CORPORATE
HIGH YIELD
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 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 August 31, 1999
Percent of
Quality Ratings+ Long-Term Investments
- --------------------------------------------------------------------------------
BBB ................................................................... 3.9%
BB .................................................................... 25.7
B or lower ............................................................ 65.5
NR (Not Rated) ........................................................ 4.9
- --------------------------------------------------------------------------------
+ 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 ................................................ 32.1%
Emerging Markets Holdings ............................................. 16.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of
Top Five Foreign Countries* Long-Term Investments
- --------------------------------------------------------------------------------
Canada ................................................................ 6.4%
United Kingdom ........................................................ 5.6
Argentina ............................................................. 5.3
Mexico ................................................................ 3.5
Brazil ................................................................ 2.2
- --------------------------------------------------------------------------------
* All holdings are denominated in US dollars.
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
DEAR SHAREHOLDER
High-Yield Market Overview
During the fiscal year ended August 31, 1999, high-yield markets have been
buffeted by world events. The period began with extreme pessimism, as Asian,
Russian and other economies appeared to collapse. Investors sought the relative
safety of US Treasury issues and stayed away from riskier fixed-income
investments, including high-yield and emerging market bonds. A high-yield market
rebound in early 1999 was cut short in the spring by investors' concerns about
rising US inflation and higher interest rates. Markets remained unsettled
through August 31, 1999, reflecting ongoing interest rate fears. Ten-year US
Treasury bonds lost nearly 4% during the fiscal year and 3.45% during the six
months ended August 31, 1999. The high-yield market performed better during the
period, with a total return of +4.74% for the fiscal year ended August 31, 1999
and a very modest +1.22% for the past six months, as measured by the unmanaged
CS First Boston High Yield Index. The yield of the CS First Boston High Yield
Index exceeds that of ten-year Treasury issues by 5.94%, a yield spread that
remains wide by historical standards.
Our long-term outlook for the high-yield market remains optimistic, reflecting
our view that underlying credit fundamentals are gradually improving. Near term
the market continues to suffer from both technical and fundamental malaise.
Unfavorable technical factors include ongoing trading illiquidity, weak cash
inflows and heavy new-issue supply. On the fundamental side are higher interest
rates, rising defaults and earnings disappointments. Many companies have
stumbled because of the poor execution of ambitious strategies, despite good
industry fundamentals. Furthermore, the market has not rewarded those with
positive news. Some industry sectors, most notably healthcare, have deteriorated
in credit quality during the fiscal year. However, the earnings outlook for a
number of industries has improved, with markedly higher demand and prices in
both the energy and paper/ forest products sectors. As earnings stabilize in
healthcare and begin to recover in other industries, we believe the high-yield
market will strengthen.
Fund Performance
For the fiscal year ended August 31, 1999, the total investment return on the
Fund's Common Stock was +6.08%, based on a change in the per share net asset
value from $11.30 to $10.62, and assuming reinvestment of $1.346 per share
income dividends. During this period, the net annualized yield of the Fund's
Common Stock was 12.60%. The Fund's total return compares favorably to the
+4.74% return of the benchmark unmanaged CS First Boston High Yield Index for
the same 12-month period. The Fund also modestly outperformed the benchmark for
the six months ended August 31, 1999 with a total return of +1.52% compared to
the Index return of +1.22%. The Fund benefited during the period from our
leverage strategy and from strength in many emerging market and energy sector
names. The Fund's exposure to emerging markets remains higher than that of the
benchmark Index at 16.1%, compared to Index exposure of 7.2% on August 31, 1999.
Fund performance during the period was hindered by exposure to healthcare
issues.
Investment Strategy
We intend to continue the strategies currently in place within the constraints
set by the difficult market conditions that presently exist. We expect to
maintain our current credit quality profile, which closely conforms to the
benchmark CS First Boston High Yield Index. Our strategy of selling fully valued
names and adding to positions with upside potential is ongoing as we evaluate
the Fund's investments in light of current conditions. During the past six
months, we established or added to positions in companies that we believe have
favorable earnings prospects, including Doman Industries Limited, a pulp and
lumber producer, Protection One Alarm Monitoring, a security alarm system
provider, Regal Cinemas Inc., a movie theater company, and several downtrodden
energy names. We sold our positions in Metronet Communications, which was
acquired by AT&T Corp., and Container Corp. of America and SD Warren Co., both
paper companies with bonds yielding well below 8%.
Leverage Strategy
The Fund was on average 25% leveraged during the six-month and 12-month periods
ended August 31, 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. At August 31, 1999, the Fund was 26.2% leveraged, having
borrowed $34.6 million at a borrowing cost of 6.125%. Given our generally
favorable long-term view of the market, we expect leverage on balance to remain
near these levels. (For a complete explanation of the benefits and risks of
leveraging, see page 1 of this report to shareholders.)
