Airlines--1.0% B+ B1 1,035,836 USAir Inc., 11.20% due 3/19/2005** 911,536 1,153,156
- ------------------------------------------------------------------------------------------------------------------------------------
Automotive--1.1% B B3 625,000 Collins & Aikman Products, 11.50% due 4/15/2006 625,000 709,375
B+ B2 625,000 Venture Holdings Trust, 9.50% due 7/01/2005 (b) 602,619 614,063
------------ ------------
1,227,619 1,323,438
- ------------------------------------------------------------------------------------------------------------------------------------
Broadcasting--Radio B- B2 1,250,000 EZ Communications, Inc., 9.75% due 12/01/2005 1,265,625 1,343,750
& Television--2.2% B B2 500,000 Sinclair Broadcasting Group Inc., 10% due 9/30/2005 494,375 522,500
B Ba2 625,000 Young Broadcasting Corporation, 11.75% due 11/15/2004 695,313 693,750
------------ ------------
2,455,313 2,560,000
- ------------------------------------------------------------------------------------------------------------------------------------
Building BB Ba3 1,500,000 Building Materials Corporation, 10.241% due 7/01/2004* 1,294,446 1,383,750
Materials--1.8% BB B1 625,000 Cemex S.A., 12.75% due 7/15/2006 (b) 625,000 742,188
------------ ------------
1,919,446 2,125,938
- ------------------------------------------------------------------------------------------------------------------------------------
Cable--3.7% CCC+ Caa 2,823,149 American Telecasting, Inc., 13.646% due 6/15/2004* 2,252,779 825,771
B B2 1,000,000 Intermedia Capital Partners, 11.25% due 8/01/2006 1,003,750 1,090,000
BB- B2 1,250,000 Lenfest Communications, Inc., 10.50% due 6/15/2006 1,267,813 1,353,125
BB+ Ba3 500,000 TCI Communications Inc., 9.65% due 3/31/2027 545,625 541,920
B- B3 1,915,000 Wireless One Inc., 13.499% due 8/01/2006* (f) 1,148,242 411,725
------------ ------------
6,218,209 4,222,541
- ------------------------------------------------------------------------------------------------------------------------------------
Cable-- NR++ NR++ 2,961,000 Australis Media Ltd., 14.09% due 5/15/2003* (e) 2,044,654 2,391,007
International--6.4% BB- Baa3 500,000 Bell Cablemedia PLC, 9.898% due 7/15/2004* 439,192 458,750
Diamond Cable Communications PLC*:
B- B3 875,000 10.773% due 12/15/2005 639,073 624,531
B- B3 1,750,000 11.387% due 2/15/2007 1,045,041 1,080,625
International Cabletel Inc.:
B B3 500,000 10% due 2/15/2007 500,313 517,500
B- B3 1,250,000 Series B, 9.99% due 2/01/2006* 845,509 900,000
B+ Baa3 1,515,000 Videotron Holdings PLC, 12% due 7/01/2004* 1,182,388 1,397,587
------------ ------------
6,696,170 7,370,000
- ------------------------------------------------------------------------------------------------------------------------------------
Chemicals--0.4% B+ B2 500,000 Huntsman Corporation, 9.50% due 7/01/2007 (b) 500,000 520,000
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Services/ BB- Ba1 1,000,000 Advanced Micro Devices Inc., 11% due 8/01/2003 1,038,750 1,117,500
Electronics--2.6% B- B2 750,000 Amphenol Corporation, 9.875% due 5/15/2007 750,000 774,375
B B2 1,000,000 Celestica International Inc., 10.50% due 12/31/2006 1,000,000 1,072,500
------------ ------------
2,788,750 2,964,375
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer B B3 1,175,000 Coleman Escrow Corp., 11.573% due 5/15/2001* (b) 775,485 769,625
Products--3.0% B B2 2,000,000 Revlon Consumer Products Corp., 9.375% due 4/01/2001 1,762,619 2,067,500
B+ B1 547,000 Samsonite Corporation, 11.125% due 7/15/2005 528,910 616,742
------------ ------------
3,067,014 3,453,867
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer B B2 1,110,000 Affinity Group Inc., 11.50% due 10/15/2003 1,140,250 1,190,475
Services--1.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Diversified--1.2% B- B3 1,250,000 Crain Industries, 13.50% due 8/15/2005 1,256,875 1,421,875
- ------------------------------------------------------------------------------------------------------------------------------------
Energy--7.6% B+ B2 1,125,000 Benton Oil & Gas Co., 11.625% due 5/01/2003 1,125,000 1,226,250
B+ B3 1,000,000 Clark USA Inc., 10.875% due 12/01/2005 1,000,000 1,065,000
B B1 1,250,000 KCS Energy Inc., 11% due 1/15/2003 1,279,375 1,362,500
BBB- Baa3 2,000,000 Oleoducto Central S.A., 9.35% due 9/01/2005 (b) 2,000,000 2,123,610
B+ B3 3,950,000 Transamerican Energy Corp., 13.155% due 6/15/2002* (b) 3,134,783 3,011,875
------------ ------------
8,539,158 8,789,235
- ------------------------------------------------------------------------------------------------------------------------------------
Entertainment--1.3% B B2 1,250,000 Six Flags Theme Parks, 5.969% due 6/15/2005* 1,280,000 1,290,625
B+ Ba3 250,000 Speedway Motorsports, Inc., 8.50% due 8/15/2007 (b) 249,320 250,625
------------ ------------
1,529,320 1,541,250
- ------------------------------------------------------------------------------------------------------------------------------------
