United
High Income
Fund II, Inc.
ANNUAL
REPORT
--------------------------------------------
For the fiscal year ended September 30, 1998
<PAGE>
MANAGER'S LETTER----------------------------------------------------------------
SEPTEMBER 30, 1998
Dear Shareholder:
This report relates to the operation of United High Income Fund II, Inc. for the
fiscal year ended September 30, 1998. The discussion, graphs and tables
contained in this report provide you with information regarding the Fund's
performance during that period.
The high yield market has generally been tracking the equity markets. There has
been much volatility in prices due to problems in Japan and Asia, the default in
Russia, and the potential for problems in Latin America. Hedge funds invested
in these areas have been selling their high yield securities in order to
increase their liquidity. Traditional high yield investors have been
positioning their portfolios for a potential recession; i.e., selling their
lower quality holdings and debt issued by companies with exposure to the areas
listed above, and raising their cash levels. This has had the effect of pushing
down prices of high yield securities. Currently there is a limited "new issues"
market as investors are focused on their current portfolios.
We have maintained our strategy of buying credits that we feel can weather a
recession. During the months prior to the end of the fiscal year, we also
increased our cash position to the 10-12% range by selling issues that were
either overvalued or had the potential to be credit problems in the future. The
cash will be used to invest in strong companies at attractive prices as
opportunities arise. The Fund has nearly eliminated its exposure to emerging
markets, with investments in Mexico remaining as the only holdings in that
sector. Also, the Fund has very little exposure to commodities, which are under
pressure as prices have fallen.
The strategies and techniques we applied resulted in the Fund's performance
during the fiscal year remaining above that of the Lipper High Current Yield
Bond Fund Universe Average and below that of the Salomon Brothers High Yield
Index, both charted on the following page. Those indexes reflect the
performance of the universe of funds with similar investment objectives (the
Lipper Average) and of securities that generally represent the high yield bond
market (the Salomon Brothers Index). The Fund's outperformance relative to the
Lipper Average was due largely to its limited exposure to emerging markets.
We anticipate more volatility in the high yield market until there is a
resolution to the banking problems in Japan and until the hedge funds quit
liquidating their high yield holdings. There needs to be a catalyst to bring
back confidence in the market. There are buyers of paper in the market, but in
order for there to be a sustained rally, there needs to be some indication that
the problems are being addressed. Until we see that, we expect to maintain our
current strategies for managing the Fund.
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. Class A Shares,
The Salomon Brothers High Yield Index
and The Lipper High Current Yield Bond Fund Universe Average
United Salomon Lipper High
High BrothersCurrent Yield
Income High Bond Fund
Fund II, Yield Universe
Inc. Index Average
------------------ ----------
09/30/88 9,425 10,000 10,000
09/30/89 9,610 10,649 10,534
09/30/90 8,838 9,455 9,334
09/30/91 10,929 12,894 11,635
09/30/92 13,039 15,903 14,126
09/30/93 14,744 18,370 16,270
09/30/94 15,085 18,632 16,606
09/30/95 16,782 21,800 18,564
09/30/96 18,780 24,182 20,975
09/30/97 21,823 28,090 24,304
09/30/98 22,089 28,918 23,914
==== United High Income Fund II Class A Shares -- $22,089*
- - - Salomon Brothers High Yield Index -- $28,918
---- Lipper High Current Yield Bond Fund Universe Average -- $23,914
*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
9/30/98 -4.60% 1.38%
5 Years Ended
9/30/98 7.14% N/A
10 Years Ended
9/30/98 8.25% N/A
Life of Class
Y +++ N/A 8.62%
+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 9/30/98.
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.
FOUNDED: 1986
SCHEDULED DIVIDEND FREQUENCY: MONTHLY
<PAGE>
PERFORMANCE SUMMARY -- Class A Shares
PER SHARE DATA
For the Fiscal Year Ended September 30, 1998
- --------------------------------------------
DIVIDENDS PAID $0.37
=====
NET ASSET VALUE ON
9/30/98 $ 4.12
9/30/97 4.42
-----
CHANGE PER SHARE $(0.30)
=====
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 9-30-98 -4.60% 1.22%
5-year period ended 9-30-98 7.14% 8.42%
10-year period ended 9-30-98 8.25% 8.89%
*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, 1998, United High Income Fund II, Inc. had net assets totaling
$418,345,478 invested in a diversified portfolio of:
80.13% Corporate Debt Securities
