CORPORATE
HIGH YIELD
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 1998
<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.
Portfolio Profile As of August 31, 1998
Percent of
Quality Ratings+ Long-Term Investments
- --------------------------------------------------------------------------------
BBB ................................................................ 5.2%
BB ................................................................. 20.9
B or lower ......................................................... 67.6
NR (Not Rated) ..................................................... 6.3
- --------------------------------------------------------------------------------
+ The quality ratings shown are weighted averages by Standard & Poor's Corp.
and Moody's Investors Service, Inc.
Percent of
Foreign Holdings Long-Term Investments
- --------------------------------------------------------------------------------
Total Foreign Holdings ............................................. 26.6%
Emerging Markets Holdings .......................................... 12.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of
Top Five Foreign Countries* Long-Term Investments
- --------------------------------------------------------------------------------
United Kingdom ..................................................... 4.6%
Canada ............................................................. 4.2
Argentina .......................................................... 3.2
Colombia ........................................................... 3.0
Mexico ............................................................. 2.5
- --------------------------------------------------------------------------------
* All holdings are denominated in US dollars.
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
DEAR SHAREHOLDER
High-Yield Market Overview
In August, the high-yield market was swept away by weak world stock markets,
dismal reports of the Russian economy with its forced currency devaluation, and
ongoing Asian turmoil. Investor concern has centered on possible earnings
weakness that could occur if problems overseas ripple into domestic markets. As
a result, high-yield returns started to slip at the end of July and sagged
further as August progressed. The unmanaged CS First Boston Index returned -6.8%
for the month of August and -4.5% for the six months ended August 31, 1998. The
Index includes about 7% emerging markets bonds, which were especially hard hit.
The yield spread between ten-year Treasury securities and the high-yield market,
as measured by the CS First Boston High Yield Index, widened to 619 basis points
(6.19%) from 395 basis points on May 31, 1998 and 371 basis points on February
28, 1998. We believe that these levels provide opportunity in the high-yield
market, although unfavorable trends may persist in the months ahead.
While considering the high-yield market to be good value seems a stretch given
upheavals in global financial markets, a look at the historical yield spread
between high-yield issues and US Treasury securities supports this view. The
yield spread is the incremental yield demanded by investors for the additional
credit risk they take on by investing in the high-yield market rather than in US
Government obligations. The average monthly yield spread between high-yield
issues as measured by the CS First Boston High Yield Index from 1986 to 1997 is
517 basis points, compared to 619 basis points at August 31, 1998. This
historical period includes 1990 and 1991, two turbulent years that experienced
the unwinding of considerable speculative excess in the market, the fall of the
dominant high-yield dealer Drexel Burnham Lambert, the savings and loan crisis,
and the Persian Gulf War.
In our opinion, the high-yield market continues to offer a measure of
diversification to investors, as well as a reasonable risk/reward profile. The
high-yield market acts as a hybrid market, since it has characteristics of both
the fixed-income and equity markets, although it does not track either exactly.
The performance of the high-yield market has been more closely tied to the
Treasury market in a benign economic environment. On the other hand, when
corporate earnings concerns dominate, as is currently the case, the performance
of the high-yield market has more closely followed that of the equity market.
However, over the long term, high-yield issues tend to deliver their returns
with about half the volatility of stocks and about the same volatility as
Treasury securities.
Fund Performance
For the year ended August 31, 1998, total investment return on the Fund's Common
Stock was -4.10%, based on a change in the per share net asset value from $13.07
to $11.30, and assuming reinvestment of $1.327 per share income dividends. For
the six months ended August 31, 1998, total investment return for the Fund's
Common Stock was -8.87%. During the same period, the net annualized yield of the
Fund's Common Stock was 11.80%. The Fund's performance for the period reflects
downward pressure in emerging market holdings, weakness in the high-yield market
as a whole and earnings weakness in specific credits generally related to
international economic upheaval.
Leverage Strategy
The Fund was on average 20.5% leveraged during the six-month period ended August
31, 1998. This means that we borrowed the equivalent of 20.5% of total assets
invested, earning incremental yield on the investments we made with the borrowed
funds. We expect to hold or slightly increase leverage in the coming months as
market conditions permit. On August 31, 1998, the Fund was 24.5% leveraged,
having borrowed $33 million at a borrowing cost of 6.14%. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of this report
to shareholders.)
Investment Strategy
Dramatic market moves such as those we have experienced recently tend to swing
from strongly overbought to deeply oversold. We believe that oversold conditions
will create opportunities to buy bonds of healthy companies at quite favorable
valuations. We intend to use this period to reposition the portfolio, discarding
positions with unfavorable valuations and acquiring positions with solid
fundamental characteristics.
Though the Board of Directors approved on January 14, 1998 the Fund's ability to
invest up to 15% of total assets in secondary market purchases of corporate bank
loans, to date we have not purchased bank loans.