Major Industries
At August 31, 1999, the largest allocations were: telephony--competitive local
exchange carrier, 9.0% of total long-term investments; transportation, 7.5%;
health services, 6.4%; energy, 6.2%; and wireless communications--domestic
paging & cellu- lar--5.0%. Dollar-denominated non-US bonds totaled 32.1% of the
portfolio, with emerging market holdings accounting for 16.1% 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, 1999, the average maturity for the portfolio was 6.5 years.
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/ 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
Elizabeth M. Phillips
Vice President and Portfolio Manager
October 11, 1999
2 & 3
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
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>
Airlines--1.0% BB Ba2 $ 885,504 USAir Inc., 11.20% due 3/19/2005 (c) $ 779,243 $ 954,511
====================================================================================================================================
Automotive--1.0% CC Caa3 1,000,000 Breed Technologies Inc., 9.25% due 4/15/2008 1,000,000 20,000
BB+ Ba2 1,000,000 Federal-Mogul Company, 7.375% due 1/15/2006 995,830 991,930
------------ ------------
1,995,830 1,011,930
====================================================================================================================================
Broadcasting-- BB- Ba3 1,000,000 Antenna TV SA, 9% due 8/01/2007 972,557 938,750
Radio & B- B3 1,000,000 Cumulus Media, Inc., 10.375% due 7/01/2008 1,000,000 1,032,500
Television--4.4% B+ B2 750,000 Globo Comunicacoes e Participacoes, Ltd.,
10.50% due 12/20/2006 (d) 748,143 556,050
BB Ba2 1,250,000 Grupo Televisa SA, 11.375% due 5/15/2003 1,250,000 1,296,875
B B2 500,000 Sinclair Broadcasting Group Inc., 10% due
9/30/2005 494,375 502,500
------------ ------------
4,465,075 4,326,675
====================================================================================================================================
Cable--2.0% B+ B2 1,250,000 Charter Communications Holdings LLC, 8.625%
due 4/01/2009 (d) 1,246,187 1,171,875
B B2 700,000 Intermedia Capital Partners LP, 11.25% due
8/01/2006 702,625 770,000
------------ ------------
1,948,812 1,941,875
====================================================================================================================================
Cable-- Australis Media Ltd. (a)(f):
International--6.4% 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 (h) 2,086,637 29,610
BB Ba3 1,500,000 Cablevision SA, 13.75% due 5/01/2009 (d) 1,500,000 1,312,500
Diamond Cable Communications PLC**:
B- B3 500,000 11.055% due 9/30/2004 497,978 524,375
B- B3 875,000 10.773% due 12/15/2005 771,767 787,500
B- B3 250,000 11.387% due 2/15/2007 185,769 193,750
B- B3 1,250,000 International Cabletel, Inc., 11.643%** due
2/01/2006 1,058,919 1,084,375
D Caa3 1,950,000 Supercanal Holdings SA, 11.50% due
5/15/2005 (d)(f) 945,375 994,500
B+ B1 2,200,000 TeleWest Communications PLC, 9.11%** due
4/15/2004 (d) 1,465,283 1,344,750
------------ ------------
8,539,595 6,271,867
====================================================================================================================================
Chemicals--6.3% B- B3 1,250,000 Great Lakes Carbon Corp., 11.75% due
5/15/2008+ 1,250,000 1,204,687
NR* B2 1,250,000 Huntsman Corporation, 9.50% due 7/01/2007 (d) 1,223,750 1,162,500
BB Ba3 2,000,000 Lyondell Chemical Company, 9.625% due
5/01/2007 2,053,625 2,030,000
B+ B2 1,000,000 Octel Developments PLC, 10% due 5/01/2006 1,000,000 1,025,000
BB- B3 750,000 Sterling Chemicals Inc., 12.375% due
7/15/2006 (d) 750,000 750,000
------------ ------------
6,277,375 6,172,187
====================================================================================================================================
Communications-- B+ B2 2,150,000 Orion Network Systems, Inc., 15.167%** due
1.2% 1/15/2007 1,381,677 1,177,125
====================================================================================================================================
Computer Services/ BB- Ba3 1,000,000 Amkor Technologies Inc., 9.25% due
Electronics--5.9% 5/01/2006 (d) 997,500 975,000
B+ B1 650,000 Celestica International, 10.50% due 12/31/2006 650,000 685,750
CCC+ B3 1,750,000 MCMS Inc., 9.75% due 3/01/2008 1,501,875 1,067,500
B B2 1,500,000 SCG Holding Corporation, 12% due 8/01/2009 (d) 1,500,000 1,545,000
B- B2 1,750,000 Zilog Inc., 9.50% due 3/01/2005 1,591,875 1,601,250
------------ ------------
6,241,250 5,874,500
====================================================================================================================================
Consumer B- B3 1,000,000 Albecca Inc., 10.75% due 8/15/2008 827,500 757,500
Products--2.2% B- B2 500,000 Chattem Inc., 8.875% due 4/01/2008 501,875 480,000
B B3 500,000 Corning Consumer Products, 9.625% due
5/01/2008 482,500 395,000
CCC+ Caa1 750,000 Syratech Corp., 11% due 4/15/2007 617,500 510,000
------------ ------------
2,429,375 2,142,500
====================================================================================================================================
Consumer BB- B2 500,000 Avis Rent A Car Inc., 11% due 5/01/2009 (d) 500,000 511,250
Services--2.0% BB+ Ba3 2,000,000 Protection One Alarm Monitoring, 8.125% due
1/15/2009 (d) 1,602,500 1,460,000
------------ ------------
2,102,500 1,971,250
====================================================================================================================================
Diversified--1.2% CCC+ Caa2 1,250,000 Foamex LP, 13.50% due 8/15/2005 1,425,000 1,225,000
====================================================================================================================================
Energy--8.2% CCC- Caa1 900,000 Belden & Blake Corp., 9.875% due 6/15/2007 699,562 612,000
B B3 500,000 Chesapeake Energy Corp., 9.625% due 5/01/2005 488,750 465,000
B+ B3 1,000,000 Clark USA Inc., 10.875% due 12/01/2005 1,000,000 860,000