Financial NR++ Ba3 1,508,000 First Nationwide Escrow, 10.625% due 10/01/2003 1,678,920 1,651,260
Services--5.3% BB+ B1 2,000,000 Penncorp Financial Group, Inc., 9.25% due 12/15/2003 2,000,000 2,105,000
BB- B1 2,000,000 Reliance Group Holdings Inc., 9.75% due 11/15/2003 2,010,000 2,094,480
BB- NR++ 250,000 Veritas Holdings, 9.625% due 12/15/2003 (b) 252,187 261,250
------------ ------------
5,941,107 6,111,990
- ------------------------------------------------------------------------------------------------------------------------------------
Food & B B3 500,000 Curtice Burns Foods, Inc., 12.25% due 2/01/2005 500,000 551,250
Beverage--3.2% B+ B2 3,000,000 Fresh Del Monte Produce Corp., 10% due 5/01/2003 2,875,000 3,165,000
------------ ------------
3,375,000 3,716,250
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Government BB- B1 750,000 Republic of Brazil, 10.125% due 5/15/2027 699,255 727,500
Obligations--0.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Gaming--5.3% B+ B2 2,000,000 GB Property Funding Corp., 10.875% due 1/15/2004 1,952,500 1,795,000
D Caa 2,000,000 Harrah's Jazz Company, 14.25% due 11/15/2001 (d) 2,000,000 760,000
B+ B2 1,000,000 Station Casinos, Inc., 9.75% due 4/15/2007 (b) 992,539 972,500
BB- B1 2,000,000 Trump Atlantic City, 11.25% due 5/01/2006 2,000,000 1,950,000
NR++ Caa 750,000 Trump Castle Funding Inc., 11.75% due 11/15/2003 699,153 701,250
------------ ------------
7,644,192 6,178,750
- ------------------------------------------------------------------------------------------------------------------------------------
Health B B3 1,250,000 Imed Corp., 9.75% due 12/01/2006 (b) 1,263,750 1,285,937
Services--2.0% B+ B2 1,000,000 Quest Diagnostic Inc., 10.75% due 12/15/2006 1,000,000 1,087,500
------------ ------------
2,263,750 2,373,437
- ------------------------------------------------------------------------------------------------------------------------------------
Hotel--0.9% BB- Ba3 1,000,000 HMH Properties Inc., 8.875% due 7/15/2007 (b) 1,001,250 1,017,500
- ------------------------------------------------------------------------------------------------------------------------------------
Independent Power BB+ Ba2 375,000 California Energy Company, Inc., 9.875% due 6/30/2003 375,000 407,194
Producers--0.8% BB- Ba3 500,000 Calpine Corporation, 8.75% due 7/15/2007 (b) 498,176 506,875
------------ ------------
873,176 914,069
- ------------------------------------------------------------------------------------------------------------------------------------
Media & BB- Ba3 1,000,000 Antenna TV S.A., 9% due 8/01/2007 (b) 968,279 970,000
Communications-- Call-Net Enterprises, Inc.*:
International--7.2% BB- B1 1,250,000 10.927% due 12/01/2004 1,039,623 1,107,812
BB- B1 1,000,000 9.27% due 8/15/2007 638,360 646,250
</TABLE>
4 & 5
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1997
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Media & BB- B1 $1,000,000 Comtel Brasileira Ltd., 10.75% due 9/26/2004 (b) $ 1,000,000 $ 1,056,250
Communications-- BB- B2 750,000 Globo Communicacoes, 10.50% due 12/20/2006 (b) 748,142 785,625
International BB Ba3 1,250,000 Grupo Televisa S.A., 11.375% due 5/15/2003 1,250,000 1,371,875
(concluded) BBB- B1 2,000,000 Telefonica de Argentina S.A., 11.875% due 11/01/2004 1,960,160 2,382,400
------------ ------------
7,604,564 8,320,212
- ------------------------------------------------------------------------------------------------------------------------------------
Metals & CCC+ B2 2,000,000 Kaiser Aluminum & Chemical Corp., 12.75% due 2/01/2003 2,090,000 2,170,000
Mining--6.1% Maxxam Group, Inc.:
CCC+ B3 2,000,000 11.25% due 8/01/2003 1,990,000 2,120,000
CCC+ B3 1,835,000 14.726% due 8/01/2003* 1,507,908 1,688,200
B B3 1,000,000 Westmin Resources Ltd., 11% due 3/15/2007 1,000,000 1,070,000
------------ ------------
6,587,908 7,048,200
- ------------------------------------------------------------------------------------------------------------------------------------
Packaging--1.2% B+ Ba3 1,250,000 Vicap S.A., 11.375% due 5/15/2007 (b) 1,243,375 1,370,312
- ------------------------------------------------------------------------------------------------------------------------------------
Paper & Forest B B3 1,250,000 Ainsworth Lumber Company, 12.50% due 7/15/2007) (b)+ 1,215,725 1,214,559
Products--7.3% BB- B1 1,375,000 Doman Industries Ltd., 8.75% due 3/15/2004 1,268,125 1,354,375
BB Ba3 625,000 Malette Inc., 12.25% due 7/15/2004 695,312 706,250
BB Ba3 1,000,000 P.T. Pabrik Kertas Tjiwi Kimia, 10% due 8/01/2004 (b) 994,550 968,750
Repap New Brunswick, Inc.:
CCC B2 1,000,000 9.875% due 7/15/2000 1,000,000 1,012,500
CC Caa 500,000 10.625% due 4/15/2005 473,750 473,750
CCC B2 1,000,000 Repap Wisconsin Finance, Inc., 9.25% due 2/01/2002 872,500 1,057,500
B- B3 500,000 Riverwood International Corp., 10.25% due 4/01/2006 483,750 498,750
