United
High Income
Fund II, Inc.
ANNUAL
REPORT
---------------------------------------
For the fiscal year ended September 30, 1996
<PAGE>
FUND MANAGER'S LETTER
- -----------------------------------------------------------------
SEPTEMBER 30, 1996
Dear Shareholder:
This report relates to the operation of United High Income Fund II, Inc.
for the fiscal year ended September 30, 1996. The discussion, graphs and tables
contained in this report provide you with information regarding the Fund's
performance during that period.
The past fiscal year has been characterized by steady economic growth and
interest rate volatility. The Federal Reserve lowered short-term interest rates
in January of 1996, but did not change interest rates during the remainder of
the fiscal year. Strong demand for higher yielding securities throughout much
of the year has positively impacted the Fund.
During the past fiscal year, we lengthened the average maturity of the
Fund's holdings. The Fund reduced its exposure to higher rated non-investment
grade debt securities that tend to underperform during periods of increased
demand for higher yielding securities. Income was reinvested in slightly lower-
rated debt securities, resulting in increased yields for the Fund.
The strategies and techniques we applied resulted in the direction of the
Fund's performance remaining fairly consistent with that of the indexes charted
on the following page. Those indexes reflect the performance of securities that
generally represent the high-yield bond market (the First Boston High Yield
Index) and the universe of funds with similar investment objectives (the Lipper
High Current Yield Bond Fund Universe Average). The Fund's performance over the
past fiscal year was slightly below the Lipper Index due to the Fund's relative
underweighting in the emerging market sector. We have avoided heavy exposure to
emerging markets, including Latin America, Asia and Eastern Europe, as a result
of political and economic uncertainties affecting such investments.
We expect continued moderate U.S. economic growth and low inflation. Such
an environment should help companies issuing lower-rated debt securities.
Accordingly, we expect demand for higher yielding investments to remain positive
and look forward to selecting attractive investment opportunities throughout the
next fiscal year.
Thank you for your continued confidence.
Respectfully,
Louise D. Rieke
Manager, United High Income Fund II, Inc.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
UNITED HIGH INCOME FUND II, INC.,
THE FIRST BOSTON HIGH YIELD INDEX,
AND THE LIPPER HIGH CURRENT YIELD BOND FUND UNIVERSE AVERAGE
United First Lipper High
High Boston Current Yield
Income High Bond Fund
Fund II, Yield Universe
Inc. Index Average
------------------ ----------
09/30/86 Purchase 9,425 10,000 10,000
09/30/87 9,980 10,598 10,615
09/30/88 11,076 12,058 11,576
09/30/89 11,293 12,727 12,194
09/30/90 10,386 11,596 10,805
09/30/91 12,843 15,878 13,468
09/30/92 15,323 19,129 16,352
09/30/93 17,326 22,129 18,834
09/30/94 17,726 22,892 19,222
09/30/95 19,720 26,111 21,489
09/30/96 22,068 28,922 24,280
==== United High Income Fund II, Inc. -- $22,068*
++++ First Boston High Yield Index -- $28,922
---- Lipper High Current Yield Bond Fund Universe Average -- $24,280
*The value of the investment in the Fund is impacted by the sales load at the
time of the investment and by the ongoing expenses of the Fund.
Average Annual Total Return +
Class A++ Class Y
-----------------------------
Year Ended
9/30/96 5.47% N/A
5 Years Ended
9/30/96 10.12% N/A
10 Years Ended
9/30/96 8.24% N/A
Aggregate Total
Return for Life
of Class Y +++ N/A 5.00%
+ Total return for the Class Y shares may be greater than that of the Class A
shares because the Fund's Class Y shares are not subject to a sales load or
12b-1 fees.
++ Performance data quoted represents past performance and is based on
deduction of a 5.75% sales load on the initial purchase in each of the
three periods. Investment return and principal value will fluctuate and an
investor's shares, when redeemed, may be worth more or less than their
original cost.
+++ 2/27/96 (the date on which Fund Class Y shares were first acquired by
shareholders) through 9/30/96.
Past performance is not predictive of future performance. Indexes are
unmanaged.
<PAGE>
SHAREHOLDER SUMMARY
- --------------------------------------------------------------
United High Income Fund II, Inc.
PORTFOLIO STRATEGY:
Invests generally in High- OBJECTIVE: High level of current
Risk, High-Yield Fixed Income income, by investing
Securities primarily in a diversified portfolio of
Maximum 20% Common Stock high-yield, high-risk fixed income
securities, with a secondary objective
of capital growth when consistent
with the primary objective.
STRATEGY: Invests generally in debt securities in
lower rating categories as classified by
recognized rating agencies; may also
invest up to 20% in common stocks. (May
purchase securities subject to
repurchase agreements. May invest in
certain options and futures.)
FOUNDED: 1986
SCHEDULED DIVIDEND FREQUENCY: MONTHLY
PERFORMANCE SUMMARY -- Class A Shares
PER SHARE DATA
For the Fiscal Year Ended September 30, 1996
- --------------------------------------------
DIVIDENDS PAID $0.35
=====
NET ASSET VALUE ON
9/30/96 $4.14
9/30/95 4.03
-----
CHANGE PER SHARE $0.11
=====
Past performance is not necessarily indicative of future results.
TOTAL RETURN HISTORY
Average Annual Total Return
---------------------------
With Without
Period Sales Load* Sales Load**
- ------ ---------- ----------
1-year period ended 9-30-96 5.47% 11.90%
5-year period ended 9-30-96 10.12% 11.43%
10-year period ended 9-30-96 8.24% 8.88%
*Performance data quoted represents past performance and is based on deduction
of 5.75% sales load on the initial purchase in each of the three periods.
**Performance data quoted in this column represents past performance without
taking into account the sales load deducted on an initial purchase.
Investment return and principal value will fluctuate and an investor's shares,
when redeemed, may be worth more or less than their original cost.