13.56% Cash and Cash Equivalents
6.31% 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, 1998, your Fund owned:
$31.15 Manufacturing Bonds
25.02 Transportation, Communication, Electric
and Sanitary Services Bonds
13.56 Cash and Cash Equivalents
13.25 Services Bonds
7.55 Wholesale and Retail Trade Bonds
6.31 Common and Preferred Stocks and Warrants
3.16 Miscellaneous Bonds
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Shares Value
COMMON AND PREFERRED STOCKS
AND WARRANTS
Communication - 1.74%
Adelphia Communications Corporation,
13.0% Preferred ..................... 5,000 $ 577,500
Allegiance Telecom, Inc., Warrants (A)* 2,000 3,750
Concentric Network Corporation,
Warrants(A)* ........................ 1,000 90,000
IXC Communications, Inc.,
12.5% Preferred (A) ................. 1,128 1,201,320
Intermedia Communications Inc., 13.5%
Preferred............................ 3,075 3,455,987
Iridium LLC, Warrants (A)* ........... 3,000 360,000
Jacor Communications, Inc.* .......... 25,000 1,264,844
MetroNet Communications Corp.,
Warrants (A)* ....................... 1,000 30,000
Microcell Telecommunications Inc.,
Warrants (A)* ....................... 20,000 265,000
Pathnet, Inc., Warrants (A)* ......... 1,000 15,000
Primus Telecommunications Group,
Incorporated, Warrants* ............. 2,000 10,000
Total ............................... 7,273,401
Depository Institutions - 0.23%
California Federal Preferred Capital
Corporation, 9.125% Preferred ....... 37,500 960,938
Electric, Gas and Sanitary Services - 0.36%
Consolidated Hydro, Inc.,
Class B Warrants* ................... 7,578 1,895
Consolidated Hydro, Inc.,
Class C Warrants* ................... 4,919 2,459
El Paso Electric Company,
11.4% Preferred ..................... 13,195 1,431,657
IntelCom Group Inc., Warrants (A)* ... 7,425 64,969
Total ............................... 1,500,980
Electronic and Other Electric Equipment - 0.00%
Powertel, Inc., Warrants* ............ 5,600 15,400
Furniture and Fixtures - 0.36%
Lear Corporation* .................... 34,000 1,487,500
General Building Contractors - 1.43%
Walter Industries, Inc.* ............. 482,265 5,998,171
General Merchandise Stores - 0.51%
Fred Meyer, Inc.* .................... 55,000 2,138,125
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Shares Value
COMMON AND PREFERRED STOCKS AND
WARRANTS (Continued)
Holding and Other Investment Offices - 0.76%
LTC Properties, Inc. ................. 133,333 $ 2,324,994
National Health Investors, Inc. ...... 27,150 841,650
Total ............................... 3,166,644
Instruments and Related Products - 0.43%
Maxxim Medical, Inc.* ................ 70,000 1,798,125
Miscellaneous Retail - 0.06%
Finlay Enterprises, Inc.* ............ 30,000 247,500
Paper and Allied Products - 0.19%
SF Holdings Group, Inc., Class C (A)* . 8,700 17,400
SF Holdings Group, Inc., 13.75%
Preferred (A)* ...................... 107 774,213
Total ............................... 791,613
Printing and Publishing - 0.24%
PRIMEDIA Inc., 10.0% Preferred ....... 10,000 1,012,500
TOTAL COMMON AND PREFERRED STOCKS
AND WARRANTS - 6.31% $ 26,390,897
(Cost: $25,876,815)
Principal
Amount in
Thousands
CORPORATE DEBT SECURITIES
Agricultural Production - Crops - 0.80%
Frank's Nursery & Crafts, Inc.,
10.25%, 3-1-2008 .................... $ 2,000 1,960,000
Hines Horticulture, Inc.,
11.75%, 10-15-2005 .................. 1,301 1,380,686
Total ............................... 3,340,686
Amusement and Recreation Services - 2.21%
American Skiing Company,
12.0%, 7-15-2006 .................... 2,500 2,562,500
Premier Parks Inc.:
12.0%, 8-15-2003 .................... 1,000 1,087,500
9.25%, 4-1-2006 ..................... 2,000 1,960,000
Showboat Marina Casino Partnership,
13.5%, 3-15-2003 .................... 1,500 1,642,500
Trump Hotels & Casino Resorts
Holdings, L.P.,
15.5%, 6-15-2005 .................... 2,000 2,000,000
Total ............................... 9,252,500
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Apparel and Accessory Stores - 0.25%
Wilsons The Leather Experts Inc.,
11.25%, 8-15-2004 ................... $1,000 $ 1,037,500
Apparel and Other Textile Products - 0.50%
CONSOLTEX GROUP INC.,
11.0%, 10-1-2003 .................... 2,000 2,075,000
Auto Repair, Services and Parking - 0.58%
Safelite Glass Corp.,
9.875%, 12-15-2006 (A)............... 2,500 2,412,500
Building Materials & Garden Supplies - 0.65%
Central Tractor Farm & Country, Inc.,
10.625%, 4-1-2007 ................... 1,000 968,750
JTM Industries, Inc.,
10.0%, 4-15-2008 (A) ................ 1,750 1,763,125
Total ............................... 2,731,875
Business Services - 3.28%
Adams Outdoor Advertising Limited Partnership,
10.75%, 3-15-2006 ................... 1,500 1,578,750
Coinmach Corporation,
11.75%, 11-15-2005 .................. 3,000 3,213,750
DecisionOne Corporation,
