CORPORATE
HIGH YIELD
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
February 28, 1999
<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 February 28, 1999
- --------------------------------------------------------------------------------
Percent of
Quality Ratings+ Long-Term Investments
- --------------------------------------------------------------------------------
BBB ..................................................................... 5.6%
BB ...................................................................... 26.2
B or lower .............................................................. 61.6
NR(Not Rated) ........................................................... 6.6
- --------------------------------------------------------------------------------
+ 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 .................................................. 31.9%
Emerging Markets Holdings ............................................... 11.8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of
Top Five Foreign Countries* Long-Term Investments
- --------------------------------------------------------------------------------
Canada .................................................................. 9.6%
United Kingdom .......................................................... 5.0
Argentina ............................................................... 3.6
Colombia ................................................................ 2.9
Mexico .................................................................. 2.7
- --------------------------------------------------------------------------------
* All holdings are denominated in US dollars.
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
DEAR SHAREHOLDER
High-Yield Market Overview
During the six-month period ended February 28, 1999, the high-yield market was
extremely volatile. The dramatic revaluation of financial markets that began in
August 1998 reached oversold levels in October, but markets bounced back in
November. Since then, volatility has moderated. However, the high-yield market
remains choppy and vulnerable to both negative earnings news and unfavorable
economic events. Investor concerns about companies' ability to sustain earnings
growth in the face of weak overseas markets, which contributed to the last
fall's sell-off, have subsided. Nevertheless, investors remain skittish,
punishing bond prices of companies with earnings disappointments and reluctant
to commit cash to all but the safest and most liquid names. Returns by rating
category illustrate this trend. For the six-month period ended February 28,
1999, BB-rated bonds returned +5.64% as measured by the unmanaged CS First
Boston High Yield Index, above other rating categories, and outstripping the
+3.48% return for the unmanaged CS First Boston High Yield Index. High-yield
debt, with its higher coupon stream, outperformed US Treasury securities for the
six months ended February 28, 1999, since ten-year US Treasury bonds had a total
return of -0.49%.
Surprisingly, despite this past fall's gyrations in financial markets, the yield
spread of high-yield issues to ten-year US Treasury securities remained largely
unchanged at 613 basis points (6.13%) compared to 619 basis points at August 31,
1998. The spread or difference in yield between high-yield bonds and US Treasury
securities of similar maturity is a useful measure of the value of high-yield
bonds relative to alternative investments. The incremental yield or spread is
the compensation that investors receive for assuming the credit risk and lower
liquidity associated with lower-quality corporate bonds. In our opinion,
although markets may yet experience near-term volatility, the exceptionally wide
spreads in the high-yield market suggest long-term value.
Fund Performance
For the six months ended February 28, 1999, the total investment return on the
Fund's Common Stock was +4.49%, based on a change in the per share net asset
value from $11.30 to $11.07, and assuming reinvestment of $0.725 per share
income dividends. During this period, the net annualized yield of the Fund's
Common Stock was 12.99%. The Fund benefited during the period from positive
earnings surprises in holdings such as chip manufacturer Zilog Inc. and
improving prospects for insurer PennCorp Financial Group Inc. Fund performance
during the period was hindered by exposure to emerging markets, energy and
transportation, which suffered from the slowing world economy following the
collapse of many Asian economies. Healthcare also underperformed during the
period as compliance with government payment requirements seriously cut into
profitability.
Investment Strategy
Over the next few months, we believe that the market will continue to be
unsettled. There are many conflicting forces that could push the market toward
strength or weakness. Inflationary expectations and interest rates, equity
market fluctuations, events in emerging markets, corporate earnings expectations
and supply/demand imbalances specific to the high-yield market are all likely to
take their turn influencing the market, in our opinion. Given the general
uneasiness in the high-yield market at quarter end, we have attempted to
modestly improve portfolio quality. Consequently, we added to BB-rated holdings,
such as auto parts supplier Federal-Mogul Corporation and utility CMS Energy
Corp. We also disposed of positions whose downside risk outweighed upside
potential, or swapped into names that we believe are better prospects.
At the same time, there are good values in so-called distressed names and
out-of-favor sectors and we have selectively added here in modest size. An
example is Forcenergy, Inc., trading at near forty cents on the dollar, which
offers both asset protection and substantial upside potential. Companies, such
as Forcenergy, may require restructuring of their balance sheets, as their
high-debt usage and weak markets limit liquidity. Thus, there may be an increase
in the default rate with good returns as the asset value is realized.
Leverage Strategy
The Fund was on average 25% leveraged during the six-month period ended February
28, 1999. This means that we borrowed the equivalent of 25% of total assets
invested, earning incremental yield on the investments we made with the borrowed
funds. On February 28, 1999, the Fund was 25.6% leveraged, having borrowed $34.9
million at a borrowing cost of 5.375%. While we may adjust leverage to react to
market conditions, we expect leverage on balance to remain near present levels.
(For a complete explanation of the benefits and risks of leveraging, see page 1
of this report to shareholders.)
Portfolio Characteristics
Communications and media remained our largest broad industry category, totaling
nearly 32% of total long-term investments. Of the narrowly classified sectors,
the largest allocations were: telephony--competitive local exchange carrier,
10.0% of total long-term investments; transportation, 7.6%; health services,
6.4%; broadcasting--radio & television, 5.9%; and paper and forest products,
5.8%. Dollar-denominated non-US bonds totaled 31.9% of the portfolio, with
emerging market holdings accounting for 11.8% 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 February 28, 1999,
the average maturity for the portfolio was 7 years.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Vincent T. Lathbury III
Vincent T. Lathbury III
Senior Vice President and
Portfolio Manager
/s/ Elizabeth M. Phillips
Vice President and Portfolio Manager
April 12, 1999
================================================================================
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on Corporate High Yield Fund II, Inc.'s Board of Directors.