Portfolio Characteristics
Communications and media remained our largest broad industry category, totaling
nearly 28% of total long-term investments. Of the narrowly classified sectors,
the largest allocations were: transportation, 9.1% of total long-term
investments; media and communications--international, 6.0%; paper and forest
products, 6.1%; healthcare, 5.3%; and energy, 4.7%. Dollar-denominated non-US
bonds totaled about 2.7% of the portfolio, with emerging market holdings
accounting for 12% of total long-term investments. (See the foreign holdings
table on page 1 of this report for the distribution of non-US,
dollar-denominated investments in the portfolio.) At August 31, 1998, the
average maturity for the portfolio was 6 years, 9 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 III
Vincent T. Lathbury III
Senior Vice President and
Portfolio Manager
/s/ Elizabeth M. Phillips
Elizabeth M. Phillips
Vice President and Portfolio Manager
October 8, 1998
2 & 3
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
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 & L-3 Communications Corp.:
Defense--1.6% B B2 $ 650,000 10.375% due 5/01/2007 $ 650,000 $ 693,875
B B2 1,000,000 8.50% due 5/15/2008 999,300 977,500
------------ ------------
1,649,300 1,671,375
===================================================================================================================================
Airlines--1.1% B+ B1 964,417 USAir Inc., 11.20% due 3/19/2005** 848,687 1,117,942
===================================================================================================================================
Automotive--2.0% B+ B3 1,000,000 Breed Technologies, Inc., 9.25% due 4/15/2008 (c) 1,000,000 750,000
B B2 625,000 Collins & Aikman Corp., 11.50% due 4/15/2006 625,000 659,375
B+ B2 625,000 Venture Holdings Trust, 9.50% due 7/01/2005 604,600 610,938
------------ ------------
2,229,600 2,020,313
===================================================================================================================================
Beverages--0.2% B+ Ba3 250,000 Cott Corporation, 9.375% due 7/01/2005 257,500 251,250
===================================================================================================================================
Broadcasting--Radio CCC+ B3 1,000,000 Cumulus Media Inc., 10.375% due 7/01/2008 1,000,000 980,000
& Television--3.4% B- B2 1,250,000 EZ Communications, Inc., 9.75% due 12/01/2005 1,265,625 1,337,500
B B2 500,000 Sinclair Broadcasting Group Inc., 10% due 9/30/2005 494,375 520,000
B B2 625,000 Young Broadcasting Inc., 11.75% due 11/15/2004 695,313 668,750
------------ ------------
3,455,313 3,506,250
===================================================================================================================================
Cable--4.6% BB+ Ba2 1,000,000 CSC Holdings Inc., 7.625% due 7/15/2018 999,010 914,270
B- B2 1,250,000 Echostar Communications Corp., 10.923% due
6/01/2004* 1,188,374 1,181,250
B B2 1,000,000 Intermedia Capital Partners L.P., 11.25% due
8/01/2006 1,003,750 1,077,500
BB- B2 1,250,000 Lenfest Communications, Inc., 10.50% due 6/15/2006 1,267,813 1,412,500
CCC+ Ca 1,915,000 Wireless One Inc., 13.998% due 8/01/2006* (g) 1,272,617 134,050
------------ ------------
5,731,564 4,719,570
===================================================================================================================================
Cable-- Australis Media Ltd. (b):
International--3.2 D C 50,655 1.75%/15.75% due 5/15/2003 27,867 886
NR++ NR++ 2,961,000 1.75%/15.75% due 5/15/2003 (d) 2,086,637 51,818
Diamond Cable Communications PLC*:
B- Caa1 500,000 11.055% due 9/30/2004 474,827 465,000
B- Caa1 875,000 10.773% due 12/15/2005 701,551 717,500
B- Caa1 250,000 11.387% due 2/15/2007 166,553 175,000
NTL, Inc.:
B- B3 500,000 10% due 2/15/2007 500,313 490,000
B- B3 1,250,000 Series B, 11.643% due 2/01/2006* 946,121 962,500
B+ B1 500,000 TeleWest Communications PLC, 10.509% due 10/01/2007* 412,783 390,000
------------ ------------
5,316,652 3,252,704
===================================================================================================================================
Capital Goods-- B+ B1 1,000,000 Sequa Corporation, 9.375% due 12/15/2003 1,032,500 1,010,000
1.0%
===================================================================================================================================
Chemicals--2.6% B- B3 1,250,000 Great Lakes Carbon Corp., 10.25% due 5/15/2008+ (c) 1,250,000 1,181,250
B+ B2 500,000 Huntsman Corporation, 9.50% due 7/01/2007 500,000 492,500
B+ B2 1,000,000 Octel Developments PLC, 10% due 5/01/2006 (c) 1,000,000 990,000
------------ ------------
2,750,000 2,663,750
===================================================================================================================================
Computer Services/ B Ba3 1,500,000 Advanced Micro Devices Inc., 11% due 8/01/2003 1,547,500 1,470,000
Electronics--4.2% B- B2 750,000 Amphenol Corporation, 9.875% due 5/15/2007 750,000 705,000
B B2 650,000 Celestica International Inc., 10.50% due 12/31/2006 650,000 682,500
B- B3 1,000,000 MCMS Inc., 9.75% due 3/01/2008 1,000,000 730,000
B- B2 1,250,000 Zilog, Inc., 9.50% due 3/01/2005 (c) 1,161,875 737,500
------------ ------------