<PAGE>
PORTFOLIO HIGHLIGHTS
On September 30, 1996, United High Income Fund II, Inc. had net assets totaling
$369,719,018 invested in a diversified portfolio of:
89.38% Corporate Debt Securities
5.31% Cash and Cash Equivalents
5.31% Common and Preferred Stocks and Warrants
As a shareholder of United High Income Fund II, Inc., for every $100 you had
invested on September 30, 1996, your Fund owned:
$28.95 Manufacturing Bonds
23.00 Transportation, Communication, Electric
and Sanitary Services Bonds
20.96 Services Bonds
9.52 Wholesale and Retail Trade Bonds
5.31 Cash and Cash Equivalents
5.31 Common and Preferred Stocks and Warrants
2.66 Finance, Insurance and Real Estate Bonds
1.54 Mining Bonds
1.39 Miscellaneous Investing Institutions Bonds
0.80 Contract Construction Bonds
0.56 Agriculture, Forestry and Fisheries Bonds
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Shares Value
COMMON AND PREFERRED STOCKS
AND WARRANTS
Amusement and Recreation Services - 0.20%
Trump Hotels & Casino Resorts, Inc.* . 31,250 $ 726,563
Business Services - 0.16%
Bell & Howell Company* ............... 18,750 595,312
Communication - 0.98%
Infinity Broadcasting Corporation,
Class A* ............................ 50,625 1,594,688
Jacor Communications, Inc.* .......... 25,000 856,250
Providence Journal Company (The),
Class A* ............................ 40,000 1,175,000
Total ............................... 3,625,938
Depository Institutions - 0.15%
California Federal Bank, F.S.B.,
Preferred, Series B ................. 5,000 551,250
Electric, Gas and Sanitary Services - 0.39%
Consolidated Hydro, Inc., Preferred* . 3,000 190,950
Consolidated Hydro, Inc., Warrants (A)* 5,400 5
El Paso Electric Company, Preferred* . 10,000 1,150,000
IntelCom Group Inc., Warrants (A)* ... 7,425 107,663
Total ............................... 1,448,618
General Building Contractors - 1.67%
Walter Industries, Inc.* ............. 482,265 6,178,779
Health Services - 0.29%
Beverly Enterprises, Inc.* ........... 100,000 1,087,500
Holding and Other Investment Offices - 0.25%
National Health Investors, Inc. ...... 27,150 906,131
Lumber and Wood Products - 0.69%
Triangle Pacific Corp.* .............. 127,442 2,540,811
Motion Pictures - 0.27%
Film Roman, Inc.* .................... 100,000 1,000,000
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Shares Value
COMMON AND PREFERRED STOCKS AND
WARRANTS (Continued)
Printing and Publishing - 0.25%
K-III Communications Corporation,
Preferred ........................... 10,000 $ 934,000
Miscellaneous Securities - 0.01%
Plastic Specialties and Technologies,
Inc.* .............................. 20,000 20,000
Reliance Group Holdings, Inc.,
Warrants*............................ 1,061 2,553
Total ............................... 22,553
TOTAL COMMON AND PREFERRED STOCKS
AND WARRANTS - 5.31% $ 19,617,455
(Cost: $21,124,169)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Agricultural Services - 0.56%
Hines Horticulture, Inc.,
11.75%, 10-15-2005 .................. $ 2,000 2,057,500
Amusement and Recreation Services - 5.97%
American Skiing Company,
12.0%, 7-15-2006 (A) ................ 2,500 2,481,250
Argosy Gaming Company:
12.0%, 6-1-2001, Convertible ........ 1,000 900,000
13.25%, 6-1-2004 (A) ................ 1,500 1,492,500
California Hotel Finance Corporation,
11.0%, 12-1-2002 .................... 2,250 2,362,500
Casino America, Inc.,
12.5%, 8-1-2003 ..................... 3,000 3,138,750
GNS Finance Corp.,
9.25%, 3-15-2003 .................... 1,500 1,552,500
Harrah's Operating Company, Inc.,
10.875%, 4-15-2002 .................. 2,000 2,130,000
Rio Hotel & Casino, Inc.,
10.625%, 7-15-2005 .................. 2,000 2,100,000
Showboat Marina Casino Partnership,
13.5%, 3-15-2003 .................... 1,500 1,627,500
Trump Atlantic City Associates,
11.25%, 5-1-2006 .................... 2,000 1,970,000
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 .................... 2,000 2,320,000
Total ............................... 22,075,000
Building Materials and Garden Supplies - 0.57%
Orchard Supply Hardware Stores Corporation,
9.375%, 2-15-2002 ................... 2,000 2,115,000
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Business Services - 2.74%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 ................... $ 1,500 $ 1,558,125
Bell & Howell Company,
10.75%, 10-1-2002 ................... 1,750 1,846,250
Heritage Media Corporation,
8.75%, 2-15-2006 .................... 1,000 945,000
Lamar Advertising Company,
11.0%, 5-15-2003 .................... 2,000 2,095,000
Multicare Companies, Inc. (The),
12.5%, 7-1-2002 ..................... 415 459,613
Protect One, Convertible,
6.75%, 9-15-2003 .................... 2,000 1,957,500
Scotsman Group, Inc.,
9.5%, 12-15-2000 .................... 1,250 1,253,125
Total ............................... 10,114,613
Chemicals and Allied Products - 3.17%
Revlon Worldwide Corporation,
0.0%, 3-15-98 ....................... 4,250 3,729,375
UCC Investors Holding, Inc.:
10.5%, 5-1-2002 ..................... 5,500 5,802,500
0.0%, 5-1-2005 (B) .................. 2,500 2,187,500
Total ............................... 11,719,375
Communication - 21.48%
Adelphia Communications Corporation,
12.5%, 5-15-2002 .................... 4,000 4,220,000
Allbritton Communications Company,
9.75%, 11-30-2007 ................... 2,000 1,935,000
American Radio Systems Corporation,
9.0%, 2-1-2006 ...................... 1,500 1,455,000
Arch Communications Group, Inc.,
0.0%, 3-15-2008 (B) ................. 1,000 560,000
Argyle Television Operations, Inc.,
9.75%, 11-1-2005 .................... 3,000 3,000,000