We are pleased to announce that Terry K. Glenn has been elected President and
Director of the Fund. Mr. Glenn has held the position of Executive Vice
President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors in wishing
him well in his retirement from Merrill Lynch and are pleased that he will
continue as a member of the Fund's Board of Directors.
================================================================================
Proxy Results
During the six-month period ended February 28, 1999, Corporate High Yield Fund
II, Inc. shareholders voted on the following proposals. The proposals were
approved at a shareholders' meeting on October 8, 1998. The description of each
proposal and number of shares voted are as follows:
- --------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- --------------------------------------------------------------------------------
1. To elect the Fund's
Board of Directors: Joe Grills 8,806,786 144,127
Walter Mintz 8,816,604 134,309
Robert S. Salomon Jr. 8,817,696 133,217
Melvin R. Seiden 8,816,452 134,461
Stephen B. Swensrud 8,822,099 128,814
Arthur Zeikel 8,820,191 130,722
- --------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- --------------------------------------------------------------------------------
2. To ratify the selection of
Deloitte & Touche LLP as the
independent auditors of the
Fund to serve for the current
fiscal year. 8,811,071 25,249 114,593
- --------------------------------------------------------------------------------
2 & 3
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Corporate Bonds Cost (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Airlines--1.1% BB Ba2 $ 958,713 USAir Inc., 11.20% due 3/19/2005 (c) $ 843,668 $ 1,071,774
===================================================================================================================================
Automotive--2.9% B- Caa1 1,000,000 Breed Technologies Inc., 9.25% due 4/15/2008 (d) 1,000,000 500,000
B B2 625,000 Collins & Aikman Products, 11.50% due 4/15/2006 625,000 643,750
BB+ Ba2 1,250,000 Federal-Mogul Corporation, 7.375%
due 1/15/2006 (d) 1,244,787 1,226,037
B+ B2 625,000 Venture Holdings Trust, 9.50% due 7/01/2005 605,657 606,250
------------ ------------
3,475,44 42,976,037
==================================================================================================================================
Broadcasting-- BB- Ba3 1,000,000 Antenna TV SA, 9% due 8/01/2007 971,395 920,000
Radio & B B1 750,000 Chancellor Media Corp., 9% due 10/01/2008 750,000 811,875
Television--6.6% CCC+ B3 1,000,000 Cumulus Media, Inc., 10.375% due 7/01/2008 1,000,000 1,080,000
BB+ Baa3 500,000 EZ Communications, Inc., 9.75% due 12/01/2005 506,250 552,500
B- B2 500,000 Emmis Communications Corp., 8.125%
due 3/15/2009 (d) 500,000 495,000
B+ B2 750,000 Globo Communicacoes e Participacoes, Ltd.,
10.50% due 12/20/2006 (d) 748,142 403,125
BB Ba2 1,250,000 Grupo Televisa, SA de CV, 11.375% due 5/15/2003 1,250,000 1,225,000
B B2 500,000 Sinclair Broadcast Group Inc., 10% due 9/30/2005 494,375 526,250
B B2 625,000 Young Broadcasting Corporation, 11.75%
due 11/15/2004 695,313 671,875
------------ ------------
6,915,475 6,685,625
==================================================================================================================================
Cable--3.6% BB+ Ba2 1,000,000 CSC Holdings Inc., 7.625% due 7/15/2018 999,010 999,650
B B2 1,000,000 Intermedia Capital Partners L.P., 11.25%
due 8/01/2006 1,003,750 1,135,000
BB- B2 1,250,000 Lenfest Communications, Inc., 10.50%
due 6/15/2006 1,267,812 1,475,000
CCC Ca 1,915,000 Wireless One Inc., 13.998%** due 8/01/2006 (f) 1,360,513 76,600
------------ ------------
4,631,085 3,686,250
==================================================================================================================================
Cable-- Australis Media Ltd. (a):
International--3.0% D NR* 50,655 1.75%/15.75% due 5/15/2003 27,867 507
D NR* 2,961,000 1.75%/15.75% due 5/15/2003 (i) 2,086,637 29,610
Diamond Cable Communications PLC**:
B- B3 500,000 11.055% due 9/30/2004 486,001 510,000
B- B3 875,000 10.773% due 12/15/2005 735,353 761,250
B- B3 250,000 11.387% due 2/15/2007 175,764 193,750
B- B3 1,250,000 International Cabletel, Inc., 11.643%**
due 2/01/2006 1,000,163 1,087,500
B+ B1 500,000 TeleWest Communications PLC, 10.509%**
due 10/01/2007 431,836 440,000
------------ ------------
4,943,621 3,022,617
==================================================================================================================================
Capital Goods--1.0% B+ B1 1,000,000 Sequa Corp., 9.375% due 12/15/2003 1,032,500 1,005,000
==================================================================================================================================
Chemicals--3.5% B- B3 1,250,000 Great Lakes Carbon Corp., 11.75% due 5/15/2008+ 1,250,000 1,290,625
B+ B2 1,250,000 Huntsman Corporation, 9.50% due 7/01/2007 (d) 1,223,750 1,262,500
NR* NR* 1,000,000 Octel Developments PLC, 10% due 5/01/2006 1,000,000 1,048,750
------------ ------------
3,473,750 3,601,875
==================================================================================================================================
Computer Services/ B Ba3 1,500,000 Advanced Micro Devices, Inc., 11% due 8/01/2003 1,547,500 1,578,750
Electronics--4.1% B+ B1 650,000 Celestica International, 10.50% due 12/31/2006 650,000 715,000
CCC+ B3 1,000,000 MCMS Inc., 9.75% due 3/01/2008 1,000,000 765,000
B- B2 1,250,000 Zilog Inc., 9.50% due 3/01/2005 1,161,875 1,112,500
------------ ------------
4,359,375 4,171,250
==================================================================================================================================
Consumer B- B2 1,250,000 Chattem Inc., 12.75% due 6/15/2004 1,409,594 1,400,000
Products--3.3% B B3 500,000 Corning Consumer Products, 9.625% due 5/01/2008 482,500 385,000
B+ B2 1,000,000 Scotts Company, 8.625% due 1/15/2009 (d) 1,000,000 1,030,000
B- B3 750,000 Syratech Corp., 11% due 4/15/2007 617,500 588,750
------------ ------------
3,509,594 3,403,750
==================================================================================================================================
Diversified--1.4% CCC+ B3 1,250,000 Foamex LP, 13.50% due 8/15/2005 1,425,000 1,375,000
==================================================================================================================================
Energy--5.3% B B3 500,000 Chesapeake Energy Corp., 9.625% due 5/01/2005 488,750 320,000
B+ B3 1,000,000 Clark USA Inc., 10.875% due 12/01/2005 1,000,000 935,000
C Caa2 325,000 Coho Energy Inc., 8.875% due 10/15/2007 132,437 130,000