5,109,375 4,325,000
===================================================================================================================================
Consumer B- B2 1,250,000 Chattem, Inc., 12.75% due 6/15/2004 1,409,594 1,375,000
Products--3.6% B B3 500,000 Corning Consumer Products Co., 9.625% due 5/01/2008 482,500 400,000
B- B2 1,250,000 Home Interiors & Gifts, 10.125% due 6/01/2008 (c) 1,250,000 1,237,500
B- B3 750,000 Syratech Corp., 11% due 4/15/2007 617,500 630,000
------------ ------------
3,759,594 3,642,500
===================================================================================================================================
Consumer B B2 1,110,000 Affinity Group Inc., 11.50% due 10/15/2003 1,140,250 1,143,300
Services--1.1%
===================================================================================================================================
Diversified--1.8% B- B3 1,250,000 Foamex Capital Corp., L.P., 13.50% due 8/15/2005 1,425,000 1,375,000
B- B2 500,000 Koppers Industries, Inc., 9.875% due 12/01/2007 500,000 460,000
------------ ------------
1,925,000 1,835,000
===================================================================================================================================
Energy--6.1% B+ B1 500,000 Chesapeake Energy Corporation, 9.625% due 5/01/2005 488,750 410,000
B+ B3 1,000,000 Clark USA Inc., Series B, 10.875% due 12/01/2005 1,000,000 1,050,000
B B1 1,250,000 KCS Energy Inc., 11% due 1/15/2003 1,279,375 1,250,000
BBB- Baa3 1,906,250 Oleoducto Central S.A., 9.35% due 9/01/2005** (c) 1,906,250 1,634,609
NR++ B3 3,950,000 TransAmerican Energy Corp., 13.155% due 6/15/2002* 3,555,978 1,935,500
------------ ------------
8,230,353 6,280,109
===================================================================================================================================
Entertainment--1.3% B- B3 1,250,000 Six Flags Theme Parks Inc., 9.937% due 6/15/2005* 1,388,827 1,375,000
===================================================================================================================================
Financial B B2 1,750,000 AMRESCO, Inc., 9.875% due 3/15/2005 1,756,250 1,662,500
Services--5.3% B Ba2 1,508,000 First Nationwide Holdings Inc., 10.625% due
10/01/2003 1,678,920 1,647,490
B- B2 2,000,000 Penncorp Financial Group Inc., 9.25% due 12/15/2003 2,000,000 1,240,000
BB+ Ba2 670,000 Reliance Group Holdings Inc., 9.75% due 11/15/2003 659,950 713,925
BB NR++ 162,000 Veritas Holdings GMBH, 9.625% due 12/15/2003 163,417 163,620
------------ ------------
6,258,537 5,427,535
===================================================================================================================================
Food & B B3 500,000 Curtice-Burns Foods, Inc., 12.25% due 2/01/2005 500,000 537,500
Beverage--1.2% B- B3 1,000,000 Favorite Brands International Inc., 10.75% due
5/15/2006 903,750 730,000
------------ ------------
1,403,750 1,267,500
===================================================================================================================================
Foreign Government BB- B1 1,000,000 Republic of Brazil, 10.125% due 5/15/2027 910,505 560,000
Obligations--0.6%
===================================================================================================================================
Furniture--1.1% B B1 1,000,000 Lifestyle Furnishings, Inc., 10.875% due 8/01/2006 1,126,250 1,135,000
===================================================================================================================================
Gaming--5.7% B+ B2 2,000,000 Greate Bay Property Funding Corp., 10.875% due
1/15/2004 (f) 1,952,500 1,615,000
D Caa 2,000,000 Harrah's Jazz Company, 14.25% due 11/15/2001 (f) 2,000,000 540,000
B+ B2 750,000 Hollywood Casino Corp., 12.75% due 11/01/2003 809,375 802,500
BB- B1 2,000,000 Trump Atlantic City, 11.25% due 5/01/2006 2,000,000 1,720,000
</TABLE>
4 & 5
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
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>
Gaming Venetian Casino Resort LLC:
(concluded) CCC+ Caa1 $1,000,000 10% due 11/15/1999 $ 954,349 $ 885,000
B- B3 250,000 12.25% due 11/15/2004 254,062 235,000
------------ ------------
7,970,286 5,797,500
===================================================================================================================================
Health B- B3 1,250,000 ALARIS Medical Systems, Inc., 9.75% due 12/01/2006 1,263,750 1,196,875
Services--6.9% BBB Ba2 750,000 Columbia/HCA Healthcare Corp., 7.15% due 3/30/2004 720,000 737,587
B- B2 500,000 Extendicare Inc., 9.35% due 12/15/2007 500,000 465,000
Fresenius Medical Capital:
B+ Ba3 300,000 Trust I, 9% due 12/01/2006 314,250 307,500
B+ Ba3 700,000 Trust II, 7.875% due 2/01/2008 701,750 630,000
B- B3 1,250,000 Kinetic Concepts, Inc., 9.625% due 11/01/2007 1,259,375 1,218,750
B- B3 1,125,000 Magellan Health Services Inc., 9% due 2/15/2008 1,114,531 911,250
B- B3 500,000 Mariner Post--Acute Network Inc., 9.50% due
11/01/2007 497,770 460,000
B+ B2 1,000,000 Quest Diagnostic Inc., 10.75% due 12/15/2006 1,000,000 1,100,000
------------ ------------
7,371,426 7,026,962
===================================================================================================================================