9.75%, 8-1-2007 ..................... 2,000 1,320,000
Federal Data Corporation,
10.125%, 8-1-2005 ................... 1,000 950,000
Lamar Advertising Company:
9.625%, 12-1-2006 ................... 2,000 2,120,000
8.625%, 9-15-2007 ................... 1,250 1,284,375
Protect One,
6.75%, 9-15-2003 (Convertible)....... 2,000 2,280,000
Rental Service Corporation,
9.0%, 5-15-2008 ..................... 1,000 960,000
Total ............................... 13,706,875
Chemicals and Allied Products - 3.27%
Aqua-Chem, Inc.,
11.25%, 7-1-2008 (A) ................ 1,500 1,447,500
Dade International Inc.,
11.125%, 5-1-2006 ................... 1,000 1,075,000
Marsulex Inc.,
9.625%, 7-1-2008 (A) ................ 1,500 1,440,000
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Chemicals and Allied Products (Continued)
Moll Industries, Inc.,
10.5%, 7-1-2008 (A) ................. $ 2,000 $ 1,850,000
Spinnaker Industries, Inc.,
10.75%, 10-15-2006 .................. 2,000 1,910,000
UCC Investors Holding, Inc.,
10.5%, 5-1-2002 ..................... 5,500 5,967,500
Total ............................... 13,690,000
Communication - 21.31%
Adelphia Communications Corporation:
10.25%, 7-15-2000 ................... 1,250 1,262,500
9.25%, 10-1-2002 .................... 2,450 2,548,000
10.5%, 7-15-2004 .................... 1,500 1,635,000
9.875%, 3-1-2007 .................... 2,500 2,687,500
Allbritton Communications Company,
9.75%, 11-30-2007 ................... 2,000 2,050,000
Allegiance Telecom, Inc.,
0.0%, 2-15-2008 (B) ................. 2,000 860,000
American Radio Systems Corporation,
9.0%, 2-1-2006 ...................... 1,000 1,070,000
CenCall Communications Corp.,
0.0%, 1-15-2004 (B).................. 2,500 2,462,500
Chancellor Media Corporation,
10.5%, 1-15-2007 .................... 2,000 2,190,000
Comcast Corporation,
9.5%, 1-15-2008 ..................... 1,750 1,960,438
Comcast UK Cable Partners Limited,
0.0%, 11-15-2007 (B) ................ 4,000 3,240,000
Concentric Network Corporation,
12.75%, 12-15-2007 .................. 1,000 925,000
Diamond Cable Communications Plc,
0.0%, 12-15-2005 (B) ................ 2,000 1,605,000
Diamond Holdings plc,
9.125%, 2-1-2008 .................... 1,500 1,496,250
GST Telecommunications,
0.0%, 11-15-2007 (B) ................ 2,500 2,375,000
Hyperion Telecommunications, Inc.,
0.0%, 4-15-2003 (B) ................. 4,000 2,760,000
ICG Holdings, Inc.,
0.0%, 9-15-2005 (B) ................. 2,250 1,755,000
ICG Services, Inc.,
0.0%, 5-1-2008 (B) .................. 2,500 1,150,000
ITC /\ DeltaCom, Inc.,
8.875%, 3-1-2008 .................... 1,000 980,000
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
IXC Communications, Inc.,
9.0%, 4-15-2008 ..................... $ 1,500 $ 1,485,000
Intermedia Communications of Florida, Inc.,
0.0%, 5-15-2006 (B) ................. 2,250 1,828,125
Iridium LLC,
13.0%, 7-15-2005 .................... 4,000 3,520,000
Iridium LLC and Iridium Capital Corporation:
10.875%, 7-15-2005 .................. 2,000 1,600,000
11.25%, 7-15-2005 ................... 1,000 820,000
JCAC, Inc.,
10.125%, 6-15-2006 .................. 1,000 1,070,000
LIN Holdings Corp.,
0.0%, 3-1-2008 (A)(B) ............... 3,500 2,292,500
Marcus Cable Co.,
0.0%, 12-15-2005 (B) ................ 3,250 3,022,500
Marcus Cable Operating Company, L. P.,
0.0%, 8-1-2004 (B) .................. 3,500 3,430,000
MetroNet Communications Corp.,
0.0%, 6-15-2008 (A)(B) .............. 2,500 1,381,250
Microcell Telecommunications Inc.,
0.0%, 6-1-2006 (B) .................. 5,900 4,189,000
Nextel Communications, Inc.:
0.0%, 8-15-2004 (B) ................. 4,275 4,104,000
0.0%, 9-15-2007 (B) ................. 1,500 945,000
0.0%, 2-15-2008 (B) ................. 2,500 1,475,000
NEXTLINK Communications, Inc.,
9.625%, 10-1-2007 ................... 2,000 1,955,000
OnePoint Communications Corp., Units,
14.5%, 6-1-2008 (A)(C) .............. 2,000 1,580,000
Pathnet, Inc.,
12.25%, 4-15-2008 (A) ............... 1,000 760,000
Primus Telecommunications Group, Incorporated,
11.75%, 8-1-2004 .................... 2,000 1,925,000
Rifkin Acquisition Partners, L.L.L.P.,
11.125%, 1-15-2006 .................. 1,500 1,605,000
Rogers Communications Inc.,
9.125%, 1-15-2006 ................... 3,000 2,985,000
SFX Broadcasting, Inc.,
10.75%, 5-15-2006 ................... 986 1,074,740
Salem Communications Corporation,
9.5%, 10-1-2007 ..................... 1,000 1,005,000
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Communication (Continued)
Satelites Mexicanos, S.A. de C.V.,
10.125%, 11-1-2004 (A) .............. $ 375 $ 255,000
Sinclair Broadcast Group, Inc.,
9.0%, 7-15-2007 ..................... 2,000 2,010,000
Sprint Spectrum L.P.,
0.0%, 8-15-2006 (B) ................. 3,600 3,024,000
Time Warner Telecom LLC and Time Warner
Telecom Inc.,