B- Caa 21,250,000 Forcenergy, Inc., 8.50% due 2/15/2007 525,000 450,000
B B1 1,000,000 KCS Energy Inc., 11% due 1/15/2003 1,029,375 730,000
BBB- Baa 31,812,500 Oleoducto Centrale SA, 9.35% due 9/01/2005 (c)(d) 1,812,500 1,640,312
CCC Caa 23,950,000 TransAmerican Energy Corp., 13.155%**
due 6/15/2002 3,785,844 1,185,000
------------ ------------
8,773,906 5,390,312
==================================================================================================================================
Entertainment--1.8% BB- Ba2 500,000 Imax Corp., 7.875% due 12/01/2005 500,000 495,000
B- B3 1,250,000 Six Flags Theme Parks Inc., 9.937%**
due 6/15/2005 1,378,915 1,387,500
------------ ------------
1,878,915 1,882,500
==================================================================================================================================
Financial CCC+ Caa 31,750,000 Amresco Inc., 9.875% due 3/15/2005 1,756,250 1,400,000
Services--2.9% CCC- Caa 32,000,000 PennCorp Financial Group, 9.25% due 12/15/2003 2,000,000 1,400,000
BB NR* 162,000 Veritas Holdings GMBH, 9.625% due 12/15/2003 163,417 165,240
------------ ------------
3,919,667 2,965,240
==================================================================================================================================
Food & B+ Ba3 250,000 COTT Corp., 9.375% due 7/01/2005 257,500 242,500
Beverage--0.8% B- B3 1,000,000 Favorite Brands International Inc., 10.75%
due 5/15/2006 (d) 903,750 610,000
------------ ------------
1,161,250 852,500
==================================================================================================================================
Foreign Government B+ B2 1,000,000 Republic of Brazil, 10.125% due 5/15/2027 910,505 635,000
Obligations--0.6%
==================================================================================================================================
Furniture--1.1% B B1 1,000,000 Lifestyle Furnishings, Inc.,
10.875% due 8/01/2006 1,126,250 1,080,000
==================================================================================================================================
Gaming--6.1% D Caa1 2,000,000 GB Property Funding Corp., 10.875%
due 1/15/2004 (f) 1,952,500 1,240,000
BB+ Ba2 500,000 Harrah's Operating Co. Inc., 7.875%
due 12/15/2005 500,000 500,000
B+ B2 750,000 Hollywood Casino Corp., 12.75% due 11/01/2003 809,375 810,000
Jazz Casino Co. LLC:
NR* NR* 1,362,000 5.867% due 11/15/2009+ 685,220 749,100
NR* NR* 84,000 New Contingent Notes, due 11/15/2009 (h) 0 0
BB- B2 2,000,000 Trump Atlantic City Associates/Funding Inc.,
11.25% due 5/01/2006 2,000,000 1,700,000
Venetian Casino/LV Sands:
B- B3 250,000 12.25% due 11/15/2004 254,062 255,000
CCC+ Caa1 1,000,000 10% due 11/15/2005 (g) 972,225 960,000
------------ ------------
7,173,382 6,214,100
==================================================================================================================================
Health B- B3 1,250,000 ALARIS Medical Systems, Inc., 9.75%
Services--8.3% due 12/01/2006 1,263,750 1,284,375
BB+ Ba2 750,000 Columbia HCA/Healthcare Corp., 7.15%
due 3/30/2004 720,000 702,015
B- B2 750,000 Extendicare Health Services, 9.35%
due 12/15/2007 735,000 600,000
Fresenius Medical Capital:
B+ ba3 300,000 Trust I, 9% due 12/01/2006 314,250 311,625
B+ ba3 700,000 Trust II, 7.875% due 2/01/2008 701,750 672,000
B- B3 1,250,000 Kinetic Concepts, Inc., 9.625% due 11/01/2007 1,259,375 1,192,187
B- B3 1,125,000 Magellan Health Services, 9% due 2/15/2008 1,114,531 961,875
B- B3 500,000 Mariner Post--Acute Network, 9.50%
due 11/01/2007 497,770 245,000
</TABLE>
4 & 5
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
SCHEDULE OF INVESTMENTS (continued)
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Corporate Bonds Cost (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Health Services B+ B2 $1,000,000 Quest Diagnostic Inc., 10.75% due 12/15/2006 $ 1,000,000 $ 1,105,000
(concluded) B+ Ba3 1,500,000 Quorum Health Group Inc., 8.75% due 11/01/2005 1,458,750 1,430,000
------------ ------------
9,065,176 8,504,077
===================================================================================================================================
Hotels & Motels-- BB Ba2 1,500,000 HMH Properties, Inc., 8.45% due 12/01/2008 1,494,960 1,470,000
1.4%
===================================================================================================================================
Independent Power B+ Ba1 750,000 AES Corporation, 8.50% due 11/01/2007 748,500 740,625
Producers--3.0% BB- Ba2 500,000 Calpine Corporation, 8.75% due 7/15/2007 498,176 512,500
BB B2 1,500,000 Midland Funding II, 13.25% due 7/23/2006 1,895,625 1,849,800
------------ ------------
3,142,301 3,102,925
===================================================================================================================================
Industrial--1.2% Neff Corp.:
B B3 1,000,000 10.25% due 6/01/2008 1,000,000 990,000
B B3 250,000 10.25% due 6/01/2008 (d) 246,290 247,500
------------ ------------
1,246,290 1,237,500
===================================================================================================================================
Industrial-- BBB- Baa 31,250,000 Equistar Chemicals LP, 8.50% due 2/15/2004 (d) 1,249,900 1,270,312
Manufacturing--1.2%
===================================================================================================================================
Industrial-- CCC+ Caa1 1,000,000 Metal Management Inc., 10% due 5/15/2008 625,000 635,000
Transportation--0.6%
===================================================================================================================================
Internet Transport-- NR* NR* 1,250,000 Splitrock Services Inc., 11.75% due 7/15/2008 1,236,250 1,131,250
1.1%
===================================================================================================================================
Media & B- B3 1,000,000 Satelites Mexicanos SA, 10.125% due 11/01/2004 1,000,000 765,000
Communications--
International--0.8%
===================================================================================================================================
Metals & Mining--1.9% CCC+ B2 2,000,000 Kaiser Aluminum & Chemical Corp., 12.75%
due 2/01/2003 2,090,000 1,935,000
===================================================================================================================================
Packaging--1.1% B+ Ba3 1,250,000 Vicap SA, 11.375% due 5/15/2007 1,243,375 1,112,500
===================================================================================================================================