Independent Power B+ Ba1 750,000 AES Corporation, 8.50% due 11/01/2007 748,500 712,500
Producers--3.1% BB- Ba2 500,000 Calpine Corporation, 8.75% due 7/15/2007 498,176 500,000
B B2 1,500,000 Midland Funding II, 13.25% due 7/23/2006 1,895,625 1,949,535
------------ ------------
3,142,301 3,162,035
===================================================================================================================================
Industrial--1.0% B B3 1,000,000 Neff Corporation, 10.25% due 6/01/2008 (c) 1,000,000 970,000
===================================================================================================================================
Media & BB- Ba3 1,000,000 Antenna TV S.A., 9% due 8/01/2007 970,316 967,500
Communications-- Call-Net Enterprises, Inc.*:
International--7.8% BB- B1 1,250,000 10.927% due 12/01/2004 1,125,489 1,175,000
BB- B1 1,000,000 9.27% due 8/15/2007 698,730 640,000
BB- B1 1,250,000 Comtel Brasileira Ltd., 10.75% due 9/26/2004 (c) 1,237,500 950,000
BB- B1 750,000 Globo Communicacoes Participacoes, Ltd., 10.50% due
12/20/2006 (c) 748,142 489,375
BB Ba2 1,250,000 Grupo Televisa, S.A., 11.375% due 5/15/2003 1,250,000 1,137,500
B- B3 1,000,000 Satelites Mexicanos S.A., 10.125% due 11/01/2004 (c) 1,000,000 820,000
BBB- Ba3 2,000,000 Telefonica de Argentina S.A., 11.875% due
11/01/2004 1,960,160 1,780,000
------------ ------------
8,990,337 7,959,375
===================================================================================================================================
Metals & CCC+ B2 2,000,000 Kaiser Aluminum & Chemical Corp., 12.75% due
Mining--2.0% 2/01/2003 2,090,000 2,090,000
===================================================================================================================================
Packaging--2.6% B- B3 1,750,000 Indesco International Inc., 9.75% due 4/15/2008 (c) 1,739,062 1,662,500
B+ Ba3 1,250,000 Vicap S.A., 11.375% due 5/15/2007 (c) 1,243,375 962,500
------------ ------------
2,982,437 2,625,000
===================================================================================================================================
Paper & Forest B B3 1,250,000 Ainsworth Lumber Company, 12.50% due 7/15/2007+ 1,217,585 1,262,500
Products--7.9% B B2 1,000,000 Bear Island Paper LLC, 10% due 12/01/2007 1,000,000 985,000
B+ B1 1,000,000 Container Corporation of America, 11.25% due
5/01/2004 1,095,000 1,071,250
B+ B1 1,375,000 Doman Industries Ltd., 8.75% due 3/15/2004 1,268,125 1,141,250
BB Ba3 625,000 Malette Inc., 12.25% due 7/15/2004 695,312 692,187
B- B3 500,000 Riverwood International Corp., 10.25% due 4/01/2006 483,750 455,000
B+ B1 1,000,000 S.D. Warren Co., 12% due 12/15/2004 1,000,000 1,090,000
BB Caa1 1,000,000 Tjiwi Kimia Finance Mauritius, 10% due 8/01/2004 994,550 410,000
CCC+ B2 500,000 Tjiwi Kimia International BV, 13.25% due 8/01/2001 555,000 217,500
B+ B1 750,000 US Timberlands Klamath Falls, 9.625% due 11/15/2007 750,000 727,500
------------ ------------
9,059,322 8,052,187
===================================================================================================================================
Product B- B3 1,000,000 AmeriServe Food Company, Inc., 10.125% due
Distribution--3.6% 7/15/2007 1,000,000 902,500
B B2 1,250,000 CEX Holdings Inc., 9.625% due 6/01/2008 1,250,000 1,175,000
B- B3 750,000 Fisher Scientific International Inc., 9% due
2/01/2008 750,000 705,000
B- B3 1,000,000 Nebraska Book Co., 8.75% due 2/15/2008 1,000,000 905,000
------------ ------------
4,000,000 3,687,500
===================================================================================================================================
Publishing & Hollinger International, Inc.:
Printing--1.7% BB+ Ba3 500,000 8.625% due 3/15/2005 497,500 500,000
BB- B1 500,000 9.25% due 3/15/2007 496,790 505,000
B B3 750,000 MDC Communications Corp., 10.50% due 12/01/2006 750,000 757,500
------------ ------------
1,744,290 1,762,500
===================================================================================================================================
Real Estate--1.4% BB- Ba3 1,500,000 Forest City Enterprises Inc., 8.50% due 3/15/2008 1,500,000 1,470,000
===================================================================================================================================
Specialty B+ B1 1,000,000 NBTY, Inc., 8.625% due 9/15/2007 991,750 965,000
Retailing--0.9%
===================================================================================================================================
Steel--0.4% NR++ B1 750,000 CSN Iron S.A., 9.125% due 6/01/2007 (c) 608,750 453,750
===================================================================================================================================
Telecommunications-- CCC NR++ 1,250,000 Splitrock Services Inc., 11.75% due 7/15/2008 1,250,000 1,175,000
1.8% B- B2 750,000 Time Warner Telecom LLC, 9.75% due 7/15/2008 750,000 714,375
------------ ------------
2,000,000 1,889,375
===================================================================================================================================
Telephony-- B- Caa1 1,000,000 Esprit Telecom Group PLC, 10.875% due 6/15/2008 (c) 1,021,875 942,500