B+ B1 1,000,000 S.D. Warren Co., 12% due 12/15/2004 1,000,000 1,122,500
------------ ------------
8,003,712 8,408,934
- ------------------------------------------------------------------------------------------------------------------------------------
Product B- B3 1,000,000 AmeriServ Food Company, 10.125% due 7/15/2007 (b) 1,000,000 1,025,000
Distribution--1.5% B+ B3 750,000 Fleming Companies, Inc., 10.50% due 12/01/2004 (b) 745,642 759,375
------------ ------------
1,745,642 1,784,375
- ------------------------------------------------------------------------------------------------------------------------------------
Publishing & Hollinger International, Inc.:
Printing--1.6% BB+ Ba3 500,000 8.625% due 3/15/2005 497,500 510,000
BB- B1 500,000 9.25% due 3/15/2007 496,790 517,500
B B3 750,000 MDC Communications Corp., 10.50% due 12/01/2006 750,000 796,875
------------ ------------
1,744,290 1,824,375
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate--1.4% NR++ NR++ 2,325,000 Rockefeller Center Properties, Inc., 11.07% due
12/31/2000* (Convertible) 1,630,799 1,592,625
- ------------------------------------------------------------------------------------------------------------------------------------
Supermarkets--0.9% NR++ Caa 1,250,000 Food 4 Less Supermarkets, Inc., 11.039% due 7/15/2005* 1,010,409 996,875
- ------------------------------------------------------------------------------------------------------------------------------------
Telephony-- NR++ NR++ 1,000,000 Brooks Fiber Properties, Inc., 10.546% due 11/01/2006* 682,445 695,000
Competitive B+ B2 1,000,000 GCI Inc., 9.75% due 8/01/2007 1,000,000 1,020,000
Local Exchange B B2 500,000 Intermedia Communications Inc., 10.503% due 7/15/2007* (b) 312,524 316,250
Carriers--3.6% NR++ NR++ 1,250,000 Nextlink Communications Inc., 12.50% due 4/15/2006 1,250,000 1,378,125
B B1 750,000 Teleport Communications Group Inc., 9.875% due 7/01/2006 791,625 804,375
------------ ------------
4,036,594 4,213,750
- ------------------------------------------------------------------------------------------------------------------------------------
Transportation--9.4%BB- NR++ 1,000,000 Autopistas Del Sol S.A., 10.25% due 8/01/2009 (b) 1,000,000 1,022,500
NR++ B3 1,000,000 Central Transport Rental Group, PLC (CTR),
9.50% due 4/30/2003 1,055,000 1,045,000
BB- Ba2 2,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 2,030,000 2,025,000
BB- B1 1,250,000 Sea Containers Ltd., 12.50% due 12/01/2004 1,368,750 1,412,500
NR++ B3 4,271,000 Transtar Holdings, Inc., 12.75% due 12/15/2003* 3,218,506 3,673,060
B B3 1,750,000 Trism Inc., 10.75% due 12/15/2000 1,666,875 1,754,375
------------ ------------
10,339,131 10,932,435
- ------------------------------------------------------------------------------------------------------------------------------------
Utilities--6.0% BB- B1 1,750,000 Beaver Valley Funding Corp., 9% due 6/01/2017 1,635,625 1,859,637
BB- NR++ 1,010,000 First PV Funding Corp., 10.30% due 1/15/2014 1,075,138 1,067,469
BBB- B1 1,500,000 Metrogas S.A., 12% due 8/15/2000 1,497,500 1,665,000
NR++ NR++ 2,359,520 Tucson Electric & Power Co., 10.21% due 1/01/2009** (c) 2,312,331 2,382,456
------------ ------------
6,520,594 6,974,562
- ------------------------------------------------------------------------------------------------------------------------------------
Wireless CCC- B3 1,000,000 Cencall Communications Corporation, 13.935% due 1/15/2004* 712,905 842,500
Communications-- CCC- B3 950,000 Nextel Communications Inc., 13.486% due 8/15/2004* 639,394 786,125
Domestic Paging & B- B3 1,000,000 Western Wireless Corp., 10.50% due 2/01/2007 995,937 1,035,000
Cellular--2.3% ------------ ------------
2,348,236 2,663,625
- ------------------------------------------------------------------------------------------------------------------------------------
Wireless CCC+ B3 2,250,000 Cellular Communications International Inc., 11.885%
Communications-- due 8/15/2000* 1,592,327 1,749,375
International B+ B3 2,070,000 Comunicacion Celular, 13.153% due 11/15/2003* 1,370,885 1,604,250
Paging & B- B3 1,500,000 Millicom International Cellular S.A., 13.80% due 6/01/2006* 901,470 1,126,875
Cellular--3.9% ------------ ------------
3,864,682 4,480,500
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Corporate Bonds--105.0% 118,124,341 121,732,176
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
Held Stocks & Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
Broadcasting--Radio 1,339 Paxson Communications Corp. (Convertible Preferred))(b)(d)+ 1,244,972 1,446,120
& Television--1.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Cable--0.0% 18,350 American Telecasting, Inc. (Warrants) (a) 0 7,340
- ------------------------------------------------------------------------------------------------------------------------------------
Entertainment--1.7% 17,076 On Command Corporation (d) 3,186,975 251,871