Paper & Forest B B3 1,250,000 Ainsworth Lumber Company, 12.50% due 7/15/2007+ 1,183,796 1,256,250
Products--7.6% B B2 1,000,000 Bear Island Paper LLC, 10% due 12/01/2007 1,000,000 990,000
B- B2 1,000,000 Container Corp. of America, 11.25% due 5/01/2004 1,095,000 1,060,000
B+ B1 875,000 Doman Industries Ltd., 8.75% due 3/15/2004 808,750 634,375
BB Ba3 1,750,000 Malette Inc., 12.25% due 7/15/2004 1,907,950 1,870,312
P.T. Pabrik Kertas Tjiwa Kimia:
CCC+ Caa1 500,000 13.25% due 8/01/2001 555,000 335,000
CCC+ Caa1 1,000,000 10% due 8/01/2004 994,550 530,000
B+ B1 1,000,000 SD Warren Co., 12% due 12/15/2004 1,000,000 1,082,500
------------ ------------
8,545,046 7,758,437
===================================================================================================================================
Product Distribution-- B- B3 1,000,000 AmeriServe Food Distributors, 10.125%
4.1% due 7/15/2007 1,000,000 800,000
B B2 1,250,000 CEX Holdings Inc., 9.625% due 6/01/2008 1,250,000 1,156,250
Fisher Scientific International:
B- B3 750,000 9% due 2/01/2008 750,000 757,500
B- B3 500,000 9% due 2/01/2008 482,832 505,000
B- B3 1,000,000 Nebraska Book Company, 8.75% due 2/15/2008 1,000,000 945,000
------------ ------------
4,482,832 4,163,750
===================================================================================================================================
Publishing & B B1 500,000 American Lawyer Media, Inc., 9.75%
Printing--2.5% due 12/15/2007 523,125 518,750
BB+ Ba3 500,000 Hollinger International Publishing, Inc.,
8.625% due 3/15/2005 497,500 528,750
B B2 1,500,000 MDC Communications Corp., 10.50% due 12/01/2006 1,483,825 1,530,000
------------ ------------
2,504,450 2,577,500
===================================================================================================================================
Real Estate--1.5% BB- Ba3 1,500,000 Forest City Enterprises Inc., 8.50%
due 3/15/2008 1,500,000 1,515,000
===================================================================================================================================
Recreation--0.7% B+ B1 725,000 Intrawest Corp., 9.75% due 8/15/2008 746,750 747,656
===================================================================================================================================
Shipping--0.5% BB Ba2 500,000 Stena AB, 10.50% due 12/15/2005 525,000 520,000
===================================================================================================================================
Steel--0.5% NR* B2 750,000 CSN Iron SA, 9.125% due 6/01/2007 (d) 608,750 517,500
===================================================================================================================================
Telecommunications-- B- Caa1 500,000 Dolphin Telecom PLC, 17.456%** due 6/01/2008 198,227 220,000
0.2%
===================================================================================================================================
Telephony-- Call-Net Enterprises, Inc.**:
Competitive Local BB- B1 1,250,000 10.927% due 12/01/2004 1,172,451 1,237,500
Exchange Carrier-- BB- B1 1,000,000 9.27% due 8/15/2007 730,612 675,000
12.4% NR* NR* 1,250,000 Comtel Brasileira Ltd., 10.75% due 9/26/2004 (d) 1,237,500 921,875
B- Caa1 1,000,000 Esprit Telecom Group PLC, 10.875% due 6/15/2008 1,021,875 1,035,000
Intermedia Communications Inc.:
B B2 500,000 10.503%** due 7/15/2007 359,733 347,500
B B2 500,000 8.60% due 6/01/2008 500,000 473,750
L-3 Communications Corp.:
B B2 650,000 10.375% due 5/01/2007 650,000 716,625
B B2 1,000,000 8.50% due 5/15/2008 999,300 1,052,500
Metronet Communications:
B B3 1,500,000 9.95%** due 6/15/2008 988,561 1,027,500
B B3 500,000 10.625% due 11/01/2008 (d) 500,000 555,000
Nextlink Communications Inc.:
CCC+ B2 1,250,000 12.50% due 4/15/2006 1,250,000 1,375,000
CCC+ B2 500,000 9% due 3/15/2008 498,990 472,500
RSL Communications PLC:
B- B2 175,000 10.502%** due 3/01/2008 114,644 99,313
B- B2 550,000 12% due 11/01/2008 520,164 577,500
BBB- Ba3 2,000,000 Telefonica de Argentina SA, 11.875%
due 11/01/2004 1,960,160 2,087,500
------------ ------------
12,503,990 12,654,063
===================================================================================================================================
Textiles--1.2% B B2 1,250,000 Polymer Group Inc., 8.75% due 3/01/2008 1,250,000 1,250,000
===================================================================================================================================
Transportation--9.9% B+ B3 1,000,000 American Reefer Co. Ltd., 10.25% due 3/01/2008 1,000,000 595,000
BB- NR* 1,250,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (d) 1,225,000 937,500
BB- Ba3 2,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 2,030,000 1,920,000
BB- B1 1,250,000 Sea Containers Ltd., 12.50% due 12/01/2004 1,368,750 1,362,500
B+ B2 1,000,000 TFM, SA de CV, 11.939%** due 6/15/2009 677,467 525,000
B- B3 4,271,000 Transtar Holdings LP, 12.907%** due 12/15/2003 3,869,741 4,057,450
B- Caa2 1,550,000 Trism Inc., 10.75% due 12/15/2000 1,476,375 759,500
------------ ------------
11,647,333 10,156,950
===================================================================================================================================
</TABLE>
6 & 7
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Ratings Ratings Amount Corporate Bonds Cost (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Utilities--5.4% BB Ba3 $1,000,000 CMS Energy Corp., 7.50% due 1/15/2009 $ 1,000,000 $ 992,812
BBB- Ba3 1,750,000 Metrogas SA, 12% due 8/15/2000 1,766,094 1,798,125
NR* NR* 2,359,521 Tucson Electric & Power Co., 10.21%**
due 1/01/2009 (b)(c) 2,312,330 2,669,680
------------ ------------
5,078,424 5,460,617
===================================================================================================================================
Waste Management-- BB Ba2 1,000,000 Allied Waste North America, 7.375%
1.0% due 1/01/2004 (d) 998,530 1,010,000
===================================================================================================================================
Wireless CCC+ B2 1,000,000 Cencall Communications Corporation, 13.935%**
Communications-- due 1/15/2004 839,429 1,015,000
Domestic Paging & Nextel Communications, Inc.**:
Cellular--5.0% CCC+ B2 1,200,000 12.576% due 8/15/2004 1,051,468 1,212,000
CCC+ B2 750,000 9.505% due 10/31/2007 537,341 483,750
NR* NR* 2,000,000 Pinnacle Holdings Inc., 11.674%** due 3/15/2008 1,186,989 1,280,000
B- B3 1,000,000 Western Wireless Corp., 10.50% due 2/01/2007 995,938 1,080,000
------------ ------------
4,611,165 5,070,750