Competitive B+ B2 1,000,000 GCI Inc., 9.75% due 8/01/2007 1,000,000 995,000
Local Exchange Intermedia Communications Inc.:
Carrier--6.1% B B2 500,000 10.503% due 7/15/2007* 343,238 340,000
B B2 500,000 8.60% due 6/01/2008 500,000 472,500
B B2 500,000 Level 3 Communications Inc., 9.125% due 5/01/2008 497,895 445,000
B B3 1,500,000 Metronet Communications, 9.95% due 6/15/2008* (c) 942,107 787,500
Nextlink Communications Inc.:
B B3 1,250,000 12.50% due 4/15/2006 1,250,000 1,350,000
B B3 500,000 9% due 3/15/2008 498,990 450,000
B- B3 1,000,000 RSL Communications PLC, 10.502% due 3/01/2008* 622,639 520,000
------------ ------------
6,676,744 6,302,500
===================================================================================================================================
Textiles--1.1% B B2 1,250,000 Polymer Group, Inc., 8.75% due 3/01/2008 1,250,000 1,143,750
===================================================================================================================================
Transportation-- BB- B1 1,000,000 Alpha Shipping PLC, 9.50% due 2/15/2008 994,280 815,000
11.8% B+ B1 1,000,000 American Reefer Co. Ltd., 10.25% due 3/01/2008 (c) 1,000,000 860,000
BB- NR++ 1,250,000 Autopistas del Sol S.A., 10.25% due 8/01/2009 (c) 1,225,000 918,750
BB- Ba2 2,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 2,030,000 2,020,000
</TABLE>
6 & 7
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Transportation GS Superhighway Holdings:
(concluded) BB Ba2 $ 500,000 9.875% due 8/15/2004 $ 498,750 $ 245,000
BB Ba3 500,000 10.25% due 8/15/2007 501,875 245,000
BB- B1 1,250,000 Sea Containers Ltd., 12.50% due 12/01/2004 1,368,750 1,350,000
B+ B2 1,000,000 TFM, S.A. de C.V., 11.939% due 6/15/2009* 639,630 507,500
B- B3 4,271,000 Transtar Holdings, Inc., 12.907% due 12/15/2003* 3,639,400 3,737,125
B Caa1 1,750,000 Trism Inc., 10.75% due 12/15/2000 1,666,875 1,408,750
------------ ------------
13,564,560 12,107,125
===================================================================================================================================
Utilities--5.2% BB+ Baa3 1,000,000 Empresa Electricidad del Norte, 10.50% due
6/15/2005 (c) 1,000,000 950,000
BBB- Ba3 1,750,000 Metrogas S.A., 12% due 8/15/2000 1,766,094 1,741,250
NR++ NR++ 2,359,520 Tucson Electric & Power Co., 10.21% due
1/01/2009** (e) 2,312,331 2,679,826
------------ ------------
5,078,425 5,371,076
===================================================================================================================================
Wireless CCC+ B2 1,000,000 Cencall Communications Corporation, 13.935% due
Communications-- 1/15/2004* 803,325 1,002,500
Domestic Paging & Nextel Communications Inc.*:
Cellular--3.6% CCC+ B2 1,200,000 12.576% due 8/15/2004 1,000,433 1,167,000
CCC+ B2 750,000 9.505% due 10/31/2007 513,816 438,750
B- B3 1,000,000 Western Wireless Corp., 10.50% due 2/01/2007 995,937 1,045,000
------------ ------------
3,313,511 3,653,250
===================================================================================================================================
Wireless B- NR++ 1,000,000 Celcaribe S.A., 12.082% due 3/15/2004* 1,059,962 1,025,000
Communications-- B+ B3 2,070,000 Comunicacion Celular S.A., 13.153% due 11/15/2003* 1,555,905 1,407,600
International Paging & CCC+ Caa1 1,250,000 McCaw International Ltd., 11.757% due 4/15/2007* 851,496 750,000
Cellular--5.7% B- B3 1,500,000 Millicom International Cellular S.A., 13.803% due
6/01/2006* 1,025,852 1,065,000
B+ Ba3 1,250,000 Orange PLC, 8% due 8/01/2008 1,240,475 1,150,000
CCC+ Caa1 750,000 Telesystems International Wireless Inc., 11.778%
due 6/30/2007* 508,521 450,000
------------ ------------
6,242,211 5,847,600
===================================================================================================================================
Total Investments in Corporate Bonds--126.3% 144,099,907 129,540,583
===================================================================================================================================
<CAPTION>
Shares
Held Stocks & Warrants
===================================================================================================================================
<S> <C> <C> <C> <C>
Broadcasting-- 1,000 Cumulus Media Inc. (Preferred) 1,000,000 960,000
Radio &
Television--0.9%
===================================================================================================================================
Cable--0.0% 18,350 American Telecasting, Inc. (Warrants) (a) 0 184
1,915 Wireless One, Inc. (Warrants) (a) 40,445 19
------------ ------------
40,445 203
===================================================================================================================================
Entertainment--0.2% 19,739 On Command Corporation (f) 3,186,975 202,325
6,417 On Command Corporation (Warrants) (a) 43,576 20,053
------------ ------------
3,230,551 222,378
===================================================================================================================================
Supermarkets--0.0% 1,873 Grand Union Co. (Warrants) (a) 19 19
===================================================================================================================================
Telephony-- 593 Intermedia Communications Inc.