Brooks Fiber Properties, Inc.,
0.0%, 3-1-2006 (B) .................. 2,500 1,537,500
CS Wireless Systems, Inc., Units,
0.0%, 3-1-2006 (A)(B)(C)............. 100 2,060,000
Cablevision Industries Corporation,
9.25%, 4-1-2008 ..................... 2,000 2,055,600
Cablevision Systems Corporation,
10.75%, 4-1-2004 .................... 1,500 1,541,250
CenCall Communications Corp.,
0.0%, 1-15-2004 (B).................. 2,500 1,650,000
COMCAST CELLULAR CORPORATION,
0.0%, 3-5-2000 ...................... 2,200 1,545,500
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
Comcast Corporation,
9.5%, 1-15-2008 ..................... $ 4,000 $ 4,075,000
Comcast UK Cable Partners Limited,
0.0%, 11-15-2007 (B) ................ 4,000 2,535,000
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (B) ................ 1,000 645,000
Granite Broadcasting Corporation:
10.375%, 5-15-2005 .................. 1,000 1,010,000
9.375%, 12-1-2005 ................... 1,500 1,440,000
Infinity Broadcasting Corporation,
10.375%, 3-15-2002 .................. 2,500 2,637,500
InterCel, Inc., Units,
0.0%, 2-1-2006 (B)(D) ............... 18 1,019,375
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (B) ................. 2,250 1,406,250
Jacor Communications, Inc.,
10.125%, 6-15-2006 .................. 1,000 1,030,000
MFS Communications Company, Inc.:
0.0%, 1-15-2004 (B) ................. 2,475 2,079,000
0.0%, 1-15-2006 (B) ................. 2,500 1,750,000
Marcus Cable Operating Company, L. P.,
0.0%, 8-1-2004 (B) .................. 3,500 2,730,000
Metrocall, Inc.,
10.375%, 10-1-2007 .................. 1,000 830,000
Microcell Telecommunications Inc., Units,
0.0%, 6-1-2006 (A)(B)(E) ............ 5,000 2,800,000
PanAmSat, L.P.:
9.75%, 8-1-2000 ..................... 2,500 2,637,500
0.0%, 8-1-2003 (B) .................. 5,000 4,550,000
RSL Communications, Ltd., Units,
12.25%, 11-15-2006 (A)(F) ........... 1,000 1,000,000
Rifkin Acquisition Partners, L.L.L.P.,
11.125%, 1-15-2006 .................. 1,500 1,545,000
Rogers Cantel Inc.,
9.375%, 6-1-2008 .................... 1,500 1,481,250
Rogers Communications Inc.,
9.125%, 1-15-2006 ................... 3,000 2,835,000
SFX Broadcasting, Inc.,
10.75%, 5-15-2006 ................... 1,500 1,560,000
Shared Technologies Fairchild
Communications Corp.,
0.0%, 3-1-2006 (B) .................. 1,000 787,500
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (B) ................. 3,500 2,047,500
Sullivan Broadcasting Company, Inc.,
10.25%, 12-15-2005 .................. 500 497,500
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
Teleport Communications Group Inc.:
9.875%, 7-1-2006 .................... $ 1,000 $ 1,025,000
0.0%, 7-1-2007 (B) .................. 1,750 1,120,000
USA Mobile Communications, Inc. II,
9.5%, 2-1-2004 ...................... 1,000 960,000
United International Holdings, Inc.,
0.0%, 11-15-99 ...................... 2,500 1,737,500
Vanguard Cellular Systems, Inc.,
9.375%, 4-15-2006 ................... 1,000 990,000
Viacom International Inc.,
8.0%, 7-7-2006 ...................... 6,000 5,602,500
Videotron Plc,
0.0%, 8-15-2005 (B) ................. 2,250 1,490,625
Total ............................... 79,413,850
Depository Institutions - 0.28%
First Nationwide Escrow Corp.,
10.625%, 10-1-2003 (A) .............. 1,000 1,046,250
Eating and Drinking Places - 0.27%
Foodmaker, Inc.,
9.25%, 3-1-99 ....................... 1,000 1,000,000
Electric, Gas and Sanitary Services - 0.96%
El Paso Electric Company,
8.9%, 2-1-2006 ...................... 2,000 2,024,140
IntelCom Group Inc.,
0.0%, 9-15-2005 (B) ................. 2,250 1,507,500
Total ............................... 3,531,640
Electronic and Other Electric Equipment - 2.40%
A+ Network, Inc.,
11.875%, 11-1-2005 .................. 1,500 1,458,750
Advanced Micro Devices, Inc.,
11.0%, 8-1-2003 ..................... 1,000 1,032,500
Communications & Power Industries,
Inc.,
12.0%, 8-1-2005 ..................... 2,000 2,172,500
Exide Corporation:
0.0%, 12-15-2004 (B) ................ 1,000 900,000
10.0%, 4-15-2005 .................... 1,500 1,537,500
Harmon Industries, Inc.,
12.0%, 8-1-2002 ..................... 1,635 1,790,325
Total ............................... 8,891,575
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Engineering and Management Services - 0.55%
Essex Group, Inc.,
10.0%, 5-1-2003 ..................... $ 2,000 $ 2,050,000
Fabricated Metal Products - 1.34%
American Safety Razor Company,
9.875%, 8-1-2005 .................... 2,000 2,045,000
Nortek, Inc.,
9.875%, 3-1-2004 .................... 3,000 2,910,000
Total ............................... 4,955,000
Food and Kindred Products - 1.00%
Dr Pepper Bottling Holdings, Inc.,
0.0%, 2-15-2003 (B) ................. 1,000 920,000
Specialty Foods Corporation:
10.25%, 8-15-2001 ................... 2,000 1,840,000
11.125%, 10-1-2002 .................. 1,000 930,000
Total ............................... 3,690,000
Food Stores - 4.19%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 .................... 1,500 1,440,000
Bruno's, Inc.,
10.5%, 8-1-2005 ..................... 2,000 2,050,000
Dominick's Finer Foods, Inc.,
10.875%, 5-1-2005 ................... 1,000 1,082,500
Jitney-Jungle Stores of America, Inc.,
12.0%, 3-1-2006 ..................... 1,500 1,593,750
Penn Traffic Company (The):
10.25%, 2-15-2002 ................... 3,500 3,080,000
10.65%, 11-1-2004 ................... 2,500 2,100,000
Ralphs Grocery Company,
10.45%, 6-15-2004 ................... 2,500 2,534,375
Smith's Food & Drug Centers, Inc.,
11.25%, 5-15-2007 ................... 1,500 1,593,750
Total ............................... 15,474,375