===================================================================================================================================
Wireless NR* NR* 1,000,000 Celcaribe SA, 12.082%** due 3/15/2004 1,057,055 847,500
Communications-- B+ B3 2,070,000 Comunicacion Celular SA, 13.153%**
International due 11/15/2003 (d) 1,601,795 1,353,263
Paging & CCC+ Caa1 750,000 McCaw International Ltd., 11.757%** due 4/15/2007 536,765 420,000
Cellular--6.0% B- Caa1 1,500,000 Millicom International Cellular, 13.803%**
due 6/01/2006 1,093,998 1,110,000
B+ Ba3 1,250,000 Orange PLC, 8% due 8/01/2008 1,240,475 1,293,750
CCC+ Caa1 2,500,000 Telesystem International Wireless Inc., 17.392%**
due 6/30/2007 1,284,429 1,100,000
------------ ------------
6,814,517 6,124,513
===================================================================================================================================
Total Investments in Corporate Bonds--128.2% 143,961,653 130,929,130
===================================================================================================================================
<CAPTION>
Shares
Held Stock & Warrants
===================================================================================================================================
<S> <C> <C> <C> <C>
Broadcasting-- 1,069 Cumulus Media, Inc., Series A (Preferred, 13.75%) 1,070,955 1,210,643
Radio &
Television--1.2%
===================================================================================================================================
Cable--0.0% 18,350 American Telecasting, Inc. (Warrants) (e) 0 184
1,915 Wireless One Inc. (Warrants) (e) 40,445 19
------------ ------------
40,445 203
===================================================================================================================================
Entertainment--0.2% 19,739 On Command Corporation (f) 3,169,707 189,988
6,417 On Command Corporation (Warrants) (e) 43,576 17,647
------------ ------------
3,213,283 207,635
===================================================================================================================================
Gaming--0.1% 24,357 JCC Holding Company 97,428 88,294
===================================================================================================================================
Internet 1,250 Splitrock Services Inc. (Warrants) (e) 13,750 18,750
Transport--0.0%
===================================================================================================================================
Supermarkets--0.0% 1,873 Grand Union Co. (Warrants) (e) 19 4,565
===================================================================================================================================
Telephony-- 633 Intermedia Communications Inc., Series B
Competitive Local (Convertible Preferred)+ 648,704 629,835
Exchange Carrier--
0.6%
===================================================================================================================================
Wireless 3,020 Nextel Communications, Inc. (Class A) 48,750 90,789
Communications--
Domestic Paging &
Cellular--0.1%
===================================================================================================================================
Wireless 2,070 Comunicacion Celular SA (Warrants) (d)(e) 2,261 647
Communications--
International Paging
& Cellular--0.0%
===================================================================================================================================
Total Investments in Stocks & Warrants--2.2% 5,135,595 2,251,361
===================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
===================================================================================================================================
<S> <C> <C> <C> <C>
Commercial $ 261,000 General Electric Capital Corp., 4.875%
Paper***--0.2% due 3/01/1999 261,000 261,000
===================================================================================================================================
Total Investments in Short-Term Securities--0.2% 261,000 261,000
===================================================================================================================================
Total Investments--130.6% $149,358,248 133,441,491
============
Liabilities in Excess of Other Assets--(30.6%) (31,282,450)
------------
Net Assets--100.0% $102,159,041
============
===================================================================================================================================
</TABLE>
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown is
the effective yield at the time of purchase by the Fund.
*** Commercial Paper is traded on a discount basis; the interest rate
shown reflects the discount rate paid at the time of purchase by the
Fund.
+ Represents a pay-in-kind security which may pay interest in
additional shares/face.
(a) 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.
(b) Restricted securities as to resale. The value of the Fund's
investment in restricted securities was approximately $2,670,000,
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 $2,312,330 $2,669,680
- --------------------------------------------------------------------------------
Total $2,312,330 $2,669,680
========== ==========
- --------------------------------------------------------------------------------
(c) Subject to principal paydowns.
(d) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(e) Warrants entitle the Fund to purchase a predetermined number of
shares of common stock and are non-income producing. The purchase
price and number of shares are subject to adjustment under certain
conditions until the expiration date.
(f) Non-income producing security.
(g) Represents a step bond. The Fund receives an annualized interest
rate of 10% until 11/15/1999. Subsequently, the Fund will receive an
annualized interest rate of 14.25% until maturity.
(h) Represents an obligation by Jazz Casino Co. LLC to pay a semi-annual
amount to the Fund through 11/15/2009. The payments are based upon
varying interest rates and the amounts, which may be paid-in-kind,
are contingent upon the earnings before income taxes, depreciation
and amortization of Jazz Casino Co. LLC on a fiscal year basis.
(i) Each $1,000 face amount contains one warrant of Australis Media Ltd.
See Notes to Financial Statements.
8 & 9
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of February 28, 1999
============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$149,358,248) (Note 1a) ........ $133,441,491
Cash ................................................................... 707
Receivables:
Interest ............................................................. $ 2,721,781