NR* Ca 1,250,000 Forcenergy, Inc., 8.50% due 2/15/2007 (f) 525,000 1,025,000
D Caa3 1,000,000 Hvide Marine, Inc., 8.375% due 2/15/2008 (f) 534,531 420,000
CCC B3 1,000,000 Ocean Rig Norway AS, 10.25% due 6/01/2008 733,750 735,000
BB Ba3 1,000,000 Port Arthur Finance Corporation, 12.50% due
1/15/2009 (d) 1,000,000 1,000,000
BB- Ba3 1,000,000 RBF Finance Company, 11% due 3/15/2006 1,037,500 1,050,000
BB- B1 1,000,000 Tesoro Petroleum Corp., 9% due 7/01/2008 997,031 980,000
D C 3,950,000 TransAmerican Energy Corp., 13.155%** due
6/15/2002 (f) 3,824,149 404,875
B- B3 750,000 United Refining Co., 10.75% due 6/15/2007 565,312 547,500
------------ ------------
11,405,585 8,099,375
====================================================================================================================================
Entertainment--1.9% B- B3 1,250,000 Premier Parks Inc., 9.75% due 6/15/2007 1,247,163 1,237,500
B Caa1 1,000,000 Regal Cinemas Inc., 9.50% due 6/01/2008 842,500 690,000
------------ ------------
2,089,663 1,927,500
====================================================================================================================================
Financial CCC+ Caa3 1,750,000 Amresco Inc., 9.875% due 3/15/2005 1,756,250 1,505,000
Services--3.2% CCC- Caa3 2,000,000 PennCorp Financial Group, 9.25% due 12/15/2003 2,000,000 1,645,000
------------ ------------
3,756,250 3,150,000
====================================================================================================================================
Foreign Government B+ B2 1,000,000 Republic of Brazil, 10.125% due 5/15/2027 910,505 708,750
Obligations--0.7%
====================================================================================================================================
Gaming--3.7% D Caa1 2,000,000 GB Property Funding Corp., 10.875% due
1/15/2004 (f) 1,952,500 1,197,500
BB+ Ba2 500,000 Harrah's Operating Co. Inc., 7.875% due
12/15/2005 500,000 475,000
Jazz Casino Co. LLC:
NR* NR* 1,405,284 5.927% due 11/15/2009+ 724,942 864,250
NR* NR* 84,000 Contingent Notes due 11/15/2009 (g)(j) 0 0
Venetian Casino/LV Sands:
B- B3 250,000 12.25% due 11/15/2004 254,063 220,000
CCC+ Caa1 1,000,000 10% due 11/15/2005 991,638 850,000
------------ ------------
4,423,143 3,606,750
====================================================================================================================================
Health Services--8.5% B- B3 1,250,000 ALARIS Medical Systems, Inc., 9.75% due
12/01/2006 1,263,750 1,170,312
BB+ Ba2 750,000 Columbia HCA/Healthcare Corp., 7.15% due
3/30/2004 720,000 686,250
CCC+ B2 750,000 Extendicare Health Services, 9.35% due
12/15/2007 735,000 510,000
Fresenius Medical Capital:
B+ ba3 300,000 Trust I, 9% due 12/01/2006 314,250 295,500
B+ ba3 700,000 Trust II, 7.875% due 2/01/2008 701,750 644,000
</TABLE>
4 & 5
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
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>
Health Services BB Ba3 $ 500,000 ICN Pharmaceutical Inc., 8.75% due
(concluded) 11/15/2008 (d) $ 484,617 $ 463,750
B- B3 1,250,000 Kinetic Concepts, Inc., 9.625% due 11/01/2007 1,259,375 962,500
B- Caa1 1,125,000 Magellan Health Services, 9% due 2/15/2008 1,114,531 967,500
CC C 1,250,000 Mariner Post--Acute Network, 9.50% due
11/01/2007 739,645 100,000
NR* B2 1,000,000 Quest Diagnostic Inc., 10.75% due 12/15/2006 1,000,000 1,140,000
B+ Ba3 1,500,000 Quorum Health Group Inc., 8.75% due
11/01/2005 1,458,750 1,425,000
------------ ------------
9,791,668 8,364,812
====================================================================================================================================
Hotels & Motels--1.4% BB Ba2 1,500,000 HMH Properties, Inc., 8.45% due 12/01/2008 1,494,960 1,383,750
====================================================================================================================================
Independent Power B+ Ba3 750,000 AES Corporation, 8.50% due 11/01/2007 748,500 691,875
Producers--3.0% BB Ba2 500,000 Calpine Corporation, 8.75% due 7/15/2007 498,176 495,625
BB Ba3 1,500,000 Midland Funding II, 13.25% due 7/23/2006 1,895,625 1,803,420
------------ ------------
3,142,301 2,990,920
====================================================================================================================================
Industrial--1.3% Neff Corp.:
B B3 1,000,000 10.25% due 6/01/2008 1,000,000 1,010,000
B B3 250,000 10.25% due 6/01/2008 246,290 252,500
------------ ------------
1,246,290 1,262,500
====================================================================================================================================
Industrial-- BBB- Baa3 1,250,000 Equistar Chemicals LP, 8.50% due 2/15/2004 (d) 1,249,900 1,244,847
Manufacturing--1.3%
====================================================================================================================================
Industrial-- CCC+ Caa2 1,250,000 Metal Management Inc., 10% due 5/15/2008 775,625 950,000
Transportation--1.0%
====================================================================================================================================
Internet B- B3 1,000,000 PSINet Inc., 11% due 8/01/2009 (d) 1,000,000 990,000
Transport--2.1% NR* NR* 1,250,000 Splitrock Services Inc., 11.75% due 7/15/2008 1,236,250 1,125,000
------------ ------------
2,236,250 2,115,000
====================================================================================================================================
Media & B- B3 2,250,000 Satelites Mexicanos SA, 10.125% due 11/01/2004 2,062,500 1,762,875
Communications--
International--1.8%
====================================================================================================================================
Metals & CCC+ B3 2,000,000 Kaiser Aluminum & Chemical Corp., 12.75%
Mining--2.1% due 2/01/2003 2,090,000 2,030,000