Competitive (Convertible Preferred)+ 606,254 684,915
Local Exchange
Carrier--0.7%
===================================================================================================================================
Wireless 3,020 Nextel Communications Inc. (Class A) (f) 48,750 54,360
Communications-- 848 Nextel Communications Inc. (Preferred) 859,635 856,480
Domestic Paging & ------------ ------------
Cellular--0.9% 908,385 910,840
===================================================================================================================================
Wireless 1,250 Cellular Communications International Inc.
Communications-- (Warrants) (a) 30,163 19,625
International Paging & 2,070 Comunicacion Celular S.A. (Warrants) (a)(c) 2,261 3,105
Cellular--0.0% ------------ ------------
32,424 22,730
===================================================================================================================================
Total Investments in Stocks & Warrants--2.7% 5,818,078 2,801,085
===================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
===================================================================================================================================
<S> <C> <C> <C> <C>
Commercial $ 746,000 General Motors Acceptance Corp., 5.81% due
Paper***--0.8% 9/01/1998 746,000 746,000
===================================================================================================================================
Total Investments in Short-Term Securities--0.8% 746,000 746,000
===================================================================================================================================
Total Investments--129.8% $150,663,985 133,087,668
============
Liabilities in Excess of Other Assets--(29.8%) (30,528,680)
------------
Net Assets--100.0% $102,558,988
============
===================================================================================================================================
</TABLE>
* Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase.
** Subject to principal paydowns.
*** Commercial Paper is traded on a discount basis; the interest rate
shown reflects 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 and are non-income producing. The purchase
price and the number of shares are subject to adjustment under
certain conditions until the expiration date.
(b) Represents a step bond. Coupon payments are paid-in-kind, in which
the Fund receives additional face at an annual rate of 1.75% until
May 15, 2000. Subsequently, the Fund will receive cash coupon
payments at an annual rate of 15.75% until maturity.
(c) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(d) Each $1,000 face amount contains one warrant of Australis Media Ltd.
(e) Restricted security as to resale. The value of the Fund's investment
in restricted securities was approximately $2,680,000, representing
2.6% 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 $ 2,679,826
- --------------------------------------------------------------------------------
Total $ 2,312,331 $ 2,679,826
=========== ===========
- --------------------------------------------------------------------------------
(f) Non-income producing security.
(g) Each $1,000 face amount contains one warrant of Wireless One Inc.
Ratings shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
8 & 9
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of August 31, 1998
================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$150,663,985) (Note 1a) .......... $133,087,668
Cash ..................................................................... 681
Interest receivable ...................................................... 2,979,484
Deferred organization expenses (Note 1e) ................................. 2,731
Prepaid expenses and other assets ........................................ 122,786
------------
Total assets ............................................................. 136,193,350
------------
================================================================================================================================
Liabilities: Loans (Note 5) ........................................................... 32,900,000
Payables:
Interest on loans (Note 5) ............................................. $ 352,879
Dividends to shareholders (Note 1f) .................................... 242,903
Investment adviser (Note 2) ............................................ 59,254 655,036
------------
Accrued expenses and other liabilities ................................... 79,326
------------
Total liabilities ........................................................ 33,634,362
------------
================================================================================================================================
Net Assets: Net assets ............................................................... $102,558,988
============
================================================================================================================================
Capital: Common stock, $.10 par value, 200,000,000 shares authorized .............. $ 907,698
Paid-in capital in excess of par ......................................... 125,906,743
Undistributed investment income--net ..................................... 820,074
Accumulated realized capital losses on investments--net (Note 6) ......... (7,499,210)
Unrealized depreciation on investments--net .............................. (17,576,317)
------------
Total--Equivalent to $11.30 net asset value per share based on
9,076,975 shares of capital stock outstanding (market price--$11.125) .... $102,558,988
============
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended August 31, 1998
================================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned ............................................. $ 13,643,798
(Note 1d): Dividends ................................................................ 454,839
Other .................................................................... 237,701
------------
Total income ............................................................. 14,336,338
------------
================================================================================================================================
Expenses: Loan interest expense (Note 5) ........................................... $ 1,344,048
Investment advisory fees (Note 2) ........................................ 693,737
Professional fees ........................................................ 69,537
Borrowing cost (Note 5) .................................................. 53,572
Accounting services (Note 2) ............................................. 49,344
Directors' fees and expenses ............................................. 40,251
Transfer agent fees ...................................................... 32,805
Printing and shareholder reports ......................................... 23,306
Custodian fees ........................................................... 16,608
Amortization of organization expenses (Note 1e) .......................... 11,729
Pricing services ......................................................... 10,171
Other .................................................................... 31,358
------------
Total expenses ........................................................... 2,376,466
------------
Investment income--net ................................................... 11,959,872
------------
================================================================================================================================
Realized & Unrealized Realized gain on investments--net ........................................ 465,030
Gain (Loss) on Change in unrealized depreciation on investments--net .................... (16,606,355)
Investments--Net ------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations ..................... $ (4,181,453)
============
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year
Ended August 31,
----------------------------
Increase (Decrease) in Net Assets: 1998 1997
================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ................................................... $ 11,959,872 $ 11,013,801
Realized gain (loss) on investments--net ................................. 465,030 (1,676,196)
Change in unrealized depreciation on investments--net .................... (16,606,355) 6,290,109
------------ ------------
Net increase (decrease) in net assets resulting from operations .......... (4,181,453) 15,627,714