Securities sold ...................................................... 2,050,685
Dividends ............................................................ 27,720 4,800,186
------------
Deferred organization expenses (Note 1e) ............................... 2,731
Prepaid expenses and other assets ...................................... 151,089
------------
Total assets ........................................................... 138,396,204
------------
============================================================================================================================
Liabilities: Loans (Note 5) ......................................................... 34,900,000
Payables:
Securities purchased .................................................. 1,104,875
Interest on loans (Note 5) ............................................ 169,661
Investment adviser (Note 2) ........................................... 53,071
Commitment fees ....................................................... 1,372
Dividends to shareholders (Note 1f) ................................... 72 1,329,051
------------
Accrued expenses and other liabilities ................................. 8,112
------------
Total liabilities ...................................................... 36,237,163
------------
============================================================================================================================
Net Assets: Net assets ............................................................. $102,159,041
============
============================================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized ............ $ 923,229
Paid-in capital in excess of par ....................................... 127,635,382
Undistributed investment income--net ................................... 378,942
Accumulated realized capital losses on investments--net (Note 6) ....... (10,861,755)
Unrealized depreciation on investments--net ............................ (15,916,757)
------------
Net Assets--Equivalent to $11.07 per share based on 9,232,294
shares of capital stock outstanding (market price--$11.125) ............ $102,159,041
============
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended February 28, 1999
============================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned ........................................... $ 7,390,977
(Note 1d): Dividends .............................................................. 167,855
Other .................................................................. 48,750
------------
Total income ........................................................... 7,607,582
------------
============================================================================================================================
Expenses: Loan interest expense (Note 5) ......................................... $ 886,133
Investment advisory fees (Note 2) ...................................... 334,297
Borrowing cost (Note 5) ................................................ 40,817
Accounting services (Note 2) ........................................... 36,678
Professional fees ...................................................... 30,945
Transfer agent fees .................................................... 23,079
Directors' fees and expenses ........................................... 19,472
Printing and shareholder reports ....................................... 14,580
Custodian fees ......................................................... 7,990
Listing fees ........................................................... 5,212
Pricing services ....................................................... 5,039
Other .................................................................. 7,536
------------
Total expenses ......................................................... 1,411,778
------------
Investment income--net ................................................. 6,195,804
------------
============================================================================================================================
Realized & Realized loss on investments--net ...................................... (3,362,545)
Unrealized Change in unrealized depreciation on investments--net .................. 1,659,560
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations ................... $ 4,492,819
(Notes 1b, ============
1d & 3):
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 1999 1998
============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ................................................. $ 6,195,804 $ 11,959,872
Realized gain (loss) on investments--net ............................... (3,362,545) 465,030
Change in unrealized depreciation on investments--net .................. 1,659,560 (16,606,355)
------------ ------------
Net increase (decrease) in net assets resulting from operations ........ 4,492,819 (4,181,453)
------------ ------------
============================================================================================================================
Dividends to Investment income--net ................................................. (6,636,936) (11,911,167)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders .... (6,636,936) (11,911,167)
------------ ------------
============================================================================================================================
Capital Share Value of shares issued to Common Stock shareholders in
Transactions reinvestment of dividends .............................................. 1,744,170 2,748,856
(Note 4): ------------ ------------
============================================================================================================================
Net Assets: Total decrease in net assets ........................................... (399,947) (13,343,764)
Beginning of period .................................................... 102,558,988 115,902,752
------------ ------------
End of period* ......................................................... $102,159,041 $102,558,988
============ ============
============================================================================================================================
*Undistributed investment income--net ................................... $ 378,942 $ 820,074
============ ============
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended February 28, 1999
================================================================================================================================