====================================================================================================================================
Oil & Gas CCC- Caa3 900,000 Wiser Oil Company, 9.50% due 5/15/2007 767,250 735,750
Producers--0.7%
====================================================================================================================================
Packaging--1.0% B+ Ba3 1,250,000 Vicap SA, 11.375% due 5/15/2007 1,243,375 1,040,625
====================================================================================================================================
Paper & Forest B B2 900,000 Ainsworth Lumber Company, 12.50% due
Products--4.1% 7/15/2007+ 843,383 990,000
Doman Industries Limited:
B Caa1 1,000,000 8.75% due 3/15/2004 892,500 680,000
B+ B3 500,000 12% due 7/01/2004 (d) 473,920 504,375
CCC+ Caa1 1,000,000 Repap New Brunswick, 10.625% due 4/15/2005 868,125 860,000
CCC+ Caa1 1,000,000 Tjiwi Kimia Finance Mauritius, 10% due
8/01/2004 994,550 620,000
CCC+ Caa1 500,000 Tjiwi Kimia International BV, 13.25% due
8/01/2001 555,000 410,000
------------ ------------
4,627,478 4,064,375
====================================================================================================================================
Product Fisher Scientific International:
Distribution--2.0% B- B3 750,000 9% due 2/01/2008 750,000 705,000
B- B3 500,000 9% due 2/01/2008 483,471 470,000
CCC+ Caa1 1,000,000 Nebco Evans, 10.125% due 7/15/2007 1,000,000 765,000
------------ ------------
2,233,471 1,940,000
====================================================================================================================================
Publishing & B B1 500,000 American Lawyer Media, Inc., 9.75% due
Printing--2.5% 12/15/2007 523,125 482,500
BB Ba2 500,000 Hollinger International Publishing, Inc.,
8.625% due 3/15/2005 497,500 498,750
B B2 1,500,000 MDC Communications Corp., 10.50% due
12/01/2006 1,483,825 1,500,000
------------ ------------
2,504,450 2,481,250
====================================================================================================================================
Real Estate--1.5% BB- Ba3 1,500,000 Forest City Enterprises Inc., 8.50% due
3/15/2008 1,500,000 1,458,750
====================================================================================================================================
Recreation--0.7% B+ B1 725,000 Intrawest Corp., 9.75% due 8/15/2008 746,750 703,250
====================================================================================================================================
Shipping--0.5% BB Ba2 500,000 Stena AB, 10.50% due 12/15/2005 525,000 497,500
====================================================================================================================================
Specialty B B2 1,250,000 Jo-Ann Stores Inc., 10.375% due 5/01/2007 1,231,250 1,243,750
Retailing--1.3%
====================================================================================================================================
Steel--1.6% NR* B2 750,000 CSN Iron SA, 9.125% due 6/01/2007 (d) 608,750 547,500
B B3 1,000,000 Republic Technology, 13.75% due
7/15/2009 (d)(i) 987,100 988,750
------------ ------------
1,595,850 1,536,250
====================================================================================================================================
Telecommunications-- CCC+ Caa1 500,000 Dolphin Telecom PLC, 17.456%** due 6/01/2008 216,238 220,000
0.2%
====================================================================================================================================
Telephony-- BB- B2 1,000,000 Call-Net Enterprises, Inc., 9.27%** due
Competitive 8/15/2007 764,997 645,000
Local Exchange NR* NR* 1,250,000 Comtel Brasileira Ltd., 10.75% due
Carrier--11.3% 9/26/2004 (d) 1,237,500 1,087,500
B- Caa1 1,000,000 Esprit Telecom Group PLC, 10.875% due
6/15/2008 1,021,875 1,013,750
Intermedia Communications Inc.:
B B2 500,000 10.503%** due 7/15/2007 377,592 347,500
B B2 500,000 8.60% due 6/01/2008 500,000 445,000
L-3 Communications Corp.:
B B2 650,000 10.375% due 5/01/2007 650,000 680,875
B B2 1,000,000 8.50% due 5/15/2008 999,300 968,750
Nextlink Communications Inc.:
B B3 1,250,000 12.50% due 4/15/2006 1,250,000 1,318,750
B B3 500,000 9% due 3/15/2008 498,990 471,250
B B3 1,000,000 10.75% due 6/01/2009 1,000,000 1,016,250
B- Caa1 1,000,000 Tele1 Europe BV, 13% due 5/15/2009 (d) 1,000,000 1,055,000
BBB- Ba3 2,000,000 Telefonica de Argentina SA, 11.875% due
11/01/2004 1,960,160 2,060,000
------------ ------------
11,260,414 11,109,625
====================================================================================================================================
Textiles--1.2% B B2 1,250,000 Polymer Group Inc., 8.75% due 3/01/2008 1,250,000 1,181,250
====================================================================================================================================
Transportation--9.9% B- B3 1,000,000 American Reefer Co. Ltd., 10.25% due 3/01/2008 1,000,000 635,000
BB- NR* 1,250,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (d) 1,225,000 812,500
BB- Ba3 2,000,000 Eletson Holdings, Inc., 9.25% due 11/15/2003 2,030,000 1,895,000
BB- B1 1,250,000 Sea Containers Ltd., 12.50% due 12/01/2004 1,368,750 1,337,500
B+ B2 1,000,000 TFM, SA de CV, 11.939%** due 6/15/2009 718,235 540,000
</TABLE>
6 & 7
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
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 B- B2 $4,271,000 Transtar Holdings LP, 12.907%** due
(concluded) 12/15/2003 $ 4,119,821 $ 4,196,258
D Caa3 1,550,000 Trism Inc., 10.75% due 12/15/2000 (f) 1,476,375 395,250
------------ ------------
11,938,181 9,811,508
====================================================================================================================================
Utilities--4.3% BBB- Ba3 1,750,000 Metrogas SA, 12% due 8/15/2000 1,766,094 1,754,375
NR* NR* 2,359,521 Tucson Electric & Power Co., 10.21% due
1/01/2009 (b)(c) 2,312,331 2,531,955