------------ ------------
================================================================================================================================
Dividends to Investment income--net ................................................... (11,911,167) (11,103,616)
Shareholders (Note 1f): ------------ ------------
Net decrease in net assets resulting from dividends to shareholders ...... (11,911,167) (11,103,616)
------------ ------------
================================================================================================================================
Capital Share Value of shares issued to Common Stock shareholders in reinvestment
Transactions (Note 4): of dividends ............................................................. 2,748,856 2,987,977
------------ ------------
Net increase in net assets derived from capital share transactions ....... 2,748,856 2,987,977
------------ ------------
================================================================================================================================
Net Assets: Total increase (decrease) in net assets .................................. (13,343,764) 7,512,075
Beginning of year ........................................................ 115,902,752 108,390,677
------------ ------------
End of year* ............................................................. $102,558,988 $115,902,752
============ ============
================================================================================================================================
* Undistributed investment income--net (Note 1g) ........................... $ 820,074 $ 692,800
============ ============
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended August 31, 1998
================================================================================================================================
<S> <C> <C>
Cash Provided by Net decrease in net assets resulting from operations .................................. $ (4,181,453)
Operating Activities: Adjustments to reconcile net decrease in net assets resulting from operations
to net cash provided by operating activities:
Increase in receivables ............................................................. (805,079)
Increase in other assets ............................................................ (58,933)
Increase in other liabilities ....................................................... 257,163
Realized and unrealized loss on investments--net .................................... 16,141,325
Amortization of discount ............................................................ (3,298,971)
------------
Net cash provided by operating activities ............................................. 8,054,052
------------
================================================================================================================================
Cash Used for Proceeds from sales of long-term investments .......................................... 62,238,538
Investing Activities: Purchases of long-term investments .................................................... (80,761,310)
Purchases of short-term investments ................................................... (76,205,007)
Proceeds from sales and maturities of short-term investments .......................... 75,693,000
------------
Net cash used for investing activities ................................................ (19,034,779)
------------
================================================================================================================================
Cash Provided by Cash receipts from borrowings ......................................................... 77,700,000
Financing Activities: Cash payments on borrowings ........................................................... (57,800,000)
Dividends paid to shareholders ........................................................ (8,919,409)
------------
Net cash provided by financing activities ............................................. 10,980,591
------------
================================================================================================================================
Cash: Net decrease in cash .................................................................. (136)
Cash at beginning of year ............................................................. 817
------------
Cash at end of year ................................................................... $ 681
============
================================================================================================================================
Cash Flow Information: Cash paid for interest ................................................................ $ 1,092,223
============
================================================================================================================================
Non-Cash Capital shares issued on reinvestment of dividends paid to shareholders ............... $ 2,748,856
Financing Activities: ============
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the
The following per share data and ratios have Period
been derived from information provided in the For the Year November 26,
financial statements. Ended August 31, 1993++ to
-------------------------------------------- August 31,
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996 1995 1994
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ........ $ 13.07 $ 12.56 $ 12.44 $ 12.37 $ 14.18
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................... 1.33 1.26 1.35 1.40 1.06
Realized and unrealized gain (loss) on
investments--net .......................... (1.77) .52 .15 .10 (1.91)
-------- -------- -------- -------- --------
Total from investment operations ............ (.44) 1.78 1.50 1.50 (.85)
-------- -------- -------- -------- --------
Less dividends from investment income--net .. (1.33) (1.27) (1.38) (1.43) (.94)
-------- -------- -------- -------- --------
Capital charge resulting from the issuance of
Common Stock ................................ -- -- -- -- (.02)
-------- -------- -------- -------- --------
Net asset value, end of period .............. $ 11.30 $ 13.07 $ 12.56 $ 12.44 $ 12.37
======== ======== ======== ======== ========
Market price per share, end of period ....... $ 11.125 $13.4375 $ 13.00 $ 12.00 $ 12.125
======== ======== ======== ======== ========
============================================================================================================================
Total Investment Based on net asset value per share .......... (4.10%) 14.91% 12.71% 13.41% (6.27%)++
Return:** ======== ======== ======== ======== ========
Based on market price per share ............. (8.16%) 14.14% 20.94% 11.61% (13.15%)++
======== ======== ======== ======== ========
============================================================================================================================
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense ............................ .89% .81% .81% .86% .50%*
======== ======== ======== ======== ========
Expenses, net of reimbursement .............. 2.06% 1.22% 1.65% 2.49% 1.68%*
======== ======== ======== ======== ========
Expenses .................................... 2.06% 1.22% 1.65% 2.49% 2.00%*
======== ======== ======== ======== ========
Investment income--net ...................... 10.35% 9.23% 9.15% 8.73% 8.75%*
======== ======== ======== ======== ========
============================================================================================================================
Leverage: Amount of borrowings outstanding, end of
period (in thousands) ....................... $ 32,900 $ 13,000 $ 9,250 $ 19,750 $ 45,000
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) ............ $ 23,036 $ 8,433 $ 16,948 $ 21,336 $ 41,935
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the period ................. $ 2.57 $ .97 $ 1.98 $ 2.55 $ 5.10
======== ======== ======== ======== ========
============================================================================================================================
Supplemental Net assets, end of period (in thousands) .... $102,559 $115,903 $108,391 $106,054 $101,696
Data: ======== ======== ======== ======== ========
Portfolio turnover .......................... 45.73% 70.76% 69.75% 61.97% 42.21%
======== ======== ======== ======== ========
============================================================================================================================
</TABLE>
+ Based on average shares outstanding.