Furniture and Fixtures - 1.07%
Lear Seating Corporation,
8.25%, 2-1-2002 ..................... 4,000 3,940,000
General Building Contractors - 0.80%
Beazer Homes USA, Inc.,
9.0%, 3-1-2004 ...................... 1,500 1,410,000
NVR L.P.,
11.0%, 4-15-2003 .................... 1,500 1,552,500
Total ............................... 2,962,500
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
General Merchandise Stores - 0.59%
Kmart Funding Corporation,
8.99%, 7-5-2010 ..................... $ 2,500 $ 2,175,000
Health Services - 5.52%
Abbey Healthcare Group Incorporated,
9.5%, 11-1-2002 ..................... 2,000 2,060,000
General Medical Corporation:
10.875%, 8-15-2003 .................. 3,000 3,075,000
12.125%, 8-15-2005 .................. 2,529 2,515,016
Paracelsus Healthcare Corporation,
10.0%, 8-15-2006 .................... 2,000 2,070,000
Quorum Health Group, Inc.:
11.875%, 12-15-2002 ................. 4,000 4,410,000
8.75%, 11-1-2005 .................... 2,000 2,005,000
Regency Health Services, Inc.,
9.875%, 10-15-2002 .................. 1,000 1,005,000
Tenet Healthcare Corporation:
9.625%, 9-1-2002 .................... 1,000 1,085,000
10.125%, 3-1-2005 ................... 2,000 2,170,000
Total ............................... 20,395,016
Holding and Other Investment Offices - 1.39%
Grupo Industrial Durango, S.A. de C.V.,
12.625%, 8-1-2003 ................... 2,000 2,117,500
LTC Properties, Inc., Convertible:
8.5%, 1-1-2000 ...................... 2,000 2,015,000
8.5%, 1-1-2001 ...................... 1,000 1,025,000
Total ............................... 5,157,500
Hotels and Other Lodging Places - 4.92%
GNF, CORP.,
10.625%, 4-1-2003 ................... 1,500 1,642,500
HMC Acquisition Properties, Inc.,
9.0%, 12-15-2007 .................... 1,500 1,441,875
LaQuinta Motor Inns, Inc.,
9.25%, 5-15-2003 .................... 4,000 4,080,000
Premier Parks, Inc.,
12.0%, 8-15-2003 .................... 1,000 1,078,750
Prime Hospitality Corp.,
9.25%, 1-15-2006 .................... 2,000 2,010,000
Red Roof Inns, Inc.,
9.625%, 12-15-2003 .................. 1,500 1,462,500
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Hotels and Other Lodging Places (Continued)
Showboat, Inc.,
9.25%, 5-1-2008 ..................... $ 4,000 $ 3,990,000
Station Casinos, Inc.,
10.125%, 3-15-2006 .................. 1,500 1,473,750
Wyndham Hotel Corporation,
10.5%, 5-15-2006 .................... 1,000 1,026,250
Total ............................... 18,205,625
Industrial Machinery and Equipment - 2.86%
American Standard Inc.:
0.0%, 6-1-2005 (B) .................. 4,750 4,358,125
9.25%, 12-1-2016 .................... 1,500 1,530,000
Collins & Aikman Products Co.,
11.5%, 4-15-2006 .................... 2,500 2,631,250
Fairfield Manufacturing Company, Inc.,
11.375%, 7-1-2001 ................... 2,000 2,050,000
Total ............................... 10,569,375
Instruments and Related Products - 2.78%
Dade International Inc.,
11.125%, 5-1-2006 (A) ............... 1,000 1,070,000
IVAC Corporation,
9.25%, 12-1-2002 .................... 1,000 1,012,500
Mark IV Industries, Inc.,
8.75%, 4-1-2003 ..................... 5,000 5,100,000
Maxxim Medical, Inc.,
10.5%, 8-1-2006 (A) ................. 3,000 3,112,500
Total ............................... 10,295,000
Insurance Carriers - 0.99%
Aetna Industries, Inc.,
11.875%, 10-1-2006 (A) .............. 1,000 1,020,000
American Annuity Group, Inc.,
9.5%, 8-15-2001 ..................... 2,500 2,631,250
Total ............................... 3,651,250
Lumber and Wood Products - 0.70%
Triangle Pacific Corp.,
10.5%, 8-1-2003 ..................... 2,500 2,600,000
Metal Mining - 0.16%
UCAR Global Enterprises Inc.,
12.0%, 1-15-2005 .................... 515 587,743
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Miscellaneous Manufacturing Industries - 0.63%
E&S Holdings Corporation,
10.375%, 10-1-2006 (A) .............. $ 1,250 $ 1,281,250
Shop Vac Corporation,
10.625%, 9-1-2003 (A) ............... 1,000 1,030,000
Total ............................... 2,311,250
Miscellaneous Retail - 2.20%
Eckerd Corporation,
9.25%, 2-15-2004 .................... 5,500 5,568,750
Michaels Stores, Inc.,
10.875%, 6-15-2006 .................. 2,500 2,550,000
Total ............................... 8,118,750
Motion Pictures - 0.97%
Cobb Theatres, L.L.C.,
10.625%, 3-1-2003 ................... 1,500 1,545,000
Plitt Theatres, Inc.,
10.875%, 6-15-2004 .................. 2,000 2,025,000
Total ............................... 3,570,000
Nondepository Institutions - 1.39%
First Nationwide Holdings Inc.,
12.5%, 4-15-2003 .................... 1,500 1,623,750
GP Group, Inc.,
8.75%, 12-15-98 ..................... 3,500 3,526,250
Total ............................... 5,150,000
Oil and Gas Extraction - 1.38%
Falcon Drilling, Inc.,
9.75%, 1-15-2001 .................... 1,500 1,518,750
Flores & Rucks, Inc.,
9.75%, 10-1-2006 .................... 1,000 1,013,750
Noble Drilling Corporation,
9.25%, 10-1-2003 .................... 2,500 2,587,500
Total ............................... 5,120,000
Paper and Allied Products - 3.39%
Asia Pulp & Paper Company Ltd,
11.75%, 10-1-2005 ................... 2,000 2,070,000
Container Corporation of America,
10.75%, 5-1-2002 .................... 2,000 2,100,000
Fort Howard Corporation:
9.25%, 3-15-2001 .................... 2,000 2,040,000
11.0%, 1-2-2002 ..................... 4,079 4,267,903
Four M Corporation,
12.0%, 6-1-2006 (A) ................. 1,000 1,060,000
Mail-Well Corporation,
10.5%, 2-15-2004 .................... 1,000 980,000
Total ............................... 12,517,903
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Personal Services - 0.29%