5,447 On Command Corporation (Warrants) (a) 43,576 29,959
1,498 Time Warner Inc. (Preferred) (Series M)+ 1,640,168 1,703,975
------------ ------------
4,870,719 1,985,805
- ------------------------------------------------------------------------------------------------------------------------------------
Supermarkets--0.1% 35,348 Grand Union Co. (d) 2,103,750 66,278
- ------------------------------------------------------------------------------------------------------------------------------------
Telephony-- 521 Intermedia Communications Inc. (Convertible Preferred)
Competitive (b)(d)+ 521,998 591,335
Local Exchange
Carriers--0.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Wireless 750 Nextel Communications Inc. (Preferred) (b)(d)+ 750,000 817,500
Communications--
Domestic Paging &
Cellular--0.7%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6 & 7
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1997
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Shares Value
INDUSTRIES Held Stocks & Warrants Cost (Note 1a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Wireless 1,250 Cellular Communications International Inc. (Warrants) (a) $ 30,163 $ 18,750
Communications-- 2,070 Comunicacion Celular S.A. (Warrants) (a)(b) 2,261 12,938
International Paging & ------------ -----------
Cellular--0.0% 32,424 31,688
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Stocks & Warrants-- 4.3% 9,523,863 4,946,066
- ------------------------------------------------------------------------------------------------------------------------------------
Face
Amount Short-Term Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $217,000 General Motors Acceptance Corp., 5.69% due 9/02/1997 217,000 217,000
Paper***--0.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities-- 0.2% 217,000 217,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments--109.5% $127,865,204 126,895,242
============
Liabilities in Excess of Other Assets--(9.5%) (10,992,490)
------------
Net Assets --100.0% $115,902,752
============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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
shares/face.
++ Not Rated.
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock. The purchase price and the number of shares are subject to
adjustment under certain conditions until the expiration date.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the securities Act of 1933.
(c) Restricted security as to resale. The value of the Fund's investment in
restricted securities was approximately $2,382,000, representing 2.1% of
net assets.
- --------------------------------------------------------------------------------
Acquisition Value
Issue Date Cost (Note 1a)
- --------------------------------------------------------------------------------
Tucson Electric & Power Co., 10.21%
due 1/01/2009 3/23/1994 $ 2,312,331 $ 2,382,456
- --------------------------------------------------------------------------------
Total $ 2,312,331 $ 2,382,456
=========== ===========
- --------------------------------------------------------------------------------
(d) Non-income producing security.
(e) Each $1,000 face amount contains one warrant of Australis Media Ltd.
(f) 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.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of August 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$127,865,204) (Note 1a) ................ $126,895,242
Cash ........................................................................... 817
Interest receivable ............................................................ 2,174,405
Deferred organization expenses (Note 1e) ....................................... 14,460
Prepaid expenses and other assets .............................................. 52,124
------------
Total assets ................................................................... 129,137,048
------------
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities: Loans (Note 5) ................................................................. 13,000,000
Payables:
Interest on loans (Note 5) ................................................... $ 101,054
Investment adviser (Note 2) .................................................. 56,979 158,033
---------
Accrued expenses and other liabilities ......................................... 76,263
------------
Total liabilities .............................................................. 13,234,296
------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ..................................................................... $115,902,752
============
- ----------------------------------------------------------------------------------------------------------------------------------
Capital: Common stock, $.10 par value, 200,000,000 shares authorized .................... $ 886,462
Paid-in capital in excess of par ............................................... 123,179,123