++ Commencement of operations.
++ Aggregate total investment return.
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
See Notes to Financial Statements.
12 & 13
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
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 financial 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 its 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 period not exceeding five years. In
accordance with Statement of Position 98-5, any unamortized organization
expenses will be expensed on the first day of the next fiscal year beginning
after December 15, 1998. This charge will not have any material impact on the
operations of the Fund.
(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 prin-ciples 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 $78,569 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, 1998, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), $2,580 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, 1998 were $80,761,310 and $62,238,538, respectively.
Net realized gains for the year ended August 31, 1998 and net unrealized losses
as of August 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains Losses
- --------------------------------------------------------------------------------
Long-term investments ........................ $ 465,030 $(17,576,317)
--------- ------------
Total ........................................ $ 465,030 $(17,576,317)
========= ============
- --------------------------------------------------------------------------------
As of August 31, 1998, net unrealized depreciation for Federal income tax
purposes aggregated $18,025,533, of which $2,253,804 related to appreciated
securities and $20,279,337
14 & 15
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
related to depreciated securities. The aggregate cost of investments at August
31, 1998 for Federal income tax purposes was $151,113,201.
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, 1998 and August
31, 1997 increased by 212,354 and 233,770, respectively, as a result of dividend
reinvestment.
5. Short-Term Borrowings:
On January 30, 1998, the Fund extended its one-year credit agreement with
Merrill Lynch International Bank Limited, an affiliate of FAM. The agreement is
for a $50,000,000 unsecured revolving credit facility bearing interest at the
Federal Funds rate plus 0.25% and/or LIBOR plus 0.25%. For the year ended August
31, 1998, the average amount borrowed was approximately $23,036,000 and the
daily weighted average interest rate was 5.85%. For the year ended August 31,
1998, facility and commitment fees aggregated approximately $54,000.
6. Capital Loss Carryforward:
At August 31, 1998, the Fund had a net capital loss carryforward of
approximately $7,018,000, of which $2,626,000 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, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.109726 per share,
payable on September 30, 1998, to shareholders of record as of September 22,
1998.
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, 1998, 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 four-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, 1998, 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, 1998, 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 9, 1998
16 & 17
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1998
PORTFOLIO INFORMATION (unaudited)
<TABLE>
<CAPTION>
Percent of
As of August 31, 1998 Long-Term Investments
================================================================================================================================
<S> <C> <C> <C>
Ten Largest Transtar Holdings, Inc. Transtar is a transportation holding company with seven railroads, a
Holdings 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. 2.8%
-----------------------------------------------------------------------------------------------------------------
Nextel Communications Inc. Nextel is building a network to provide digital wireless
communications services that ultimately will have a nationwide
footprint. The company currently has service in over 225 cities and
expects service to cover 85% of the US population by the end of 1998.
The company has over 1.2 million units in service. 2.7
-----------------------------------------------------------------------------------------------------------------
Tucson Electric & Power Co. This electric utility serves Tucson, Arizona and surrounding areas.
Our bonds are secured lease obligation bonds on the company's
Springerville coal-fired power generation plant. 2.0
-----------------------------------------------------------------------------------------------------------------
Kaiser Aluminum & Chemical Corp. Kaiser Aluminum & Chemical, an affiliate of Maxxam Inc., is one of the
world's leading producers of aluminum. The company mines and refines
bauxite into alumina, produces aluminum from alumina and manufactures
fabricated aluminum products. 1.6
-----------------------------------------------------------------------------------------------------------------
Eletson Holdings, Inc. A Greek shipping company, Eletson owns and operates one of the world's
largest and most modern fleets of medium-size double-hulled product
tankers. 1.5
-----------------------------------------------------------------------------------------------------------------
Midland Funding II Midland Funding operates a natural gas-fired, cogeneration facility
located in Midland County, Michigan. The plant also produces steam for
industrial applications. Consumers Energy Company, who is Midland's
main customer, indirectly owns a 49% stake in the company. 1.5
-----------------------------------------------------------------------------------------------------------------
Cumulus Media Inc. Cumulus Media is one of the largest radio broadcasting companies in
the United States, owning and operating radio stations throughout the
country. The company also provides sales and marketing services to
radio stations. 1.5
-----------------------------------------------------------------------------------------------------------------
TransAmerican Energy Corp. TransAmerican Energy has interests in natural gas and oil refining.
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. 1.5
-----------------------------------------------------------------------------------------------------------------
Call-Net Enterprises, Inc. The company is the largest alternative provider of long distance
telephone services in Canada, marketing under the brand name Sprint
Canada. Sprint Communications Company L.P., the third-largest long
distance services carrier in the United States, owns approximately 25%
of the company's shares. 1.4
-----------------------------------------------------------------------------------------------------------------
Nextlink Communications Inc. Nextlink provides local, long distance and enhanced telephone
communications services to commercial customers. The company operates
in 24 markets in seven states. 1.4
-----------------------------------------------------------------------------------------------------------------
</TABLE>
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
Vincent T. Lathbury III, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, 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
18 & 19
<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--8/98
[RECYCLE LOGO] Printed on post-consumer recycled paper