9.75%, 7-15-2008 .................... 1,000 1,005,000
Vanguard Cellular Systems, Inc.,
9.375%, 4-15-2006 ................... 1,000 1,010,000
WinStar Communications, Inc.:
0.0%, 10-15-2005 (A)(B)(Convertible) 1,500 1,327,500
10.0%, 3-15-2008 (A) ................ 2,000 1,440,000
Total ............................... 89,135,803
Depository Institutions - 0.95%
First Nationwide Holdings Inc.:
9.125%, 1-15-2003 ................... 2,000 2,240,000
12.5%, 4-15-2003 .................... 1,500 1,721,250
Total ............................... 3,961,250
Eating and Drinking Places - 0.96%
Foodmaker, Inc.,
8.375%, 4-15-2008 ................... 1,750 1,697,500
Fresh Foods, Inc.,
10.75%, 6-1-2006 (A) ................ 1,500 1,350,000
NE Restaurant Company, Inc.,
10.75%, 7-15-2008 (A) ............... 1,000 982,500
Total ............................... 4,030,000
Electric, Gas and Sanitary Services - 2.88%
Allied Waste North America, Inc.:
10.25%, 12-1-2006 ................... 4,750 5,177,500
0.0%, 6-1-2007 (B) .................. 3,000 2,220,000
El Paso Electric Company:
8.9%, 2-1-2006 ...................... 2,000 2,286,380
9.4%, 5-1-2011 ...................... 2,000 2,371,000
Total ............................... 12,054,880
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Electronic and Other Electric Equipment - 3.86%
Communications & Power Industries, Inc.,
12.0%, 8-1-2005 ..................... $ 2,000 $ 2,177,500
Communications Instruments, Inc.,
10.0%, 9-15-2004 .................... 1,000 1,010,000
Echostar Communications Corporation:
0.0%, 3-15-2004 (B) ................. 3,000 2,640,000
0.0%, 6-1-2004 (B) .................. 3,000 2,895,000
Elgar Holdings, Inc.,
9.875%, 2-1-2008 .................... 1,250 1,046,875
Intercel, Inc.,
0.0%, 2-1-2006 (B) .................. 1,750 1,262,187
Omnipoint Corporation,
11.625%, 8-15-2006 .................. 3,500 2,345,000
Telex Communications, Inc.,
10.5%, 5-1-2007 ..................... 1,000 791,250
WESCO Distribution, Inc.,
9.125%, 6-1-2008 (A) ................ 1,500 1,455,000
WESCO International, Inc.,
0.0%, 6-1-2008 (A)(B) ............... 1,000 547,500
Total ............................... 16,170,312
Engineering and Management Services - 0.28%
United International Holdings, Inc.,
0.0%, 2-15-2008 (A)(B) .............. 2,500 1,175,000
Fabricated Metal Products - 2.93%
AXIA Incorporated,
10.75%, 7-15-2008 (A) ............... 1,000 965,000
American Safety Razor Company,
9.875%, 8-1-2005 .................... 2,000 2,060,000
Neenah Corporation,
11.125%, 5-1-2007 ................... 3,000 3,011,250
Nortek, Inc.,
9.875%, 3-1-2004 .................... 3,000 2,925,000
Safety Components International, Inc.,
10.125%, 7-15-2007 .................. 2,250 2,275,312
U.S. Can Corporation,
10.125%, 10-15-2006 ................. 1,000 1,015,000
Total ............................... 12,251,562
Food and Kindred Products - 0.90%
B & G Foods, Inc.,
9.625%, 8-1-2007 .................... 2,000 1,850,000
Eagle Family Foods, Inc.,
8.75%, 1-15-2008 .................... 1,000 895,000
Southern Foods Group, L.P.,
9.875%, 9-1-2007 .................... 1,000 1,007,500
Total ............................... 3,752,500
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Food Stores - 0.96%
Big V Supermarkets, Inc.,
11.0%, 2-15-2004 .................... $ 1,500 $ 1,507,500
Pueblo Xtra International, Inc.,
9.5%, 8-1-2003 ...................... 2,750 2,530,000
Total ............................... 4,037,500
Health Services - 2.26%
Fountain View, Inc.,
11.25%, 4-15-2008 (A) ............... 1,000 891,250
Multicare Companies, Inc. (The),
9.0%, 8-1-2007 ...................... 2,175 2,044,500
Paragon Health Network, Inc.:
0.0%, 11-1-2007 (B) ................. 1,000 545,000
9.5%, 11-1-2007 ..................... 2,000 1,840,000
Quorum Health Group, Inc.,
8.75%, 11-1-2005 .................... 2,000 2,050,000
Tenet Healthcare Corporation,
8.625%, 1-15-2007 ................... 2,000 2,075,000
Total ............................... 9,445,750
Heavy Construction, Except Building - 0.45%
Level 3 Communications, Inc.,
9.125%, 5-1-2008 .................... 2,000 1,895,000
Holding and Other Investment Offices - 0.27%
LTC Properties, Inc.,
8.5%, 1-1-2001 (Convertible) ........ 1,000 1,121,250
Hotels and Other Lodging Places - 2.33%
CapStar Hotel Company,
8.75%, 8-15-2007 .................... 1,000 945,000
HMH Properties, Inc.,
7.875%, 8-1-2008 .................... 5,000 4,937,500
Prime Hospitality Corp.:
9.25%, 1-15-2006 .................... 2,000 1,965,000
9.75%, 4-1-2007 ..................... 1,000 920,000
Station Casinos, Inc.,
10.125%, 3-15-2006 .................. 1,000 1,000,000
Total ............................... 9,767,500
Industrial Machinery and Equipment - 3.06%
American Standard Inc.,
9.25%, 12-1-2016 .................... 1,276 1,301,520
Anchor Lamina Inc. and
Anchor Lamina America, Inc.,