Undistributed investment income--net ........................................... 692,800
Accumulated realized capital losses on investments--net (Note 6) ............... (7,885,671)
Unrealized depreciation on investments--net .................................... (969,962)
------------
Net Assets--Equivalent to $13.07 per share based on 8,864,621 shares
of capital stock outstanding
(market price $13.4375) ........................................................ $115,902,752
============
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended August 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income Interest and discount earned ...................................................... $ 12,188,700
(Note 1d): Dividends ......................................................................... 110,387
Other ............................................................................. 170,325
------------
Total income ...................................................................... 12,469,412
------------
- ---------------------------------------------------------------------------------------------------------------------------
Expenses: Investment advisory fees (Note 2) ................................................. 597,891
Loan interest expense (Note 5) .................................................... 485,353
Professional fees ................................................................. 69,053
Borrowing cost (Note 5) ........................................................... 65,172
Accounting services (Note 2) ...................................................... 64,737
Printing and shareholder reports .................................................. 41,884
Directors' fees and expenses ...................................................... 40,297
Transfer agent fees ............................................................... 29,000
Custodian fees .................................................................... 12,538
Amortization of organization expenses (Note 1e) ................................... 11,729
Pricing services .................................................................. 5,867
Listing fees ...................................................................... 125
Other ............................................................................. 31,965
------------
Total expenses .................................................................... 1,455,611
------------
Investment income--net ............................................................ 11,013,801
------------
- ---------------------------------------------------------------------------------------------------------------------------
Realized & Unrealized Realized loss on investments--net ................................................. (1,676,196)
Gain (Loss) on Change in unrealized depreciation on investments--net ............................. 6,290,109
Investments--Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations .............................. $ 15,627,714
============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9 & 10
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1997
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year
Ended August 31,
--------------------------
Increase (Decrease) in Net Assets: 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations: Investment income--net .................................................. $ 11,013,801 $ 11,504,639
Realized loss on investments--net ....................................... (1,676,196) (430,981)
Change in unrealized depreciation on investments--net ................... 6,290,109 1,676,281
------------ ------------
Net increase in net assets resulting from operations .................... 15,627,714 12,749,939
------------ ------------
- -------------------------------------------------------------------------------------------------------------------------------
Dividends to Investment income--net .................................................. (11,103,616) (11,768,201)
Shareholders (Note 1f): ------------ ------------
Net decrease in net assets resulting from dividends to shareholders ..... (11,103,616) (11,768,201)
------------ ------------
- -------------------------------------------------------------------------------------------------------------------------------
Capital Share Value of shares sold to Common Stock shareholders in reinvestment
Transactions (Note 4): of dividends ........................................................... 2,987,977 1,355,059
------------ ------------
Net increase in net assets derived from capital share transactions ...... 2,987,977 1,355,059
------------ ------------
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets ............................................ 7,512,075 2,336,797
Beginning of year ....................................................... 108,390,677 106,053,880