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations .................................. $ 4,492,819
Operating Activities: Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Decrease in receivables ............................................................. 229,983
Increase in other assets ............................................................ (28,303)
Decrease in other liabilities ....................................................... (259,243)
Realized and unrealized loss on investments--net .................................... 1,702,985
Amortization of discount ............................................................ (1,537,894)
-----------
Net cash provided by operating activities ............................................. 4,600,347
-----------
================================================================================================================================
Cash Used for Proceeds from sales of long-term investments .......................................... 28,427,955
Investing Activities: Purchases of long-term investments .................................................... (30,386,345)
Purchases of short-term investments ................................................... (43,147,335)
Proceeds from sales and maturities of short-term investments .......................... 43,641,000
-----------
Net cash used for investing activities ................................................ (1,464,725)
-----------
================================================================================================================================
Cash Used for Cash receipts from borrowings ......................................................... 24,800,000
Financing Activities: Cash payments on borrowings ........................................................... (22,800,000)
Dividends paid to shareholders ........................................................ (5,135,596)
-----------
Net cash used for financing activities ................................................ (3,135,596)
-----------
================================================================================================================================
Cash: Net increase in cash .................................................................. 26
Cash at beginning of period ........................................................... 681
-----------
Cash at end of period ................................................................. $ 707
===========
================================================================================================================================
Cash Flow Information: Cash paid for interest ................................................................ $ 1,069,351
===========
================================================================================================================================
Non-Cash Capital shares issued on reinvestment of dividends paid to shareholders ............... $ 1,744,171
Financing Activities: ===========
================================================================================================================================
</TABLE>
See Notes to Financial Statements.
12 & 13
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios For the
have been derived from information provided Six Months For the Year
in the financial statements. Ended Ended August 31,
February 28, ----------------------------------------------
Increase (Decrease) in Net Asset Value: 1999+ 1998+ 1997+ 1996 1995
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ........... $ 11.30 $ 13.07 $ 12.56 $ 12.44 $ 12.37
Operating ---------- ---------- ---------- ---------- ----------
Performance: Investment income--net ....................... .68 1.33 1.26 1.35 1.40
Realized and unrealized gain (loss) on
investments--net ............................. (.19) (1.77) .52 .15 .10
---------- ---------- ---------- ---------- ----------
Total from investment operations ............... .49 (.44) 1.78 1.50 1.50
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net ..... (.72) (1.33) (1.27) (1.38) (1.43)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period ................. $ 11.07 $ 11.30 $ 13.07 $ 12.56 $ 12.44
========= ========= ========= ========= =========
Market price per share, end of period .......... $ 11.125 $ 11.125 $ 13.44 $ 13.00 $ 12.00
========= ========= ========= ========= =========
===================================================================================================================================
Total Investment Based on net asset value per share ............. 4.49%++ (4.10%) 14.91% 12.71% 13.41%
Return:** ========= ========= ========= ========= =========
Based on market price per share ................ 6.66%++ (8.16%) 14.14% 20.94% 11.61%
========= ========= ========= ========= =========
===================================================================================================================================
Ratios to Average Expenses, excluding interest expense ........... 1.05%* .89% .81% .81% .86%
Net Assets: ========= ========= ========= ========= =========
Expenses ....................................... 2.82%* 2.06% 1.22% 1.65% 2.49%
========= ========= ========= ========= =========
Investment income--net ......................... 12.37%* 10.35% 9.23% 9.15% 8.73%
========= ========= ========= ========= =========
===================================================================================================================================
Leverage: Amount of borrowings outstanding, end of
period (in thousands) .......................... $ 34,900 $ 32,900 $ 13,000 $ 9,250 $ 19,750
========= ========= ========= ========= =========
Average amount of borrowings outstanding
during the period (in thousands) ............... $ 33,856 $ 23,036 $ 8,433 $ 16,948 $ 21,336
========= ========= ========= ========= =========
Average amount of borrowings outstanding
per share during the period .................... $ 3.70 $ 2.57 $ .97 $ 1.98 $ 2.55
========= ========= ========= ========= =========
===================================================================================================================================
Supplemental Net assets, end of period (in thousands) ....... $ 102,159 $ 102,559 $ 115,903 $ 108,391 $ 106,054
Data: ========= ========= ========= ========= =========
Portfolio turnover ............................. 22.99% 45.73% 70.76% 69.75% 61.97%
========= ========= ========= ========= =========
===================================================================================================================================
</TABLE>
+ Based on average shares outstanding.