------------ ------------
4,078,425 4,286,330
====================================================================================================================================
Waste BB- Ba3 1,000,000 Allied Waste North America, 7.375% due
Management--0.9% 1/01/2004 998,530 930,000
====================================================================================================================================
Wireless B- B2 1,000,000 Cencall Communications Corporation, 13.935%**
Communications-- due 1/15/2004 839,429 1,002,500
Domestic Paging & Nextel Communications, Inc.:
Cellular--6.5% B- B2 1,200,000 9.75% due 8/15/2004 1,051,468 1,203,000
B- B2 750,000 9.505%** due 10/31/2007 562,285 530,625
NR* NR* 2,000,000 Pinnacle Holdings Inc., 11.674%** due
3/15/2008 1,254,492 1,120,000
NR* B3 1,475,000 TeleCorp PCS Inc., 11.764%** due 4/15/2004 (d) 865,590 848,125
CCC+ B3 1,000,000 Triton PCS Inc., 11.33%** due 5/01/2008 660,185 680,000
B- B3 1,000,000 Western Wireless Corp., 10.50% due 2/01/2007 995,938 1,040,000
------------ ------------
6,229,387 6,424,250
====================================================================================================================================
Wireless NR* NR* 1,000,000 Celcaribe SA, 12.082%** due 3/15/2004 1,054,162 805,000
Communications-- B+ B3 2,070,000 Comunicacion Celular SA, 13.153%** due
International Paging & 3/01/2005 (d) 1,731,487 1,221,300
Cellular--6.6% B- Caa1 750,000 McCaw International Ltd., 11.757%** due
4/15/2007 564,949 442,500
B- Caa1 2,000,000 Millicom International Cellular, 13.622%**
due 6/01/2006 1,573,834 1,485,000
BB- Ba3 1,250,000 Orange PLC, 8% due 8/01/2008 1,240,475 1,187,500
CCC+ Caa1 2,750,000 Telesystem International Wireless Inc.,
17.143%** due 6/30/2007 1,547,301 1,347,500
------------ ------------
7,712,208 6,488,800
====================================================================================================================================
Total Investments in Corporate Bonds--130.6% 144,918,629 128,819,762
====================================================================================================================================
<CAPTION>
Shares
Held Stocks & Warrants
====================================================================================================================================
<S> <C> <C> <C> <C>
Broadcasting-- 554 Cumulus Media, Inc., Series A, 13.75%
Radio & (Preferred) (f) 560,848 609,400
Television--0.6%
====================================================================================================================================
Cable--0.0% 1,915 Wireless One Inc. (Warrants) (e) 40,445 19
====================================================================================================================================
Entertainment--0.4% 19,739 On Command Corporation (f) 3,167,928 354,068
6,417 On Command Corporation (Warrants) (e) 43,576 38,502
------------ ------------
3,211,504 392,570
====================================================================================================================================
Gaming--0.2% 24,357 JCC Holding Company (Class A) (f) 97,428 203,990
====================================================================================================================================
Internet 1,250 Splitrock Services Inc. (Warrants) (e) 13,750 60,000
Transport--0.1%
====================================================================================================================================
Supermarkets--0.0% 1,873 Grand Union Co. (Warrants) (e) 19 3,161
====================================================================================================================================
Telephony-- 676 Intermedia Communications Inc. (Convertible
Competitive Preferred) (f)+ 691,274 635,440
Local Exchange
Carrier--0.6%
====================================================================================================================================
Wireless 3,020 Nextel Communications, Inc. (Class A) (f) 48,750 174,405
Communications--
Domestic Paging &
Cellular--0.2%
====================================================================================================================================
Wireless 2,070 Comunicacion Celular SA (Warrants) (d)(e) 2,261 388
Communications--
International Paging &
Cellular--0.0%
====================================================================================================================================
Total Investments in Stocks & Warrants--2.1% 4,666,279 2,079,373
====================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
====================================================================================================================================
<S> <C> <C> <C> <C>
Commercial $ 250,000 General Motors Acceptance Corp., 5.56% due
Paper***--0.3% 9/01/1999 250,000 250,000
====================================================================================================================================
Total Investments in Short-Term Securities--0.3% 250,000 250,000
====================================================================================================================================
Total Investments--133.0% $149,834,908 131,149,135
============
Liabilities in Excess of Other Assets--(33.0%) (32,506,428)
------------
Net Assets--100.0% $ 98,642,707
============
====================================================================================================================================
</TABLE>
* Not Rated.
** Represents a zero coupon or step bond; the interest rate shown reflects
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 $2,532,000, 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 $2,531,955
--------------------------------------------------------------------------
Total $2,312,331 $2,531,955
========== ==========
--------------------------------------------------------------------------