------------ ------------
End of year* ............................................................ $115,902,752 $108,390,677
============ ============
- -------------------------------------------------------------------------------------------------------------------------------
* Undistributed investment income--net (Note 1g) .......................... $ 692,800 $ 681,877
============ ============
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended August 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations .................................... $ 15,627,714
Operating Activities: Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by operating activities:
Decrease in receivables ............................................................... 383,901
Increase in other assets .............................................................. (13,902)
Increase in other liabilities ......................................................... 43,074
Realized and unrealized gain on investments--net ...................................... (4,613,913)
Amortization of discount .............................................................. (3,244,320)
------------
Net cash provided by operating activities ............................................... 8,182,554
------------
- --------------------------------------------------------------------------------------------------------------------------------
Cash Used for Proceeds from sales of long-term investments ............................................ 83,380,387
Investing Activities: Purchases of long-term investments ...................................................... (88,074,134)
Purchases of short-term investments ..................................................... (129,556,914)
Proceeds from sales and maturities of short-term investments ............................ 130,384,000
------------
Net cash used for investing activities .................................................. (3,866,661)
------------
- --------------------------------------------------------------------------------------------------------------------------------
Cash Used for Cash receipts from borrowings ........................................................... 52,850,000
Financing Activities: Cash payments on borrowings ............................................................. (49,100,000)
Dividends paid to shareholders .......................................................... (8,115,638)
------------
Net cash used for financing activities .................................................. (4,365,638)
------------
- --------------------------------------------------------------------------------------------------------------------------------
Cash: Net decrease in cash .................................................................... (49,745)
Cash at beginning of year ............................................................... 50,562
------------
Cash at end of year ..................................................................... $ 817
============
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flow Information: Cash paid for interest .................................................................. $ 440,310
============
- --------------------------------------------------------------------------------------------------------------------------------
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders ................. $ 2,987,977
Financing Activities: ============
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year For the Period
Ended August 31, November 26,
-------------------------------- 1993++ to
Increase (Decrease) in Net Asset Value: 1997+ 1996 1995 August 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ........................... $ 12.56 $ 12.44 $ 12.37 $ 14.18
Operating -------- -------- -------- --------
Performance: Investment income--net ....................................... 1.26 1.35 1.40 1.06
Realized and unrealized gain (loss) on investments--net ...... .52 .15 .10 (1.91)
-------- -------- -------- --------
Total from investment operations ............................... 1.78 1.50 1.50 (.85)
-------- -------- -------- --------
Less dividends from investment income--net ..................... (1.27) (1.38) (1.43) (.94)
-------- -------- -------- --------
Capital charge resulting from the issuance of Common Stock ..... -- -- -- (.02)
-------- -------- -------- --------
Net asset value, end of period ................................. $ 13.07 $ 12.56 $ 12.44 $ 12.37
======== ======== ======== ========
Market price per share, end of period .......................... $13.4375 $ 13.00 $ 12.00 $ 12.125
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Based on net asset value per share ............................. 14.91% 12.71% 13.41% (6.27%)++
Return:** ======== ======== ======== ========
Based on market price per share ................................ 14.14% 20.94% 11.61% (13.15%)++