9.875%, 2-1-2008 .................... 1,000 825,000
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Industrial Machinery and Equipment (Continued)
Falcon Building Products, Inc.,
0.0%, 6-15-2007 (B) ................. $ 4,000 $ 2,320,000
Morris Material Handling, Inc.,
9.5%, 4-1-2008 ...................... 2,000 1,510,000
National Equipment Services, Inc.,
10.0%, 11-30-2004 (A) ............... 1,750 1,662,500
Paragon Corporate Holdings, Inc.,
9.625%, 4-1-2008 .................... 2,000 1,502,500
Terex Corporation,
8.875%, 4-1-2008 .................... 3,000 2,790,000
Walbro Corporation,
9.875%, 7-15-2005 ................... 1,000 900,000
Total ............................... 12,811,520
Instruments and Related Products - 1.62%
Cole National Group, Inc.,
9.875%, 12-31-2006 .................. 2,000 2,080,000
Maxxim Medical, Inc.,
10.5%, 8-1-2006 ..................... 3,500 3,762,500
Universal Hospital Services, Inc.,
10.25%, 3-1-2008 .................... 1,000 951,250
Total ............................... 6,793,750
Miscellaneous Manufacturing Industries - 0.45%
AAi.Fostergrant, Inc.,
10.75%, 7-15-2006 (A) ............... 1,000 946,250
Hedstrom Corporation,
10.0%, 6-1-2007 ..................... 1,000 950,000
Total ............................... 1,896,250
Miscellaneous Retail - 2.25%
Big 5 Corp.,
10.875%, 11-15-2007 ................. 1,400 1,302,000
Eye Care Centers of America, Inc.,
9.125%, 5-1-2008 (A) ................ 1,000 840,000
Finlay Fine Jewelry Corporation,
8.375%, 5-1-2008 .................... 1,000 920,000
MTS INCORPORATED,
9.375%, 5-1-2005 (A) ................ 1,750 1,557,500
Michaels Stores, Inc.,
10.875%, 6-15-2006 .................. 3,500 3,815,000
TravelCenters of America, Inc.,
10.25%, 4-1-2007 .................... 1,000 980,000
Total ............................... 9,414,500
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Motion Pictures - 1.78%
AMC Entertainment, Inc.,
9.5%, 3-15-2009 ..................... $ 3,000 $ 2,805,000
Hollywood Theaters, Inc.,
10.625%, 8-1-2007 ................... 2,865 2,607,150
Regal Cinemas, Inc.,
9.5%, 6-1-2008 (A) .................. 2,000 2,020,000
Total ............................... 7,432,150
Oil and Gas Extraction - 0.36%
Cross Timbers Oil,
8.75%, 11-1-2009 .................... 500 450,000
Flores & Rucks, Inc.,
9.75%, 10-1-2006 .................... 1,000 1,042,500
Total ............................... 1,492,500
Paper and Allied Products - 3.27%
Container Corporation of America,
10.75%, 5-1-2002 .................... 2,000 2,040,000
Fonda Group, Inc. (The),
9.5%, 3-1-2007 ...................... 2,000 1,800,000
Fort Howard Corporation,
11.0%, 1-2-2002 ..................... 3,778 3,825,110
Four M Corporation,
12.0%, 6-1-2006 ..................... 500 492,500
Mail-Well Corporation,
10.5%, 2-15-2004 .................... 1,000 1,035,000
Outsourcing Services Group, Inc.,
10.875%, 3-1-2006 (A) ............... 1,500 1,430,625
Radnor Holdings Corporation,
10.0%, 12-1-2003 .................... 1,000 995,000
Republic Group Incorporated,
9.5%, 7-15-2008 (A) ................. 1,000 965,000
SF Holdings Group, Inc.,
0.0%, 3-15-2008 (B) ................. 2,500 1,112,500
Total ............................... 13,695,735
Personal Services - 0.24%
Prime Succession Acquisition Corp.,
10.75%, 8-15-2004 ................... 1,000 992,500
Petroleum and Coal Products - 0.24%
Building Materials Corporation of America,
0.0%, 7-1-2004 (B) .................. 1,000 990,000
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Primary Metal Industries - 1.65%
Commonwealth Aluminum Corporation,
10.75%, 10-1-2006 ................... $ 2,000 $ 1,920,000
Weirton Steel Corporation:
11.375%, 7-1-2004 ................... 2,500 2,250,000
10.75%, 6-1-2005 .................... 1,000 875,000
Wheeling-Pittsburgh Corporation,
9.25%, 11-15-2007 ................... 2,000 1,860,000
Total ............................... 6,905,000
Printing and Publishing - 2.43%
American Media Operations, Inc.,
11.625%, 11-15-2004 ................. 3,000 3,105,000
K-III Communications Corporation,
8.5%, 2-1-2006 ...................... 1,000 1,010,000
Perry-Judd's Incorporated,
10.625%, 12-15-2007 ................. 4,000 4,000,000
TransWestern Publishing Company LLC,
9.625%, 11-15-2007 .................. 2,000 2,055,000
Total ............................... 10,170,000
Railroad Transportation - 0.11%
TFM, S.A. de C.V.,
0.0%, 6-15-2009 (B) ................. 1,000 480,000
Real Estate - 0.33%
Delco Remy International, Inc.,
8.625%, 12-15-2007 .................. 1,400 1,386,000
Rubber and Miscellaneous Plastics Products - 2.18%
Furon Company,
8.125%, 3-1-2008 .................... 1,000 980,000
Graham Packaging Company and
GPC Capital Corp. I,
8.75%, 1-15-2008 .................... 3,000 2,857,500
Heafner (J.H.) Company, Inc. (The),