(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 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.
(h) Each $1,000 face amount contains one warrant of Australis Media Ltd.
(i) Each $1,000 face amount contains one warrant of Republic Technology.
(j) Floating rate note.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
8 & 9
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of August 31, 1999
===============================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$149,834,908) (Note 1a) $ 131,149,135
Cash ........................................................... 196,565
Receivables:
Interest .................................................... $ 2,859,684
Dividends ................................................... 11,000 2,870,684
-------------
Prepaid expenses and other assets .............................. 102,968
-------------
Total assets ................................................... 134,319,352
-------------
===============================================================================================================
Liabilities: Loans (Note 5) ................................................. 34,600,000
Payables:
Securities purchased ........................................ 381,510
Interest on loans (Note 5) .................................. 327,362
Dividends to shareholders (Note 1f) ......................... 196,201
Investment adviser (Note 2) ................................. 54,558
Commitment fees ............................................. 2,751 962,382
-------------
Accrued expenses and other liabilities ......................... 114,263
-------------
Total liabilities .............................................. 35,676,645
-------------
===============================================================================================================
Net Assets: Net assets ..................................................... $ 98,642,707
=============
===============================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized .... $ 928,799
Paid-in capital in excess of par ............................... 128,239,366
Undistributed investment income--net ........................... 387,188
Accumulated realized capital losses on investments--net (Note 6) (12,226,873)
Unrealized depreciation on investments--net .................... (18,685,773)
-------------
Net Assets--Equivalent to $10.62 per share based on 9,287,994
shares of capital stock outstanding (market price--$10.4375) ... $ 98,642,707
=============
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended August 31, 1999
========================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned ........................ $ 14,315,979
(Note 1d): Dividends ........................................... 269,318
Other ............................................... 133,765
------------
Total income ........................................ 14,719,062
------------
========================================================================================================
Expenses: Loan interest expense (Note 5) ...................... $ 1,834,528
Investment advisory fees (Note 2) ................... 677,649
Accounting services (Note 2) ........................ 87,071
Borrowing cost (Note 5) ............................. 68,885
Professional fees ................................... 67,874
Transfer agent fees ................................. 47,742
Directors' fees and expenses ........................ 40,702
Printing and shareholder reports .................... 32,584
Custodian fees ...................................... 16,892
Pricing services .................................... 12,477
Listing fees ........................................ 10,780
Amortization of organization expenses (Note 1e) ..... 2,731
Other ............................................... 17,255
------------
Total expenses ...................................... 2,917,170
------------
Investment income--net .............................. 11,801,892
------------
========================================================================================================
Realized & Unreal- Realized loss on investments--net ................... (4,578,158)
lized Loss on Change in unrealized depreciation on investments--net (1,109,456)
Investments--Net ------------
(Notes 1b, 1d & 3) Net Increase in Net Assets Resulting from Operations $ 6,114,278
============
========================================================================================================
</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: 1999 1998
==============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ............................................ $ 11,801,892 $ 11,959,872
Realized gain (loss) on investments--net .......................... (4,578,158) 465,030
Change in unrealized depreciation on investments--net ............. (1,109,456) (16,606,355)
------------- -------------
Net increase (decrease) in net assets resulting from operations ... 6,114,278 (4,181,453)
------------- -------------
==============================================================================================================================
Dividends to Investment income--net ............................................ (12,384,283) (11,911,167)
Shareholders (Note 1f): ------------- -------------
Net decrease in net assets resulting from dividends to shareholders (12,384,283) (11,911,167)
------------- -------------
==============================================================================================================================
Capital Share Value of shares issued to Common Stock shareholders in reinvestment
Transactions (Note 4): of dividends ...................................................... 2,353,724 2,748,856
------------- -------------
==============================================================================================================================