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Expenses, net of reimbursement and excluding interest expense .. .81% .81% .86% .50%*
Net Assets: ======== ======== ======== ========
Expenses, net of reimbursement ................................. 1.22% 1.65% 2.49% 1.68%*
======== ======== ======== ========
Expenses ....................................................... 1.22% 1.65% 2.49% 2.00%*
======== ======== ======== ========
Investment income--net ......................................... 9.23% 9.15% 8.73% 8.75%*
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------
Leverage: Amount of borrowings (in thousands) ............................ $ 13,000 $ 9,250 $ 19,750 $ 45,000
======== ======== ======== ========
Average amount of borrowings outstanding during the period (in
thousands) .................................................... $ 8,433 $ 16,948 $ 21,336 $ 41,935
======== ======== ======== ========
Average amount of borrowings outstanding per share during the
period ........................................................ $ .97 $ 1.98 $ 2.55 $ 5.10
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Net assets, end of period (in thousands) ....................... $115,903 $108,391 $106,054 $101,696
Data: ======== ======== ======== ========
Portfolio turnover ............................................. 70.76% 69.75% 61.97% 42.21%
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Based on average shares outstanding during the period.
++ 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 returns exclude the effects of sales
loads.
++ Aggregate total investment return.
See Notes to Financial Statements.
11 & 12
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1997
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 are 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. 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.
o 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.
o 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.
o 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.
(g) Reclassification -- Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $100,738 have been reclassified between accumulated net
realized capital losses and 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, 1997, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), $4,447 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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended August 31, 1997 were $87,510,662 and $83,380,387, respectively.
Net realized and unrealized losses as of August 31, 1997 were as follows:
- -----------------------------------------------------------------------
Realized Unrealized
Losses Losses
- -----------------------------------------------------------------------
Long-term investments........... $ (1,676,196) $ (969,962)
------------ ----------
Total .......................... $ (1,676,196) $ (969,962)
============ ==========
- -----------------------------------------------------------------------
As of August 31, 1997, net unrealized depreciation for Federal income tax
purposes aggregated $1,035,503, of which $7,870,749 related to appreciated
securities and $8,906,252 related to depreciated securities. The aggregate cost
of investments at August 31, 1997 for Federal income tax purposes was
$127,930,745.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10, all of which were 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.
Shares issued and outstanding during the years ended August 31, 1997 and August
31, 1996 increased by 233,770 and 107,955, respectively, as a result of dividend
reinvestment.
5. Short-Term Borrowings:
On January 31, 1997, the Fund entered into a credit agreement with Merrill Lynch
International Bank Limited, an affiliate of MLPF&S, for an unsecured revolving
credit facility. The agreement provides for $50,000,000 unsecured revolving
credit facility bearing interest at the Federal Funds Rate plus 0.25% and/or
LIBOR plus 0.25%. The proceeds of the new facility were used, in part, to
refinance the Fund's existing credit facility. For the year ended August 31,
1997, the maximum amount borrowed was $16,300,000, the average amount borrowed
was approximately $8,433,000 and the daily weighted average interest rate was
5.76%. For the year ended August 31, 1997, facility and commitment fees
aggregated approximately $65,000.
6. Capital Loss Carryforward:
At August 31, 1997, the Fund had a net capital loss carryforward of
approximately $7,117,000, of which $2,725,000 expires in 2003, $3,371,000
expires in 2004 and $1,021,000 expires in 2005. This amount will be available to
offset like amounts of any future taxable gains.
7. Subsequent Event:
On September 8, 1997, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.103589 per share,
payable on September 30, 1997 to shareholders of record as of September 18,
1997.