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 (A) ............... $ 1,000 $ 1,067,500
Primary Metal Industries - 1.12%
Commonwealth Aluminum Corporation,
10.75%, 10-1-2006 (A) ............... 2,000 2,050,000
Oregon Steel Mills, Inc.,
11.0%, 6-15-2003 .................... 2,000 2,102,500
Total ............................... 4,152,500
Printing and Publishing - 2.92%
American Media Operations, Inc.,
11.625%, 11-15-2004 ................. 3,000 3,157,500
Big Flower Press, Inc.,
10.75%, 8-1-2003 .................... 1,667 1,704,508
Herff Jones, Inc.,
11.0%, 8-15-2005 .................... 2,000 2,115,000
Jordan Industries, Inc.,
10.375%, 8-1-2003 ................... 3,000 2,895,000
K-III Communications Corporation,
8.5%, 2-1-2006 ...................... 1,000 930,000
Total ............................... 10,802,008
Rubber and Miscellaneous Plastics Products - 0.50%
RBX Corporation,
11.25%, 10-15-2005 .................. 2,000 1,880,000
Stone, Clay and Glass Products - 1.80%
Owens-Illinois, Inc.:
10.0%, 8-1-2002 ..................... 2,000 2,080,000
9.75%, 8-15-2004 .................... 4,500 4,590,000
Total ............................... 6,670,000
Textile Mill Products - 1.62%
Avondale Mills, Inc.,
10.25%, 5-1-2006 (A) ................ 1,000 1,020,000
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 .................... 2,000 1,975,000
WestPoint Stevens Inc.,
9.375%, 12-15-2005 .................. 3,000 3,007,500
Total ............................... 6,002,500
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Transportation Equipment - 1.65%
Greenwich Air Services, Inc.,
10.5%, 6-1-2006 ..................... $ 2,500 $ 2,568,750
Silgan Corporation,
13.25%, 12-15-2002 .................. 1,000 1,015,000
Walbro Corporation,
9.875%, 7-15-2005 ................... 1,000 1,020,000
Westinghouse Air Brake Company,
9.375%, 6-15-2005 ................... 1,500 1,488,750
Total ............................... 6,092,500
Transportation Services - 0.28%
Core-Mark International, Inc.,
11.375%, 9-15-2003 (A) .............. 1,000 1,025,000
Trucking and Warehousing - 0.28%
Iron Mountain Incorporated,
10.125%, 10-1-2006 .................. 1,000 1,025,000
Wholesale Trade - Durable Goods - 0.28%
Alvey Systems, Inc.,
11.375%, 1-31-2003 .................. 1,000 1,047,500
Wholesale Trade - Nondurable Goods - 1.42%
Corporate Express, Inc.,
9.125%, 3-15-2004 ................... 2,000 1,997,500
LaRoche Industries Inc.,
13.0%, 8-15-2004 .................... 500 547,500
United Stationers Supply Co.,
12.75%, 5-1-2005 .................... 2,500 2,703,125
Total ............................... 5,248,125
TOTAL CORPORATE DEBT SECURITIES - 89.38% $330,473,723
(Cost: $322,618,459)
TOTAL SHORT-TERM SECURITIES - 3.34% $ 12,341,873
(Cost: $12,341,873)
TOTAL INVESTMENT SECURITIES - 98.03% $362,433,051
(Cost: $356,084,501)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.97% 7,285,967
NET ASSETS - 100.00% $369,719,018
See Notes to Schedule of Investments on pages 17 - 18.
<PAGE>
THE INVESTMENTS OF
UNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1996
Notes to Schedule of Investments
* No income dividends were paid during the preceding 12 months.
(A) As of September 30, 1996, the following restricted securities were
owned: Shares/
Principal
Acquisition Amount Market
Security Date in 000's Cost Value
-------- ----------- --------------------------------
Consolidated Hydro, Inc.,
Warrants 6/15/93 5,400$ 127,817$ 5
IntelCom Group Inc.,
Warrants 8/3/95 7,425 28,881 107,663
Aetna Industries, Inc.,
11.875%, 10-1-2006 8/8/96 $1,000 1,000,000 1,020,000
American Skiing Company,
12.0%, 7-15-2006 6/25/96 2,500 2,429,125 2,481,250
Argosy Gaming Company,
13.25%, 6-1-2004 5/31/96 1,500 1,500,000 1,492,500
Avondale Mills, Inc.,
10.25% 5-1-2006 4/23/96 1,000 984,700 1,020,000
Commonwealth Aluminum Corporation,
10.75%, 10-1-2006 9/16/96 1,000 1,000,000 1,025,000
9/19/96 1,000 1,012,500 1,025,000
Core-Mark International, Inc.,
11.375%, 9-15-2003 9/24/96 1,000 1,000,000 1,025,000
CS Wireless Systems, Inc.,
Units,
0.0%, 3-1-2006 2/16/96 100 2,294,840 2,060,000
Dade International Inc.,
11.125%, 5-1-2006 4/30/96 1,000 1,000,000 1,070,000
E&S Holdings Corporation,
10.375%, 10-1-2006 9/24/96 750 750,000 768,750
9/25/96 500 508,750 512,500
First Nationwide Escrow Corp.,
10.625%, 10-1-2003 9/13/96 1,000 1,000,000 1,046,250
Four M Corporation,
12.0%, 6-1-2006 5/23/96 1,000 1,000,000 1,060,000
Maxxim Medical, Inc.,
10.5%, 8-1-2006 7/18/96
to 9/11/96 3,000 3,030,313 3,112,500
Microcell Telecommunications
Inc., Units,
0.0%, 6-1-2006 6/13/96 5,000 2,392,500 2,800,000
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 8/13/96 1,000 1,000,000 1,067,500
RSL Communications, Ltd., Units,
12.25%, 11-15-2006 9/30/96 1,000 1,000,000 1,000,000
Shop Vac Corporation,
10.625%, 9-1-2003 9/25/96 1,000 1,000,000 1,030,000
----------------------
$24,059,426$24,723,918
======================
The total market value of restricted securities represents approximately
6.69% of the total net assets at September 30, 1996.
(B) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(C) Each Unit consists of 1 senior discount note due 3/1/2006 and 1.1 shares of
common stock.
(D) Each Unit consists of 10 senior discount notes due 2/1/2006 and 32
warrants.
(E) Each Unit consists of $1,000 principal amount at maturity of senior
discount notes due 2006, four initial warrants to purchase Class B non-
voting shares of Microcell and four conditional warrants to purchase Class
B shares.
(F) Each Unit consists of one 12.25% senior note due 2006 and one warrant to
purchase Class A common stock.