Net Assets: Total decrease in net assets ...................................... (3,916,281) (13,343,764)
Beginning of year ................................................. 102,558,988 115,902,752
------------- -------------
End of year* ...................................................... $ 98,642,707 $ 102,558,988
============= =============
==============================================================================================================================
*Undistributed investment income--net (Note 1g) .................... $ 387,188 $ 820,074
============= =============
==============================================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended August 31, 1999
===================================================================================================
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations ....... $ 6,114,278
Operating Activities: Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Decrease in receivables ................................. 108,800
Decrease in other assets ................................ 22,549
Increase in other liabilities ........................... 7,475
Realized and unrealized loss on investments--net ........ 5,687,614
Amortization of discount ................................ (2,538,419)
------------
Net cash provided by operating activities .................. 9,402,297
------------
===================================================================================================
Cash Used for Proceeds from sales of long-term investments ............... 75,523,612
Investing Activities: Purchases of long-term investments ......................... (76,865,006)
Purchases of short-term investments ........................ (82,405,758)
Proceeds from sales and maturities of short-term investments 82,918,000
------------
Net cash used for investing activities ..................... (829,152)
------------
===================================================================================================
Cash Used for Cash receipts from borrowings .............................. 56,700,000
Financing Activities: Cash payments on borrowings ................................ (55,000,000)
Dividends paid to shareholders ............................. (10,077,261)
------------
Net cash used for financing activities ..................... (8,377,261)
------------
===================================================================================================
Cash: Net increase in cash ....................................... 195,884
Cash at beginning of year .................................. 681
------------
Cash at end of year ........................................ $ 196,565
============
===================================================================================================
Cash Flow Information: Cash paid for interest ..................................... $ 1,860,045
============
===================================================================================================
Non-Cash Capital shares issued on reinvestment of dividends paid
Financing Activities: to shareholders ............................................ $ 2,353,724
============
===================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have
been derived from information provided in the
financial statements. For the Year Ended August 31,
------------------------------------------------------------
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 year ............ $ 11.30 $ 13.07 $ 12.56 $ 12.44 $ 12.37
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ..................... 1.30 1.33 1.26 1.35 1.40
Realized and unrealized gain (loss) on
investments--net (.63) (1.77) .52 .15 .10
-------- -------- -------- -------- --------
Total from investment operations .............. .67 (.44) 1.78 1.50 1.50
-------- -------- -------- -------- --------
Less dividends from investment income--net .... (1.35) (1.33) (1.27) (1.38) (1.43)
-------- -------- -------- -------- --------
Net asset value, end of year .................. $ 10.62 $ 11.30 $ 13.07 $ 12.56 $ 12.44
======== ======== ======== ======== ========
Market price per share, end of year ........... $10.4375 $ 11.125 $ 13.44 $ 13.00 $ 12.00
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on net asset value per share ............ 6.08% (4.10%) 14.91% 12.71% 13.41%
Return:* ======== ======== ======== ======== ========
Based on market price per share ............... 5.90% (8.16%) 14.14% 20.94% 11.61%
======== ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses, excluding interest expense .......... 1.07% .89% .81% .81% .86%
Net Assets: ======== ======== ======== ======== ========
Expenses ...................................... 2.87% 2.06% 1.22% 1.65% 2.49%
======== ======== ======== ======== ========
Investment income--net ........................ 11.62% 10.35% 9.23% 9.15% 8.73%
======== ======== ======== ======== ========
==================================================================================================================================
Leverage: Amount of borrowings outstanding, end of
year (in thousands) ........................... $ 34,600 $ 32,900 $ 13,000 $ 9,250 $ 19,750
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the year (in thousands) ................ $ 34,078 $ 23,036 $ 8,433 $ 16,948 $ 21,336
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the year ..................... $ 3.71 $ 2.57 $ .97 $ 1.98 $ 2.55
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of year (in thousands) ........ $ 98,643 $102,559 $115,903 $108,391 $106,054
Data: ======== ======== ======== ======== ========
Portfolio turnover ............................ 56.58% 45.73% 70.76% 69.75% 61.97%
======== ======== ======== ======== ========
==================================================================================================================================
</TABLE>
+ Based on average shares outstanding.