13 & 14
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1997
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, 1997, 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 three-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, 1997, 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, 1997, 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, 1997
PORTFOLIO INFORMATION (unaudited)
<TABLE>
<CAPTION>
Percent of Total
As of August 31, 1997 Long-Term Investments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Top Ten
Holdings Maxxam Group, Inc. Maxxam is a holding company whose affiliate, Kaiser Aluminum, is a leading producer
11.25% 8/01/2003 of aluminum. Kaiser's common stock secures these bonds. Through subsidiaries,
14.726% 8/01/2003 Pacific Lumber and Britt Lumber, Maxxam is the largest producer of premium-grade
redwood lumber in the world. 3.01%
- ------------------------------------------------------------------------------------------------------------------------------------
Transtar Holdings, Inc. Transtar is a transportation holding company with seven railroads, a Great Lakes shipping
12.75% 12/15/2003 fleet and an inland barge operation. Transtar provides sole rail access and primary
water transport for nearly all the steel plants of USX. 2.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Fresh Del Monte Fresh Del Monte is a world leader in fresh tropical fruits, primarily bananas, but also
Produce Corp. pineapples and melon. The company is the third-largest marketer of bananas in the world. 2.50%
10% 5/01/2003
- ------------------------------------------------------------------------------------------------------------------------------------
Transamerican Energy Corp. Transamerican Energy is an energy company with interests in natural gas and oil refining.
13.155% 6/15/2002 The company owns approximately 70% of TransTexas Gas Corp., a public natural gas
exploration, development and production company, primarily in South Texas. 100%-owned
Transamerican Refining Corp. owns a large petroleum refinery on the Gulf Coast near
New Orleans. The refinery is being rebuilt to process heavy, sour crude oils into higher
value, light petroleum products such as gasoline and heating oil. 2.38%
- ------------------------------------------------------------------------------------------------------------------------------------
Nextel Communications Inc. Nextel is building a network to provide digital wireless communications services that
13.486% 8/15/2004 ultimately will have a nationwide footprint. The company currently has service in
13.935% 1/15/2004 over 225 cities and expects service to cover 85% of the US population by the end of
13% Preferred Stock 1998. The company has over 423,000 subscribers. Cencall Communications Corporation
is part of Nextel Communications Inc. 1.93%
- ------------------------------------------------------------------------------------------------------------------------------------
Australis Media Ltd. Australis is a television programming provider offering a package of popular shows for
14.09% 5/15/2003 the Australian market. Australis also is a wireless and satellite television signal
provider in Australia. The company is in talks to be acquired by Foxtel, a joint venture
between News Corp. and Telstra Corp. 1.89%
- ------------------------------------------------------------------------------------------------------------------------------------
Tucson Electric & This electric utility serves Tucson, Arizona, and surrounding areas. Our bonds are secured
Power Co. lease obligation bonds on the company's Springerville coal fired power generation plant. 1.88%
10.21% 1/01/2009
- ------------------------------------------------------------------------------------------------------------------------------------
Telefonica de Telefonica de Argentina provides monopoly telephone service to the southern half of
Argentina S.A. Argentina, including about half the Buenos Aires metropolitan area where nearly one
11.875% 11/01/2004 third of Argentina's population is located. 1.88%
- ------------------------------------------------------------------------------------------------------------------------------------
Kaiser Aluminum Kaiser, an affiliate of Maxxam Inc., is one of the world's leading producers of aluminum.
& Chemical Corp. The company mines and refines bauxite into alumina, produces aluminum from alumina
12.75% 2/01/2003 and manufactures fabricated aluminum products. 1.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Oleoducto Central S.A. Oleoducto Central ("Ocensa") was formed to own and operate the Oleoducto Central
9.35% 9/01/2005 pipeline in Colombia that connects the large Cusiana and Cupiagua oil fields to a port
on the Caribbean coast. The pipeline is under construction, with completion expected
in late 1997. Ocensa is owned by Ecopetrol, the Colombian state oil company, and by
subsidiaries of British Petroleum, Total, Triton Energy, and TransCanada Pipelines. 1.68%
</TABLE>
15 & 16
<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 #16913--8/97
Printed on post-consumer recycled paper