++ 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.
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's financial statements are prepared in accordance
with generally accepted accounting principles which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal recurring nature. The Fund determines and makes available for
publication the net asset value of its Common Stock on a weekly basis. The
Fund's Common Stock is listed on the New York Stock Exchange under the symbol
KYT.
(a) Valuation of investments--Portfolio securities 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 or purchased are valued at the last sale price in the
case of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options written) or
the last bid price (options purchased). 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
and assets 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 exist-
14 & 15
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
ing 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 change 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.
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 six months ended February 28, 1999, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), $1,072 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 six
months ended February 28, 1999 were $31,491,220 and $30,478,640, respectively.
Net realized losses for the six months ended February 28, 1999 and net
unrealized losses as of February 28, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
- --------------------------------------------------------------------------------
Long-term investments ............................. $ (3,362,545) $(15,916,757)
------------ ------------
Total ............................................. $ (3,362,545) $(15,916,757)
============ ============
- --------------------------------------------------------------------------------
As of February 28, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $15,916,757, of which $3,735,517 related to appreciated
securities and $19,652,274 related to depreciated securities. The aggregate cost
of investments at February 28, 1999 for Federal income tax purposes was
$149,358,248.
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 six months ended February 28, 1999 and
for the year ended August 31, 1998 increased by 155,319 and 212,354,
respectively, as a result of dividend reinvestment.
5. Short-Term Borrowings:
On January 27, 1999, the Fund entered into a one-year credit agreement with
State Street Bank and Trust Company and Bank of America National Trust and
Savings Association. The agreement is a $50,000,000 credit facility bearing
interest at the Federal Funds rate plus 0.50% and/or LIBOR plus 0.50%. For the
six months ended February 28, 1999, the average amount borrowed was
approximately $33,856,000 and the daily weighted average interest rate was
5.28%. For the six months ended February 28, 1999, facility and commitment fees
aggregated approximately $41,000.
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 March 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.098010 per share,
payable on March 31, 1999, to shareholders of record as of March 24, 1999.
16 & 17
<PAGE>
Corporate High Yield Fund II, Inc., February 28, 1999
PORTFOLIO INFORMATION
<TABLE>
<CAPTION>
Percent of
As of February 28, 1999 Long-Term Investments
====================================================================================================================================
<S> <C> <C> <C>
Ten Largest Transtar Holdings LP Transtar is a transportation holding company with seven railroads,
Holdings a Great Lakes shipping fleet and Holdings an inland barge operation.
Transtar provides sole rail access and primary water transport for
nearly all the steel plants of USX. 3.1%
---------------------------------------------------------------------------------------------------------------------
NTL, Inc. (Comcast Through various subsidiaries, NTL Inc. owns and operates television
UK Cable Partners Ltd.; and radio broadcasting, cable television and telecommunications systems
Diamond Cable) in the United Kingdom. The company also owns Comcast and Diamond cable
and telephony operations. 1.9
---------------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------------
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. 1.7
---------------------------------------------------------------------------------------------------------------------
Telefonica de Argentina SA Telefonica de Argentina provides monopoly telephone service to the
southern half of Argentina, including about half the Buenos Aires
metropolitan area where nearly one third of Argentina's population
is located. 1.6
---------------------------------------------------------------------------------------------------------------------
Kaiser Aluminum & Kaiser Aluminum & Chemical Corp., an affiliate of Maxxam Inc., is
Chemical Corp. 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. 1.5
---------------------------------------------------------------------------------------------------------------------
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. 1.4
---------------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------------------
Malette Inc. Malette is a Canadian producer of oriented strand board (OSB) panels
and commodity 2x4 lumber with facilities primarily located in the
province of Quebec. Malette is a wholly-owned subsidiary of Canadian
paper and forest products producer Tembec, Inc. 1.4
---------------------------------------------------------------------------------------------------------------------
Midland Funding II Midland Cogeneration 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. 1.4
---------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the securities in which
the Fund invests, and this could hurt the Fund's investment returns.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Vincent T. Lathbury III, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Elizabeth M. Phillips, Vice President
Donald C. Burke, Vice President and Treasurer
Patrick D. Sweeney, Secretary
- --------------------------------------------------------------------------------
Gerald M. Richard, Treasurer of Corporate High Yield Fund II, Inc. has recently
retired. His colleagues at Merrill Lynch Asset Management, L.P. join the Fund's
Board of Directors in wishing Mr. Richard well in his retirement.
- --------------------------------------------------------------------------------
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--2/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