* 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
charges.
See Notes to Financial Statements.
12 & 13
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
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. 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 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 main tains 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 orga nization expenses are
amortized on a straight-line basis over a period not exceeding five years. 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 principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $149,505 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 .50% of the Fund's average weekly net assets plus the proceeds
of any outstanding principal borrowed.
During the year ended August 31, 1999, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), $3,078 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, 1999 were $77,246,516 and $75,523,612, respectively.
Net realized losses for the year ended August 31, 1999 and net unrealized losses
as of August 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Losses Losses
- --------------------------------------------------------------------------------
Long-term investments .............. $ (4,578,158) $(18,685,773)
------------ ------------
Total .............................. $ (4,578,158) $(18,685,773)
============ ============
- --------------------------------------------------------------------------------
As of August 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $19,259,249, of which $2,962,750 related to appreciated
securities and $22,221,999 related to depreciated securities. The aggregate cost
of investments at August 31, 1999 for Federal income tax purposes was
$150,408,384.
<PAGE>
Corporate High Yield Fund II, Inc., August 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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, 1999 and August
31, 1998 increased by 211,019 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 .50% and/or LIBOR plus .50%. For the
year ended August 31, 1999, the average amount borrowed was approximately
$34,078,000 and the daily weighted average interest rate was 5.38%. For the year
ended August 31, 1999, facility and commitment fees aggregated approximately
$69,000.
6. Capital Loss Carryforward:
At August 31, 1999, the Fund had a net capital loss carryforward of
approximately $9,795,000, of which $2,626,000 expires in 2003, $3,371,000
expires in 2004, $1,021,000 expires in 2005 and $2,777,000 expires in 2007. This
amount will be available to offset like amounts of any future taxable gains.
7. Subsequent Event:
On September 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.102052 per share,
payable on September 30, 1999 to shareholders of record as of September 22,
1999.
INDEPENDENT AUDITORS' REPORT
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, 1999, 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 five-year period then ended. 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, 1999, by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
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, 1999, 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 14, 1999
16 & 17
<PAGE>
PORTFOLIO INFORMATION (unaudited)
Percent of
As of August 31, 1999 Long-Term Investments
================================================================================
Ten Largest
Holdings
Transtar Holdings LP Transtar is a transportation
holding company with seven
railroads, a Great Lakes shipping
fleet and an inland barge
operation. Transtar provides sole
rail access and primary water
transport for nearly all the steel
plants of USX. 3.2%
- --------------------------------------------------------------------------------
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 more than 225
cities, servicing more than 85% of
the US population. The company has
more than 1.2 million units in
service. 2.2
- --------------------------------------------------------------------------------
Nextlink Communications Nextlink provides local, long
Inc. distance and enhanced telephone
communications services to
commercial customers. The company
operates in 23 facilities-based
networks in 14 states. 2.1
- --------------------------------------------------------------------------------
NTL Inc. NTL provides communications
services to residential, business
and wholesale customers. The
company offers residential
telephony, cable television and
Internet access services. NTL also
provides national and international
telecommunications, and satellite
and radio communications. We hold
bonds of International Cabletel,
Inc., renamed NTL, Inc., and
wholly-owned Diamond Cable
Communications PLC. 2.0
- --------------------------------------------------------------------------------
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. 1.9
- --------------------------------------------------------------------------------
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.,
Chemical Corp. 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
- --------------------------------------------------------------------------------
Lyondell Chemical Lyondell is a global commodity
Company chemical company. The company is
the world's largest producer of
propylene oxide and produces a
variety of derivative chemicals
based on propylene oxide. Styrene
monomer and tertiary butyl alcohol
are also important products.
Lyondell's chemicals have such end
uses as flexible foam for
automotive seating and furniture,
antifreeze and coolants, personal
care products, coatings, adhesives,
sealants, resins and solvents. 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 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
- --------------------------------------------------------------------------------
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 issuers of securities
in which the Fund invests. This negative impact may be greater for companies in
foreign markets, particularly emerging markets, since they may be less prepared
for the Year 2000 Problem than domestic companies and markets. If the companies
in which the Fund invests have Year 2000 Problems, the Fund's returns could be
adversely affected.
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
William E. Zitelli, 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--8/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