10.0%, 5-15-2008 (A) ................ 1,400 1,316,000
Home Products International, Inc.,
9.625%, 5-15-2008 ................... 2,500 2,212,500
LDM Technologies, Inc.,
10.75%, 1-15-2007 ................... 2,000 1,740,000
Total ............................... 9,106,000
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Social Services - 0.29%
La Petite Academy, Inc. and LPA
Holding Corp.,
10.0%, 5-15-2008 .................... $ 1,250 $ 1,215,625
Stone, Clay and Glass Products - 0.53%
SIMCALA, Inc.,
9.625%, 4-15-2006 ................... 2,750 2,200,000
Textile Mill Products - 2.80%
Avondale Mills, Inc.,
10.25%, 5-1-2006 .................... 1,000 1,031,250
Collins & Aikman Products Co.,
11.5%, 4-15-2006 .................... 4,500 4,725,000
Galey & Lord, Inc.,
9.125%, 3-1-2008 .................... 2,750 2,365,000
Glenoit Corporation,
11.0%, 4-15-2007 .................... 1,000 990,000
Globe Manufacturing Corp.,
10.0%, 8-1-2008 (A) ................. 2,750 2,585,000
Total ............................... 11,696,250
Transportation Equipment - 1.46%
Federal-Mogul Corporation:
7.75%, 7-1-2006 ..................... 2,000 2,038,020
7.875%, 7-1-2010 .................... 2,500 2,568,025
Westinghouse Air Brake Company,
9.375%, 6-15-2005 ................... 1,500 1,515,000
Total ............................... 6,121,045
Trucking and Warehousing - 0.72%
Iron Mountain Incorporated,
10.125%, 10-1-2006 .................. 1,000 1,050,000
Pierce Leahy Corp.,
9.125%, 7-15-2007 ................... 2,000 1,980,000
Total ............................... 3,030,000
Wholesale Trade - Durable Goods - 1.07%
Alvey Systems, Inc.,
11.375%, 1-31-2003 .................. 1,000 1,037,500
Exide Corporation,
10.0%, 4-15-2005 .................... 1,010 954,450
Sealy Mattress Company:
0.0%, 12-15-2007 (B) ................ 2,000 1,260,000
9.875%, 12-15-2007 .................. 1,250 1,225,000
Total ............................... 4,476,950
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
CORPORATE DEBT SECURITIES (Continued)
Wholesale Trade - Nondurable Goods - 1.41%
Core-Mark International, Inc.,
11.375%, 9-15-2003 .................. $ 1,500 $ 1,503,750
NBC Acquisition Corp.,
0.0%, 2-15-2009 (B) ................. 3,000 1,560,000
Nebraska Book Company, Inc.,
8.75%, 2-15-2008 .................... 1,750 1,577,188
U.S. Office Products Company,
9.75%, 6-15-2008 (A) ................ 1,500 1,252,500
Total ............................... 5,893,438
TOTAL CORPORATE DEBT SECURITIES - 80.13% $335,244,456
(Cost: $346,710,607)
SHORT-TERM SECURITIES
Communication - 0.24%
Dominion Resources, Inc.,
5.67%, 10-20-98 ..................... 1,000 997,007
Electric, Gas and Sanitary Services - 3.82%
Commonwealth Edison Co.,
5.67%, 10-28-98 ..................... 5,000 4,978,738
Florida Power Corp.,
5.38%, 10-7-98 ...................... 11,000 10,990,137
Total ............................... 15,968,875
Fabricated Metal Products - 0.43%
Danaher Corporation,
5.3438%, Master Note ................ 1,804 1,804,000
Food and Kindred Products - 0.13%
General Mills, Inc.,
5.1988%, Master Note ................ 560 560,000
Food Stores - 3.89%
Kroger Co. (The),
6.15%, 10-1-98 ...................... 7,200 7,200,000
Safeway Inc.:
5.77%, 10-6-98 ...................... 3,360 3,357,307
5.68%, 10-9-98 ...................... 5,725 5,717,774
Total ............................... 16,275,081
Transportation Equipment - 2.59%
Echlin Inc.:
5.7%, 10-15-98 ...................... 1,040 1,037,695
5.7%, 10-26-98 ...................... 9,830 9,791,089
Total ............................... 10,828,784
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Principal
Amount in
Thousands Value
SHORT-TERM SECURITIES (Continued)
Wholesale Trade - Nondurable Goods - 0.92%
Enron Corp.,
5.67%, 10-15-98 ..................... $ 3,850 $ 3,841,511
TOTAL SHORT-TERM SECURITIES - 12.02% $ 50,275,258
(Cost: $50,275,258)
TOTAL INVESTMENT SECURITIES - 98.46% $411,910,611
(Cost: $422,862,680)
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.54% 6,434,867
NET ASSETS - 100.00% $418,345,478
See Notes to Schedule of Investments on page 19.
<PAGE>
THE INVESTMENTS OFUNITED HIGH INCOME FUND II, INC.
SEPTEMBER 30, 1998
Notes to Schedule of Investments
*No income dividends were paid during the preceding 12 months.
(A) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be resold in transactions exempt from registration, normally
to qualified institutional buyers. At September 30, 1998, the value of
these securities amounted to $42,712,652 or 10.21% of net assets.
(B) The security does not bear interest for an initial period of time and
subsequently becomes interest bearing.
(C) Each Unit of OnePoint Communications Corp. consists of $1,000 principal
amount of 14.5% senior notes due 2008 and one warrant to purchase 0.635
shares of common stock, $0.01 par value of the company.