See Note 1 to financial statements for security valuation and other significant
accounting policies concerning investments.
See Note 3 to financial statements for cost and unrealized appreciation and
depreciation of investments owned for Federal income tax purposes.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
Assets
Investment securities -- at value (Notes 1 and 3) $362,433,051
Cash ............................................. 80,932
Receivables:
Interest and dividends .......................... 7,156,213
Investment securities sold ...................... 6,470,431
Fund shares sold ................................ 282,902
Prepaid insurance premium ........................ 15,629
Other assets ..................................... 5,836
------------
Total assets .................................. 376,444,994
------------
Liabilities
Payable for investment securities purchased ...... 5,028,750
Payable for Fund shares redeemed ................. 1,272,009
Dividends payable ................................ 256,879
Accrued service fee .............................. 116,100
Accrued transfer agency and dividend disbursing .. 47,238
Accrued accounting services fee .................. 5,000
------------
Total liabilities ............................. 6,725,976
------------
Total net assets ............................. $369,719,018
============
Net Assets
$1.00 par value capital stock
Capital stock ................................... $ 89,344,925
Additional paid-in capital ...................... 323,850,681
Accumulated undistributed gain (loss):
Accumulated undistributed net realized
loss on investment transactions ............... (49,825,138)
Net unrealized appreciation in value of
investments at end of period .................. 6,348,550
------------
Net assets applicable to outstanding
units of capital ............................. $369,719,018
============
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $4.14
Class Y .......................................... $4.14
Capital shares outstanding
Class A .......................................... 88,946,257
Class Y .......................................... 398,668
Capital shares authorized .......................... 400,000,000
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1996
Investment Income
Income:
Interest ....................................... $34,753,551
Dividends ....................................... 275,305
-----------
Total income .................................. 35,028,856
-----------
Expenses (Note 2):
Investment management fee ....................... 2,048,451
Transfer agency and dividend disbursing - Class A 582,124
Service fee - Class A ........................... 555,154
Legal fees ...................................... 63,218
Accounting services fee ......................... 60,000
Audit fees ...................................... 27,274
Custodian fees .................................. 21,331
Shareholder servicing - Class Y.................. 1,419
Other ........................................... 113,000
-----------
Total expenses ................................ 3,471,971
-----------
Net investment income ........................ 31,556,885
-----------
Realized and Unrealized Gain (Loss) on Investments
Realized net loss on securities .................. (305,611)
Realized net loss on foreign
currency transactions ........................... (2,475)
---------
Realized net loss in investments ................ (308,086)
Unrealized appreciation in value of investments
during the period ............................... 9,597,709
-----------
Net gain on investments ......................... 9,289,623
-----------
Net increase in net assets resulting
from operations .............................. $40,846,508
===========
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the fiscal year ended
September 30,
-------------------------
1996 1995
------------ ------------
Increase in Net Assets
Operations:
Net investment income ...............$ 31,556,885 $ 32,004,221
Realized net loss on
investments ...................... (308,086) (9,062,829)
Unrealized appreciation ............. 9,597,709 15,239,840
------------ ------------
Net increase in net assets
resulting from operations ........ 40,846,508 38,181,232
------------ ------------
Dividends to shareholders from
net investment income:*
Class A ............................. (31,472,032) (32,004,221)
Class Y ............................. (82,378) ---
------------ ------------
(31,554,410) (32,004,221)
------------ ------------
Capital share transactions:
Proceeds from sale of shares
Class A (6,019,156 and 7,993,791
shares, respectively) ............ 24,540,706 31,537,803
Class Y (399,081 and 0
shares, respectively) ............ 1,655,574 ---
Proceeds from reinvestment of
dividends
Class A (6,888,364 and 7,199,082
shares, respectively) ............ 28,126,443 28,417,425
Class Y (19,867 and 0
shares, respectively) ............ 81,059 ---
Payments for shares redeemed
Class A (15,121,588 and 15,495,006
shares, respectively) ............ (61,675,274) (60,993,212)
Class Y (20,280 and 0
shares, respectively) ............ (83,233) ---
------------ ------------
Net decrease in net assets
resulting from capital
share transactions ............... (7,354,725) (1,037,984)
------------ ------------
Total increase ................... 1,937,373 5,139,027
Net Assets
Beginning of period .................. 367,781,645 362,642,618
------------ ------------
End of period ........................$369,719,018 $367,781,645
============ ============
Undistributed net investment
income ............................ $--- $---
==== ====
*See "Financial Highlights" on pages 22 - 23.
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
Class A Shares
For a Share of Capital Stock Outstanding
Throughout Each Period:
For the fiscal year ended
September 30,
------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Net asset value,
beginning of
period ............ $4.03 $3.96 $4.21 $4.06 $3.75
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.35 0.35 0.35 0.36 0.39
Net realized and
unrealized gain
(loss) on
investments ..... 0.11 0.07 (0.25) 0.15 0.31
----- ----- ----- ----- -----
Total from investment
operations ....... 0.46 0.42 0.10 0.51 0.70
----- ----- ----- ----- -----
Less dividends declared
from net investment
income ............ (0.35) (0.35) (0.35) (0.36) (0.39)
----- ----- ----- ----- -----
Net asset value,
end of period .... $4.14 $4.03 $3.96 $4.21 $4.06
===== ===== ===== ===== =====
Total return* ...... 11.90% 11.25% 2.31% 13.07% 19.31%
Net assets, end of
period (000
omitted) ......... $368,069$367,782$362,643$380,819$345,376
Ratio of expenses to
average net assets 0.95% 0.89% 0.88% 0.80% 0.82%
Ratio of net investment
income to average
net assets ....... 8.60% 8.93% 8.41% 8.64% 9.79%
Portfolio turnover
rate ............. 55.64% 26.82% 47.05% 69.24% 80.28%
*Total return calculated without taking into account the sales load deducted
on an initial purchase.
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
FINANCIAL HIGHLIGHTS
Class Y Shares
For a Share of Capital Stock Outstanding
Throughout the Period:
For the
period
from 2/27/96
through
9/30/96*
--------
Net asset value,
beginning of period $4.15
-----
Income from investment
operations:
Net investment
income .......... 0.21
Net realized and
unrealized loss
on investments... (0.01)
-----
Total from investment
operations ........ 0.20
-----
Less dividends declared
from net investment
income ............ (0.21)
-----
Net asset value,
end of period ..... $4.14
=====
Total return ....... 5.00%
Net assets, end of
period (000
omitted) ......... $1,650
Ratio of expenses
to average net
assets ............ 0.77%**
Ratio of net
investment income
to average net
assets ............ 8.83%**
Portfolio
turnover rate ..... 55.64%**
*On January 12, 1996, the Fund began offering Class Y shares to the public.
Fund
shares outstanding prior to that date were designated Class A shares.
**Annualized.
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 -- Significant Accounting Policies
United High Income Fund II, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Its investment objective is to provide a high level of current income,
by investing primarily in a diversified portfolio of high-yield, high-risk
fixed-income securities, with a secondary objective of capital growth when
consistent with the primary objective. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles.
A. Security valuation -- Each stock and convertible bond is valued at the
latest sale price thereof on the last business day of the fiscal period as
reported by the principal securities exchange on which the issue is traded
or, if no sale is reported for a stock, the average of the latest bid and
asked prices. Bonds, other than convertible bonds, are valued using a
pricing system provided by a pricing service or dealer in bonds.
Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Stocks which are traded over-the-counter are
priced using Nasdaq (National Association of Securities Dealers Automated
Quotations System) which provides information on bid and asked or closing
prices quoted by major dealers in such stocks. Restricted securities and
securities for which market quotations are not readily available are valued
at fair value as determined in good faith under procedures established by
and under the general supervision of the Fund's Board of Directors. Short-
term debt securities are valued at amortized cost, which approximates
market.
B. Security transactions and related investment income -- Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Securities gains and losses are calculated on the
identified cost basis. Original issue discount (as defined in the Internal
Revenue Code), premiums on the purchase of bonds and post-1984 market
discount are amortized for both financial and tax reporting purposes over
the remaining lives of the bonds. Dividend income is recorded on the ex-
dividend date. Interest income is recorded on the accrual basis. See Note
3 -- Investment Security Transactions.
C. Federal income taxes -- The Fund intends to distribute all of its net
investment income and capital gains to its shareholders and otherwise
qualify as a regulated investment company under the Internal Revenue Code.
In addition, the Fund intends to pay distributions as required to avoid
imposition of excise tax. Accordingly, provision has not been made for
Federal income taxes. See Note 4 -- Federal Income Tax Matters.
D. Dividends and distributions -- All of the Fund's net investment income is
declared and recorded by the Fund as dividends payable on each day to
shareholders of record as of the close of the preceding business day. Net
investment income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are due to
differing treatments for items such as deferral of wash sales and post-
October losses, foreign currency transactions, net operating losses and
expiring capital loss carryforwards. At September 30, 1996, $2,475 was
reclassified between accumulated undistributed net investment income and
accumulated undistributed net realized gain on investment transactions.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
NOTE 2 -- Investment Management and Payments to Affiliated Persons
The Fund pays a fee for investment management services. The fee is
computed daily based on the net asset value at the close of business. The fee
consists of two elements: (i) a "Specific" fee computed on net asset value as of
the close of business each day at the annual rate of .15% of net assets and (ii)
a "Group" fee computed each day on the combined net asset values of all of the
funds in the United Group of mutual funds (approximately $14.7 billion of
combined net assets at September 30, 1996) at annual rates of .51% of the first
$750 million of combined net assets, .49% on that amount between $750 million
and $1.5 billion, .47% between $1.5 billion and $2.25 billion, .45% between
$2.25 billion and $3 billion, .43% between $3 billion and $3.75 billion, .40%
between $3.75 billion and $7.5 billion, .38% between $7.5 billion and $12
billion, and .36% of that amount over $12 billion. The Fund accrues and pays
this fee daily.
Pursuant to assignment of the Investment Management Agreement between the
Fund and Waddell & Reed, Inc. ("W&R"), Waddell & Reed Investment Management
Company ("WRIMCO"), a wholly-owned subsidiary of W&R, serves as the Fund's
investment manager.
The Fund has an Accounting Services Agreement with Waddell & Reed Services
Company ("WARSCO"), a wholly-owned subsidiary of W&R. Under the agreement,
WARSCO acts as the agent in providing accounting services and assistance to the
Fund and pricing daily the value of shares of the Fund. For these services, the
Fund pays WARSCO a monthly fee of one-twelfth of the annual fee shown in the
following table.
Accounting Services Fee
Average
Net Asset Level Annual Fee
(all dollars in millions) Rate for Each Level
------------------------- -------------------
From $ 0 to $ 10 $ 0
From $ 10 to $ 25 $ 10,000
From $ 25 to $ 50 $ 20,000
From $ 50 to $ 100 $ 30,000
From $ 100 to $ 200 $ 40,000
From $ 200 to $ 350 $ 50,000
From $ 350 to $ 550 $ 60,000
From $ 550 to $ 750 $ 70,000
From $ 750 to $1,000 $ 85,000
$1,000 and Over $100,000
For Class A shares, the Fund also pays WARSCO a monthly per account charge
for transfer agency and dividend disbursement services of $1.3125 for each
shareholder account which was in existence at any time during the prior month
($1.0208 per account prior to April 1, 1996), plus $0.30 for each account on
which a dividend or distribution of cash or shares had a record date in that
month. With respect to Class Y shares, the Fund pays WARSCO a monthly fee at an
annual rate of .15% of the average daily net assets of the class for the
preceding month. The Fund also reimburses W&R and WARSCO for certain out-of-
pocket costs.
As principal underwriter for the Fund's shares, W&R received direct and
indirect gross sales commissions for Class A shares (which are not an expense of
the Fund) of $931,980, out of which W&R paid sales commissions of $516,639 and
all expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Service Plan for Class A shares adopted by the Fund pursuant to
Rule 12b-1 under the Investment Company Act of 1940, the Fund may pay monthly a
fee to W&R in an amount not to exceed .25% of the Fund's average annual net
assets. The fee is to be paid to reimburse W&R for amounts it expends in
connection with the provision of personal services to Fund shareholders and/or
maintenance of shareholder accounts.
The Fund paid Directors' fees of $14,351.
W&R is an indirect subsidiary of Torchmark Corporation, a holding company,
and United Investors Management Company, a holding company, and a direct
subsidiary of Waddell & Reed Financial Services, Inc., a holding company.
NOTE 3 -- Investment Security Transactions
Purchases of investment securities, other than U.S. Government and short-
term securities, aggregated $192,425,405 while proceeds from maturities and
sales aggregated $192,305,371. Purchases of short-term securities aggregated
$275,688,266 while proceeds from maturities and sales aggregated $285,627,651.