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, 1998
(In Thousands, Except for Per Share Amounts)
Assets
Investment securities -- at value (Notes 1 and 3) $411,911
Receivables:
Interest and dividends .......................... 7,593
Fund shares sold ................................ 493
Prepaid insurance premium ........................ 15
--------
Total assets .................................. 420,012
--------
Liabilities
Payable to Fund shareholders ..................... 1,070
Dividends payable ................................ 440
Accrued service fee (Note 2) ..................... 81
Accrued transfer agency and dividend
disbursing (Note 2).............................. 56
Accrued management fee (Note 2) .................. 6
Accrued accounting services fee (Note 2) ......... 5
Accrued distribution fee (Note 2) ................ 1
Due to custodian ................................. 1
Other ............................................ 7
--------
Total liabilities ............................. 1,667
--------
Total net assets ............................. $418,345
========
Net Assets
$1.00 par value capital stock
Capital stock ................................... $101,484
Additional paid-in capital ...................... 364,293
Accumulated undistributed loss:
Accumulated undistributed net realized
loss on investment transactions ............... (36,480)
Net unrealized depreciation in value of
investments ................................... (10,952)
--------
Net assets applicable to outstanding
units of capital ............................. $418,345
========
Net asset value per share (net assets divided
by shares outstanding)
Class A .......................................... $4.12
Class Y .......................................... $4.12
Capital shares outstanding
Class A .......................................... 100,861
Class Y .......................................... 623
Capital shares authorized .......................... 400,000
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.STATEMENT OF OPERATIONS
For the Fiscal Year Ended SEPTEMBER 30, 1998
(In Thousands)
Investment Income
Income (Note 1B):
Interest and amortization ....................... $37,799
Dividends ....................................... 1,245
-------
Total income .................................. 39,044
-------
Expenses (Note 2):
Investment management fee ....................... 2,303
Service fee - Class A ........................... 901
Transfer agency and dividend disbursing - Class A 614
Accounting services fee ......................... 60
Custodian fees .................................. 21
Audit fees ...................................... 17
Distribution fee - Class A ...................... 6
Legal fees ...................................... 5
Shareholder servicing - Class Y.................. 3
Other ........................................... 143
-------
Total expenses ................................ 4,073
-------
Net investment income ........................ 34,971
-------
Realized and Unrealized Gain (Loss) on
Investments (Notes 1 and 3)
Realized net gain on investments ................. 4,820
Unrealized depreciation in value of investments
during the period ............................... (34,757)
-------
Net loss on investments ......................... (29,937)
-------
Net increase in net assets resulting
from operations .............................. $ 5,034
=======
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.STATEMENT OF CHANGES IN NET ASSETS
(Dollars In Thousands)
For the fiscal year ended
September 30,
-------------------------
1998 1997
Increase in Net Assets ------------ ------------
Operations:
Net investment income ............... $ 34,971 $32,626
Realized net gain on
investments ...................... 4,820 8,525
Unrealized appreciation
(depreciation) .................... (34,757) 17,456
-------- --------
Net increase in net assets
resulting from operations ........ 5,034 58,607
-------- --------
Dividends to shareholders from
net investment income (Note 1D):*
Class A ............................. (34,790) (32,497)
Class Y ............................. (181) (129)
-------- --------
(34,971) (32,626)
-------- --------
Capital share transactions:
Proceeds from sale of shares:
Class A (17,927,324 and 8,682,161
shares, respectively) ............ 77,845 36,917
Class Y (279,221 and 14,256
shares, respectively) ............ 1,264 60
Proceeds from reinvestment of
dividends:
Class A (7,125,552 and 6,869,010
shares, respectively) ............ 31,452 29,167
Class Y (40,487 and 29,866
shares, respectively) ............ 178 127
Payments for shares redeemed:
Class A (16,161,757 and 12,527,249
shares, respectively) ............ (70,753) (53,077)
Class Y (58,442 and 81,123
shares, respectively) ............ (261) (337)
-------- --------
Net increase in net assets
resulting from capital
share transactions ............. 39,725 12,857
-------- --------
Total increase ................. 9,788 38,838
Net Assets
Beginning of period .................. 408,557 369,719
-------- --------
End of period ........................ $418,345 $408,557
======== ========
Undistributed net investment
income ............................ $--- $---
==== ====
*See "Financial Highlights" on pages 23 - 24.
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,
------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Net asset value,
beginning of
period ............ $4.42 $4.14 $4.03 $3.96 $4.21
----- ----- ----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.37 0.36 0.35 0.35 0.35
Net realized and
unrealized gain
(loss) on
investments ..... (0.30) 0.28 0.11 0.07 (0.25)
----- ----- ----- ----- -----
Total from investment
operations ....... 0.07 0.64 0.46 0.42 0.10
----- ----- ----- ----- -----
Less dividends declared
from net investment
income ............ (0.37) (0.36) (0.35) (0.35) (0.35)
----- ----- ----- ----- -----
Net asset value,
end of period .... $4.12 $4.42 $4.14 $4.03 $3.96
===== ===== ===== ===== =====
Total return* ...... 1.22% 16.20% 11.90% 11.25% 2.31%
Net assets, end of
period (in
millions) ........ $416 $407 $368 $368 $363
Ratio of expenses to
average net assets 0.96% 0.93% 0.95% 0.89% 0.88%
Ratio of net investment
income to average
net assets ....... 8.26% 8.54% 8.60% 8.93% 8.41%
Portfolio turnover
rate ............. 58.85% 64.38% 55.64% 26.82% 47.05%
*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 Each Period:
For the
For the fiscal year period
ended September 30, from 2/27/96*
-------------------- through
1998 1997 9/30/96
------ ------ --------
Net asset value,
beginning of period $4.42 $4.14 $4.15
----- ----- -----
Income from investment
operations:
Net investment
income .......... 0.37 0.37 0.21
Net realized and
unrealized gain (loss)
on investments... (0.30) 0.28 (0.01)
----- ----- -----
Total from investment
operations ........ 0.07 0.65 0.20
----- ----- -----
Less dividends declared
from net investment
income ............ (0.37) (0.37) (0.21)
----- ----- -----
Net asset value,
end of period ..... $4.12 $4.42 $4.14
===== ===== =====
Total return ....... 1.38% 16.38% 5.00%
Net assets, end of
period (in
millions) ........ $2 $2 $2
Ratio of expenses
to average net
assets ............ 0.79% 0.77% 0.77%**
Ratio of net
investment income
to average net
assets ............ 8.43% 8.69% 8.83%**
Portfolio
turnover rate ..... 58.85% 64.38% 55.64%**
*Commencement of operations.