No U.S. Government securities were bought or sold during the period ended
September 30, 1996.
For Federal income tax purposes cost of investments owned at September 30,
1996 was $355,624,617, resulting in net unrealized appreciation of $6,808,434,
of which $14,086,001 related to appreciated securities and $7,277,567 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized net capital losses of
$7,783,310 during its fiscal year ended September 30, 1996, which included
losses of $8,672,751 deferred from the year ended September 30, 1995 (see
discussion below). Capital loss carryforwards aggregated $50,009,569 at
September 30, 1996, and are available to offset future realized capital gain net
income for Federal income tax purposes through September 30, 1997; $49,637,018
of this amount is available through September 30, 1998; $48,332,059 is available
through September 30, 1999; $16,403,059 is available through September 30, 2000;
$8,173,389 is available through September 30, 2003; and $7,783,310 is available
through September 30, 2004.
Internal Revenue Code regulations permit the Fund to defer into its next
fiscal year net capital losses incurred between each November 1 and the end of
its next fiscal year ("post-October losses"). From November 1, 1994 through
September 30, 1995, the Fund incurred net capital losses of $8,672,751, which
have been deferred to the fiscal year ended September 30, 1996.
NOTE 5 -- Commencement of Multiclass Operations
On January 21, 1996, the Fund was authorized to offer investors a choice of
two classes of shares, Class A and Class Y, each of which has equal rights as to
assets and voting privileges. Class Y shares are not subject to a sales charge
on purchases; they are not subject to a Rule 12b-1 Service Plan and have a
separate transfer agency and dividend disbursement services fee structure. A
comprehensive discussion of the terms under which shares of either class are
offered is contained in the prospectus and the Statement of Additional
Information for the Fund. The Fund commenced multiclass operations on February
27, 1996.
Income, non-class specific expenses and realized and unrealized gains and
losses are allocated daily to each class of shares based on the value of
relative net assets as of the beginning of each day adjusted for the prior day's
capital share activity.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
United High Income Fund II, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of United High Income Fund II, Inc.
(the "Fund") at September 30, 1996, the results of its operations for the year
then ended and the changes in its net assets and the financial highlights for
each of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Kansas City, Missouri
November 8, 1996
<PAGE>
INCOME TAX INFORMATION
Dividends are declared and recorded by the Fund on each day the New York Stock
Exchange is open for business. Dividends are paid monthly on the 27th of the
month or on the preceding business day if the 27th is a weekend or holiday.
The table below shows the taxability of dividends paid during the fiscal year
ended September 30, 1996:
PERCENTAGE OF AMOUNTS PAID REPORTABLE AS:
-----------------------------------------------
For Individuals For Corporations
----------------- -----------------------------
Record Ordinary Long-Term Non- Long-Term
Date IncomeCapital GainsQualifyingQualifyingCapital Gains
- --------- ---------------------------------------------------
Class A
October through
December 1995 100.00% ---% 0.9343% 99.0657% ---%
January through
September 1996 100.00% ---% 0.8487% 99.1513% ---%
Class Y
October through
December 1995 100.00% ---% 0.9343% 99.0657% ---%
January through
September 1996 100.00% ---% 0.8487% 99.1513% ---%
CORPORATION DEDUCTIONS -- Under Federal tax law, the amounts reportable as
Qualifying Dividends are eligible for the dividends received deduction as
provided by Section 243 of the Internal Revenue Code.
The tax status of dividends will be reported to you on Form 1099-DIV after the
close of the applicable calendar year.
Shareholders are advised to consult with their tax adviser concerning the tax
treatment of dividends and distributions from the Fund.
<PAGE>
DIRECTORS
Ronald K. Richey, Birmingham, Alabama, Chairman of the Board
Henry L. Bellmon, Red Rock, Oklahoma
Dodds I. Buchanan, Boulder, Colorado
Jay B. Dillingham, Kansas City, Missouri
Linda Graves, Topeka, Kansas
John F. Hayes, Hutchinson, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
Doyle Patterson, Kansas City, Missouri
William L. Rogers, Los Angeles, California
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Keith A. Tucker, Overland Park, Kansas
Frederick Vogel III, Milwaukee, Wisconsin
Paul S. Wise, Carefree, Arizona
OFFICERS
Keith A. Tucker, President
Robert L. Hechler, Vice President
Henry J. Herrmann, Vice President
John M. Holliday, Vice President
Theodore W. Howard, Vice President and Treasurer
Sharon K. Pappas, Vice President and Secretary
Louise D. Rieke, Vice President
Carl E. Sturgeon, Vice President
This report is submitted for the general information of the shareholders of
United High Income Fund II, Inc. It is not authorized for distribution to
prospective investors in the Fund unless accompanied with or preceded by the
United High Income Fund II, Inc. current prospectus.
To all IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from an IRA unless you make a written election not to
have taxes withheld. The election may be made by submitting forms provided by
Waddell & Reed, Inc. which can be obtained from your Waddell & Reed
representative or by submitting Internal Revenue Service form W-4P. Once made,
an election can be revoked by providing written notice to Waddell & Reed, Inc.
If you elect not to have tax withheld you may be required to make payments of
estimated tax. Penalties may be imposed by the IRS if withholding and estimated
tax payments are not adequate.
<PAGE>
The United Group of Mutual Funds
United Cash Management, Inc.
United Government Securities Fund, Inc.
United Bond Fund
United Municipal Bond Fund, Inc.
United Municipal High Income Fund, Inc.
United High Income Fund, Inc.
United High Income Fund II, Inc.
United Continental Income Fund, Inc.
United Retirement Shares, Inc.
United Asset Strategy Fund, Inc.
United Income Fund
United Accumulative Fund
United Vanguard Fund, Inc.
United New Concepts Fund, Inc.
United Science and Technology Fund
United International Growth Fund, Inc.
United Gold & Government Fund, Inc.
FOR MORE INFORMATION:
Contact your representative, or your
local office as listed on your
Account Statement, or contact:
WADDELL & REED
CUSTOMER SERVICE
6300 Lamar Avenue
P.O. Box 29217
Shawnee Mission, KS 66201-9217
(913) 236-1303
Our INTERNET address is:
http://www.waddell.com
NUR1015A(9-96)
printed on recycled paper