**Annualized.
See notes to financial statements.
<PAGE>
UNITED HIGH INCOME FUND II, INC.NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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 the Nasdaq Stock Market, which provides information on bid and
asked 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 Subchapter M of 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 dividends 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 carryovers.
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 $18.9 billion of
combined net assets at September 30, 1998) 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,
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 gross sales
commissions for Class A shares (which are not an expense of the Fund) of
$1,812,811, out of which W&R paid sales commissions of $1,044,174 and all
expenses in connection with the sale of Fund shares, except for registration
fees and related expenses.
Under a Distribution and 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 distribution and/or service fee to W&R in an amount not to
exceed .25% of the Fund's Class A average annual net assets. The fee is to be
paid to reimburse W&R for amounts it expends in connection with the distribution
of the Class A shares and/or provision of personal services to Fund shareholders
and/or maintenance of shareholder accounts.
The Fund paid Directors' fees of $14,940, which are included in other
expenses.
W&R is a subsidiary of Waddell & Reed Financial, Inc., 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 $225,571,400 while proceeds from
maturities and sales aggregated $235,831,991. Purchases of short-term securities
and U. S. Government securities aggregated $403,613,973 and $8,906,015,
respectively, while proceeds from maturities and sales aggregated $369,594,784
and $9,040,000, respectively.
For Federal income tax purposes, cost of investments owned at September 30,
1998 was $422,862,680, resulting in net unrealized depreciation of $10,952,069,
of which $9,361,716 related to appreciated securities and $20,313,785 related to
depreciated securities.
NOTE 4 -- Federal Income Tax Matters
For Federal income tax purposes, the Fund realized capital gain net income
of $5,280,197 during its fiscal year ended September 30, 1998, which was
entirely offset by utilization of capital loss carryovers. Remaining capital
loss carryovers aggregated $36,204,273 at September 30, 1998, and are available
to offset future realized capital gain net income for Federal income tax
purposes through the following fiscal year-ends: $19,801,215 through September
30, 1999; $8,229,670 through September 30, 2000; $390,078 through September 30,
2003 and $7,783,310 through September 30, 2004.
NOTE 5 -- Multiclass Operations
On January 12, 1996, the Fund was authorized to offer 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 Distribution and 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>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
United High Income Fund II, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of United High Income Fund II, Inc. (the "Fund") as
of September 30, 1998, and the related statements of operations for the fiscal
year then ended and changes in net assets for each of the fiscal years in the
two-year period then ended, and the financial highlights for each of the fiscal
periods 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
September 30, 1998 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of United High Income
Fund II, Inc. as of September 30, 1998, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 6, 1998
<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.
The table below shows the taxability of dividends paid during the fiscal year
ended September 30, 1998:
PERCENTAGE OF AMOUNTS PAID REPORTABLE AS:
--------------------------------------------------------------------
For Individuals For Corporations
---------------------------------------------------------------
Record OrdinaryLong-Term Capital Gain Non- Long-Term
Date Income 28% Rate 20% RateQualifyingQualifyingCapital Gain
- ----------- -------- -------- ---------------------------------------
Class A and Class Y
October through
December 1997 100.00% ---% ---% 3.0130% 96.9870% ---%
January through
September 1998 100.00% ---% ---% 3.7425% 96.2575% ---%
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
Keith A. Tucker, Overland Park, Kansas, Chairman of the Board
James M. Concannon, Topeka, Kansas
John A. Dillingham, Kansas City, Missouri
David P. Gardner, Menlo Park, California
Linda Graves, Topeka, Kansas
Joseph Harroz, Jr., Norman, Oklahoma
John F. Hayes, Hutchinson, Kansas
Robert L. Hechler, Overland Park, Kansas
Henry J. Herrmann, Overland Park, Kansas
Glendon E. Johnson, Miami, Florida
William T. Morgan, Coronado, California
Ronald C. Reimer, Mission Hills, Kansas
Frank J. Ross, Jr., Kansas City, Missouri
Eleanor B. Schwartz, Kansas City, Missouri
Frederick Vogel III, Milwaukee, Wisconsin
OFFICERS
Robert L. Hechler, President
Henry J. Herrmann, Vice President
John M. Holliday, Vice President
Theodore W. Howard, Vice President and Treasurer
Louise D. Rieke, 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 traditional IRA Planholders:
As required by law, income tax will automatically be withheld from any
distribution or withdrawal from a traditional 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
(800) 366-5465
Our INTERNET address is:
http://www.waddell.com
NUR1015A(9-98)
printed on recycled paper
